Jordan cuts subsidies for the rich

But economists warn price hikes will be passed on poor, risking political upheaval.

Boy sells Iraqi Dinnars in Amman 370 (photo credit: Ali Jarekji / Reuters)
Boy sells Iraqi Dinnars in Amman 370
(photo credit: Ali Jarekji / Reuters)
The government of Jordan’s King Abdullah II is teetering, as the delicate economic and political tightrope act he’s been performing since the start of the Arab Spring becomes unstable. 
The government announced on Sunday that it will raise both the price of electricity and fuel for major mining firms, hotels and banks and the price of premium gasoline by 25 percent. The cuts are an effort to reduce the kingdom’s massive level of subsidies, which has jumped five-fold since the outbreak of the Arab Spring to more than $1.8 billion in 2011.
Like other Middle Eastern rulers, the king ordered budget-busting fiscal measures in the form of stepped-up subsidies and government hiring in an attempt to counter growing political anger and forestall political reforms. But more than a year later, his government can longer sustain the economic side of his balancing act – and that means trouble ahead on the political side, too, analysts say.
The subsidy cuts and price increases were designed to hit big businesses and the wealthy, thereby avoiding an explosion of street protests like the ones causes by similar steps in 1989 and 1996. They do not affect subsidies on cooking gas or electricity for lower-income households. But, economists say, it will result in higher inflation and slower economic growth as the impact gets passed along in the form of higher prices for consumer goods and services.
“We are talking about a wave of limited inflation, but one that will be devastating because it comes at a time of slowdown in the economy. It’s the worst combination you can have because it limits the creation of new jobs,” Ibrahim Saif, a resident scholar and economist at the Carnegie Endowment for Peace’s Middle East Center, told The Media Line.
The Arab Spring has complicated the task of governing Jordan, a small country that nevertheless serves as a lynchpin for the US and Israel in the Middle East because of its strategic location and relative stability.
The toppling of long-standing rulers in Egypt, Tunisia and Libyan has emboldened Jordan’s opposition to stage mass protests and step up demands for reform, and has cost the jobs of three prime ministers in the past 15 months. Civil war in Syria has brought critical trade to a standstill while unrest in Egypt’s Sinai Peninsula has cut the flow of cheap natural gas.
Gross domestic product, which grew an average of 6.5 percent in 2000-09, slowed to 2.5 percent annually in 2010 and 2011. It was supposed to show some small improvement this year, according to an International Monetary Fund (IMF) report last month, but that was based on “modest growth” for the mining and financial services sectors, both of which have now been hit by massive cost increases.
Hashim Mohamed Ibrahim Momani, the general manager of General Mining, which operates six gypsum mines around the country, told the Dubai daily The National that higher fuel costs are going to hurt his business. “It’s raising the cost of my overheads. We can't compete with cheap products coming in from the Gulf, where companies have access to cheap fuel,” he said.
Islamic and other opposition leaders have cut little slack for the government even if they recognize that Jordan can’t continue the subsidies regime. Capital Economics, a London-based constancy, estimates that Jordan’s fiscal deficit will widen from an average of 5 percent of GDP over the past decade to around 9 percent in 2012. That would raise the public debt level to 75 percent of GDP, a five-year high.
Prime Minister Fayez Tarawneh has warned the country's overall debt could reach $24.6 billion by the end of this year. The price hikes will bring in $425 million to state coffers as it tries to rein in a yawning budget deficit.
“We reject imposing more and more burdens on Jordanians,” the Islamic Action Front, the political arm of Jordan's Muslim Brotherhood, was quoted as saying by Agence France-Presse. “The government instead should restore stolen money and find an effective way to cut its own spending.”
Saif of Carnegie said very few Jordanians believe that the government’s efforts to buy time by imposing subsidiary cuts on the rich and on companies will work.
“The compromise was designed to avoid any reaction in the street … [But] I wouldn’t be surprised if more people take to the street when they realize the real impact of the price changes,” he said.
Jordan is need of an economic overhaul that would make its trade-dependent economy more internationally competitive. But Said Hirsch, of Capital Economics, doubts that Abdullah and his prime minster have the political wherewithal to tackle the big problems.
“Domestic political problems mean that the Jordanian government will find it almost impossible to reform the subsidies system in the near term without increasing social unrest,” he wrote in a note last week. “There are signs that the government is determined to remove some of the energy subsidies. But experience from previous administrations suggests that implementing reforms will prove difficult.”
Succor for Jordan’s economic woes – at least for the short term – is supposed to come from the IMF and from Saudi Arabia. Amman is seeking $3 billion from Riyadh and more recently put in a request for a $2 billion loan from the IMF, the Al-Arab Al-Yawm newspaper reported last week, citing an unidentified official.
If Jordan were to successfully reach an agreement with both donors, the amount should be enough to meet its $3 billion in external funding needs for this year, which comprise a current account deficit of $2 billion and another $1 billion of maturing debt, according to Capital Economics.
But the IMF, as a matter of policy, expects country’s like Jordan to get their fiscal house in order as a condition for aid. The Saudis have traditionally conditioned their aid on political concessions, but Saif said that they are increasingly reluctant to foot the bill for chronic overspending and may insist on economic reform this time around, too.