Jordan: Energy price rises inevitable
The Middle East | 18 Feb 2013
Ongoing energy concerns continue to plague Jordanian manufacturers despite an overall resilient performance from the sector in 2012. As the country grapples with slow economic growth, subdued international investment and a mounting public budget deficit, industrialists are working to combat a new wave of electricity tariffs that have already contributed to a rise in production costs.
Jordan’s energy woes have long been documented, and once again came to the fore as the result of attacks on the Egyptian gas pipeline in El Arish over the past few years. This has led to government imports of fuel at an unsustainable cost to keep up with growing energy demand. The decision to lift fuel subsidies in November 2012 to comply with the parameters of the IMF’s reform programme dented the pockets of Jordanians deeply, but the next step in receiving the IMF’s $2bn credit access could prove even more crippling to local industry.
As the IMF loan’s main objective is to cut into the soaring public debt, the National Electricity Producing Company (NEPCO) has become the main target. According to Energy Minister Alaa Batayneh, a combination of price hikes and planned power outages will be necessary to close NEPCO’s JD2.38bn ($3.35bn) budget deficit. Local media has reported that prices are expected to rise 40% through 2017. Although Batayneh said the decision will ultimately be left to the new government, these measures seem unavoidable. Currently, NEPCO sells electricity to consumers at an average rate 60% lower than its JD0.188 ($0.26) per kilowatt hour generation cost.
This leaves Jordanian manufacturers concerned with their ability to stay competitive. As Nazzal Armouti, general manager of the Jordan Cypriot Construction Company, told OBG, “The industrial sector is a lifeline of the Jordan economy as it is the main source of exports, as well as a tremendous job creator”.
The industrial sector employs around 22% of the working population, according to the UN. Salim Karadsheh, CEO of the industrial conglomerate Nuqul Group, reiterated the harm that increased energy costs could bring to Jordan’s regional competitive balance, stating, “Industries in Jordan are at a competitive disadvantage because oil-rich countries in the region sell fuel to their domestic firms at subsidised, non-market prices”.
According to the Central Bank of Jordan, the manufacturing sector made up 20.4% of GDP at the end of 2011, and ramifications from the electricity hikes this past June, as high as 150% across some sectors, have already been felt. National exports dropped by 1.8% over the first seven months of 2012, the central bank reported, and there was an average increase of industrial producer prices by 5.3% over the first eight months of 2012.
“The central government’s choice was either to raise the prices of fuel or devalue the dinar,” Ayman Azzeh, the CEO of Red Sea Timber Industries, told OBG. “Neither solution is ideal, but the latter would be detrimental in Jordan’s quest to attract more external investment. Now the industrial sector must also get ready to brace itself for energy hikes of up to 40% between 2014 and 2017.”
The industrial sector does have a strong lobbying arm in the Jordan Chamber of Industry, which according to Armouti is in talks with the government to lessen the percentage of price hikes. Another medium-term solution will be a concerted effort by a number of entities to emphasise alternative and renewable energies. Jordan is one of the most sun-rich countries in the world, averaging more than 320 days of sun a year, and many are looking towards photovoltaic technology once it becomes more cost-efficient. The country also has a number of promising oil-shale projects underway that could potentially render the kingdom self-sufficient in energy needs within the next decade.
Despite the challenges that lie ahead, the industrial sector does have much to be proud of. Its phosphate and potash industries, as well as fertiliser manufacturers, have continued to grow exceptionally well. Jordan’s exports in clothing and medical and pharmaceutical products have also remained strong. The industrial sector’s flexibility and diversity should equip it to ride out the storm.