Energy Costs: The Challenge Jordan Faces

Last week, the government announced that the price of several fuel products would rise:

  • 90 octane gas: increased from JD0.800 to JD0.835/liter
  • 95 octane gas: increased from JD0.990 to JD1.030/liter
  • diesel: increased from JD0.685 to JD0.710/liter
  • kerosene: increased from JD0.685 to JD0.710/liter
  • cooking gas cylinders: maintained at JD10/cylinder

The increase triggered protests in several cities, especially in Karak and Tafileh governorates in the southern part of Jordan. Several professional associations opposed the price increase, as did the Muslim Brotherhood and a major politica bloc, the Democratic Gathering Bloc (though it is backing IEC Chairman Abdallah al-Khatib for PM rather than Ensour) said it would not support a government that maintained this increase. The National Union bloc opposed it although it was sympathetic to the circumstances, while the Islamic Centrist Party said it would meet with Ensour before making a decision.

The recent price hike is part of the closely-linked challenges of a poor fiscal situation and a troubled economy are a key challenge that the next government and its successors will have to address over the long term. These challenges are inextricably linked – a stronger economy does not just generate more employment for the population, but it also improves the country’s fiscal situation. As private sector employment becomes more attractive it reduces the burden on the state to provide employment for the population. Meanwhile, the employees and businesses in the private sector would pay taxes and generate more revenue. So its beneficial in two ways.

One of the most difficult economic challenges for Jordan’s next government is energy, and specifically Jordan’s reliance on imported energy for 98 percent of its needs. This means that with energy prices high, Jordan pays 20 percent of GDP for energy imports. On the surface, the relationship seems to be a direct one: when energy prices rise, its bad for Jordan’s fiscal situation, and vice versa, but a report by the IMF indicates a slightly more complex situation. According to this report, increases in oil prices have two opposite effects – it is immediately negative because of the higher cost of imports, but Jordan does benefit from increases in remittances and aid over the longer term, as well as higher phosphate prices and demand for other Jordanian exports.

What this means is that in a normal situation an increase in energy prices would actually be a net positive when all factors were taken into account and the external inflows from the oil-producing economies are maintained. But what’s different now, and who, if anyone, is to blame for it? The answer ultimately is that the regime is to blame for leaving Jordan in a position where events such as the attacks on the gas pipeline in Egypt, not for the events that have occurred in the region themselves, but for leaving Jordan as unprepared as it is to cope with them, and for not addressing the imbalances in the Jordanian economy before it became a crisis.

With regards to fuel, Jordan is left with a single outdated refinery that has a legal monopoly on the refining business, and no immediate prospects for investment to either upgrade it or replace it with a more modern refinery. There is also the issue of electricity, where the regime has been providing power to households for 60 percent less than it costs to generate it, causing power consumption to rise rapidly. When disruptions occur, such as the attacks on the pipeline from Egypt, it raises the cost of power considerably, but with the indirect effects that rising oil prices bring (increased remittances and aid) that help offset the impact. It means that the cost of subsidies rose considerably, and the government had little choice but to lift the subsidies at the worst possible time, when people were most vulnerable.

Events in neighboring states, such as attacks on the pipeline in Egypt, the war in Syria, and continued instability in Iraq (and accompanying potential threats to the future pipeline to Aqaba) are outside Jordanian control, but they nonetheless should not be sufficient to harm the economy to the extent that they have. Some difficulties were inevitable, but it was the regime that allowed the country to get into its current position by neglecting needed reforms and using measures like patronage and subsidies to compensate.