Jordan subsidy cuts to spur aid, growth: minister

AMMAN Thu Nov 22, 2012 7:08am EST

AMMAN (Reuters) - Jordan's controversial fuel price hikes last week, which sent thousands of protestors onto the streets, have been painful but clear the way for the economy to grow and attract foreign aid, a minister responsible for economic policy said on Wednesday.

"This decision was made when we had not yet started sliding off the edge, to make sure that we can continue in the right direction and that it will not be too late," said Planning and International Cooperation Minister Jafar Hassan.

"The longer we waited, the higher the cost of funding and the higher the debt burden would be, and at the same time the closer and closer you move towards a crisis that would be more difficult to escape."

Thousands of demonstrators, some chanting the Arab Spring slogan "the people want the downfall of the regime", protested for three days last week after the government cut fuel subsidies in order to shore up its shaky finances.

Hassan's comments, made at the Reuters Middle East Investment Summit, suggested the government was unlikely to back down from its subsidy reforms, and that it felt the long-term risk of failing to repair its finances outweighed the short-term threat of street protests.

Jordan's economy, which imports almost all its energy and commodity needs, has suffered from last year's Arab Spring uprisings in the region. Tourism receipts, remittances from Jordanian workers abroad and investment inflows have been hit.

Hassan said the government had been obliged to earmark more than a quarter of its $9.87 billion annual budget to paying for electricity production after the revolution in Egypt disrupted cheap gas imports, forcing Jordan to import expensive fuel oil.

The Syrian civil war has cost Jordan hundreds of millions of dollars by disrupting the transit route for trade with Europe through Syria, Hassan said. Caring for Syrian refugees has cost about $500 million.

The International Monetary Fund agreed in August to provide a $2 billion loan to Jordan, but this is expected to cover only a fraction of the country's needs.

BUDGET

Hassan did not say how much the subsidy cuts would reduce pressure on Jordan's budget, but other Jordanian officials have estimated they could save about $1.1 billion.

The adjustment of the budget burden will help to attract foreign aid to Jordan by convincing donor countries that their money will be spent wisely, said Hassan, whose ministry oversees foreign aid receipts.

"We are on the right track in getting our financial policy moving in line with the reforms that we have put forward, and this gives donors and lenders more confidence that our fiscal policy is on solid ground," he said.

United Arab Emirates Foreign Minister Sheikh Abdullah bin Zayed al-Nahayan said this week that the UAE and other wealthy Gulf countries were looking at ways to support Jordan financially.

Some of the money freed up by the cuts to the universal subsidy system will be spent on targeted transfers to poorer Jordanians.

Hassan said the transfers would be much fairer, redirecting resources to the most vulnerable and needy people among Jordan's population of 7 million.

"It is an anomaly to have a system of subsidies that benefits nationals and non-nationals, rich and poor in an equal way," he said, adding that over 1.5 million non-Jordanians had been benefiting from the universal subsidies.

The budget reform will also help the government stimulate economic activity in poor provincial towns, which will receive more budget spending and foreign financing, Hassan added.

"We are trying to move investments in terms of services more towards the peripheral areas than in the capital and major cities, to make sure there is more balance in terms of opportunities you create in these governates."

Wealthy Gulf Arab states pledged last year to give $2.5 billion in aid to Jordan, though the money has not yet arrived. Hassan said Jordan would use the money primarily for energy and water projects as well as local development plans.

"We hope to use the GCC grants to cover most of our capital expenditure needs in order to lower the deficit."

Jordan has channelled between $300 million and $400 million of soft loans this year into alternative energy and energy-saving projects to reduce its vulnerability to the global energy market.

Projects include a $70 million offshore liquefied natural gas terminal to receive imports of cheap Gulf gas.

"We cannot remain hostage to the Egyptian pipeline and cannot remain hostage to world oil prices. This is why we have directed capital expenditure and taken loans, so that in five years time we do not have another energy crisis," Hassan said.

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(Editing by Andrew Torchia and David Cowell)

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