Abstract
This Selected Issues paper investigates the macroeconomic impact of the Syria crisis on Jordan. It is indicated that the crisis: (1) had an overall negative impact on measured output growth—although anecdotal evidence suggests possibly a positive impact on output in the informal sector; (2) contributed to inflationary pressures, particularly on rents; and (3) strained labor markets, mostly in the informal sector as refugees compete with locals for jobs. Although the crisis has put a strain on the external trade balance, the overall impact on the current account is not clear.
Electricity Tariff Increases—Impact on Competitiveness and Options for Reform1
This note finds that recent and planned electricity tariff increases are likely not to have a major impact on Jordan’s competitiveness. Business perceptions and cross-country data suggest that the reliability of electricity supply is a major comparative advantage for Jordan with respect to peer countries. Also, the low share of electricity in producer price indices and firms’ cost structure indicates that the impact of tariff increases on business profitability and costs is limited. The note also suggests options for tariff adjustments, which would reduce distortions while protecting the poor and the lower middle class.
A. Background and Motivation
1. Substantial tariff increases are needed to return the electricity company to cost recovery. As flows of cheap gas from Egypt were disrupted, the more expensive fuel alternatives raised the losses of Jordan’s electricity transmission company NEPCO. Though cheaper sources of energy are expected to come on stream starting in 2015, tariff increases are needed to return NEPCO to cost recovery.
2. Tariff increases so far have focused on selected sectors. The first round of increases (some by more than 100 percent) was implemented in June 2012 for mining, refining, and services. Tariffs were increased again (by 7.5–15 percent) in August 2013 for most non-household consumers and once more in January 2014 covering as well rich households and small industries (by 5–15 percent). Going forward, similar tariff increases have been set for each year during 2015–17.2
3. The profitability of some sectors might suffer. Because most households are exempt, the brunt of the adjustment falls on the industrial and service sectors. For some sectors – such as banking, telecom and large industries – tariffs will more than triple between 2012 and 2017.
4. This note looks into the impact of tariff reforms on Jordan’s competitiveness and sketches options for further reform. It starts by analyzing business perceptions and cross-country data. The note then reviews the impact of tariff increases on industries and services. Finally, it takes a look at ongoing tariff reforms and suggests ways to minimize distortions.
Nominal Average Electricity Tariff by Consumer Type
(In Jordanian fils)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Sources: Electricity Regulatory Commission; and IMF staff estimates.Nominal Average Electricity Tariff by Consumer Type
(In Jordanian fils)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Sources: Electricity Regulatory Commission; and IMF staff estimates.Nominal Average Electricity Tariff by Consumer Type
(In Jordanian fils)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Sources: Electricity Regulatory Commission; and IMF staff estimates.B. Electricity and Competitiveness
Reliable Supply as a Comparative Advantage
5. A reliable public electricity supply provides a competitive edge to Jordanian firms. Indeed, Jordan’s electricity infrastructure fares well in a number of key indicators. The number of outages, their length and their impact on operating revenue are the lowest in the MENA region and compare well with other emerging market economies.
6. This finding is reinforced by businesses’ own perceptions. Though market operators perceive electricity as a constraint to their business, this is well below the MENA average. Indeed, electricity appears to be a second-tier concern in business surveys (nonetheless, it is considered a significant impediment by over a fifth of firms).3
Electrical Outages, Selected Countries
(In hours, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Electrical Outages, Selected Countries
(In hours, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Electrical Outages, Selected Countries
(In hours, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.
Electricity as Impediment to Business, Selected Countries
(In percent of annual sales, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Electricity as Impediment to Business, Selected Countries
(In percent of annual sales, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Electricity as Impediment to Business, Selected Countries
(In percent of annual sales, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.
Perceived Constraints to Business
(In percent of positive firm responses)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Perceived Constraints to Business
(In percent of positive firm responses)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Perceived Constraints to Business
(In percent of positive firm responses)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.7. The costs of paying cost-recovery tariffs are significantly lower than those of going off-grid. While some productive sectors (especially mining and non-retail services) face relatively high electricity tariffs, they do not have to buy expensive generators and fuel to self-generate electricity in the case of supply interruptions from the main grid. In contrast, many industries in the Arab world and in emerging markets enjoy relatively lower public tariffs, but are forced to buy and run their own generators. A back-of-the envelop calculation indicates that, in general, businesses are better off paying a higher tariff for reliable service rather than resorting to self-generation because the fixed costs are large and, as generators use diesel, the fuel costs of operating them is significantly higher than NEPCO’s average fuel costs.
8. Tariff increases are also likely a better solution than black-outs. Scheduled and rolling black-outs have been discussed as an option to contain NEPCO’s losses if there are shortfalls in gas from Egypt. A better policy response would though be to apply temporary tariff surcharges. This is because raising tariffs would only temporarily (and marginally) reduce business margins, while black-outs would push business into making costly investment in self-generation. That said, large energy-intensive companies may decide to switch off-grid, because their energy needs might justify the construction of an “in-house” turbine. Jordan’s potash company is going that route, but it is unlikely that other industries will follow, given the large fixed costs and the high energy-intensity of the potash industry.
Self-generation, Selected Countries
(In percent, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Self-generation, Selected Countries
(In percent, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Self-generation, Selected Countries
(In percent, unless otherwise noted)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Price Levels Effects of Tariff Reforms
9. Tariff increases have had a minor impact on inflation. Export-oriented sectors could suffer from an increase in inflation, because sustained price increases could drive an appreciation of the real exchange rate and favor foreign goods over Jordanian tradables. However, the weight of energy is only about 6 percent in both the consumer and producer price baskets, and other energy-related goods—such as fossil fuels—are included in the weights.4 Moreover, a vector autoregressive model5 of inflation shows a small short-run impact from tariff increases and no second-order impact. Both approaches suggest that the consumer price response to a 15 percent increase in the effective tariff6 would be just below 0.5 percent.
Sector Analysis
10. The World Bank business surveys show that shortcomings in electricity infrastructure vary across the economy. Small firms see electricity as a major constraint to business in almost one third of the interviews, significantly more than medium or large firms. Interestingly, exporting firms declare to be less affected by electricity issues than non-exporting ones. Losses deriving from electrical outages are generally small as a share of revenue in all sectors, again with small and non-exporting firms marginally more affected than others.
Firms stating Electricity Major Constraint
(Percent of total firms)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Firms stating Electricity Major Constraint
(Percent of total firms)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Firms stating Electricity Major Constraint
(Percent of total firms)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.
Losses if Electrical Outages Occur
(In percent of sales)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Losses if Electrical Outages Occur
(In percent of sales)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.Losses if Electrical Outages Occur
(In percent of sales)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.11. Electricity constitutes a relatively small share of Jordanian firms’ operating costs. Among major industries, electricity costs are more than 5 percent of operating costs only for mining and refining companies.7 Most industries and services are not very energy-intensive, with electricity representing less than 2 percent of operating costs.
Cost Structure and Value Added of Industries
(Buble size indicates value added)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Cost Structure and Value Added of Industries
(Buble size indicates value added)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
Cost Structure and Value Added of Industries
(Buble size indicates value added)
Citation: IMF Staff Country Reports 2014, 153; 10.5089/9781498368919.002.A003
12. Removing electricity subsidies will eliminate distortions against labor-intensive industries. Cross-country studies8 find that energy subsidies usually drive resources away from labor-intensive industries and favor energy- and capital-intensive ones. This may well be true for Jordan, and tariff increases—coupled with the removal of fuel subsidies in 2012—will likely create more of a level playing field.
C. Outstanding Reform Issues
Tariff Structure
13. Large tariff variations across sectors create distortions. The top electricity tariff is more than six times higher than the bottom one. By 2017, it will be over ten times higher (Box 1). Rather than making each business sector pay a different input cost, the authorities should seek to create a level-playing field by setting uniform tariffs across sectors and pursue any industrial policy through more transparent and effective means.
14. The structure of planned household tariff increases could be improved. For example, the World Bank (2011) shows that a staggered tariff structure benefits all consumers without discrimination, but at high fiscal costs.9 Also, only a fraction of households effectively curbs their energy consumption because of poverty. Since the household tariff structure is based on marginal tariff brackets, a well-off Jordanian’s household consuming, say 750kWh per month, will pay the same price as the poorest household for the first 160kWh consumed (see Table below).
15. Better targeting household subsidies could yield substantial savings. This could be achieved by targeting the subsidy to those who consume, say, a maximum of 300 kWh per month10 while consumers whose total consumption is above this threshold would pay at or above cost recovery. Such a scheme would protect the poor and the most vulnerable while generating significant savings. Importantly, the subsidy could be easily administered and would be relatively broad (over 42 percent of the population would be covered).
Electricity Tariff Structure
Electricity tariffs vary substantially according to consumer category. Household consumers are divided in seven different brackets depending on their consumption levels. The non-household sector is split in thirteen sectors, each with a different price. Some sectors are subject to differential tariffs according to their consumption level. Most sectors face a different tariff for day and night consumption.
Households, small industries, and agriculture have the lowest tariffs. For instance, the average tariff for small household consumers is half of that of the average household tariff and 20 percent of the top tariff. Average tariffs are above cost recovery for a variety of consumers, including large industries and selected services (such as banking, telecom, and hotels).
Tariff Structure and Household Consumption of Electricity
Tariff Structure and Household Consumption of Electricity
| Consumption brackets 2010 (kWh/month) | Class of consumption (JD) | Mean consumption (JD) | No of Households (HH) | % of HH |
|---|---|---|---|---|
| 1-160 | 0-5.28 | 4.5 | 22,018 | 2 |
| 161-300 | 5.29-15.36 | 11 | 453,408 | 40.2 |
| 301-500 | 15.37-32.56 | 21.8 | 508,827 | 45.1 |
| 501-750 | 32.57-61.06 | 41.8 | 122,351 | 10.8 |
| 751-1000 | 61.07-94.81 | 73.2 | 17,605 | 1.6 |
| 1000 < | > 94.81 | 128 | 4,308 | 0.4 |
| Total | 20.5 | 1,128,517 | 100 |
Tariff Structure and Household Consumption of Electricity
| Consumption brackets 2010 (kWh/month) | Class of consumption (JD) | Mean consumption (JD) | No of Households (HH) | % of HH |
|---|---|---|---|---|
| 1-160 | 0-5.28 | 4.5 | 22,018 | 2 |
| 161-300 | 5.29-15.36 | 11 | 453,408 | 40.2 |
| 301-500 | 15.37-32.56 | 21.8 | 508,827 | 45.1 |
| 501-750 | 32.57-61.06 | 41.8 | 122,351 | 10.8 |
| 751-1000 | 61.07-94.81 | 73.2 | 17,605 | 1.6 |
| 1000 < | > 94.81 | 128 | 4,308 | 0.4 |
| Total | 20.5 | 1,128,517 | 100 |
16. Direct cash transfers would be an even better option. The recent elimination of fuel subsidies, which were replaced with cash transfers, provides a good example.
Other Inefficiencies
17. NEPCO is technically well run, but there are efficiency losses in the distribution companies. According to the World Bank, transmission losses are in line with international standards. The distribution companies are privately-owned and in general lag behind international best practices; distribution losses are high because of underinvestment and poor payment enforcement.
D. Conclusion and Policy Recommendations
18. The impact of tariff reform on Jordan’s competitiveness appears limited. Reliable electricity supply is one of Jordan’s comparative advantages relative to its neighbors, which—despite higher tariffs—is cheaper than firms having to resort to self-generation. Also, profit margin compression will be likely be negligible and not warrant any significant pass-through of tariff increases to producer (and consumer) prices.
19. Policy action could focus on:
Discontinuing industrial policy through utility pricing policies. Ongoing reforms provide an opportunity to create a more level-playing field by using the same tariffs for each sector.
Improving the household tariff structure. Currently, almost all households are subsidized. Streamlining tariff brackets would yield savings while better targeting those who are in need. An even better option would be to replace the electricity subsidies with cash transfers.
Prepared by Andrea Gamba in consultation with the World Bank.
Agriculture and small households will continue to be exempt.
The World Bank Doing Business indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints and information availability.
Assuming that half of the energy weight is indeed electricity most likely overestimates the share of electricity.
The model estimates inflation as a function of the lagged price level and the nominal effective exchange rate over 2002–13. These variables are usually found to be good predictors of inflation and are available monthly. A time trend is added to take into account the evolution of unobserved variables. The effect of electricity tariffs on the endogenous variables is modeled by adding the average effective electricity tariff variable over time.
This is constructed by weighting the end-use tariff paid by each segment by the segment’s electricity consumption.
Given Jordan’s water scarcity and infrastructure challenges, water supply is also very energy-intensive, but end-user prices are administered.
See International Monetary Fund, 2013, Regional Economic Outlook: Middle East and Central Asia, (Washington, November); and International Monetary Fund, 2014, Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead.
World Bank, 2011, “Electricity Subsidies and Household Welfare in Jordan: Can households afford to pay for the budget crisis?” Background paper for the Jordan Poverty Reduction Strategy.
This is equivalent to the first two brackets of the current structure, and close to the average consumption of Jordanian households (328kWh/month, according to the Electricity Regulatory Commission).
