This Selected Issues Paper focuses on economic condition, energy subsidies, and oil prices in Jordan. Energy price subsidies pose a serious fiscal risk in the present context of increasing and volatile international prices. The macroeconomic situation in Jordan is closely tied to that of other countries in the Middle East. From a policy perspective, macroeconomic and structural policies in Jordan should be conducted in such a way that the vulnerability of the country to sudden stops or reversals of external income flows is reduced.
I. Energy Subsidies: Fiscally Burdensome and Inequitable1
The cost of energy price subsidies represented close to 6 percent of GDP in 2011. Given their universal (untargeted) nature, these subsidies disproportionately benefit rich households as they account for a relatively large share of total energy consumption. Leakage of benefits to higher income groups makes energy price subsidies an extremely costly mechanism for the provision of social assistance to lower-income households.
1. Amid heightened social and political tensions in the region, energy price subsidies increased substantially in Jordan during 2011. Energy price subsidies are expected to increase from about 1⅓ percent of GDP in 2010 to nearly 6¼ percent of GDP in 2011 (Figure 1).2 This is due to the impact of higher international prices on existing liquefied petroleum gas (LPG) subsidy schemes; the authorities’ decision in early 2011 to freeze fuel prices and stop implementing the monthly automatic adjustment pricing mechanism adopted in 2008 (Figure 2); and frequent disruptions of gas supply from Egypt.3
2. Energy price subsidies pose a serious fiscal risk in the present context of increasing and volatile international prices. Jordan is a net oil importer and a highly energy-dependent country. If international prices continue their upward trend, keeping domestic prices unchanged could result in subsidies increasing to 18 percent of GDP by 2014. This would require a major fiscal adjustment, including substantial reductions in higher-priority public spending (e.g., on education, health, and public infrastructure).
3. Existing universal (untargeted) energy price subsidies disproportionately benefit the rich, who account for a relatively high share of national energy consumption. Jordanian households allocate a substantial proportion of their budget to energy consumption. Expenditures on energy account on average for around 10 percent of total household consumption, with gasoline expenditure accounting for the highest share followed by electricity and LPG (Figure 3).
4. Benefits from energy subsidies are pro-rich. A very large share of the benefits from price subsidies is captured by higher-income households. Overall, the richest one-fifth (quintile) of households receives over 25 percent more in subsidies than the poorest one-fifth of households. The leakage of subsidy benefits to rich households is most pronounced in the cases of gasoline and diesel subsidies (Figure 4), where the richest one-fifth of households receives nearly 6½ (2½) times more in gasoline (diesel) subsidies than the poorest one-fifth. Hence, benefits from energy subsidies are distributed inequitably among households.
5. The substantial leakage of subsidy benefits to higher-income groups makes energy price subsidies an extremely costly mechanism for the provision of social assistance to lower-income households. Every dinar transferred to the bottom two income quintiles through gasoline subsidies costs the budget about JD 5 (the bottom two quintiles’ share in gasoline subsidies is around 20 percent—Figure 4). A simple cash distribution of these benefits to all households would have been less costly and more effective in assisting the poor. This inefficient and inequitable distribution of energy subsidies is not surprising; almost any universal consumption subsidy disproportionately benefits the rich since they, by definition, account for a relatively higher share of total energy consumption. Well targeted safety net programs can substantially reduce this leakage of benefits to higher income groups, and help protect the poorest households at much lower fiscal cost.
Prepared by Moataz El-Said.
The electricity subsidy does not appear in the central government budget. It is calculated as the difference between Jordan’s National Electric Power Company (NEPCO) cost-recovery price and the wholesale price charged to distributors. It increased from JD 161 million in 2010 to an estimated JD 1.1 billion in 2011, equivalent to 3.8 percent of GDP.
The pipeline transporting Egypt’s natural gas to Israel and Jordan has been damaged by explosions thirteen times since January 2011. The gas is mainly used for electricity generation, forcing Jordan’s NEPCO to use more costly imported fuel oil during the extensive periods of interrupted gas supply. As a consequence, NEPCO’s debt increased from JD 453 million at end-2010 to an estimated JD 1.3 billion by end-2011.