Inflation threat to Jordan's economy

The Jordanian government has taken a number of steps in recent years to open its economy, control public debt, boost foreign direct investment, and increase privatisation.

As a result of these reforms, the kingdom's nominal GDP grew at a compound annual growth rate of 10.6% during the period of 2002-2007, according to a recent report by Kuwait-based Global Investment House.

In 2007, Jordan's nominal GDP grew by 12.3%, compared to 11.8% in 2006.

In 2008, the kingdom's real GDP growth is projected to be 6.1%, slightly higher than the figure of 6.0% that was recorded in 2007, the report predicted.

Inflation rate doubles

However, the kingdom's economic growth is being offset by rising inflation which has hit all-time highs.

Jordan's inflation stood at 12.7% by the end of May 2008 compared to the 6.7% reported for the same period last year.

According to the Central Bank of Jordan, the high inflation figure for the first five months of 2008 was 'above all due to oil and to electricity', which experienced inflation of 44.3%.

As Jordan must import almost all of its oil, it is being hit by skyrocketing oil prices and the end of imports at extremely favourable prices from Iraq, which the kingdom had benefited from before Saddam Hussein's regime was overthrown.

At the same time, Jordan has been reducing subsidies on domestic fuel to help trim its deficit.

Finance Minister Hamad Kasasbeh told Meed earlier this year that if fuel subsidies had not been lifted, every dollar increase in barrel price of oil would have cost the government $28.2m.

The government's plan to completely remove subsidies - which was slated for the end of 2007 - has been put on hold pending a review of the economic climate in 2009. For now the only subsidies that remain are those for liquid petroleum gas used in cooking and heating.

However, to cover its swelling energy costs Jordan has hiked fuel prices ten times in two years. On July 10, Jordan announced its sixth increase this year alone, bringing the price of one litre of unleaded gasoline up about 5 cents, from approximately $1.13 to $1.18.

The increases have angered poorer Jordanians and some opposition MPs have launched protests.

Food costs fuel inflation

But rising fuel cost is not the only factor that is contributing to Jordan's inflation.

An unusually cold and frosty winter damaged harvests in the kingdom, leading to a record 15.5% jump in food prices in the first five months of this year.

Food costs in Jordan have also been impacted by changing global consumption trends and the increased cultivation of biofuels over food crops in Europe and America, according to a report by the Oxford Business Group.

Also, the price of a tonne of fodder has risen to $340 on the black market, from $200 last year. The increase has been caused in part by the easing of fodder subsidies, which are due to be phased out by the end of 2008, and in part by a shortage of agricultural ingredients.

Economic pressures

Jordan is also partly a victim of its own success, with economic growth leading to rising wages.

Meanwhile, a housing shortage, particularly at the lower-end of the price scale, has driven rents up.

Another factor that has helped boost inflation is the increasing influx of Iraqis over the past five years, thus increasing demand and consequently prices, especially for housing.

Part two of this report on inflation will look at the threat that inflation poses on Jordan's economy, what the government should be doing to curb rising prices, and steps that it is taking to ease the impact of high inflation on Jordanians.