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FEATURE-Arab Spring exposes Jordan’s economic policy rifts

* Growth languishes at low levels* Fears that government could raid c.bank funds* To remain heavily dependent on foreign aidBy Suleiman Al-KhalidiAMMAN, Oct 12 (Reuters) - Jordan’s former central bank chief, ousted by the government last month after security personnel surrounded the bank to stop him entering, says he fears for the country’s economic stability as rising government spending pushes state finances deeper into the red.”Am I conceited because I speak my view and don’t agree with government policies that will create problems in the future?” Faris Abdul Hamid Sharaf told reporters, responding to public criticism of him by Prime Minister Marouf al-Bakhit.Just several years ago, Jordan was viewed by many businessmen as an economic success story; under reforms guided by the International Monetary Fund, it became one of the Middle East’s most open economies.Now, political unrest across the Arab world has pushed Jordan into a big increase in government spending on salaries, food and energy subsidies and its social safety network, in an effort to head off domestic protests by placating the country’s poor. Millions of dollars of state money have been channelled to tribal areas that provide the backbone of support for the Hashemite royal family regime.This has prompted the government to increase state spending this year by over 700 million dinars from its original plan to 6.95 billion dinars ($9.8 billion) through two supplementary annexes to the 2011 budget.That makes the government’s budget deficit target this year, 5.5 percent of gross domestic product, look much too optimistic; economists and bankers think the deficit will be nearly 7 percent. Public debt was already rising before the additional spending — at the end of August it stood at 12 billion dinars or 57 percent of GDP. Including debt incurred by the national electric power company and guaranteed by the government, it is already above a legal limit set by Jordan of 60 percent, according to the finance ministry.”The government is saying the deficit is a small price to pay in return for maintaining social peace and security. They are pursuing a policy of political convenience and appeasement. But they are just postponing problems at a higher cost,” said Jawad Anani, a leading economist and former deputy prime minister.Earlier this year, Jordan’s economy was officially expected to grow around 3 percent in 2011, much slower than the average 7 percent seen over the last decade during a boom fed by high aid levels and capital inflows and investments.But even 3 percent may not be attainable, officials now concede privately, as the kingdom is still struggling to recover from the global downturn of 2008-2009, which cut remittances from Jordanian expatriates in the Gulf.Another blow to state finances is a record energy bill that is expected to top $4.5 billion after the disruption of Egyptian gas supplies to Jordan due to sabotage of the pipeline in the Sinai region. This prompted the kingdom to switch to more expensive diesel fuel to generate electricity.”The government cannot touch or change 90 percent of the expenditure allocations in the budget. Economic conditions are not comforting,” an exasperated Finance Minister Mohammad Abu Hammour told Reuters.TENSIONSThese tensions spilled over last month in the government’s sacking from the central bank of the 41-year-old Sharaf, a U.S.-educated banker who is the son of Abdul Hamid Sharaf, a former liberal prime minister who tried to modernise the country’s tribe-based political structure before his death in 1980.Sharaf said he did not know why he was ousted, suggesting it might be because he had “fought corruption within the banking sector and stood up against the entry of criminal elements”.But disagreements over economic policy appeared at least partly responsible. Sharaf, known as a fierce advocate of fiscal discipline, had repeatedly warned that wasteful subsidies were distorting the economy and hindering IMF-guided reforms.Sharaf also had forthright views on the need to rationalise Jordan’s secret army expenditure. This made him enemies in a bloated military patronage system.Prime Minister Bakhit, a conservative former general, said publicly that Sharaf’s free-market views ran contrary to the populist agenda of a government which claims to defend ordinary Jordanians from the abuses of the business elite. The current government came to power in February, during the Arab Spring unrest in the region, after King Abdullah sacked an unpopular pro-business prime minister.Regardless of the specific issues at stake, the government’s action against the central bank governor, who was only ten months into a five-year tenure, raised questions about the predictability of economic policy-making.”It sends a very, very bad signal. This was a political mistake of huge dimensions. This is a very worrying development,” said one senior Western diplomat, who requested anonymity.Sharaf, who described his dismissal as illegal, was replaced by a long-time veteran of the bank, Mohammad Said Shaheen, a deputy governor. He is expected to focus on the central bank’s traditional role of defending the dinar currency, which is pegged to the U.S. dollar.INDEPENDENCEIn March this year, Sharaf stood up to the government when it sought to overdraw its account at the central bank to pay civil servants’ salaries. He wrote to Bakhit and the finance ministry saying they had three days to come up with the funds, a rare move in a country where influential politicians are rarely challenged over spending.”If you overdraw it’s a form of printing money. I am not going to let the government find an illegal window of financing,” he said.Now some economists and businessmen fear that with Sharaf out of the way, the government could seek to finance its budget deficit by raiding funds at the central bank.”If the central bank succumbs to pressure to give advances to the government to alleviate pressure on the budget by taking on more public debt, the bank could become a government puppet,” said Anani.Prominent commercial banker Mufleh Aqel said, “The independence of the central bank must be maintained under all circumstances so that it does not fall under the government’s influence — especially at a time of expanding social programmes that appease rather than solve fundamental problems facing the economy.”Jordan’s key role in protecting geopolitical stability in the Middle East makes it one of the highest per capita recipients of foreign aid in the world, according to figures from USAID, the U.S. aid agency. In the past, foreign aid has sometimes financed almost half the country’s budget deficit; Anani and others credit a $1.4 billion cash injection by Saudi Arabia this year for keeping the economy afloat.Last year Jordan issued its first sovereign Eurobond on the international market, raising $750 million. Abu Hammour said the price of those bonds had now dropped about 10 percent in secondary market trading, though he attributed this to pressure on bond prices across the region in the wake of the Arab Spring, and did not rule out Jordan returning to international debt markets next year.Weak global markets may make it hard for Jordan to issue another international bond, however. In that case, the government will have to continue relying heavily on foreign aid in the coming year. But the fiscal pressures on Jordan mean the aid may not be enough to support solid economic growth; economists worry large government debt issues to local banks to fund the deficit will crowd out credit to the private sector.”Jordan has to resort to more stringent fiscal policies and ask people to tighten their belts. Otherwise we might become