Special Report: Jordan - Struggling with soaring inflation

17 July 2008

Amman is in the middle of a deeply unpopular subsidy reduction plan aimed at cutting the kingdom’s growing budget deficit, which means that soaring fuel and food costs are now affecting consumers rather than government finances.

Despite the unpopularity of the plan, the government had little choice. Thanks to soaring fuel and food prices, its current account deficit is spiralling. After three years of surplus between 2002 and 2004, the government now has an overdraft of JD1.97bn ($2.78bn) and a budget deficit equal to about 6.5 per cent of gross domestic product (GDP) in 2008.

Amman claims that its current fuel subsidy levels mean that every dollar increase in the price of a barrel of oil costs the treasury more than $28m.

The authorities are aware of the pain caused by the cuts and have sought to mitigate the impact by delaying the elimination of subsidies on liquid petroleum gas used in cooking and heating, and increasing public sector wages. They will review the situation in 2009.

The government has also instructed ministries to defer 15 per cent of project spending into next year.

There is no doubt that the country is seeking to act prudently in response to challenging circumstances. But in the short term, it is likely that the budget deficit and the current account balance will continue to plunge.

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