THE COMBUSTIBLE POLITICS OF FUEL SUBSIDIES IN

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 004780

SIPDIS

E.O. 12958: DECL: 06/15/2015
TAGS: PGOV EAID ECON EPET JO
SUBJECT: THE COMBUSTIBLE POLITICS OF FUEL SUBSIDIES IN
JORDAN

REF: A. AMMAN 4652

B. AMMAN 4362

Classified By: CDA David Hale for Reasons 1.4 (b),(d)

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SUMMARY
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1. (C) Proposed plans to end fuel subsidies have already
elicited howls of protest throughout Jordan. Numerous MPs
have confirmed that blocking an increase in fuel prices is
one of the top concerns of their constituents, and the
Islamic Action Front has made opposition to fuel price
increases a centerpiece of its strategy to boost its popular
appeal. The partial lifting of fuel subsidies in 1989
sparked riots in southern Jordan and led to the collapse of
the government. Eager to avoid a similar crisis, the GOJ
plans to phase in the lifting of subsidies over a period of
three years or less. End Summary.

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PAYING MORE FOR FUEL
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2. (C) In an effort to shore up a bleak budget picture, and
under pressure from the IMF, the GOJ is on the verge of
agreeing to a plan to remove subsidies on fuel products, as
well as on other items. (NOTE: While the government has
argued for at least a three-year period in which to raise
prices to market levels, the Finance Ministry sent a letter
on June 12 to the British and Germans laying out a more
aggressive plan that would end fuel subsidies in less than
three years. END NOTE.) Currently, the largest government
subsidy goes toward diesel fuel, which is of critical
importance to farmers and the Jordanian trucking sector which
forms an important part of the economy of the restive region
around the city of Ma'an (septel) in the south. Kerosene,
another subsidized fuel product, is used by millions of poor
Jordanians to heat their homes and for cooking.


3. (C) While no formal announcement of a fuel price hike has
been made, cabinet members informed Charge that the
government agreed in principle on June 7 to start this year
with a phased elimination of subsidies by 2007. According to
these ministers, PM Badran -- who must still face a
confidence vote in parliament in the next six months -- was
very reluctant to begin this year, and was persuaded only by
a forceful presentation by an IMF mission. The issue has
already drawn intense public attention. For example, two
major Arabic dailies, Al-Rai and Al-Arab Al-Yawm, printed
front page reports June 13 on the impact of high fuel prices
on the growing budget deficit and tentative GOJ plans to
raise the price of certain fuels in response. Initial
reaction among the general public to a proposed fuel price
hike has been resoundingly negative. Numerous MPs,
particularly those representing underprivileged areas and
refugee camps, have told poloff that the price of fuel is one
of the top concerns of their constituents and that they are
under heavy pressure to vote against any price increase in
parliament. Attempting to exploit the public mood, the
Islamic Action Front (IAF) has publicly called on the GOJ to
categorically reject pressure to raise fuel prices and has
made opposition to the elimination of fuel subsidies a
central tenet of its strategy to boost its popular appeal
(ref B).

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A DANGEROUS PRECEDENT
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4. (C) Post contacts are unanimous in cautioning that the
lifting of fuel subsidies could have serious negative
consequences for the GOJ if implemented too abruptly and
without a concerted effort to soften the blow on poorer
Jordanians. Many hearken back to the political crisis of
1989 that was triggered by a similarly unpopular fuel price
hike. Specifically, in early 1989 the GOJ began implementing
an IMF structural adjustment program in response to mounting
foreign debt. In April of that year, the government began
lifting several price supports, including a fuel subsidy,
sending gasoline and diesel prices up by 30% overnight. This
measure hit the trucking industry around Ma'an particularly
hard, which was already suffering from a slowdown following
the end of the Iran-Iraq war. Riots broke out in Ma'an the
day the reforms went into effect and at least five protesters
were killed by police (in addition to dozens of injuries).
The unrest spread quickly throughout Jordan, coinciding with
the start of Ramadan and reflecting strong nationwide
dissatisfaction with the government's IMF-inspired policies.
Faced with growing discontent, the government eventually
collapsed.


5. (C) The replacement of the cabinet did not end the
crisis, however. Although the early demands of the rioters
did not include calls for political reforms, the late King
Hussein approved national parliamentary elections (the first
since the suspension of parliament following the 1967 war
with Israel) in an effort to deflate tension over economic
issues, or at least to direct dissent into channels that the
state could monitor and control.

6. (C) Social unrest over price hikes has not been limited
to fuel. In August 1996, for example, riots broke out in
Kerak and other towns in traditionally pro-Hashemite areas
when bread prices almost tripled after government subsidies
were decreased. (NOTE: The GOJ is currently considering the
removal of all subsidies on bread at IMF insistence. END
NOTE.) There were also protests that same year targeting the
Ministry of Education caused by a hike in school fees
connected with the IMF program.

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COMMENT
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7. (C) While the new reformist cabinet has continued appeals
for further oil grants from Gulf states (which have been slow
in coming),it nevertheless recognizees that the end of fuel
subsidies is overdue. Their day of reckoning, however,
unfortunately comes at a time when oil prices are at historic
highs in nominal terms. Wary of the volatile history of
price liberalization in Jordan, and already suffering from an
acute lack of public confidence (ref A),the GOJ is hoping
that a gradual, phased-in lifting of fuel subsidies will
minimize the potentially serious repercussions that higher
prices could generate.
HALE