# **1. Introduction**

Morocco has a very long history with consumers’ subsidies that predates World War II. This history has been characterized by different historical phases when subsidies fulfilled different functions from export promoting incentives, to price stabilization mechanisms, to social protection policies. Irrespective of their role, consumers’ subsidies continue to exist 73 years after their first introduction. The past few years have, however, made consumers’ subsidies more difficult to sustain. The global rise in commodities prices accompanied by the global rise in oil prices has turned consumers’ subsidies in a major liability for the government’s budget, becoming the main constraint to the current fiscal balance. This, in turn, has forced the government to reconsider subsidy policies, first by increasing prices of selected subsidized goods in 2012 and 2013, and then by undertaking a rather comprehensive reform in 2014, leading to a partial dismantling of the subsidy system.

This paper evaluates the 2014 subsidy reforms by simulating the impact of reforms on household welfare, poverty and the government budget. Using a household consumption survey and input-output tables, we estimate direct effects via changes in prices of subsidized products and indirect effects via changes in prices of non-subsidized products. We will also simulate the impact of the total elimination of subsidies to see the implications of completing the reforms initiated in 2014. In addition, we will consider the cost and benefits of possible compensation mechanisms in cash. Two sections of the paper set the framework for the reforms. The first is a section on the evolution of subsidies since their introduction and the second is a section on the political economy of reforms. This last section helps to understand what the major obstacles to further reforms may be.

The paper is organized as follows. The next section covers the evolution of subsidies since their first introduction. Section three explains the baseline data. Section four documents the distribution of subsidies as of October 2014. Section five describes the results of the simulations. Section six discusses the political economy of reforms and section seven concludes.

# **2. The evolution of subsidies**

The subsidy system in Morocco was created in 1941<sup>2</sup> to stabilize prices of consumers’ products that had been rising strongly because of the Second World War. To cope with the war effort, France was importing heavily from Morocco<sup>3</sup> and this contributed to raise domestic prices.<sup>4</sup> As a response, the kingdom introduced a stabilization fund called “Caisse de Compensation (CDC)”. After the end of the war, the CDC continued to operate as an instrument to facilitate the entry of various French products in Morocco at competitive prices under the “Open Entry” regime.

After independence in 1956, the government continued to use the CDC<sup>5</sup> to stabilize prices of selected commodities while extending its mission to helping all troubled sectors, mostly industries of craft, charcoal, cement, and fertilizers, along selected firms exporting strategic products. Before 1974, the CDC was financially autonomous, with its resources coming from fees and taxes levied on sectors benefiting from its support, especially from the oil sector. Its financial balance was maintained through

> 2 Before 1941, there were 6 equalization funds to stabilize prices of sugar, steel, fuels, eggs, timber, and vegetables.

> 3 Morocco was a protectorate of France until 1956.

> 4 The main basic commodities targeted by the CDC during WWII include flour, bread, edible oil, charcoal, sugar, barley, corn, and milk.

> 5 In the rest of the text, CDC will be used to include also the ONICL created in 1973, the agency that administers subsidies for soft wheat and flour.

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