Amman faces growing deficit after reinstating subsidies

20 March 2008
Amman's budget deficit is likely to increase significantly this year unless far-reaching spending cuts are made, after King Abdullah reversed his decision to scrap subsidies for gas and barley.

The government scrapped subsidies on petrol, diesel, kerosene, gas and barley with effect from 8 February, in a move the Finance Ministry predicted will save more than JD700m ($988m) in 2008.

However, King Abdullah has now decided to reinstate subsidies on gas and barley without reducing the handouts designed to compensate low and middle-income Jordanians. No reason has been given for the change.

“If they now continue to compensate fully for the subsidies, that would put into question their budget, at least the financing of the budget,” says Luc Marchand, analyst at ratings agency Standard & Poor's. “There is a risk of a spike in the deficit, and that is worrisome.”

The government will ask for extra money to pay for gas and barley subsidies in a supplementary budget, which will be presented to parliament in April.

The Finance Ministry has already had to seek JD190m through a supplementary budget after it agreed to give bigger handouts to government employees than originally planned.

“The ministry needs to add the costs of this decision [King Abdullah's announcement] to the supplementary budget,” says Essa Saleh, director of studies and economic policies at the ministry.

Finance Minister Hamad Kasasbeh has to give a breakdown of the spending in the supplementary budget when he presents it to parliament. “We have to announce the reasons behind every item,” says Saleh.

The government was already forecasting a budget deficit of JD724m, or 5.6 per cent of gross domestic product, for 2008.

The supplementary budget will add several hundred million dinars to the deficit unless the government finds a way of balancing out the additional expenditure.

The government can either cut spending or increase taxes.

The Finance Ministry has already asked other government departments to cut their spending by 10 per cent, saving JD112m.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications