Deficit pushes Morocco to cut subsidies

Morocco bought social peace by heavily subsidising consumer goods, but spending has since spiralled out of control.

Morocco ended some fuel subsidies but continues to subsidise sugar, butane and wheat [JP Keenan/Al Jazeera]

Rabat – Ahmed Dabachi’s heavy blue coat is stained with soot as he lugs a 25-pound butane canister from inside his dark shop to a customer in Rabat.

This is the fuel that many Moroccans depend on for cooking and also often for heating. The government heavily subsidizes the cost for Dabachi and also for his customers. He sells canisters for 42 dirhams or $5.04, but they actually trade for $14.50 on the commodities market.

Dabachi is wary of any but the slightest price increases, knowing they would be bad for him but even worse for families who rely on his products.     

“If the prices go up, I’m not going to buy it. How are my customers going to?” he said.

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Three years ago, Morocco managed to avoid the revolutions that brought down dictators in Tunisia and Egypt. One way the Moroccan government bought social peace was by spending 20 percent of its budget to subsidise the cost of bread, fuel and electricity. But that spending has since spiralled out of control – Morocco’s deficit ballooned to 7.1 percent of its gross domestic product (GDP) in 2012. Now, in a deal with the International Monetary Fund (IMF), the country will have to bring its deficit down to three percent by 2017, largely by cutting subsidies.

Butane canisters await refilling in Rabat’s old city. Subsidies enable consumers to pay nearly three times less for them than their market value. [JP Keenan/Al Jazeera]

In January, Morocco ended some fuel subsidies but stopped short of a full reform by keeping subsidies on sugar, butane and wheat. Moroccans like Rabat shopkeeper Yezza El Mehini, 47, fear drastic repercussions if further cuts are put into place.

“Every business is going to stop, and we’re going to be in a crisis. I don’t want a crisis,” she said. 

It has happened before. In response to IMF cost-cutting measures in 1981 and 1984, thousands protested and hundreds were killed in Morocco. More recently, violent protests swept Jordan in November 2012 after fuel prices increased, and deadly riots hit Khartoum in October 2013 when fuel subsidies were removed.

Eighty-year-old Mohammed Guerouani, a Rabat shopkeeper who sells traditional Moroccan clothes, remembers Morocco’s riots in the 1980s and fears impending price increases. “[Moroccans] can never accept this,” he said.

In September, when Morocco partially tied gas and diesel prices to the world market, triggering price increases, thousands protested around the country’s parliament building. Forty-five-year-old taxi driver Anass Goumi felt the pinch.

“I’m not happy because of this. Naturally, the price of the fares increase. It’s not a simple thing for me,” he said.

Morocco is not the only country facing these pressures. Countries in the Middle East and North Africa (MENA) spend more government money subsidising fuel than any other region in the world, and they rely heavily on food subsidies. MENA countries spent $212bn on subsidies in 2011 alone, or 7.2 percent of the region’s GDP, according to the IMF. But high subsidy spending is not confined to this region: The US is the world’s largest subsidiser in absolute terms, spending $502bn to subsidise energy sources in 2011, according to the IMF.

Timur Kuran, a Duke University professor who studies Middle Eastern economic history, notes subsidies constrain a country’s ability to spend on social services that could actually reach the poor.

The problem with the present system is that it's blind. If you're rich or poor, you buy with the same price.

by Najib Akesbi, economist

“If a quarter of [the budget] is going to subsidies, and there are other inescapable expenses like defence, there isn’t going to be much left for long-term investments in general healthcare or education,” he said.

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In 2011, Egypt spent seven times more on fuel subsidies than on health and three times more than on education, according to the IMF. Overall, the richest 20 percent of households in low- and middle-income countries benefit six times more from fuel subsidies than the poorest 20 percent, by the IMF’s estimates.

“The problem with the present system is that it’s blind. If you’re rich or poor, you buy with the same price. And if you are rich, you consume more and you benefit more,” said Najib Akesbi, a Moroccan economist at the Hassan Agriculture and Veterinary Institute in Rabat. 

But rolling back subsidies without larger adjustments is not a catch-all for addressing social ills. Countries that have significantly scaled back subsidies, such as the Philippines and Brazil, continue to face high poverty rates. This is especially important in Morocco, where nearly 25 percent of the population is in absolute poverty or at risk of falling into poverty. Completely removing fuel subsidies would increase poverty by five percentage points, according to the World Bank.

It is unclear whether Morocco’s reforms will last; the country has made cuts before but reversed them because of public pressure. Regardless, there is one product that is likely safe from subsidy cuts: Morocco’s traditional round flat bread (khubz, in Arabic), often baked in communal, wood-fired ovens.

“The government is doing their best to make sure the price of bread won’t change, because bread is related to our culture,” Ministry of Finance spokesperson Rachidi Abdeljabar said. “It’s a very special product.”

Ishan Thakore produced this story in association with Round Earth Media, a nonprofit organisation that mentors journalists. Khaoula Lasmer contributed reporting.

Source: Al Jazeera