* Surge in subsidy spending kept peace politically
* But left state finances in unsustainable position
* Reforms could start as early as June
* Would replace subsidies with cash payments to poor
* But government may choose slow, partial reform
By Aziz El Yaakoubi
RABAT, Jan 16 The alleys of Rabat's old city
resound with the shouts of street vendors advertising Chinese
consumer goods such as fabrics and electronic gadgets. But the
area's vegetable sellers, from whom many residents buy dinner on
the way home, are unusually quiet.
"Prices have increased since the winter began, so we don't
have anything positive to shout about," says Hassan Hansali,
whose shop offers carrots, onions, tomatoes and green peas.
Abdelhaq Jbili, a neighbouring vegetable trader, agrees that
rising prices are making business more difficult but suggests a
"Vegetable prices have risen since the government raised oil
prices," he says, referring to a 20 percent hike in subsidised
petrol prices last June. More expensive petrol has pushed up
harvesting and transport costs, making food dearer too, he says.
Morocco's cash-strapped government is preparing to launch
its biggest economic policy change in years: root-and-branch
reform of the system of food and energy subsidies which it uses
to keep down the living costs of millions of people.
The reforms are needed to prevent heavy government borrowing
from destabilising the economy, and could serve as a model for
the governments of other Arab countries, such as Egypt, which
need to repair their finances after the region's wave of unrest.
But as the conversation in Rabat's old city suggests, the
reforms are politically risky. Even a relatively minor change to
the system, such as the petrol price hike, can affect Moroccans'
living standards; major reform could prompt a backlash against
Last month, New Year festivities in the tourist city of
Marrakesh were disrupted by a clash between police and
demonstrators protesting an electricity price rise. Thirty
people were arrested.
"The risk of the reform is the impoverishment of the middle
class," finance minister Nizar Baraka has said in a
Najib Akesbi, an economist at the Hassan II Institute of
Agronomy and Veterinary Science in Rabat, said changes would
have to be designed carefully to avoid disaster.
"For bread and sugar, there isn't a real danger, but cooking
gas prices will triple if the subsidy system is completely
abolished. The government has to think how to protect" the
people most affected by the reform, he said.
Morocco's subsidy system began heading towards crisis in
early 2011, when the government started sharply raising its
spending on subsidies to buy social peace as uprisings engulfed
other countries in the region.
Politically, the strategy worked; the country saw street
protests demanding democracy and better economic management, but
there was no sustained challenge to King Mohammed's government.
The protests faded after the king introduced constitutional
limits to his powers and let an Islamist party form a cabinet
But economically, the policy has left the government in an
unsustainable position. State subsidies on food and energy
jumped from 29.8 billion dirhams ($3.56 billion) in 2010 to 48.8
billion dirhams in 2011 and 53 billion dirhams, or nearly 7
percent of gross domestic product, in 2012.
Morocco does not face any immediate financial crisis; the
government's gross debt is 58 percent of GDP, according to the
International Monetary Fund, lower than levels for several other
Last month Morocco raised $1.5 billion with an international
bond issue, a sign that international investors still have
confidence in it.
But signs of financial stress are emerging. Since the
international bond sale, the Treasury has borrowed about 15
billion dirhams by issuing short- and medium-term bills in the
domestic money market.
This has drained funds needed for bank lending and private
investment, pushing the interest rate on 26-week T-bills up to
4.06 percent from its level early this month of 3.59 percent.
"The state borrowed 10 billion dirhams in the domestic
market in one day. This is unprecedented," wrote local analyst
Omar El Hyani. He said liquidity created by the central bank was
flowing to the Treasury, bypassing the private sector.
Morocco is also under pressure from the IMF. Last August the
multilateral lender approved a $6.2 billion precautionary line
of credit for Morocco but urged action to reform subsidies,
though it did not formally tie the reform to the aid.
The country needs the aid because it is running a large
deficit in trade of goods and services; its foreign currency
reserves are worth about four months of imports, which
economists say is an uncomfortably low level.
Reforms could start as soon as June, the state news agency
quoted general affairs and governance minister Mohamed Najib
Boulif as saying this month.
"Technically, the reform of the subsidies system is quite
ready," he said. "Once talks are concluded and the political
decision is taken, it will be launched."
Nabila Mounib, head of the opposition Unified Socialist
Party, said he believed that meant the government was waiting
for approval from the royal palace, which still plays a key role
in decisions on major issues.
Under draft plans released by officials, the government
would fully or partially replace the current subsidy system with
monthly cash payments of 1,000 dirhams to as many as 2 million
of Morocco's most needy families.
If the plan proceeds in full, it would cut the state's
annual bill to 24 billion dirhams. The process would take around
four years and could eventually raise inflation, now officially
running under 2 percent, to 7 percent, officials calculated.
The government may see a 7 percent inflation rate as
politically too risky, however, so it may implement the reforms
only in part. Boulif himself has said prefers "the intermediate
way", which would involve initially cutting the state's
financial burden by about a third.
Despite the IMF's pressure, analysts say the government may
not, in the first stage at least, touch subsidies for wheat and
cooking gas - which are socially very sensitive - and merely
begin with sugar and electricity.
"I'm not really confident about this reform," said economist
Akesbi, warning that changes to the system might be used by
corrupt suppliers to manipulate prices for their own profit.
"The government cannot launch such reforms without thinking
about how to control inflation. Success depends on it."