Amman government faces subsidies battle

07 December 2007

With the oil price at a record high and the cost of cereals rising, Jordan’s subsidies are unsustainable. But plans by the new government of Prime Minister Nader Dahabi to cut them carry significant political risks.

In the recent book ‘The Life of King Hussein in War and Peace’, the king is quoted as saying: “We were totally cut off and we needed oil and there was only one way: to fly it across Israel into Jordan.”

Hussein was recounting Jordan’s oil crisis in 1958 when the kingdom found itself without any source of oil after the Iraqi coup that year. Almost 50 years later, the country faces a different type of oil crisis. Unlike 1958, Saudi Arabia and Egypt are both prepared to sell oil and gas to Jordan. The problem is, Jordan cannot afford to keep buying it.

When the new Jordanian government led by Prime Minister Nader Dahabi was appointed on 25 November, it immediately faced its toughest task: drawing up a budget for the year ahead that would cut petrol, food and energy of subsidies without provoking a political crisis.

Jordan’s government is keeping the price of petrol at the pump artificially low at a time when oil has reached all-time record prices on world energy markets. In the second half of 2007, the government has been buying oil at $80 or $90 a barrel on world markets but supplying it to its citizens at $60 a barrel.

Soaring deficit

The state predicted the oil price would average $60 a barrel in 2007, so made no provision for a fuel subsidy in its budget. With oil prices far exceeding that, the Finance Ministry estimates the government will spend JD250m ($353m) on petrol subsidies by the end of 2007.

The subsidies add to the government’s soaring budget deficit. Even without any allowance for fuel subsidies, the government forecast a deficit of JD385m in its budget for 2007.

With oil in excess of $90 a barrel in recent months, in early October credit ratings agency Moody’s Investors Service increased its forecast for the full-year budget deficit to JD494m.

The report, written by Tristan Cooper, vice-president of Moody’s, says: “We remain concerned by the size of the current account deficit, but note that the deficit continues to be financed comfortably with non-debt-creating sources.”

By early November, the Finance Ministry had increased its own estimate of the deficit to JD561m for the year. Record oil prices of almost $100 a barrel in November added to the strain on the government’s finances.

Subsidising crops

But it is not just oil prices that are causing problems for Dahabi and his new Finance Minister Hamad Kasasbeh. The government is also spending more than predicted to keep down the price of cereals, after a surge in the price of wheat and barley in the autumn.

Having spent nothing on food subsidies in 2005, it spent JD64m on the two crops in 2006. And the government estimates it will spend JD200m subsidising wheat and barley by the end of 2007.

Barley, which is used as animal feed, consumed about JD35m in subsidies. The government expects to spend JD165m on the wheat subsidy.

As a result, the budget deficit for the year is likely to be even higher than the ministry’s November forecast, according to Essa Saleh, director of studies and economic policies at the Finance Ministry.

“Maybe the budget deficit will be increased by JD50m to JD600m,” he says. “It is because of the huge increase in oil prices and the increase in cereal prices.”

Food subsidies could prove to be more dangerous to public finances than petrol subsidies in the long term.

The government did not expect to subsidise food in 2007 and made no provision for food subsidies in the budget it presented to parliament on 1 December 2006.

Jordanians have been preparing for rising petrol prices. The issue often appears in Jordan’s newspapers and there were price rises under the past two administrations.

Under the governments of prime ministers Adnan Badran, who was in power from April to November 2005, and Marouf Bakhit, who succeeded him as prime minister until November 2007, oil prices were increased three times.

The price was raised in April 2005 at the beginning of Badran’s government, and again in September the same year. The government of Bakhit, which was appointed to restore security and confidence after terrorist attacks aimed at hotels in Amman in November 2005, also increased prices in April 2006.

Dahabi’s government would be in a much deeper political hole today if his two predecessors had not taken the politically unpopular step of raising prices. “Without increasing the oil price in 2005 and again in 2006, the oil subsidy may have reached more than JD500m this year,” says Saleh.

Oil high

However, even the earlier price rises are not enough to lessen the adverse effects of the current high oil prices. “If the average price of oil in 2008 is $90, the subsidy, without increasing domestic prices, could reach JD700m,” he says.

Oil subsidies are so politically sensitive in Jordan that the last attempt to reduce them cost former finance minister Ziad Fariz his job. In August, Fariz resigned after the other cabinet ministers rejected his plan to bring an immediate end to petrol subsidies. Ordinary Jordanians were outraged that their finance minister had been prepared to make them pay more for petrol. Bakhit, the then prime minister, said his government would honour a pledge it made in a December 2006 budget speech that petrol prices would not rise in 2007.

Jordan has a problem with oil because its economy became reliant on cut-price oil imports from Iraq for several decades. During the Iran-Iraq war, Iraq provided Jordan with cheap oil in return for the Jordanians’ military and logistical support.

Iraq continued to supply Jordan with cheap oil in the 1990s after UN sanctions severely limited the number of countries that were prepared to buy Iraq’s oil. With an abundance of cheap oil, Jordan’s government felt no need to constrain demand. Successive governments acted as though cheap oil would keep flowing forever. When the US invaded Iraq in 2003, Jordan’s supply of cheap oil stopped.

Despite the disagreements and controversy, recent Jordanian governments have done a good job of cutting subsidies as much as they can.

The government spent JD310m keeping petrol artificially cheap in 2005. Thanks to two subsidy cuts, the bill fell to JD270m in 2006. Even though petrol prices recently set an historic record, the subsidy bill for 2007 will be marginally less than in 2006, at JD250m.

What Fariz failed to achieve in August, his successor Kasasbeh hopes to introduce in 2008. Kasasbeh announced in September that petrol subsidies would end in January 2008. The measure is included in the 2008 budget, which parliament received on 1 December.

Rather than increase petrol prices so that they match the current price for crude oil, the government will stop setting prices and allow the market to determine how much people pay.

“The government is going to liberalise the market,” says Saleh. “The price of oil products will be reflected by the international prices and the price at the petrol pump will be adjusted automatically.”

Allowing the market to set petrol prices carries risks in an economy where many people have been used to the petrol price being determined by the government, rather than a function of supply and demand on international markets.

The government hopes to make the end of general petrol subsidies more acceptable by introducing a JD300m package of targeted subsidies for the poorest in society. The details of who will benefit and by how much have yet to be made public.

Government handouts

A number of government agencies that already give handouts to the poor will supervise the distribution of the JD300m.

One, the National Aid Fund, has already been involved in discussions about targeting handouts, but it still does not know how many people it can afford to help.

The state will make food subsidies more bearable on the public purse by ending the subsidy on barley, but not on wheat.

“We will not end subsidies for the wheat, but we will for the barley,” says Saleh.

“The government is going to leave wheat for the moment because cutting the subsidy will affect everyone. The price of wheat in Jordan is one-third of the international price.”

The Finance Ministry will need to be careful its handouts reach the most needy. Even if they do, Jordan’s middle classes are likely to protest at the higher petrol prices they will be expected to pay.

If Dahabi and his finance minister get both their political and economic calculations wrong, it could well be a shortlived administration.

TABLE: Oil and cereal subsidiaries 2005-07

 Oil ($m)Cereal ($m)

* Revised estimate
** Forecast

Source: Finance Ministry

Jordan’s government

  • Prime Minister and Defence Minister: Nader Dahabi

  • Finance Minister: Hamad Kasasbeh

  • Interior Minister: Eid Fayez

  • Foreign Affairs Minister: Salah Bashir

  • Information & Communications Technology Minister: Bassem Roussan

  • Minister of State for Prime Ministry Affairs:Thouqan Qudah

  • Tourism & Antiquities Minister: Maha Khatib

  • Justice Minister: Ayman Odeh

  • Public Sector Reform Minister: Maher Madadha

  • Governor, Central Bank of Jordan: Umayya Toukan

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