Moroccan Government Pays Rising Cost of Fuel Subsidies

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As global oil prices have risen sharply over the past 10 years, the Moroccan government has increased its oil-subsidy budget by a factor of 10.

After more than a year of hesitation, the Moroccan government, led by the Justice and Development Party, resorted to a new system to set the prices of oil based on a partial connection between local prices and global market ones. The government reviews the prices of oil sales in distribution stations in the middle of every month and raises or lowers them according to the market fluctuations. The implementation of this system, known as the indexation system, led to an 8% increase in fuel prices since it became effective in mid-September.

The government spending destined for fuel subsidies has multiplied by more than 10 times in the past decade due to oil prices reaching record levels in the global markets, as compared to stagnant local prices. This cost the government budget around 6% of the GDP last year, despite the increase in oil prices by 15-20% during June. Consequently, the public financial deficit was exacerbated and reached 7.6%, according to the Central Bank of Morocco. The cost of fuel subsidies exceeds the budget for government spending in the investment field and constitutes three times the budget set for the health sector.

While the recent decision by the government infuriated the Moroccan people, who expressed their anger through protests in several cities and strikes by transportation workers, it increased foreign investors’ trust in the treasury bills and reassured the financial institutions and international rating agencies of the government’s resolve to move forward in controlling public spending and gradually returning to acceptable deficit rates.

Despite the major efforts that the government will not spare to communicate with the public opinion and convince it that its policy is correct and that there are no other available options under the deteriorating circumstances of the public budget, an objective analysis necessitates the following remarks:

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First, the indexation system constitutes a partial and circumstantial solution for the governmental budget imbalance, especially after the oil prices have maintained their high rates during the past months.

To link domestic prices to world market prices, petrol subsidies ought to be fixed for each type of fuel, in such a way that the fuel support prices would not exceed the total amount provided for in the fiscal law. However, it should be noted that 70% of the funds have been spent during the first eight months of the year.

Second, this system had already been applied during the period between 1995 and 2000, before it was discarded due to the steady rise in oil prices at the time.

The government has also provided unconditional and comprehensive support for prices so as to preserve social peace.

However, it seems that the government has failed to uphold its reform program, which seeks to shift from comprehensive support to a system based on the liberalization of fuel prices, allocating a part of the budget to support impoverished segments through cash transfers, investing the other part of the budget in infrastructure and facilitating access to basic services.

Third, unlike the government rhetoric, which confirms its will to uphold the purchasing power of the poor, the implementation of the indexation system could have negative aspects, according to the High Commission for Planning.

Aside from the limited positive impact on the government’s budget, it is clear that this new/old system could lead to an increase in domestic prices, especially some basic consumer goods, for poor families, and a decline in domestic demand. This would result in lower economic growth, which is essentially based on household consumption.

Moreover, the increase in domestic prices as a result of the implementation of the indexation system is likely to reduce job opportunities. This is due to the decline of competitiveness in local products and of exports.

The reform system is seen as a key component in the rationalization of government spending in order to reallocate public resources to finance social sectors to the benefit of impoverished groups.

The role of the government should not be reduced to the implementation of technical measures to alleviate the burden of the comprehensive support system on petrol prices. The government is obsessed with situational financial balances so as to reassure the international financial institutions.

A well-planned and inclusive reform process ought to be put forth in order to move forward toward rational measures regarding public resources.

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Found in: morocco fuel subsidies, morocco, moroccan economy, fuel, deficit, budget 2013
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