Tightening the belt: A programme of austerity is aimed at rebalancing the kingdom’s fiscal position

In 2012, faced with a range of major economic chal-lenges, the Jordanian government began implement-ing a new macroeconomic programme. This aimed at reducing the kingdom’s vulnerability to external shocks, particularly in the realm of energy prices and supply, while also seeking a fair distribution of the burdens that the fiscal deficit was imposing on the state. Fundamentally, the new programme was aimed at ensuring future economic stability and growth, via a series of important structural reforms.

Implementing this programme has not been easy, given the financial pressures many ordinary Jorda-nians face, the regional instability surrounding the country and the atmosphere of global economic uncertainty. Yet the kingdom’s leaders have taken dif-ficult decisions and pressed on with their programme despite some opposition. This is likely to yield posi-tive results, as the long-term effect of these reforms is the creation of a more sustainable macroeconom-ic climate in the years to come.

POLICY POINTS: The key plank of the programme has been to try and reduce the fiscal deficit. One of the main challenges is the loss made by the Nation-al Electric Power Company (NEPCO). Interruptions in the Egyptian gas used for electricity generation have resulted in the use of much more expensive fuel sources, as well as in system outages. Yet tariffs remained fixed, with the government guaranteeing the company’s losses. By November 2012, NEPCO declared that its debts had reached some $3.5bn, $2.64bn of which was in bank loans.

The NEPCO debt had thus became a major bur-den on the net public debt, which rose by 28.8%, or JD2.95bn ($4.15bn), between December 2011 and December 2012. Without an electricity tariff rise, the government also estimated that NEPCO’s losses would reach 5.8% of GDP by the end of 2012.

DEFICIT REDUCTION: Addressing the NEPCO issue is thus a major way of reducing the deficit overall. The government’s objective is to get NEPCO back to a cost-recovery position within four years. This plan dovetails with a wider effort to bring down the fis-cal deficit by reducing subsidies on fuel and fuel products. The fuel used by NEPCO (as well as that used by industry and by consumers) is being sub-sidised as part of longstanding efforts to tackle poverty and, more recently, to ameliorate protests exacerbated by the regional turmoil.

In late 2012, then, the government raised the pump price for gasoline 95 by 26% and gasoline 90 by 13%. Diesel and kerosene prices were also increased by 6%, while jet fuel, heavy fuel and gaso-line were brought under monthly price adjustment regimes, this method having been suspended in 2011. In 2013 kerosene and diesel will also enter into the monthly price adjustment method.

The immediate effect of this hike was to spark some social protest, though this had largely died away by the start of 2013. The more long-term impact has been an increase of inflationary pressures, with the Consumer Price Index rising from 4.4% for 2011 to 7.2% for December 2012, according to Capital Investment figures. This figure rose to 7.6% in March 2013, but fell back to 6% in April.

The programme also instituted a reduction in state expenditure of 2.1% of GDP, with current spending the target, as capital spending cuts were limited to just 1.1% of GDP. The military was given a haircut of 0.7% of GDP, operational and other current spend-ing of 0.2% of GDP, and subsidies of independent insti-tutions were cut by 0.1% of GDP. The fiscal deficit target for 2013, excluding grants, was thus set at 6.3% of GDP. Future targets in the programme for the primary fiscal deficit, excluding grants, are 4.8% of GDP in 2014, and 3.2% in 2015. The programme also assumes delivery of around half the contracted amount of Egyptian gas in 2013, along with the arrival of grants worth some 4.2% of GDP.

TAX REFORM: A major push on tax collection was also initiated to raise revenues – an estimated JD1.7bn ($2.39bn) in tax arrears is currently outstanding, according to the government.

A standard sales tax is being restored for hotels, luxury goods and building materials. A new income tax law was also submitted to parliament in late 2012, which is slated to come into play in 2013. This raises the income tax threshold, while also increas-ing the tax burden on higher-income earners.

Improvements in the tax administration system are also part of the plan, shifting from blanket cov-erage to in-depth, higher quality auditing. Public finance management should get a boost from the implementation of a new government financial man-agement information system.

MONETARY POLICY: In monetary policy terms, the dollar peg continues to be the foundation, with the Central Bank of Jordan (CBJ) narrowing the interest rate corridor in the first half of 2012, and then mak-ing several hikes in rates in response to regional instability. The CBJ has also been building up short-term government securities to try and control liq-uidity. The expectation is that an increase in grants and soft loans in 2013 may place some downwards pressure on dinar interest rates, with the CBJ ready to manage these potential risks to interest rate sta-bility via an active monetary policy.

In terms of structural changes, the fuel price increases are part of a long-term effort to roll back subsidies; the new programme also envisages a series of laws reforming the labour and financial markets, boosting job creation and making the kingdom more attractive to foreign investment.

The reforms also seek to ensure a level of equity in the effects of the cutbacks. Indeed, the govern-ment is not seeking to remove all of the safeguards it has for those less well-off, but to target these more effectively. As the IMF has pointed out, fuel sub-sidies can often benefit the rich more than the poor, as the well-off are better able to take advantage of them. The monthly fuel price adjustment system, then, will also likely be replaced in the future by tar-geted transfers, aimed at protecting the poor, if oil prices should rise above a benchmark $100 a bar-rel (the programme assumes that in 2013, prices will stay around the $94 per barrel level).

REFORMING NEPCO: Meanwhile, back at NEPCO, electricity tariffs were raised in June 2012 for telecommunications, hotels, energy-intensive indus-tries, and large domestic households and corpora-tions. This pulled down losses from an expected 5.8% of GDP to 5.3%, with the aim of reducing losses in stages to 2016. In 2013 the target is 3.8% of GDP, 2.7% in 2014, 1.8% in 2015 and 0.7% in 2016.

Accomplishing this goal is the subject of a major new plan for NEPCO (see Energy chapter). Fundamen-tally, the use of expensive diesel and heavy fuel oil has to be phased out, which will create the need for a variety of other energy inputs, as well as increased stability in Egyptian gas supplies.

Investment in renewable sources, nuclear power and shale oil are longer-term solutions, while improv-ing the facilities for receiving liquefied natural gas at Aqaba is a more medium-term goal. Gas imports from Iraq may also be a future possibility. The refin-ery and distribution markets will also be opened up to competition. In addition to these measures, 2013 will see more electricity tariff hikes.

RECEPTION TO REFORMS: Jordan’s ambitious reform programme has received the backing of the IMF, which has made ready a standby fund of some $2bn. In its implementation, the programme can draw on some continuing strengths in the Jordanian econo-my. The banking sector, for instance, has survived and prospered despite the recent challenges, and is well capitalised and profitable (see Banking chapter).

The main challenge, some businesses say, is in the political and social consequences of the austerity pro-gramme. The government has made it clear that it intends for all sectors of society to play their part, recognising that fairness is a central condition of its acceptance by society at large.

In this vein, the government has also pushed for-ward with an anti-corruption drive, targeting even some senior figures in the administration and royal court, as a way of illustrating that it is serious about tackling this longstanding issue.

The government endorsed the programme in November 2012, with the new administration that took office after the January 2013 general elections following suit. Indeed, in terms of the structural changes, the parliament and government roles are crucial, as a large number of temporary laws passed by previous parliaments are currently still in place and overdue for debate and promulgation. There is a great deal of work for the administration to do, therefore, in the months to come. In the meantime many ordinary Jordanians – along with government departments and businesses alike – will be tighten-ing their belts. They will doubtless also be hoping that the macroeconomic programme enables the swiftest possible end to the current austerity drive.