The Compensation System: Unfinished Reform

The Compensation System: Unfinished Reform

سلمى صدقيسلمى صدقي23 August 202132min6130
The second phase of the Compensation Fund reform was held back due to the defects of the first phase, which included the liberalization of the fuel market

The second phase of the Compensation Fund reform was held back due to the defects of the first phase, which included the liberalization of the fuel market

 

Introduction

In 2015, the Moroccan government implemented a complete liberalization of fuel prices as a first stage in reforming the Compensation System. The aim of this step was to ease the burden on the state budget after a continuous rise in compensation expenditures since the global financial crisis of 2008. The goal was also to move towards a more equitable support for all social strata., Although the reform achieved its goal of reducing the burden on public finances, it was not able to achieve equity as main stakeholders in the fuel market were targeted rather than citizens.

The second stage of the reform, related to liberalizing the prices of the most consumed commodities by the poor, faltered for technical and political reasons. This paper will explain why the second phase of the Compensation Fund reform was stalled, and how it is related to the first phase.

The Compensation Fund issue emerged during the 2008 global economic crisis. Moreover, the rise in the crude oil price in global markets, reached its peak in 2009 at more than $140 / barrel, which is an all-time high in the international market. Reflecting this global crisis, the prices of basic materials have skyrocketed. Since Morocco imports more than 90% of its energy needs, the change in prices in international markets has led to a rise in the expenditures of the Compensation Fund that subsidizes petroleum and some basic materials, as well as a decrease in the payments balance reserve, a rise in the public finance deficit, and the collapse of the State’s macro-economic balances.

This situation raised an old question in public debate: Isn’t it time to reform the compensation system? The legitimacy of this question is always related to the type of targeting strategy that the Moroccan compensation system adopts: a targeting strategy that does not exclude any social class, even the ineligible which deviates the system from its supposed role in redistribution and achieving social justice. Official statistics indicate that more than 42% of expenditures of the Compensation Fund go to the rich (13%), whereas the poor class concerned with subsidies account for only 7% of these expenditures[i].

On another level, by targeting all social segments, the Compensation Fund contributes to achieving social peace, particularly by granting vulnerable and poor groups access to subsidy, and meeting their basic needs. This has led successive governments to linger in reforming the fund, especially with growing social and spatial differences, despite the State’s efforts to fight poverty. This delay may have also been a result of successive governments’ fear in of the impact of dropping the Compensation System on social peace, in a decade marked by the increase and diversity of social protests.

At the end of 2015, the Moroccan government implemented the first phase of reforming the Compensation Fund with a complete liberalization of fuel prices. This reform occurred in an economic and social context characterized by the accumulation of significant experience regarding social policies targeting the poor. Though these policies, which were launched within the National Initiative for Human Development in 2005, contributed somewhat to alleviating poverty, it did not achieve all the desired goals. Thus, it became possible to replace subsidies provided within the compensation system with policies that target the poor directly.

It must also be noted that the discussion about the need to reform the Compensation Fund began when the burden of subsidies on public finances increased since the 2008 financial crisis. The rise in compensation expenditures after the global crisis urged decision-makers in Morocco to think of the best way to provide support and at the same time alleviate the burden on the state’s budget.

Two approaches emerged in this sense: the first is providing universal subsidy that targets all groups, and the second calls for targeting the poor directly with all the financial, human, and logistical resources it requires. It must be pointed out that among the advantages of direct subsides, remittances in particular compared to universal subsidies, is the possibility of benchmarking its burden on the state budget more accurately.

The reform of the Compensation Fund also comes after adopting the “Ramed”[ii] health coverage, which is considered the largest government program targeting the vulnerable class, benefitting about 11 million citizens. Despite the program’s short falls, in terms of issues related to governance and targeting, it serves as a poor class monitoring procedure that can be improved and used in creating a Unified Social Registry. In addition to “Ramed”, the last decade has seen the launch of other programs aiming to support the poor, particularly in education, such as “Tayssir” program. These programs are considered an important criterion for accessing conditional transfers after the lifting of subsidies.

Official statistics indicate that more than 42% of expenditures of the Compensation Fund go to the rich (13%), whereas the poor class concerned with subsidies account for only 7% of these expenditures

Most of the countries that liberalized fuel prices, especially butane, combined reform with measures that would mitigate the damage of lifting subsidies. These measures ranged from direct measures, the most important of which are conditional and unconditional money transfers, to indirect measures mainly related to incorporating aid into a comprehensive social protection system.

Global experience also shows that the success of the reform process depends on the political communication of government authorities through explaining its implications to citizens before implementation, and is also tied to tracking and monitoring the political and economic consequences that reform will have on vulnerable groups. In this regard, it is necessary to accurately measure the number of poor and the categories that must be taken into account throughout the reform process. Preparing a clear strategy for the various phases of reform is important for the reform to succeed and achieve the desired effects on state finances.

How the first phase of the reform went?

 

Lifting fuel subsidy was the first step in reforming the Compensation Fund. This eased the burden on the state’s budget, as compensation expenditure decreased to 13 – 17 billion dirhams since 2016, while it ranged between 29 and 56 billion dirhams in 2009 – 2014. However, this lifting of subsidy went through many problems, as major importers took this opportunity to boost their profit margin and reduce the purchasing power of citizens, in complete absence of the role of the Competition Council.

 Figure: Evolution of compensation expenditure since 2002, in billions of dirhams

Source: compiled by the researcher based on the Compensation reports related to the finance laws

 

This situation necessitated the formation of a parliamentary fact-finding committee headed by MP Abdellah Bouanou, member of the Justice and Development Party. This committee concluded[iii] that after the price liberalization, major importers increased their profit margins significantly, and that the drop in prices in world markets did not affect the sale to the public[iv]. The committee stressed the need to establish a government mechanism to track and monitor prices at the international and national levels so that the government can protect the consumer.

At the end of 2018, the government demanded consultation with the Competition Council for an interim fuel price ceiling to curb practices that lack competition fundamentals. In its response to the government, the Competition Council considered – in a report[v] that was issued to the public- that the government’s demand for an interim price ceiling is not supported, for several considerations, the most important of which is that the problem of the fuel market in Morocco is structural and cannot be fixed with interim solutions. Furthermore, price ceiling strikes the competition-based practices and confuses the stakeholders.

The council also added that the government’s demand is not methodologically supported, and confuses Articles 2 and 4 of Law 104.12. It also stressed that the standards for the access to interim price ceiling included in this law are not available in the fuel market after the liberalization, as there must be a massive increase or drop in prices in order to implement these Articles. On the other hand, the Competition Council reminded the government that the latter has full powers regarding price ceiling; however, the government has not yet taken any decision in this regard.

In parallel, the investigations of the Competition Council on the findings of the Parliamentary Committee regarding some transactions that go against the principle of competition led to convicting many market stakeholders, including three large companies, as well as small suppliers. As a result, in July 2020, the Competition Council decided to fine the major companies active in the market with 9% of the transaction volume, whereas the rest of the suppliers were fined with 8%. One day after informing the King of this decision[vi], and for the first time, the president of the Council called the members to a new meeting upon which a new decision was taken and all those who were convicted were fined 8% of the transaction volume[vii].

At the end of March 2021, the committee submitted its report to the King, and concluded that addressing the fuel market issue was marked by many irregularities and a noticeable deterioration in the deliberations process in the Council.

This shook the credibility of the council, and was supposed to create distrust and uncertainty in the public opinion, however, it created a gap within the council itself, as some council members submitted the case to royal arbitration[viii] expressing their rejection of the decision, questioning the autonomy of the decision of the President of the Council, and claiming that this sudden change was based on specific directives or personal interests. Whether this was true or not, changing the decision in less than a week from submitting it to royal arbitration is questionable and undermines the credibility of the council, especially since the owner of one of the major companies is a government minister and head of a political party, plus, the public opinion still remembers his part in obstructing the formation of the government after the 2016 elections.

This led to a royal decision to appoint a special committee in July 2020[ix] -in order to investigate all the circumstances- consisting of the presidents of the two chambers of Parliament, the President of the Constitutional Court, the President of the Supreme Council of Accounts, the Wali of Bank Al-Maghrib, and the President of the National Authority for Integrity, Prevention and the Fight against Corruption. The coordination of the work of the Committee was assigned to the Secretary-General of the Government. At the end of March 2021, the committee submitted its report to the King, and concluded that addressing the fuel market issue was marked by many irregularities and a noticeable deterioration in the deliberations process in the Council.

These conclusions led to the dismissal of the Council’s president, Driss Guerraoui, in a communiqué issued by the Royal Court, on March 22nd, 2021, and the appointment of a new president, in addition to the King’s commission to the Head of the Government to update the Council’s legal framework in order to ensure the independence and impartiality of this institution, as well as its contribution to strengthening economic governance.

It should be noted that in 2016, major distributors made three times more profits than they achieved before the fuel market liberalization. These huge profit margins are made possible by major companies’ large storage capabilities, which they use to build up their reserves when prices in the global market are favorable. Here, a fundamental question must be raised: Is it a coincidence that the only refinery that Morocco used to own was closed in 2015? “La Samir” used to refine 10 million tons of crude oil annually and produce 2 million cubic meters of refined oil. The International Energy Agency had warned Morocco, in its 2019 report[x], that closing “La Samir” was a mistake and that Morocco should increase its storage capacity. Was it really a mistake?

The Stumbling Block to the Second Phase of the Reform

This situation has remained inactive since the implementation of the first phase, whereas the second phase of the reform, which is expected to include the rest of the subsidized products, has been postponed several times since 2015. In fact, this issue is of a social nature par excellence, especially that the products that will no longer be subsidized at this phase are the most consumed by the poor class, namely butane gas, sugar and flour. The table below provides an idea on the subsidy provided by the State under the Compensation System:

Table: Annual Subsidies for Basic Materials

Commodity/Annual Subsidy Percentage 2016 2017 2018 2019
Sugar (million dirhams)  3385 3456 3437 3407
Flour (million dirhams) 1083 1465 1501 1350
Butane (billion dirhams) 1,7 10,3 12,93 10,4

Source: the researcher based on Compensation Fund reports

Bearing in mind that it concerns the most consumed commodities by the poor, any reform that does not take this into account will have a significant political and social cost. However, continuing to subsidize these commodities from the sources “subvention universelle” makes some ineligible people benefit from subsidization, which in turn undermines the principle of social equity and drains public finances. Hence, it is important to implement the reform in a manner that preserves what the vulnerable groups have gained so far and avoids social effects that would impede it.

To achieve this goal, certain conditions must be met, main one being the communication policy regarding the Compensation Fund reform, which supposed to precede the lifting of subsidies. The importance of this communication campaign lies in explaining the implications and mechanisms of reform and how it positively impacts the vulnerable class, the State budget, and the production of social policies in general. The first phase of the reform was marked by the lack of communication, which must be remedied in the second phase given that the commodities that will be addressed are some of the most consumed by the poor.

The government explains the suspension of the Fund reform with the lack of a database of social groups eligible for subsidization. Morocco started addressing this issue by launching the Unified Social Registry[xi], which was supposed to be ready by the end of 2019. However, it is probable that the government did not want to actually get this done as its mandate drew to a close, so as not to have to carry out the second phase of reform, which might cause social upheaval that often marks the beginning of all reforms whose positive aims may not be evident at first.

The first phase of the reform was marked by the lack of communication, which must be remedied in the second phase

What is happening today as a result of the Covid-19 pandemic namely the loss of jobs, whether in the formal or informal sector, the spillover of vulnerability, and the imbalances that marred the process of cash transfers make the adoption of the Unified Social Registry an urgent issue, especially since the economic and social effects of the pandemic can last for a longer period of time. This may make the implementation of the reform in the short and medium terms more difficult, as the recovery of the economy needs time and depends on curtailing the pandemic at the national and international level.

In the absence of a Unified Social Registry, it is difficult to accurately and comprehensively determine the eligible groups. This Registry will enable the counting of all social segments and the ascertainment of their socio-economic data, thus identifying the eligible groups in each program. It will also help eliminate problems that social programs have encountered in the past, which are mainly related to the inclusion of illegible groups or the exclusion of eligible ones, resulting in losing efficiency and equity. For the “Ramed” system, for example, inclusion errors are estimated at 10%.

Morocco’s involvement in the generalization of social protection will contribute to implementing the Compensation System reform and permanently eliminating universal subsidies. Global experience has proven that the success of policies that alternate the Compensation System bears fruit when they fall within the framework of a comprehensive social protection system, particularly at the end of the transitional phase between universal and direct subsidy targeted to the poor.

Global experience has proven that the success of policies that alternate the Compensation System bears fruit when they fall within the framework of a comprehensive social protection system

Conclusion

 

The first phase of the Compensation Fund reform, through the total liberalization of fuel prices, was characterized by the failure mainly represented in the possibility of price manipulation by distributors in order to increase their profits. This incident has seen fluctuations between the denial of those concerned and the government’s attempt of price ceiling, and the decisions of the Competition Council, which lacked credibility. This ended with the dismissal of the President of the Competition Council after the report of the Special Committee charged with investigating the credibility of the Council’s decisions. The report confirmed irregularities and questionable deliberations.

From another perspective, it is necessary to implement the second phase of the reform; as the success of this reform is now linked to its prior preparation in order to protect the gains of the poor social class. In this regard, to achieve social justice and economic efficiency, it is indispensable to adopt the Unified Social Registry to facilitate and improve the targeting process. It is also essential to break with the monetary approach to poverty, for it is deficient, and instead, adopt an approach that studies the root causes of poverty and vulnerability in their various dimensions. This will ensure that the expenditure of the Compensation Fund will be effectively alternated by direct transfers, facilitate the ideal implementation of all social policies and guarantee their contribution to the enhancement of human capital and its optimal use in the development process.

Based on all of the above, we suggest to:

  • Accelerate the adoption of the Unified Social Registry through accurate monitoring of the vulnerable and poor class.
  • Prepare for the second phase of reform through an effective communication campaign that explains to citizens the nature of reform, its importance to the national economy, its impact on the most affected groups, and the policies and programs that will be adopted in order to contain the damages.
  • Prepare thoroughly for mechanisms to alternate universal subsidy and to support vulnerable and poor groups during the transitional period before integrating them into a comprehensive social protection policy.
  • Prepare a clear strategy and specific timeframes in order to exit the transitional phase, namely the direct transfers.
  • Improve public utilities and services, especially in the education and health sectors, so that the generalization of social protection has positive impact in terms of enhancing human capital and reducing the generational inheritance of poverty and vulnerability.

References

 

Studies

  • Bentour (2015), “on the removal of energy products subsidies in an importing oil country: impacts on prices in Morocco Munich Personal”, PePGc Archive.
  • Qachar et al (2015), “reform of the Moroccan Compensation Fund: which approach to adopt”, public policy assessment and anticipation journal, CEAPP N 2.
  • Jaidi (2020), “Targeting the poor and vulnerable in Morocco: what lessons for the post-Covid-19”, policy paper, Policy Center for the New South.
  • Jaidi (2020), “The Social Register: issues and challenges”, Policy Center for the New South

Reports

  • سلReport on the Compensation System in Morocco: Diagnosis and Solutions, Supreme Council of Accounts, January 2014.
  • Opinion of the Competition Council regarding the government’s project for setting profit margins for liquid fuels.
  • Synthetic report of the recon mission on selling prices of liquid fuels to the public and competition conditions after the liberalization decision, the Finance and Economic Development Committee of the House of Representatives, February 2018.
  • Fuel Subsidy Reforms: Lessons and Results, International Monetary Fund, January 2013.

[i]    Issued by the Ministry of Public Affairs and Governance.

[ii]   It entered into force in 2008 and was disseminated in 2011.

[iii]  Synthetic report of the recon mission on the selling prices of liquid fuels to the public and competition   conditions after the liberalization decision, Finance and Economic Development Committee of the House of Representatives, February 2018.

[iv]  In the absence of the role of the Competition Council in analyzing the competition in the fuel market and monitoring incompatible practices.

[v]  The opinion of the Competition Council on the Government’s project of ceiling profit margins for liquid fuel.

[vi]  The President of the Council submits a memorandum in this regard to the King on July 23, 2020.

[vii] The President of the Council submits a second memorandum to the King on the same issue on July 28, 2020

[viii]The King received a document from some Council members accusing the President of changing the decision for non-professional reasons.

[ix]  Royal Court communiqué dated 28 July 2021.

[x]  International Energy Agency 2019 Report on Morocco.

[xi] The Unified Social Registry is a data bank that includes socio-economic information on the poor class. It is constantly updated and it enables targeting this group effectively.

سلمى صدقي

سلمى صدقي

سلمى صدقي أستاذة الاقتصاد بجامعة ابن طفيل، حاصلة على دكتوراه في الاقتصاد من جامعة محمد الخامس بالرباط. في موضوع الأسس النظرية والاسقاطات العملية لإستقلالية البنوك المركزية. من مجالات اهتماماتها، الماكرو اقتصاد ، السياسات الاقتصادية، اقتصاد التنمية و تقييم السياسات العمومية و قد كتبت عدة دراسات و أبحاث بالعربية و الفرنسية. قبل التحاقها بالتعليم العالي عملت سلمى صدقي كمستشارة تقنية بوزارة التجارة الخارجية


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