Milk prices have been fuelling unhappiness among Morocco's burgeoning social media community in recent weeks.

A hike by up to 6 per cent in cost by Central Dairy, the largest private sector milk producer and distributor, has caused consternation among consumers, even raising the threat of a boycott against its products.

Nerves are already frayed after the government rolled back some subsidies on fuel in June, pushing up prices by up to 27 per cent.

The government has no control over milk prices. But consumer experts say fuel price rises may be fanning higher food costs as producers seek to recoup revenues from paying more for transport.

“This month will see a heavy reliance on credit on the part of households to meet their expenses,” says Samir El Jaafari, the president of the consumer rights advocacy group Sais-Atlas.

“Higher fuel costs have already resulted in a surge in the price of transport of fruit and vegetables.”

Morocco provides a snapshot of the formidable challenge facing governments across the Mena region as they contemplate rolling back deeply entrenched subsidies that have for decades strained state coffers but protected consumers from the real cost of key commodities such as flour, sugar, petrol and butane.

"For non-oil importers, it's crucial [to start to roll back subsidies] over the next 12 to 18 months as they're facing massive fiscal and current account deficits but it's a difficult time to do this as unemployment is high," says Jean-Paul Pigat, an economist at Emirates NBD.

In the region, Morocco, Jordan, Iran and the UAE are among the few countries to already start to move towards price equilibrium for some goods. Others such as Tunisia, Saudi Arabia and Egypt have made tentative noises about doing so.

The IMF has for years been urging Middle East and North African (Mena) governments to close the gap between domestic and international prices. Energy subsidies alone accounted for about US$240 billion of regional government spending in 2011, more than 8.5 per cent of GDP and a larger bill than any other region.

But such calls have grown increasingly urgent in the past three years as several countries stepped up financial support for citizens in an effort to help defuse instability linked to the Arab Spring.

Many governments fear that hiking prices now will risk fuelling discontent among a newly emboldened population, sparking fresh political chaos.

Nearly 200 taxi drivers blockaded the streets of Amman last week in protest at a government move the week before to hike fuel prices by up to 10 per cent. It follows a fuel hike of up to 12 per cent in June as the Jordanian government seeks to further slash its budget deficit that is equivalent to 5 per cent of GDP.

Such moves appear much more distant in Egypt, just months into its second revolution. Like the previous regime, the new interim administration accept price rises will have to happen eventually if the government is serious about sealing a long-delayed US$4.8 billion IMF loan deal and easing a deficit expected to hit 9 per cent in the current fiscal year. But an influx of emergency cash from the GCC is helping delay the need for action.

“I don’t think we will see much from Egypt, certainly until a permanent government is in place,” says Liz Martins, a senior economist for global banking and markets at HSBC Middle East.

While populations are, not surprisingly, reluctant to see any cuts to subsidies, the IMF says there are more effective ways to support citizens. Spending on subsidies tend to squeeze out cash for other important areas such as health care, education and infrastructure. For example, Libya's US$11.5bn subsidies bill for last year was equivalent to 13.8 per cent of GDP, according to the IMF. In comparison, education and health spending made up amounts equivalent to 5.1 per cent and 1.8 per cent of GDP, respectively.

Energy subsidies also tend to benefit the better off more than others.

“If we look at who actually benefits from those subsidies, it’s clear that the bulk of the benefit goes to the better-off, who use energy the most, people with automobiles, air-conditioned houses and electrical appliances,” wrote Masood Ahmed, the director of the IMF’s Middle East and central Asia department in a blog post in May.

Despite recent high oil prices, questions are now being raised about when the GCC will reform price structures. Recent changes in the dynamics of the energy market involving the increase of shale gas output in the United States threaten to erode the dominance of the GCC in the global oil market.

Against such a potentially elastic oil demand outlook, economists say, it makes little sense for governments to continue to squander their competitive advantage on funding cheap domestic energy.

Evidence suggests a tendency towards heavy consumption in countries with subsidies in place.

“Because oil prices are quite high the need to do structural reform and make decisions around subsidies that need to be addressed is less high,” says Mr Pigat.

"But in somewhere like Saudi Arabia you have oil revenues plateauing because of domestic oil consumption and therefore it could be running a current account deficit in the next decade."

In Libya, the only major oil producer to undergo a political revolt during the Arab Spring, IMF data shows energy consumption is much higher than in other countries with a comparable GDP per capita.

Smuggling and a tendency to expand into capital intensive rather than alternative industry streams that can create more jobs are other potential side-effects from subsidy reliance, say economists.

But rebalancing prices is also potentially thorny, as officials in Morocco are finding out.

Plans to review energy prices twice a month have sparked the country’s main Islamic opposition movement to form a protest group against subsidy cuts.

“Moroccan consumers have not been legally consulted in the price reforms,” says Mr El Jaafari.

“They have been subject to abuses that affect their rights and their economic interests.”

Consumers and businesses in Morocco and elsewhere are unlikely to accept price rises lightly.

tarnold@thenational.ae

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