Risk-taking Jordan tackles deficit

Cash-strapped Jordan is bracing for tough economic times as the government prepares to raise commodity prices and taxes as part of an austerity plan to avoid a mammoth deficit of around $3 billion. But economic analysts and the powerful opposition Islamists have warned these moves would be "very dangerous" and likely to aggravate political instability in the country. Jordan has witnessed regular street protests since January 2011 demanding sweeping reforms and tough action against corruption. In the past week, Prime Minister Fayez Tarawneh has told MPs that his government was "carefully studying" an increase in the prices of electricity, some fuel derivatives and several commodities, warning against a record deficit of nearly $3 billion in this year's $9.6-billion budget. Tarawneh, who was appointed in April to push through a package of reforms needed to hold elections this year, acknowledged that Jordan's economy was "much worse than I expected." He said the budget deficit could drive up Jordan's overall debt to $24.6 billion by the end of this year. The 2012 budget had projected a $1.5-billion deficit -- 4.6 percent of gross domestic product. "Correcting the country's financial situation requires taking such measures that would help us overcome the current difficult time," said Tarawneh. "These immediate measures represent a first step towards approving a national financial reform programme." Other austerity measures, which are expected to yield around $425 million, include cuts in government spending, a freeze on hiring and a hike in taxes on some banks, according to state-run Petra news agency. Jordan's Muslim Brotherhood has warned of their potentially explosive consequences. "These are very dangerous steps that would inflame people all over the country. God knows how things would develop. The government needs to understand that there will be no economic reform in the absence of political change," the group's spokesman Jamil Abu Baker said. "Once again, these cosmetic government plans are not expected to produce genuine economic reform. They will make people poorer, increase unemployment and worsen the crisis in the country." Gross domestic product per capita was estimated at $5,900 last year, when inflation stood at 6.5 percent. Officially, unemployment is about 14 percent in the country of nearly 6.5 million people, 70 percent of whom are under the age of 30. But others, mostly non-government organisations, put the number out of work at 30 percent. "The prime minister says the economy is 'bleeding.' In other words, he is telling people not to sell or buy. This would affect the stability of the Jordanian dinar and put the country at economic risk," analyst Yusef Mansur said. He expects inflation to jump to 18 percent this year. "If the government seeks political stability, it should not raise prices now." Ratings agency Moody's has warned that political instability in Jordan, rated "Ba2/negative," will delay fiscal reform, following the April resignation of prime minister Awn Khasawneh, only six months after he was appointed to implement political reforms. He was the third premier to be named in 2011. "Popular opposition to electricity price hikes highlights the challenges faced by the authorities in reining in the fiscal deficit while satisfying demands for social transfers," the agency said. The government has expressed concern that cuts in Egyptian gas supplies, which covers 80 percent of electricity production demand in Jordan, could cost the kingdom more than two billion dollars this year. Since 2011, the pipeline supplying gas from Egypt to both Israel and Jordan has been attacked 14 times. Analyst Labib Kamhawi also argues that price hikes are the wrong answer to the government's the budget shortfall. "There are other ways to boost state revenue. Billions of dollars that have been siphoned through corruption should be collected instead of jumping into people's pockets," he said. Kamhawi said Jordanians "are already burdened with inflation and limited income." "People will not accept all of this. Meanwhile, the countries around us refuse to help because they are not sure their assistance will go to the treasury," he said. Taleb Awad, in charge of economic research at the University of Jordan's Centre for Strategic Studies, agreed, saying the government should cut spending and tax luxury goods. "Raising prices is not a wise policy, particularly under the current local and regional circumstances."