Jordan hikes gasoline, power prices to ease deficit

AMMAN, (Reuters) – Jordan has raised the price of gasoline and electricity for major mining firms, hotels and banks as part of IMF-guided austerity steps to ease its worsening budget deficit that could reach $4 billion this year.

Sunday’s move was the first major rise in retail gasoline prices since street protests early last year – inspired by a wave of Arab unrest – pushed the authorities to expand social spending and freeze fuel price hikes, including gasoline.

The price of premium petrol has been increased almost 20 percent while electricity tariffs have also been substantially raised for major industrial and service sectors of the economy, including banks and hotels.

Prices of bulk LPG, heavy fuel oil for industry, jet fuel and bunker fuel were also hiked in a move economists say will add to inflationary pressures and hurt the country’s exports competitiveness by pushing costs.

The government, mindful of public fury that exploded into street clashes in the depressed south of the country after two price hikes in 1989 and 1996, has not raised the price of lower grade gasoline used by lower-income Jordanians – the majority of the country’s seven million population.

Successive governments have adopted an expansionist fiscal policy characterised by sizeable state subsidies and salary increases in response to the months of protests.

To head off greater unrest, the authorities also created new state jobs in an already bloated public sector, and maintained subsidies for bread and other staple goods, further straining public funds.

In the latest sign of popular discontent, Islamist and tribal opposition groups held street protests against rising prices on Friday.

Officials say the focus on taxing Jordan’s wealthy and big corporations while avoiding any moves to raise prices of subsidised gas cylinders for cooking or electricity for lower income households will ward off any troubles, especially in traditional trouble spots where anti-government protesters had warned they would resist price hikes that harm the poor.

Jordanian officials say the price hikes will show a serious commitment to fiscal consolidation and win the International Monetary Fund’s (IMF) continued support and further aid.

An IMF team raised with officials at a meeting last month the prospect of the country facing a bleak economic plight if the authorities fail to contain the public sector wage bill and restore fiscal prudence.

The cabinet also announced long-planned electricity tariffs for key corporate sectors including banking, a pillar of the economy, a move that will hit the country’s struggling businesses, already reeling from the slowdown.

A senior official told Reuters that the government also planned raising taxes on banks, mining firms and large corporations, along with slapping higher taxes on luxury items.

The moves, seen as appeasing protesters demanding a fight against corruption and angry at a widening gap between the rich and poor, were criticised by a business community already reeling under heavy direct and indirect taxes.

They say such moves will not only scare investors but a drop in business activity where growth has halved in the last few years from a high 6-7 percent during a boom period until 2008, will offset any gains from higher taxes.

The budget deficit has been accentuated by a soaring energy bill that hit $4.5 billion last year after the disruption of regular Egyptian gas imports that support 80 percent of Jordan’s electricity generation.

That forced the kingdom to switch to much more expensive diesel to cover its electricity needs.

Economists said Jordan’s ability to maintain a costly subsidy system and a large state bureaucracy, whose salaries consume the bulk of the $9.6 billion of state expenditure, was increasingly untenable in the absence of large foreign capital inflows or infusions of foreign aid.

The austerity package has become more pressing with absence of any commitment so far by Saudi Arabia, which came to the rescue of the kingdom last year with a $1.4 billion cash injection, to extend any extra aid to bolster the kingdom.

Officials say the rise in gasoline prices along with fiscal prudence and restraint will help Jordan meet an IMF-backed budget deficit target of around 6 percent of gross domestic product after grants that traditionally cover budget shortfalls.