In light of the storms that the region has experienced recently, Jordan has avoided an untimely political crisis. The Jordanian King issued a decree freezing the government’s latest decision to raise prices on certain types of fuel for the second time in two months, which had earlier caused protests and demands for MPs to withdraw confidence.
With regards to the King’s intervention, we could apply the saying “a dangerous economy should be left to the economists alone”. No government wishes to take unpopular decisions leading to higher prices for vital commodities, but at the same time the ruling system is required to balance its books and the budget between expenditure and revenue. This matter relates to commodity subsidies in particular, given the fluctuating prices in the international market whereby goods such as petroleum have recorded significant price increases in recent years, meaning that subsidy bills rise with every dollar increase in the price per barrel.
This problem is not limited to Jordan alone, but extends to a lot of Arab states that have adopted subsidy policies in order to bring about an artificial decrease in commodity prices. It is believed that Nasserite Egypt began the policy of subsidies and artificial prices in the 1960s which has continued until this day, becoming a nightmare for all governments in the process, with spiraling subsidy bills amounting to tens of billions. Whenever a government has tentatively looked for a solution, this has often exploded in its face and it has been forced to retreat. For example, every Egyptian government over the past three decades has lived under the threat of the bread riots that took place in the late 1970s when the government, which at the time was seeking to conclude an agreement with the International Monetary Fund (IMF), tried to abolish some subsidies on key commodities.
Here I am reminded of the story of what an IMF negotiator reported back during his work with the Egyptian government in the 1980s. When asked in an off-the-record session to respond to the public’s bad impression of the formulas offered by the IMF – and these are usually measures aimed at reducing the financial deficit, and they usually include cutting subsidies on commodities – he said: The problem is that we offer our proposals and they reject them, and we ask them for alternative proposals to reduce the financial deficit but they do not offer anything. Then in the end they accept our program after procrastinating and delaying, but they implement it like a dumb high school student so they get a bad result, and we are forced to return to negotiations once again.
Maintaining a subsidy in this manner becomes a bigger problem over time because the prices of key commodities such as oil and grain are determined by the world market, sometimes even by the weather conditions in other continents. The matter comes to resemble someone borrowing relentlessly even when they know that at a certain point they will arrive at a dead end and will not be able repay or borrow any more. Yet abolishing subsidies presents another big problem because whatever figures or calculations the state provides to justify this, the average man on the street cannot afford hiked prices that far exceed his income, and usually economic decisions of this kind cause social unrest and uprisings.
In Egypt, the new government – formed after Mohammed Mursi took office – has discovered the pressing economic facts early, and has entered into negotiations with the IMF to borrow in order to address the balance of payments deficit on the one hand, and to improve trust in the state on the other. The intention is to open the door to other international donors and lenders such as the World Bank, who specialize in project financing. According to statements issued, the Egyptian government has begun discussions on how to reduce spending and the means of bringing down subsidies.
This will not be an easy issue, and any procedures, whether in Egypt or Jordan, will face resistance from the street, which will suffer greatly from price hikes. Borrowing, or even non-repayable grants could delay the problem but not solve it, and it will return to rear its head once again, for this approach is simply borrowing from future generations to facilitate living today. The economy will remain stagnant by virtue of the weights that currently impede its movement, and the solution is to balance the economy, resources and expenditure, or search for ways to increase resources. A large part of the solution may lie in improving how unpopular decisions are marketed to the public, i.e. by transparently explaining the facts to them, and the programs that the government intends to undertake.