x Abu Dhabi, UAEMonday 24 July 2017

Subsidy reform in Jordan's long-term interests

Jordan is not alone in the subsidies trap. Other governments too can't afford to continue keeping consumer prices low, but don't dare let them go up.

Jordan has had five prime ministers in two years. Elections are scheduled for January 23, but the opposition Muslim Brotherhood threatens to boycott them. At least 200,000 refugees from Syria have crowded into the country of 6.2 million in recent months; there have been border clashes with Syrian troops. Modest constitutional reforms announced last year by King Abdullah II have unleashed persistent demands for greater change. The country has a history of protests - most recently in September - whenever the government tries to trim the costly subsidies that hold down consumer fuel prices.

All in all, then, this week was not the most propitious time to try again to slash subsidies, raising the price of cooking gas, for example, by 53 per cent. Heated protests promptly broke out in several cities.

But Prime Minister Abdullah Ensour has little choice. Subsidies on fuel and other staples blow an annual $2.3 billion (Dh8.45 billion) hole in the government's budget, which this year will have a $3.5 billion deficit. Reducing the cost of subsidies was a condition of an urgently-needed $2 billion loan from the International Monetary Fund, approved in August.

While Jordan is in the headlines right now, the subsidy noose is tightening slowly in several other Middle Eastern and North African countries. The dilemma is simple: rising energy and food prices make subsidies more costly to governments and deficits are an ever-bigger problem as lenders become wary of sovereign debt - but consumers take to the streets if subsidies are cut, even if price increases occur in stages.

There is cruel irony in Jordan's problem. The country imports 95 per cent of its energy, including large amounts of natural gas from Egypt. That flow has been disrupted recently, amid allegations that Egypt's Muslim Brotherhood rulers were looking for a way to help their Jordanian counterparts profit from the crisis to gain political influence.

But Egypt, with its 80 million people, has a severe subsidy and deficit problem of its own, and there the government must now manage the issue, rather than merely exploit it.

Everywhere, consumer subsidies create a black hole for state funds. The idea that governments can just write cheques to shelter populations from global economic trends is frequently disproved. What governments can do is create conditions for economic efficiency, while sheltering the poorest from severe hardship. Real economic reforms often constitute short-term pain for long-term gain; selling that truth to consumers is the challenge for leaders everywhere.