Amman’s struggle to balance the budget

17 July 2008
The government’s policy of cutting subsidies to reduce its deficit is causing growing resentment among the population, many of whom are finding it difficult to afford the basic necessities of life.

In late May, King Abdullah announced to the most senior members of his government that there were “no concerns about the future of Jordan”. The next day, the statement was splashed across the front page of the Jordan Times, the country’s most widely read English-language daily.

Although the king remains highly respected, the majority of Jordanians dismissed the statement. They know the reality is very different. Jordan is beset with difficulties. The US-led inva-sion of Iraq in 2003 brought an abrupt end to the country’s supply of cheap oil, and spawned a flood of Iraqi refugees into the kingdom, who have been blamed for a dramatic increase in property prices.

Since then, the price of oil has risen to unprecedented levels, accompanied by an exponential rise in food prices. At the same time, cuts to subsidies on domestic fuel have made life even harder for ordinary Jordanians.

In purely economic terms, the government’s removal of subsidies is understandable. Finance Minister Hamad Kasasbeh stated earlier this year that if fuel subsidies had not been lifted, every dollar increase in the barrel price of oil would have cost the government JD20m ($28.2m). Amman’s treasury is already substantially in the red and could not sustain the extra spending (see interview with Kasasbeh, page 32).

To the free-market economists at the International Monetary Fund (IMF), cutting subsidies, along with planned cuts in expenditure and continued efforts to attract foreign direct investment (FDI), is the best thing the government could have done. For Jordanians, the theoretical benefits are overshadowed by the rising cost of living.

Lifting subsidies

“The years 2007-08 have been the worst in recent history for Jordan’s citizens,” says May al-Taher, deputy director general of Al-Urdun al-Jadid Research Centre, an independent thinktank based in Amman. “Fuel subsidies were lifted three times in 2007. Each time, the government said it would be the last, but after a couple of months prices would go up again.”

The rise in fuel prices has also had a knock-on effect on a range of commodities for which transportation costs are an important element. In particular, it has exacerbated the impact of global food price inflation. “The price of every single food item has risen,” says Al-Taher. “A portion of falafel - considered to be the meal for the poorest people - went up from 250 fils to 350 fils in the space of a few days in February or March, and the portions got smaller.”

It is a tale that is repeated by many in the streets of the capital. “Life is changing,” says Adel, the owner of a mobile phone shop in down-town Amman. “The hike in prices is affecting everything, not just food and fuel. The economy is booming but we don’t see any change. People cannot afford to spend money. It is 3pm and I have only made JD2 [$2.82] in profit today.”

The government insists that the population understands the necessity of subsidy cuts and appreciates that its harsh fiscal discipline is
the best way to create sustainable economic growth. But Jordanians are not concerned with the increasing levels of FDI or the management of the fiscal deficit. The fact that they are struggling to afford basic necessities such as food, fuel and housing is critical.

“Of course there is an economic explanation for the government’s need to raise more revenues to pay off debts and address the budget deficit,” says Al-Taher. “But which ordinary citizen cares about the balance of payments and rescheduling of debt?”

Changing priorities

There is a recognition that external factors have a substantial role to play in the difficulties that Jordan is facing. In particular, locals point to the impact of the Iraq war. “When we got free oil from Saddam [former Iraqi president Saddam Hussein], we were happy, we did not feel the pressure of life,” says Adel. “When Saddam was hanged, life changed 100 per cent. The situation really worsened. Now, people are concentrating all their efforts on working for their daily livelihood. Food is the number one priority.”

Although the money brought into the country by the influx of Iraqi refugees in the immediate aftermath of the invasion was positive in some ways, it also contributed to price inflation. “Property prices went up so suddenly it was like a switch was flicked,” says Abdel, a student in Amman. “Prices doubled everywhere but salaries did not increase.”

The government admits that while the Iraqi refugees are welcome, their arrival has put a strain on the economy. “Since 2003, refugees from Iraq have put a heavy pressure on the demand for private and public goods and services - especially health and education,” Finance Minister Kasasbeh tells MEED. “This has had a direct impact on our budget and caused prices to go up, affecting the livelihood of our citizens.”

But many Jordanians say the government’s policies are making the situation worse. “Every day the government introduces new taxes to try to find new ways to take money from us,” says Abdel. “I don’t sympathise with the government. Jordan does have foreign debts, but the government uses this as a pretext for taking money from the people for its own interests. The talk of improved services for the people that we read in the papers is just talk - we don’t feel it.”

High unemployment

“The method by which the government has dealt with these issues is not being felt by the people,” says Hamza Mansour, secretary general of the Islamic Action Front (IAF), the country’s main opposition party. “A large part of the population is unemployed, and a large number of people live under the poverty line. Most investments do not create jobs, because they are not in the right fields. There needs to be more investment in the agricultural and industrial sectors.”

There is particular resentment of the speed with which the cuts in fuel subsidies have been introduced. Between 10 March and 31 May 2008, the price of kerosene, used for heating and cooking, increased by 13.5 per cent, while the price of low-grade, unleaded petrol rose by 12.2 per cent. The price of diesel, used in trucks and residential heating, has doubled since 2006 and is now almost six times the price it was in 2001.

Efforts have been made to ease the pain of these policies. “The government implemented a social safety net, which included shifting from commodities subsidies to direct subsidies in the form of increased salaries to employees and aid to the poor,” says Kasasbeh. “This safety net also included tax exemptions on basic commodities, housing projects for the poor and many other measures.”

In July, implementation of the first phase of the government’s ‘Decent Housing for Decent Living’ scheme began, under which 20,000 houses will be built this year, and a further 100,000 in the next five years in an effort to provide affordable housing in Amman.

But most people say these measures have been insufficient. “People who received the increase in wages say that it by no means covers the rise in prices, and the government only employs about a third of the labour force, so about two-thirds did not benefit,” says Al-Taher.

“The government did provide some money to people when the fuel subsidies were first cut, but it was a one-off payment and is just not enough,” says Hani, an Amman taxi driver.

The housing scheme has been welcomed, but there is scepticism over whether the
programme will be sufficient to meet demand, and whether the prices will be within the reach of those in greatest need.

As yet, the government has failed to reach a deal with banks on the provision of mortgages. Banks are keen to ensure that mortgage repayments will be met, but Amman is reluctant to provide support for a subsidised mortgage rate to ease the problem. “I don’t think people will be able to afford the houses,” says Mansour. “They will be too expensive for people to keep up with [mortgage] payments.”

There has been widespread opposition in recent months to the sale of government land to international companies, particularly a reported deal to sell the army-run King Hussein Medical Centre in Amman to a foreign investor, which the government has denied. “The sale of public land shows that the government is bankrupt,” says Mansour. “It is a very sensitive issue because the country is not a commodity for sale. We think the government has not been transparent in this regard.”

The accusation of a lack of transparency - a charge the king was quick to rebuff in his end-of-May speech - is also affecting the public image of the administration’s policies in other areas. “Corruption and a lack of good governance are creating a poor perception of the government,” says Al-Taher. “The tax system is not comprehended by anyone, which creates the perception that the government is looking for any way it can to increase revenues by increasing taxes everywhere and removing subsidies.”

Under the kingdom’s current electoral system, there is only limited scope for Jordanians to express dissatisfaction with the government.The prime minister, members of the council of ministers (cabinet) and senate (parliament’s upper house) are all appointed by the king, in whom most executive power is invested. Although the national assembly (lower house) is elected, the government has the power of veto over potential candidates.

This veto makes it difficult for organised political parties to win substantial seats in the assembly. At the national polls in November 2007, the representation of the IAF, the only organised political opposition group, fell to just six deputies out of a total of 110, the lowest return for an Islamic movement since the parliamentary system was reintroduced in 1987.

Divisions within the party, its partial boycott of the elections, and the group’s attendance the previous June of the funeral of Abu Musab al-Zarqawi - a Jordanian-born Islamic militant who was head of Al-Qaeda in Iraq, the organisation responsible for the bombing of three major international hotels in Amman in November 2005 - are understood to be among the reasons for the poor performance.

Election concerns

The elections were designated as largely free and fair by international observers, but there are obvious limitations to political opposition in the kingdom. A recent law on political parties has increased the criteria necessary for opposition movements to qualify to run in elections, resulting in a fall in the number of opposition groups from 37 to about 16. A recent relaxation of the laws restricting freedom of assembly has also been widely condemned as insufficient.

But the people of Jordan are not as politically charged as those in other countries in the region, making outspoken political activism or serious social unrest unlikely. While people will criticise government policies, there is a great reluctance to condemn the system itself.

“We do not talk about the monarchy, we talk about the government,” says Mansour.

With such loyalty, though, comes responsibility. There is great determination in Amman that Jordan will ride out the current global economic storm. But while the storm rages, it is important that it does not forget to provide shelter for its people.

  • Food inflation (Jan-May 2008) - 15.5%

  • Fuel and electricity cost inflation (Jan-May 2008) - 44.3%

  • Increas ein price of diesel between 2001 and May 2008 - 473%

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