by Yusuf Mansur
The new government, the fourth in the last 15 months, has been saying that it is a must for it to raise prices on certain items, such as electricity, in order to meet its current obligations.
The rhetoric is not new, but the government’s emphasis on the severity of the situation is driving a dangerous level of uncertainty regarding the stability of the economy. Moreover, the government may soon find itself forced to look at other options.
Before delving into the aspect of raising prices, one has to ascertain that addressing the low level of efficiency exhibited in the generation of electricity and fuel derivatives is a must and could achieve significant savings for the national economy. As such, capital investment in these two fields should drive the cost of production down (by 40 per cent, according to some estimates) and reduce the need for subsidies, while easing the cost to consumers and businesses.
Some may believe that such capital improvements will require months. However, so will the government savings of JD200 million, which will be achieved over a 12-month period.
In addition, last year, the manufacturing industry witnessed significant losses; the only entities that made profits were the mining companies. Moreover, the quickly calculated savings assumes that the level of consumption will remain the same, which is not entirely true. Consumption will decrease, especially among businesses.
According to a study I conducted for industrial producers, a 10 per cent energy price hike will lead to a 1.6 per cent decrease in production.
At the same time, given that some industries’ energy cost makes up more than 30 per cent of their total production cost, a sudden increase in the energy bill will drive producers out of the market and cause price hikes of the goods of those who do remain in the market.
The same can be said of service providers, such as hospitals, schools, etc. In other words, the increase in of electricity bills will cause a supply shock leading to a quick (within three months) stagnation with inflation, otherwise known as stagflation.
If the price hike were focused simply on households that consume large quantities of electricity, the policy would be acceptable, since it would affect only those who can afford it. But raising the rates on producers of goods and services will increase inflation at a time of falling incomes, which are already low.
And yes, the government needs to revise the Income Tax Law to make it progressive, which is consistent with the stipulations of Article 111 of the Constitution.
Banks, the only sector that has not been adversely affected by the economic depression that started in 2009, need to pay more taxes, like they did in the past — their tax rates have been slashed from 55 per cent to 25 per cent.
Again, the rich few will be affected, as they should, and the banks that have not truly been active in the development of the economy of late.
Furthermore, why doesn’t the government look into importing cheap gas from abroad? The world price is definitely low, and is almost equal to the price Jordan is paying for the Egyptian gas.
Gas can be shipped and stored in Aqaba. It may cost a bit more, but it would still be cheaper than going totally into expensive oil. It is not a case of having Egyptian gas or shifting totally to fuel. There are alternatives.
We know that government officials are in a dire situation, and we do not expect from them miracles or solutions to what ails the whole economy, because we know that this would require years of correct policies, strategies and implementation mechanisms.
Yet, what is needed now is not to heighten fears and negative expectations regarding the economy, and not to come up with decisions that would motivate greater uncertainty.
* Jordan Times