Jordan yesterday backed down from a 10 per cent increase in retail prices for petrol and diesel fuel. The decision, following street protests by taxi drivers and others, is a reminder that governments everywhere that subsidies on consumer products are far, far easier to impose than to end.
The political temptation of artificially low prices for petrol, bread and other essentials is obvious. But economic reality is implacable, and subsidies can quickly ruin national budgets.
Oil-importing states like Jordan and Egypt are most vulnerable, but subsidies are inefficiently costly for every country, including Arabian Peninsula states such as the UAE that are energy exporters: selling oil at world prices, and investing the profits in the domestic economy, would be far more effective.
Wealthier states can sustain subsidies, but most others cannot. Fuel subsidies will cost Jordan 650 million dinars (Dh3.4 billion) this year, more than a quarter of the country's ominous annual budget deficit.
Jordan is not alone in this trap. The International Energy Agency estimates that state subsidies on fuel, including coal, cost $650 billion (Dh2.4 trillion) globally in 2011. The lowest petrol prices in the region are found in Egypt, which spends about 100 billion pounds (Dh60 billion) per year on subsidies, sapping strength from crucial post-Mubarak reforms.
Both countries offer clear examples of how hard it is to back away from artificially low prices once they're in place. Just last month the IMF loaned Jordan $2 billion (Dh7.35 billion) demanding subsidy reductions and other moves towards a balanced budget in return. The government has been taking measured steps to escape the subsidy spiral: the now-aborted price increase would have been the second this year, in an effort to raise petrol prices gradually towards world levels. In May, regular petrol rose by 10 per cent and premium by 20 per cent.
Also, direct cash payments to the poorest Jordanians, supplanting the reduced subsidies, had been promised for next year. As a tool for helping the poor, this approach can be vulnerable to abuses, but promises to be far more effective than subsidies, which benefit rich and poor alike.
In the UAE, the Federal National Council dispensed with a proposal this year for even lower petrol prices. Lower prices would benefit consumers in the short term, but also lock in the same market distortions that contributed to petrol stations turning off the pumps in the Northern Emirates last year. In the long term, a gradual rise to market prices would benefit both the country and its citizens.
