Jordan may be situated in a precarious environment, having borders with countries such as war-ravaged Iraq and unstable Israel and the Palestinian territories, yet it has managed in this decade to avert a recurrence of the 1988-1989 economic meltdown by having strong political allies with countries such as the US and support from the International Monetary Fund. The fund provided Jordan with support from 1989 to 2004, allowing the country to survive an economic crisis that saw that deficit spiral to 23% of GDP before grants received in 1988, external public debt soar to 174% of GDP, and inflation spike to over 25% in 1989.
Debt rescheduling
Jordan’s economic recovery was aided by debt rescheduling from political allies, mainly the 19-nation creditor group, the Paris Club. As is in the case of Egypt, the debt relief was partly a token of appreciation to Jordan for its support to the U.S.-led war on Iraq in 1990-1991, which was aimed at putting the end to the Iraqi invasion of neighboring Kuwait. This October, Jordan agreed with the Paris Club to buy $2.5 billion of its lingering debt, starting in January next year.
It is certainly an encouraging move and will have a beneficial effect on the country’s external debt servicing bill. However, the net effect will not be dramatic,” Tristan Cooper, a Dubai-based analyst with Moody’s Investors Service told Executive. “One has to bear in mind that while the government will be saving the interest payments on whatever portion of its non-ODA (official development assistance) Paris Club debt that it repurchases, it will be using its saved privatization proceeds to do this and will therefore forego the interest that it currently receives on those deposits. Hence, the net effect, while positive, will not be huge.”
Since the end of the IMF’s program in 2004, Jordan has been blessed with robust growth, an increase in foreign direct investment, and lower levels of debt as a percentage of GDP. Foreign aid to Jordan, which has fluctuated over the year, is expected to reach $810.4 million this year, according to Jordanian government figures. In 2007, Jordan’s economy continued to grow, although at a slower pace, aided by the influx of money from oil-rich Gulf countries. Real estate prices have soared amid a flood of investments, mainly from the Gulf. The flow of Iraqi refugees fleeing war and looking for accommodation in Jordan has also helped push up real estate prices. The oil-generated boom in the Persian Gulf has led to a rise in remittances from Jordanians working abroad. Economic growth in the first half of 2007 slowed to 5.8% from 6% in a year-earlier period, according to Jordan’s Department of Statistics. The IMF is projecting an economic growth rate of 6% for this year because of “continued sound policies and large capital inflows.”
“There are new changes that may influence this target such as the price of fuel,” said Amman-based economist Fahed Fanek. The financial and insurance sector was the main contributor to economy in the first half of this year. It grew 11% in the first half, followed by taxes on goods with 9.9% growth during the same period. Investments benefiting from the country’s investment laws reached $3.25 billion in the first nine months of this year and are projected to top $3.53 billion by year’s end, according to Amman-based Jordan Investment Board, which oversees the implementation of the country’s investment laws.
“Political stability is the number one factor that is helping to attract investments to Jordan,” Maen Nsour, chief executive officer of Jordan Investment Board told Executive. “The macroeconomic policy of the government is also making a big difference.”
Nsour, who projected investments benefiting from the country’s investment laws would reach $4.24 billion next year, said the major inflows are coming from the Gulf and Asia and are mainly directed to industry and tourism. To help boost the level of inflows, Jordan plans to introduce a new investment law that will open up sectors such as transport and simplify measures for investors by the first quarter of next year, he said.
Ninth most globalized economy
Jordan’s efforts to improve its economic climate has earned it the rank of the ninth most globalized economy in the world in its first year on the Globalization Index, according to a study conducted by US consulting firm A. T. Kearney and Foreign Policy which was published in October. The study, which featured 72 countries, “assesses the extent to which nations are becoming more or less globally connected.”
political stability is the number one factor that is helping to attract investments in jordan
Jordan also earned an unexpected gift as a new survey ranked Petra, the site of Jordan’s ancient Nabataean civilization, as one of the new Seven Wonders of the World — putting it on par with historical sites such as the Great Wall of China and the Taj Mahal in India. This bonanza is expected to help boost tourism revenues and reassure confidence in the sector which hasn’t been affected by the 2005 three hotel bombings in the capital. The number of tourists flocking to Jordan reached about 1.5 million in the first half of this year, compared with 3.2 million for the whole of last year, according to figures by the Ministry of Tourism and Antiquities. Tourism receipts reached $802.2 million in the first half of this year, compared with $1.643 billion for the whole of last year, as a result of the influx.
The Jordanian government has also decided not to sit on its laurels and is seeking to sell its state assets to strategic investors to boost efficiency at state-run enterprises and enlarge the country’s state coffers.
“Privatization is going fast but there is little left to sell,” said Fanek.
Already this year the government sold a 51% stake in the Central Electricity Generating Company to a group of Arab and Asian investor, the first sale of state assets in the energy sector. The government has also announced plans to sell other state-owned enterprises, including national flag carrier Royal Jordanian Airlines in an initial public offering. Privatization proceeds would help lower the country’s fiscal deficit, which is expected to reach 6.8% of GDP this year, compared with 4.4% of GDP for the whole of last year.
“Since Jordan graduated from the IMF program in 2004, the government undertook to implement reforms on its own and has succeeded except for the fiscal deficit,” said Fanek. “The deficit is increasing rather than decreasing, which is the major shortcoming of the government.”
Lowering public debt
Public debt stood at $11 billion or about 69% of GDP at the end of September this year, compared with $10.5 billion or 73.5% of GDP last year. The government is intent on lowering the public debt stock to 60% of GDP by achieving higher economic growth rate, lower interest rate payments and higher government revenue.
“Achieving a lower debt-to-GDP ratio than the 60% target by 2011 is well within reach,” the International Monetary Fund said in August following consultations with the Jordanian authorities. Jordan’s foreign currency reserves, which were almost depleted by 1989, were at an all-time high of $6.7 billion at the end of August, according to the Central Bank of Jordan.
Jordan’s rosy economic picture remains tinted. As oil prices head toward $100 a barrel in New York, the Gulf oil boon that is pouring foreign direct investment into Jordan has been offset by a rising oil import bill. During the UN sanction days under former Iraqi President Saddam Hussein, Jordan used to receive almost all its oil from Iraq, half for free and the rest at preferential prices. Jordan started to receive some Iraqi oil again this year at slightly discounted prices. However, the Iraqi oil won’t meet the country’s needs. The spiralling of the oil price has led to controversy in Jordan. The attempt to end or lower fuel subsidies, supported by former Deputy Prime Minister and Finance Minister Ziad Fariz, led to his resignation. The government had opposed such a move, which would strongly impact Jordanians, who have in the past revolted against a cut in fuel subsidies. Raising fuel prices in the short-term at a time when parliamentary elections are set to take place in Jordan in November is unlikely, Moody’s said in a country report on Jordan released in October. Following the elections a new government is expected to be formed.
“Next year presents many difficulties to Jordan, mainly because of the price of fuel which will spark inflation and create a big fiscal deficit in the budget,” said Fanek. “I think the present government should be asked to raise the fuel price rather than let a new government take unpopular decisions.”
Inflation to increase
Inflation in Jordan has remained high amid an increase in real estate, food and fuel prices, reaching 5.6% in the first eight months of this year, compared with 6.3% in a year-earlier period. Inflation is expected to pick up next because of the increase in the price of fuel, according to Fanek.
Jordan is not benefiting as much as before from the economic success of the qualified industrial zones (QIZs), which allow Jordan to export tariff-free goods to the US provided they have Israeli inputs — a result of Jordan’s signing a peace agreement with Israel in 1994. Exports to the US, Jordan’s number one export market, fell by 1% to $949.6 million in the first nine months of this year from $950.1 million in a year-earlier period, according to the Department of Statistics.
“Exports from the QIZs used to grow very fast, but they are not anymore because of competition from Egypt and China,” said Fanek.
Total exports increased by 11.2% to $3.39 billion in the first nine months of this year from $2.95 billion in a year-earlier period, Department of Statistics figures show. Imports meanwhile rose 11.5% to $9.6 billion in the first nine months of this year from $8.6 billion in a year-earlier period. Jordan and Egypt are the only two Arab countries with QIZ agreements, owing to their peace agreements with Israel. Jordan is benefiting, however, from the increase in trade with neighboring Iraq, Jordan’s second-largest trade partner, which imports a large number of its goods from Jordan.
the government has made good progress in weaning itself off high levels of foreign aid
Drop in foreign aid
Jordan suffers from a large deficit in the current account, which is projected to reach 13.8% of GDP this year, compared with 13.6% of GDP deficit, the IMF said in July. The deficit is expected to rise because of the increase in oil prices. Despite the recent drop in foreign aid, the Jordanian government is expected to receive aid representing as much as 5.1% of GDP this year, compared with 3.3% of GDP last year, to help alleviate the rise in the fiscal deficit, according to IMF projections. The fund has recommended that Jordan eliminate fuel subsidies by next year to help address the fiscal deficit.
“The government has made good progress in weaning itself off high levels of foreign aid, but the fiscal account is still dependent on that aid,” said Cooper. “The sharp reduction in foreign grants over the past four years has had a negative effect on the overall fiscal balance. While the government has made headway in minimizing the effect through its drive to raise revenues and cut fuel subsidies, the fiscal deficit has still deteriorated.”
the government is intent on lowering the public debt stock to 60% of gdp
Growth not felt by all
Jordan’s unemployment rate remains high, reaching 14.3% at the end of the third quarter, compared with 15.4% in the same period of 2006, according to the Department of Statistics. Poverty is also prevalent among Jordan’s 5.7 million population, with poverty incidence rising to 14.7% in 2005 from 14.2% in 2002-2003, according to government figures. The government has tried to alleviate poverty by setting up special economic zones in impoverished areas such as Ma’an.
“There is some concern that the strong growth in Jordan isn’t being spread throughout the population and is benefiting the wealthy more than the poor,” said Cooper. “Evidence supporting that is the unemployment rate, which is stubbornly high and is not falling as rapidly as one might expect. Reducing unemployment is clearly a long-term issue. Education and vocational training are key to lowering unemployment both in Jordan and in other countries in the region.”
