political economy constraints. In MENA countries, universal subsidies have been in place as part of the government’s role in ensuring stability in the lives of the people and doing away with them is not straightforward. Finally, section 6 concludes.

# **1. Evolution of subsidies**

Like other countries in the MENA region, the Government of Jordan has traditionally provided universal subsidies to consumers and producers of petroleum products, electricity, water, and food. With the government continuing to insulate the population from the recent large spikes in global commodities and food prices, the subsidies experienced sharp increases. In 2005, the government was spending over JD 600 million on food and oil subsidies alone, about 17 percent of total government expenditures. While the magnitude of the subsidies rose and fell with international price changes, they continued to remain a challenge for the government.

Jordan’s consumer subsidies have a long history with food price subsidies dating back to the 1960s. Starting with wheat and sugar, over time a host of food items were subsidized. By the early 1990s most food prices were liberalized with the exception of wheat, which has continued to be subsidized despite occasional attempts at reform. The government’s attempt at removing the wheat subsidies (with prices almost trebling from JD0.075 per kilogram to JD 0.25 per kilogram), resulted in widespread social discontent and erupted in ‘bread riots’ in 1996 (Lamis and Schwedler 1996). While the increase was scaled back, the retail price almost doubled in 1996, and was subsequently accompanied with a cash transfer program to compensate the poor. Since then, however, wheat prices have remained fixed in nominal terms. Consumers today receive water at subsidized rates as well. In this section, however, we focus on petroleum products and electricity because of their relative importance to Jordanian households and the government.

## **1.1 Subsidies on Petroleum Products**

Before 2003, Jordan received oil from Iraq at below market prices and the government passed on (part of) these savings to consumers. After 2003, Jordan lost this source of cheap oil and this coincided with increases in international prices (World Bank 2009). Between 2002 and 2008 world energy prices increased by more than threefold while world food prices doubled (Figure 1). The government was forced to increase prices in 2005 and again in 2006, but it still kept prices below international levels. Consequently, in 2005, government spending on petroleum subsidies alone reached 5.8 percent of GDP (Coady _et al_ 2006).

In the face of serious fiscal strain, the government phased out cash subsidies on petroleum products between 2008 and 2010. This was the first time prices were at the international level (LPG was still subsidized partially) and a rapid drop in petroleum subsidies ensued – from 2.5 percent of GDP in 2007 to 0.3 percent in 2009. At the same time the government compensated households in the form of salary increases for public and private sector employees and military personnel. At the very end of 2010, however, the government discontinued the monthly petroleum price adjustments as oil prices reached US$90 a barrel and reintroduced petroleum subsidies. By 2012, petroleum subsidies were at 2.8 percent of GDP or close to 9 percent of the government budget.

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