MENA Perspective October 2013

MENA Fuel Pricing Reform

Moroccos Reform Experience in Q3 2013
In a Nutshell After almost two years of heated political discussion, the Moroccan government announced a partial reform to its fuel subsidy system. In September 2013, the government introduced a periodic price adjustment mechanism for petroleum products that adjusts domestic prices for petrol, diesel and industrial fuel oil. The aim of the new pricing mechanism is to help reduce the budgetary burden caused consecutive years of sharp rises in government spending on subsidizing basic petroleum products in response to rising crude oil prices since the early 2000s. Unlike other times it has raised prices on petroleum products, the government has set up an accompanying cash pay-back system for urban transporters to contain inflationary pressures.
In September 2013, Morocco launched a partial reform of its fuel subsidy system after almost two years of hesitation and heated political debate. The reform announcement came at a time of growing central government concern over the multi-year surge in government spending on domestic fuel subsidies, prompted by rising domestic energy consumption and the increase in prices for crude oil and oil products on international markets. Reform Steps Domestic prices for petrol, diesel and industrial fuel oil under the new law, enacted in August 2013, are now indexed to international prices on an ongoing basis. Every sixteenth day of the month, a new set of prices will be announced. This new pricing system does not mean a full de-regulation. Consumers are still not paying international prices. Energy products will continue to be subsidized with fixed amounts, and remain below the market price compared to many other importing countries in Southern European countries. However, unlike under the previous pricing mechanism, which saw prices rise only on an ad hoc basis, Moroccos new fuel tariffs will ensure the gap between import and domestic prices does not continue to rise, while the size of fuel subsidies is now more predictable and can hence be planned for. Significance Moroccos new fuel price mechanism is amongst the most flexible in the entire Middle East and North Africa region and is hence a significant step forward in a region characterised by static domestic energy pricing mechanisms that keep price levels in any other world region. Like many energy import-dependent countries in the MENA region, Morocco has been administering domestic fuel and electricity prices for many decades in an effort to increase the affordability of energy in the country, but has been faced in turn with rising budget deficits and public debt. More than half of Morocco foreign currency reserves in 2012 fed into energy imports, of which only a portion is recovered from domestic customers the remainder is carried over by the government in the form of public transfers and government debt.

Disclaimer: This note has been prepared by MENA Insights for general information purposes only, and it is not intended to be, and should not be considered as a legal or other advice.

The primary goal of this reform is to bring stability to the subsidies budget and avoid unwanted budgetary surprises during implementation. The government hopes to avoid a budgetary squeeze similar to the one it experienced in 2012, when its annual allocated budget of 32.5 billion (bn) Dirhams (MAD) was almost depleted in the first half of the year. Higher energy import prices have exhausted the public finance budget over the last few years. During 2012, the Moroccan government expenditure on subsidies reached 54.9 bn Moroccan dirhams, an equivalent of 6.6 percent of GDP, of which more than half went to subsidizing fuel products. The remainder of government spending on subsidies is made up of food subsidies similarly contentious items whose price reform in the future should be expected to cause more outrage than current fuel price reforms, which primarily concern car drivers and certain industries. Accompanying Measures The government has also taken care to prevent any outbreak of outright protest at these sensitive times, in contrast to its handling of the price increases of 2012. Limiting public discontent is all the more important to the government since the unrest it experienced in 2011, alongside Tunisia and Egypt, during the Arab Awakening. Perhaps most importantly, it has put in place a cash pay-back system for urban transport in order to avoid the further increase of transport fares. It has also invested in selling the reform to the public, via a well-concerted media campaign. Using television and national newspapers, government ministers have highlighted the fairness of such reforms, and contrasted them with the unequal benefits that accrue to particular parts of a population and industrialist circles under typical fuel subsidy systems. Moroccos fuel price reform can also work both ways; the price of petroleum products will not inevitably increase, but could also fall, reflecting oil prices and the dollar exchange rate in the international market. The government has, moreover, promised to intervene again if international prices reach a certain level and become unaffordable for consumers. This expected price ceiling is not yet defined, but is at the discretion of the Ministry of Finance to set. In order to secure industrial support for the scheme, the government has adopted a policy of engaging with the private sector, to inform them about the mechanics of the new indexation policy as well as to listen to their adjustment needs on a continuing basis. Future Reform Outlook The existing Caisse de Compensation, or subsidies fund, is not expected to suffer any substantial reduction in its budgetary allocations in the near future. For instance, there is no plan to reduce subsidies for liquefied petroleum gas (LPG). That is partly in order to reduce the likelihood of inflationary pressure, and partly in order to maintain an element of subsidized household energy, given LPG is used by almost all Moroccan families, including in rural areas. However, the government will be looking at new ways to rationalize subsides spending. A reform of the Caisse de Compensation control procedures is already on its way to being implemented. The government suspects that there is plenty of fraud in refund applications submitted by operators to the Caisse de Compensation, which it aims to clamp down upon. This reform process will likely be a long one, and entail further, phased regulatory steps in order to avoid socio-economic and political instability. The next phase will likely target electricity subsidies, which have been excluded from the current price indexation mechanism, but cannot be ignored for much longer. The Office National de l'Electricit, a State-Owner

Disclaimer: This note has been prepared by MENA Insights for general information purposes only, and it is not intended to be, and should not be considered as a legal or other advice.

Electricity company, in 2011 received some MAD 6.3bn in subsidies for its fuel used in power generation. The subsidies reform will be enacted in tandem with other plans to diversify the energy mix, most likely by increasing the use of natural gas and renewables over the coming years. These fuels are considered cheaper in the case of Morocco compared to the use of oil. Success in rationalizing government spending on subsidies is hence also considered key by Moroccan policymakers to continuing with its public investment programs in infrastructure, upgrading and diversifying the economy. Political Reception The reforms have, meanwhile, triggered political debate driven mainly by opposition parties in the parliament and media, but to use a Moroccan allegory these reactions remain very much a storm in a cup of mint tea. These are political parties that have targeted any initiative adopted by the current government. In general, the reform has been accepted by most economic actors, and seen as a reasonable and sensitive way by the government to begin a comprehensive reform process to subsidies. Significantly, the price increases following the implementation of price-indexation system have not sparked any social unrest. This remains a positive in light of recent turbulence in other countries in the region, such as in Jordan and Sudan, following cuts in their own domestic subsidy schemes.

For further questions, please contact us: Mohammed El-Katiri Senior Analyst Tel: 44 (0) 2033 22 6671 Mobile: 44 (0) 7759200663 Email: info@menainights.com

Disclaimer: This note has been prepared by MENA Insights for general information purposes only, and it is not intended to be, and should not be considered as a legal or other advice.