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Jordan : Inflation jumps higher

Jordan’s inflation rate has hit a new high as hikes in fuel prices and the effects of a poor harvest have combined with global inflationary pressures to push prices upwards.

Jordan’s inflation hit 12.7 percent in the first five months of this year, following a record 15.5 percent jump in food prices and a 44.3 percent increase in oil and electricity costs. In the same period last year, inflation was only 6.7 percent, according to statistics released by the Central Bank of Jordan (CBJ).

Several factors have driven price increases, both global and local. Worldwide, soaring oil prices (crude oil hit $140 a barrel by some measures in June) and rising commodity costs, caused in part by demand from fast-growing emerging markets, have pushed up inflation. Rising food costs have been experienced across the world. They have been caused in part by changing global consumption trends and increased cultivation of biofuels over food crops in Europe and North America. In Jordan, they have been painfully exacerbated by an unusually cold, frosty winter, which damaged harvests.

According to the CBJ, 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 percent. The liberalization of fuel prices has caused costs to rise towards market levels, putting a new squeeze on family budgets and pushing up manufacturing costs.

As part of its program of economic liberalization, the government has been ratcheting up fuel prices assiduously over the past two years to prevent its fuel subsidy regime becoming a massive drain on the budget. In February, oil derivative prices were increased by up to 111 percent, with diesel almost doubling in cost.

On June 10, further increases were announced, with unleaded petrol costs increased from $1.03 to $1.30 per liter. Household heating fuel and kerosene rose 12 percent around $0.99 per liter. The rises have sparked protests from opposition MPs, and some worry that they will lead to discontent among poorer Jordanians and possible social unrest.

Almost all Jordan’s oil is imported. The country is suffering both from the global oil price rise and the end of imports at extremely favorable prices from Iraq, which the country had benefited from before the fall of Saddam Hussein’s regime. While oil imports from Jordan’s eastern neighbor are being resumed, pricing seems unlikely to be as generous as it was in the past.

Food inflation is the second most important inflationary factor. In the first five months of the year, prices of many foodstuffs jumped by more than 20 percent, with dairy and egg products registering inflation of almost 33 percent and cereals 26 percent.

According to international news reports, the price of a tonne of animal fodder has risen to $340 on the black market, from $200 last year. This is due in part to the easing of fodder subsidies, which are due to be phased out by the end of 2008, and in part to the shortage of agricultural ingredients for the livestock food.

Jordan is also to an extent a victim of its own success, with economic growth leading to rising wages. However, salary increases have outstripped productivity and increasing demand-pull on food prices. Meanwhile, a housing shortage, particularly at the lower-end of the price scale, has driven rents up.
One other domestic inflationary factor should also be mentioned. Over the past five years, Jordan has experienced an influx of refugees feeling instability in neighboring Iraq, contributing to rising prices, of housing in particular.

In response to the impact inflation is having on less affluent Jordanians, the government has set up a $425 million social security plan and hiked public sector wages. While these measures could be problematic, potentially increasing aggregate demand and leading to higher wage growth expectations, if the benefits are well-targeted, they could help ease the pain while subsidy regimes are relaxed and market pricing takes over.

Over time, the effects of fuel and fodder price rises will taper off, while a better harvest this year could help ease food costs. The global economic cooling could also help draw some of the heat out by reining in credit growth and commodity inflation. Over the medium term, overall price growth should therefore slow. More immediately though, given Jordan’s situation as a fuel-importing, water-scarce country, and its government liberalizing measures, inflationary pain will be felt.

Marseille,07 08 2008
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