Jordan: Power plans pose challenges

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While Jordan has had some success in meeting the requirements of its $2bn stand-by arrangement with the IMF, fulfilling its promise to lower electricity subsidies as part of a larger plan to reduce losses at the state power utility and improve the government’s fiscal position is proving more of a challenge.

In April the IMF announced it had completed its first review under the three-year loan programme with the Kingdom, enabling the release of nearly $385m. In an official statement, the IMF’s Nemik Shafik noted some positive developments, including the lifting of fuel subsidies in late 2012, which were replaced with more targeted cash transfers.

Shafik added that the government and the state power utility – National Electric Power Company (NEPCO) – performed “broadly in line with the programme, although the end-2012 quantitative performance criterion on the central government deficit was narrowly missed and the electricity company did not repay arrears as planned”.

NEPCO’s losses weigh heavily on the state budget, amounting to around $1.6bn in 2012. However, last year was an exceptionally bad year for the company, which was forced to find alternative energy sources after a disruption in gas supplies coming from Egypt.

The IMF has said the “key” to returning NEPCO to profitability is implementing the government’s medium-term energy strategy (MTES), which includes a restructuring of electricity tariffs.

According to the 2012 agreement with the IMF, the first increase in prices was scheduled to occur this past April, but because of delays in developing the MTES and a decision by the government to consult the new parliament about a rise in tariffs, the roll-out was put off until July 1.

However, as of mid-June, no decisive action had been taken by the government.

On June 13 the minister of energy and mineral resources, Malek Kabariti, told a press conference the government would delay the introduction of new tariffs until early 2014. According to the minister, price increases would be implemented across the residential, commercial, heavy industry, banking and telecommunication sectors, though households using up to 600 KW per month would be exempt. He added that this group accounts for more than 90% of citizens.

Prime Minister Abdullah Ensour made similar statements on June 15, presenting a set of price changes in line with those provided by the energy ministry. He noted that any increases would be capped at 15% per year and clarified that for high-use households, the rise in tariffs would apply only to the amount consumed above the 600 KW limit.

While it was not clear when these changes might go into effect, the prime minister said his government was committed to implementing reforms to the economy. A failure to reduce spending would result in donors withdrawing their support, he added. Describing the losses at NEPCO as “frightening”, Ensour said a major overhaul of the utility’s finances and a reduction in price support was critical to easing the state deficit.

Even with the planned hike in tariffs, it is unlikely that NEPCO’s losses will be turned around in the short term. The utility provides electricity to consumers at well under half its production cost, so even with no further jumps in supply expenses, it will likely be years before it reaches a break-even point.

It is also unclear whether this schedule of phased increases will meet with the IMF’s approval. While the international lender has shown that it is aware of the challenges facing Jordan, in a March 2013 report it said that “tariff increases are an integral part of the [MTES] and thus should be implemented as soon as possible, with the first increase before completion of the next review”.

Jordan faces significant challenges if it is not able to carry through with its subsidy reductions. Ratings agency Standard & Poor’s has warned that overseas funding support could decline if the Kingdom fails to improve its fiscal position and ability to withstand economic shocks.

“We expect external vulnerabilities to persist: the risk of losing donor support persists and the country’s terms of trade remain disadvantageous,” the agency said in a report issued in late May.

By phasing increases in electricity prices, and seeking to minimise their impact on low-income earners, the government appears to be trying to strike a balance between meeting the demands of the public and those of donors, a middle road that could lead to economic recovery.

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