Arab leaders pin hopes on subsidies to allay anger

Analysis: Experts warn the moves might actually prolong or exacerbate the economic imbalances that helped spark the unrest.

Egypt McDonalds 311 (photo credit: Associated Press)
Egypt McDonalds 311
(photo credit: Associated Press)
BEIRUT— Arab leaders are scrambling to boost salaries and subsidies in a bid to head off the kind of popular uprisings that have threatened the Egyptian president's hold on power and led to the ouster of Tunisia's leader after more than two decades.
But experts warn the moves might actually prolong or exacerbate the economic imbalances that helped spark the unrest in the first place.
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"Subsidies are needed now for short term political survival," Said Hirsh, Mideast economist with the London-based Capital Economics, said Wednesday. But paying for these programs and efforts will squeeze the countries' finances in the coming months and years, he added.
"This means less money for much needed economic reform programs and required investments, which is what is ultimately needed across the region," Hirsh told The Associated Press.
Expected drops in tourism revenue and foreign direct investment — key sources of revenue for many countries in the Middle East — will only exacerbate the problems.
In the wake of the uprisings in Egypt and Tunisia, countries including Jordan, Yemen and Syria announced plans to ease the rage over decades of economic injustices by boosting subsidies on food and heating oil, increasing salaries and lowering taxes.
Egypt and Tunisia made similar promises as the countries' leaders came under siege.
The subsidies have not quelled the unrest, much of which is linked to larger issues such as anger over corruption and authoritarian rule. But many welcome even token attempts to lessen the burden in an autocratic region where poverty cuts across vast swaths of the population.
"What the government did was a step in the right direction," said Leila Rousan, 28, a bank clerk in Jordan, where the government announced a $550 million package of subsidies for staples such as fuel, rice and sugar. "Now, it must clamp down on corrupt officials in the government, who are pocketing the revenues that must go to the poor."
Jordan appears to be facing a stark choice: either boost spending and sink deeper into debt, or continue on the same path and risk angering an already disaffected population.
Click here for full Jpost coverage of unrest in Egypt
Click here for full Jpost coverage of unrest in Egypt
The country's economy, which relies extensively on foreign investment and tourism for revenues, is already weighed down by a record deficit of $2 billion this fiscal year, a swelling foreign debt, rising inflation and rampant unemployment and poverty.
Although the country has seen smaller demonstrations than those in Egypt, King Abdullah II tried to head off bigger demonstrations by firing his Cabinet. But the moves have only served to spotlight the nation's economic vulnerability and investors are already starting to react, fearing that the momentum in Egypt will ripple across to Jordan.
Ratings agencies Moody's and Standard & Poor's have downgraded a host of ratings for Jordan.
"We believe ongoing turmoil will lower Jordan's medium-term growth prospects and damage its public finances," S&P credit analyst Luc Marchand said Tuesday, adding that the unrest in the region is likely to result in lower economic growth and fiscal revenue expectations.
In Yemen, the poorest nation on the Arabian peninsula, the government is increasing wages by up to 25 percent for more than 1 million civil and military employees — at a cost of $415 million. The government also moved to create 60,000 jobs for college graduates and exempted students at state-run universities from paying the rest of their tuition.
Syria announced a $255 million program to provide cash for the poor and said it would boost heating oil allowances from $20 per month to $32, the first increase of its kind since 2001.
Whether such measures will be enough is questionable.
The protests that have rippled across the Arab world were touched off by demonstrations in Tunisia that led to President Zine El Abidine Ben Ali's ouster last month after 23 years in power.
Just days before fleeing Tunisia, he tried to assuage economic grievances by going on national television to promise 300,000 new jobs over two years.
As riots began to grip Cairo and other Egyptian cities, President Hosni Mubarak offered more economic opportunities in a country where half the people live on less than $2 a day. But demonstrations have raged toward their third week, presenting Mubarak with his most serious political challenge in his nearly 30-year rule.
The government is now trying to sap the momentum of protesters by addressing some of the issues that precipitated the unrest.
Egypt's newly appointed Cabinet earlier this week approved a 15 percent salary and wage increase for state employees, as well as a similar increase in pensions effective April 1. The increases are expected to cost the treasury about 6.5 billion pounds ($1.1 billion), according to the Finance Ministry.
With millions out of work for over a week because of the demonstrations, the government also tried to win support by helping the people make up for lost wages and time.
Owners of Cairo's new white metered taxis got a one-month grace period for paying the installments on their vehicles. In addition, a 5 billion compensation ($854 million) fund was set up to cover losses sustained by small businesses during the period of looting, arson and violence that came during the first week of the demonstrations.
The government, which paid about 100 billion pounds ($17.4 billion) in subsidies last year, also said it would shoulder the costs of global commodity price increases — a step aimed at avoiding a further spike in food inflation costs that now run at about 17 percent per year and are seen as a key driver of unrest in the Arab world's most populous nation.
The efforts won't come cheap.
Egypt's hope to lower its budget deficit relative to GDP are unlikely to pan out in the short-term as it boosts spending. It also faces major challenges from an expected decline in tourism after the protests prompted an exodus of at least 160,000 foreigners from the country. Government officials have put the tourism losses as high as $1.5 billion so far, though many analysts say this figure is inflated.
Cairo-based Mideast investment bank Beltone Financial said in a research note that it was concerned about the country's fiscal position in the coming years in large part because of potential hits to foreign direct investment and a battering of investor confidence.
Egypt has seen several of its ratings downgraded by all three international ratings agencies.
But for the poorest of the poor in the region, there is little concern beyond the most immediate needs.
"All I care about is being able to feed my hungry children," said Mahmoud Abu-Shilbayeh, 45, a trash collector in Amman, Jordan. "We want deeds, not lip service."