US embassy cable - 05MAPUTO866

C O N F I D E N T I A L SECTION 01 OF 02 MAPUTO 000866 
 
SIPDIS 
FOR AF/S HTREGER 
E.O. 12958: DECL: 07/11/2010 
TAGS: EPET, ENRG, ECON, PGOV, MZ 
SUBJECT: MOZAMBIQUE: PETROL PRICES HIKES FUEL GROWING 
DISCONTENT 
 
REF: MAPUTO 860 
Classified By: CDA James Dudley for reasons 1.4 (b) and (d) 
 
1. (SBU) Summary. The Mozambican government has raised fuel 
prices over 60 percent since April in response to the 
devaluation of the metical and increasing world petroleum 
prices. Prior to the price increases, the GRM had held fuel 
prices near or below market levels, resulting in the 
depletion of Mozambique,s oil stocks. The price hikes have 
led to public complaints about the Guebuza government and 
sporadic strikes by mini-bus drivers, which compelled the GRM 
to announce a 50 percent increase in mini-bus fares on June 
30. The fuel price increase is expected to ignite 
inflationary pressures and dampen economic growth this year, 
but the ultimate economic and political effects of the price 
increase are still uncertain. End summary. 
 
Three Price Hikes 
----------------- 
2. (U) On June 1 and June 21, the Ministry of Energy, which 
establishes maximum retail fuel prices in Mozambique, 
announced two separate 19 to 20 percent increases in consumer 
fuel prices, comprising a total price increase of 42 to 44 
percent for the month, depending on the type of fuel. The 
Ministry had previously raised consumer fuel prices by 14 to 
18 percent on April 27, translating into a 60 to 70 percent 
price increase over the two-month period. The price 
increases were precipitated by the recent rapid increase in 
world petroleum prices and the devaluation of the metical, 
which fell from 19,000 mt/USD on January 1 to 24,200 mt/USD 
on June 1, with most of the devaluation occurring in April 
and May. 
 
3. (U) The April fuel price alterations corresponded almost 
directly with changes in currency values and world fuel 
prices. IMF and industry sources have told Emboff that the 
GRM historically shifts fuel prices in direct proportion to 
currency adjustments, generally keeping prices in line with 
the world price plus applicable taxes. This policy often 
squeezes profit margins of companies that import and 
distribute fuel, and occasionally forces them to operate at a 
loss. Between June 30 and December 31, 2004, the metical 
appreciated from 24,000 mt/USD to roughly 19,000 mt/USD. The 
GRM responded to the appreciation by dropping consumer fuel 
prices approximately 23 percent in a series of price cuts 
between January and February 2005. 
 
4. (C) The GRM,s June actions, however, may signal a shift 
by the Mozambican government toward a policy that is more 
amenable to the oil companies than to the consumer. In 
meetings held in late May and early June, representatives 
from the country's major fuel importers (including Petromoc, 
British Petroleum, Total) met with Minister of Energy 
Salvador Namburete and later with Prime Minister Luisa Diogo 
in order to secure price increases, explaining that oil 
reserves were depleted to the point that they could not 
guarantee oil supplies for more than a few days at a time. 
The Ministry of Energy responded by announcing the two June 
price increases. A local television channel (STV) announced 
yet another major price hike in the 20 percent range 
scheduled for June 27, but it did not take place. Emboff 
contacts within the Ministry of Energy confirmed that this 
price increase was planned, but was canceled by the Prime 
Minister due to concerns about the likely public response. 
 
5. In a July 3 interview with the newspaper Domingo, Prime 
Minister Diogo defended the GRM,s actions, stating that the 
increase in world fuel prices combined with the devaluation 
of the metical averaged 51 percent, and that the GRM had 
actually increased prices by less than what the market 
demanded. (Comment: It is unclear how the 51 percent figure 
was derived. Unofficial calculations show world oil prices 
have risen approximately 50 percent since July 1, 2004. 
Consumer fuel prices in Mozambique have risen approximately 
70 percent over that same period while the value of the 
metical relative to the dollar is almost exactly equal to 
what is was one year ago. End Comment.) Diogo also added 
that the GRM was planning to establish a "cushion fund8 to 
be activated in case of a future drop in world prices. In 
this scenario, companies could maintain retail price levels 
by paying windfall profits into a fund that the government 
would use to subsidize companies in order to maintain stable 
fuel prices in the face of future world price increases. 
(Comment: This measure would make it impossible for consumers 
to benefit from world price decreases, as they did in early 
2005. End Comment.) 
 
Public Response 
--------------- 
6. (U) The June fuel prices have caused disenchantment with 
the Guebuza government among regular Mozambicans and a third 
major fuel price increase within one month might well have 
lit a fuse of resentment within the populace. Rising fuel 
prices are a major worry to Mozambicans -- the price 
increases have been front-page news for much of the past 
month -- but public outcry has thus far been relatively 
muted. Mini-bus (chapa) owners have been the most vocal in 
their protests. On June 21, mini-bus operators in the 
provincial capital of Xai-Xai protested the second June price 
increase by going on strike, and subsequently raising their 
prices by 25 percent, independent of the Ministry of 
Transportation, the government body authorized to set 
mini-bus prices. Many mini-bus operators in other cities 
followed suit. On June 30, the Ministry of Transportation 
acquiesced to the mini-bus owners, association by agreeing 
to raise fares by 50 percent nationwide (to 7,500 meticais 
per fare), effective July 1. The fare increase threatens the 
well being of many Mozambicans who already spend a large 
portion of their monthly income on mini-bus fares to work and 
school. The transport association has responded with a 
proposal to reduce fares for students, but this has not been 
finalized. 
 
7. (U) Labor unions are also unhappy with the government 
because, in late May, before the first June price increase, 
they negotiated a 14 percent increase in the monthly minimum 
wage, raising it to 1,277,138 meticais (roughly USD 53.50). 
The wage increase, which is negotiated and raised on an 
annual basis, slightly outpaced Mozambique,s inflation rate 
of 12.8 percent in 2004. The increase was formally announced 
by the GRM on June 5, before the end of the fuel price hikes, 
and the GRM has told unions that it will not renegotiate the 
minimum wage increase. There is also speculation that the 
gasoline and mini-bus price increases contributed to a strike 
by workers of the guard company, Wackenhut, that provides 
guards for the embassy and other USG facilities in Maputo. 
(see reftel) 
 
Looking Forward 
--------------- 
8. (SBU) Comment: Until now, public response to the fuel 
price increase has been limited to protests in isolated 
sectors and much hand wringing in the media. Mozambique,s 
Independence Day celebrations on June 25 passed without any 
significant demonstrations against GRM policy. This level of 
tranquility may well change. The full inflationary effect of 
the fuel price increase is just starting to manifest itself 
in public transportation costs, and the expected increases in 
food prices have not yet taken effect. The GRM is trying to 
create expectations of low inflation; Diogo said on July 3 
that she expects inflation for 2005 to be about 7 or 8 
percent. This expectation seems unrealistic, given the 
combination of high prices and near drought conditions in 
much of the country, particularly in the south and central 
regions. If inflation reaches over 20 percent -- a level 
that Mozambique has not seen since the mid-1990s -- public 
reaction against the Guebuza government and the ruling 
Frelimo party could be harsh. The GRM is aware of the 
problem. On July 8-10, President Guebuza presided over a 
weekend-long extended Cabinet meeting; it is said that the 
meeting was called principally to address the impact of fuel 
price increases and the perceived decline in popularity of 
the Guebuza government. End Comment. 
Dudley