Against the backdrop of increasing global oil prices, the government decided to suspend the use of the price indexation system in 2000. This decision was due to the increasing political and social cost for the government to continue passing the full changes in the global prices through to the local markets, given its impact on transport services and hence on prices of basic commodities, and on competitiveness of the domestic enterprises.

Together with the suspension of the subsidy system, the government seized the opportunity of the relative easing of global prices between 2001 and mid-2004 to correct some cost items in the price structure of petroleum products that with time had been unduly favorable to the producers, importers and distributors of fuel products. Thus, the government revised in 2002 the price structure of petroleum products in order to simplify it and reduced the Coefficient of Adequacy of the local refinery from 6.5% to 2.5%. This coefficient was reduced in response to the performance of the processing of crude oil by the local refinery that managed to make the needed investment to enhance its production capacity and efficiency, especially for the production of diesel. Following the modernization of the local refinery in 2009, measures were taken to adapt further the price structure through indexing the freight costs and replacing the Coefficient of Adequacy by a lump-sum for the development of storage capacities. As the global oil price started to rise again strongly by mid-2004 and up until 2012, the government was forced to make several ad hoc partial upward adjustments to local prices of selected liquid petroleum products to reduce the growing pressure on the CDC and the budget. During this period, retail prices of LPG did not change (Table 3).

**Table 3- Domestic annual average prices of main petroleum products**

||**2004**|**2005**|**2006**|**2007**|**2008**|**2009**|**2010**|**2011**|**2012**|**2013**|
|---|---|---|---|---|---|---|---|---|---|---|
|Gasoline (MAD/L)|9.18|9.85|10.54|10.26|10.75|10.32|10.18|10.18|11.35|12.23|
|Diesel (MAD/L)|7.07|7.71|9.28|9.31|9.63|7.56|7.15|7.15|7.73|8.33|
|Fuel Oil|2,302|2,595|3,233|2,887|3,124|3,032|3,358|3,678|4,254|4,666|
|(Industrial)<br>(MAD/Ton)|||||||||||

LPG (MAD/12Kg 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 container) _Source: Caisse de Compensation and staff calculation_ As the global price remained high in 2013, the government decided to reform the subsidy system starting on September 16<sup>th</sup> by first reactivating the price indexation mechanism to help reverse the deteriorating fiscal trend. The indexation concerned the main liquid petroleum products, namely gasoline, diesel, and fuel oil. The new system imposed a cap on the unit subsidies for the three products to be managed by the CDC while the remaining price differential was to be passed through to domestic prices. The implementation of the price indexation system, helped by lower global oil prices, allowed reducing subsidies by almost 2 percentage points of GDP in 2013; as a result, the fiscal deficit narrowed to 6 percent of GDP (from 7.3 percent of GDP in 2012).

On February 1<sup>st</sup> 2014, the government stopped supporting prices of gasoline and industrial fuel oil. As a consequence, fuel oil used for the production of electricity has been included in the indexation system starting on June 1, 2014, with related subsidies replaced by a direct lump-sum transfer to the National Electricity Company (ONEE) for a three-year period (2014-2017). During this period, subsidies for fuel oil used to generate electricity are phased out as established by an agreement signed between the 6