Oil subsidy drains economy

Jordan's economy will remain mired in debt because public hostility to rising prices will prevent King Abdullah II from ending expensive oil subsidies next year, according to ratings agency Moody's Investors Service.

The country's finance minister Hamad Kasasbeh promised to remove the last oil subsidy early in 2008 because keeping petrol prices artificially low was preventing the government from paying off its huge debt to

foreign lenders.

'Official projections foresee the central government deficit narrowing to less than 4 per cent of GDP based on the assumption that domestic fuel will reflect world prices,' says Tristan Cooper, an analyst at Moody's.

'We are more conservative

in light of the hostility of public opinion towards further

price hikes.'

The central government's deficit will grow from 4.4 per cent of GDP in 2007 to 4.6 per cent in 2008 because the government will be unable to end oil subsidies, added the analyst.

The government cut subsidies on oil prices six times between April 2002 and April 2006, but the cost of keeping prices low is still a major drain on the finance ministry.

Ministers were forced to start cutting petrol subsidies when the US decided to invade Iraq in 2003, bringing an end to cheap oil exports from Sadaam Hussain's regime.

The price of petrol is such a critical political issue in Jordan that Kasasbeh's predecessor as finance minister, Ziad Fariz, resigned in August after fellow ministers blocked his plans to bring oil subsidies to an end

this year.

The budget deficit would be even worse without the continued strong performance of the domestic economy. GDP grew by about 5.8 per cent in the first half of 2007, compared with the first half

of 2006.

www.meed.com/economy