AMMAN Nov 14 (Reuters) - Facing the spectre of bankruptcy, the Jordanian government lifted fuel subsidies to avert economic collapse. But the Western-backed kingdom now risks instability after long averting the Arab Spring unrest that shook its neighbours.
The sweeping subsidies decision, which took effect on Wednesday after repeated delays, sparked scattered protests across the kingdom. Skirmishes broke out in the heart of the capital when anti-riot police dispersed hundreds of angry young men who occupied a major traffic intersection.
Price hikes caused by cuts in subsidies for fuel and food staples were one of the main grievances last year in the Arab Spring protests across North Africa and the Middle East.
Jordan's government, mindful of public fury that exploded into street clashes in the depressed south of the country after price hikes in 1989 and 1996, had been reluctant to raise fuel prices.
But a higher energy bill after the disruption of cheap gas supplies from Egypt and a steep drop in foreign grants have brought the aid-dependent kingdom to the brink of economic disaster. Mounting budget deficits reached $3 billion, or 11 percent of GDP.
Saudi Arabia, which provided a last-minute $1.4 billion cash handout to keep Jordan afloat last year, was unwilling to repeat the gesture, officials say, adding to pressure to act fast.
"If we the delay this further we would have faced a catastrophe and insolvency," Prime Minister Abdullah Ensour said in a televised address to the nation.
"We should have made this decision two years ago but successive governments could not do it for political reasons."
Ensour said slashing subsidies and instead channelling money to poor households was crucial to winning donor support and International Monetary Fund financing. He did not give figures on how much the decision would save.
A staunch U.S. ally with the longest border with Israel, Jordan has so far been spared the large-scale unrest of other Arab countries. The coming days will be crucial in testing whether that relative calm can continue.
Jordanian demonstrators have held sporadic protests over the past two years, demanding democratic reforms and curbs on corruption, but these have been peaceful and the security forces have not used arms. Although demonstrators sometimes chant against King Abdullah, few are thought to sincerely want to topple the monarchy.
"The protest movement does not want to change the regime and does not threaten the regime as much as it demands basic and fundamental changes in the way the regime is run," said Marwan al-Muasher, a leading liberal Jordanian politician and vice president of Carnegie Endowment for International Peace.
The monarchy is widely seen as a guarantor of stability, balancing the interests of powerful tribes native to the east of the Jordan river with those of the majority of citizens, who are of Palestinian origin.
"There is no alternative in Jordan to the Hashemite monarchy and even if there are voices that call for the downfall of the regime it is not representative, because Jordan's tribes and all parties agree the Hashemite regime is a safety valve despite the difficult circumstances," said Ghazi Rababa, a political science professor.
Nevertheless, forces pushing for reform in Jordan complain of resistance from an entrenched old guard composed of bureaucrats and members of influential tribes eager to preserve privileges and influence within the state.
During two years of protests, poor demonstrators in outlying provincial areas populated by native Jordanian tribes were motivated mainly by economic grievances and a sense the state was abandoning them.
In urban areas, by contrast, the mainstream Muslim Brotherhood, the country's most effective political opposition, was seeking broader political reforms, a sign in part of the desire of the Palestinian majority for a greater voice.
A costly subsidy system and a large bureaucracy whose salaries consume the bulk of state expenditure were increasingly untenable in the absence of large foreign capital inflows or infusions of foreign aid.
The price rises could boost the popularity of the Islamist opposition, emboldened by the successes of its ideological kin in Egypt and Tunisia. Islamists are already calling for protests in the next few days. They have never sounded more confident.
"The level of discontent is unprecedented in the history of Jordan," said Zaki Bani Rusheid, deputy head of the Muslim Brotherhood. "The Jordanian people are expressing their natural right to oppose this reckless move. If events develop then the responsibility is on those who created this problem."