Download Managing Price Shocks: Oil and Food Subsidies in Jordan

MANAGING PRICE SHOCKS
Oil and Food Subsidies in Jordan
First MENA-SBO
MEETING
CAIRO
November 24-25, 2008
Dr.Hamzah Jaradat, Ph.D
MoF Jordan
1
Presentation
Overview
Background
Subsidies Elimination
Impact of Subsidies Elimination
Compensatory Measures
2
Background
During the last few years 2004-2008, the
continuous increase of food and energy
prices, whose consumption is subsidized
by the government, has put great
pressure on the Kingdom’s fiscal stance.
The oil imports bill has increased, as a
percent of GDP, from 12% in 2004 to
18.5% in 2007.
These imports are expected to increase
further in 2008; it will be around 22% 30% of GDP assuming that oil prices will
average in the range of $90-$120 a barrel
in 2008.
3
Oil Imports, Percent of GDP
%GDP
29.7
30.0
27.3
25.0
25.0
22.3
20.0
15.0
17.1
17.4
18.5
12.0
10.0
2008
5.0
0.0
2004
2005
2006
2007
$90
$100
$110
$120
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the Kingdom’s imports of subsidized food
items (mainly wheat, flour of wheat, bran
and barley) have also been increasing
over the same period. The imports of
these items reached $577 million in 2007
and expected to rise to $655 million this
year.
As the figure below shows, the relative
weight of these imports has risen from
2.3% of GDP in 2004 to 3.6% in 2007 and
expected to be at the same level in 2008.
5
Food Imports of Subsidized Items, percent of GDP
% of GDP
4.0
3.6
3.6
3.5
3.0
2.3
2.3
2.4
2.5
2.0
1.5
1.0
0.5
0.0
2004
2005
2006
2007
2008
6
The abovementioned developments
have resulted in higher government
subsidies to absorb the rising
international food and oil prices and to
mitigate the impact on the poor. The
total amount of subsidies increased
from 3.2% of GDP in 2004 to 4.5% in
2007.
This happened despite the fact that the
government has increased the prices of
petroleum products several times
during 2005 and 2006 as part of its
strategy to gradually liberalize the local
prices of all petroleum products.
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Had not the government started
gradually to remove oil subsidies and
liberalize prices in February 2008, oil
and food subsidies would have reached
about $1.3 billion in 2007 and $1.7
billion in 2008; that is about 8.2% and
9.7% of GDP for 2007 & 2008
respectively.
The following graph compares what
would have been the situation if no
change has been made to oil subsidies
(red bars) with what happened as a
result of those policy changes.
8
Oil & Food Subsidies, % GDP
9.7
10.0
8.7
8.2
9.0
7.2
8.0
6.7
7.0
6.0
4.5
5.0
4.0
3.2
3.1
2.9
3.0
2.0
1.0
0.0
2004
2005
2006
2007
2008
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Oil subsidies alone was estimated to reach
about $1 billion in 2008, which is 5.8% of
GDP, assuming that the yearly average of
international price of oil is $90/ barrel;
while these subsidies would reach about
$1.4 billion if the price is $100/ barrel; i.e.,
7.5% of GDP.
Also, it was estimated that the targeted
budget deficit of 6.5% of GDP in 2008
would have increased to 9.3% if
international oil prices is $90 /barrel and to
11.3% if oil price is $100/ barrel.
10
Budget Deficit, percent of GDP
%, GDP
11.3
12
9.3
10
8
6.5
6
4
5.5
5.3
4.4
2.7
2
2008
0
2004
2005
2006
2007
2008
Budget
$90
$100
11
About JD 375 million ($530 million); i.e.,
about 3% of GDP of food subsidies are
allocated in 2008 budget. The increase in
these subsidies compared to previous years
is mainly due to sharp increases of the
international prices of the subsidized food
items like barley and wheat.
However, budget re-estimates for 2008
shows that a saving of about $ 190 million
would be achieved as a result of decreasing
wheat and barley prices during the last few
months.
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Subsidies Elimination
Studies by the IMF and the Ministry of Finance
found that the lowest 20% income decile gets
only 8.9% of the allocated fuel subsidies,
while the highest 20% income decile gets
42% of the subsidies. Further, livestock
farmers on average get fodder subsidy of
about JD 3370 ($ 4760) per year, compared
to an average of JD 718 ($1014) per year the
beneficiary families get from the National Aid
Fund, NAF.
Therefore, a four year plan was approved in
2004 to gradually removing oil subsidies by
2008 and to fully liberalize domestic fuel
market and prices.
13
During the period 2005-2007, domestic fuel
prices were increased several times but not
as high as that of February 2008.
The sharp increases of international oil
prices in particular since the second half of
2007, put immense pressure on the budget,
where a year around one dollar increase in
international oil price would cost the budget
additional $28 million per year of subsidies.
Therefore, in February 2008, the
government decided to fully remove all fuel
subsidies and liberalize prices except of
Liquefied Petroleum Gas, LPG. This resulted
in increasing most fuel prices as high as
40%.
14
Since then, a “Pricing Committee” sets
prices on a monthly basis to reflect the
changes in international oil prices.
The remaining energy subsidies are
estimated at 1.3% of GDP in 2008
compared to 2.7% in 2007.
Removing the impact of delays in voting
the budget would reduce the 2008 number
to slightly below 1% of GDP.
15
Oil Subsidy, % of GDP
5.9
6.0
5.0
4.0
3.2
2.7
3.0
2.1
2.0
1.3
1.0
0.0
2004
2005
2006
2007
2008
16
Food subsidies have been through many
reforms in the past. As the figure below
shows, there were no food subsidies in
2004. Starting in 2005, food subsidies
started to increase. The government was
aware of the issue, but these subsidies, in
particular those directed to wheat and flour
of wheat ware considered crucial to social
stability in Jordan at this time.
As mentioned above, the costs of importing
these food products increased sharply
during the last few years. Therefore, the
subsidies allocated to food items has
increased from 0% of GDP in 2004 to 1.8%
in 2007, and was expected to reach to 3%
in 2008.
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Food Subsidies, % of GDP
3.0
3.0
2.5
1.9
1.8
2.0
1.5
0.8
1.0
0.8
0.5
0.0
0.0
2004
2005
2006
2007
2008
2008
Budget
Budget
Re-estimate
18
Impact of Oil Subsidies Elimination and
Compensatory Measures
A study by the Ministry of Finance shows
the inflationary pressures resulted from
eliminating oil subsidies in 2008. The
following diagram shows the non-fuel
expected inflation and fuel push inflation
for different international prices of oil
US$/ barrel.
19
Non-fuel
Fuel
Expected Inflation of 2008
20.0
18.0
4.5
Annual Inlation, %
16.0
4.5
14.0
12.0
4.5
4.5
10.0
8.0
4.5
4.5
13.8
6.0
4.0
2.0
7.0
8.1
9.3
11.5
4.8
0.0
$80
$90
$95
$100
$110
$120
Average Price of Oil US$/ Barrel
20
The average oil price for the first nine
months of the year was $111.59/ barrel.
Given this price, the expected inflation
rate (fuel and non-fuel) was about 16%.
During this period, the actual inflation rate
was 15.5%.
21
Inflation Rate, 2004-2009
15.5
16
14
12
10
8
6.3
5.4
6
3.4
6
3.5
4
2
0
2004
2005
2006
2007
Jan-Sep. Expected
2008
2009
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Compensatory Measures
1- Social Safety Net. The cost of which is
estimated at JD 391 million ($552 million)
of the 2008 budget, i.e., about 4.3% of
GDP. The main features of the net are:
- Increase the salaries of all public
sector employees; civil servant workers,
military and security agencies personnel,
and civil and military pensioners.
- Direct cash payment to non
government workers or pensioners who
have average per family income of less
than JD 1000 ($1400) per annum.
- Increase the payment to the
beneficiaries of the National Aid Fund.
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2- Maintain the price of bread at the same level
after liberalizing the diesel prices through additional
subsidy.
3- Maintain electricity tariff fixed to households
who consume less than 160 kilowatt per month.
4- Partially increasing the price of LPG, while the
government bears the additional subsidy. The cost is
estimated at $ 113 million for 2008.
5- Maintain barley subsidized price until early
next year. The Government is expected to liberalize
the price of barley in April 2009. The cost is
estimated at $42 million for 2009.
6- Exempting 13 essential commodities, energy
saving products, and agricultural production inputs
from custom duties and taxes. The cost was
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estimated at $141 million.
7- Salaries indexation with inflation and
productivity or at least performance. For 2009,
an increase of 7% on the base salary of
employees and retirees was suggested. The cost
is estimated at $ 88 million.
8- Direct cash payment to kerosene users of
low income groups; expected cost is $ 28 million.
9- Establishing parallel markets for
vegetables and fruits and exempting sellers from
fees paid to municipalities to encourage farmers
to sell directly to consumers.
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