Interview with Jordan’s finance minister, Hamad Kasasbeh

22 July 2008
Hamad Kasasbeh talks about the dollar-dinar peg, rising inflation and the effect of Iraqi refugees on the economy.

Q: Can you comment on the growth of foreign direct investment into Jordan, the relationship with the US and the importance of other trading partners?

A: Let me first refer to the global ranking of the 2007 World Investment Report issued by the UN Conference on Trade & Development (Unctad), which places Jordan among the world’s top 10 countries for inward foreign direct investment (FDI) in 2006.

As for the growth of FDI, over the past few years inflows have continued to pour into Jordan, fuelled by:

  • Improved legislation and tax systems

  • Strong economic fundamentals

  • An accelerated privatisation programme

  • High regional liquidity

  • A secure environment despite regional unrest

In 2006, FDI exceeded $3.2bn, or 23 per cent of gross domestic product (GDP). In 2007, FDI was more than $1.8bn, and in the same year investment agreements amounting to $2.5bn were signed at the Dead Sea World Economic Forum. The FDI momentum is expected to continue over the medium term.

As for Jordan’s relationship with the US, both countries have historically enjoyed a distinctive and special relationship in all fields, including trade, foreign aid and support for Jordan’s policy reforms.

Over the past decade, two trade preferential agreements were reached with the US: the launching of Jordan’s qualified industrial cones (QIZs) in 1996 and the signing of a free trade agreement in 2000, which contributed to increasing Jordan’s exports to the US from less than JD10m ($14m) in 1999 to more than JD850m by 2007. This increase in exports has positioned the US at the top of Jordan’s list of trade partners.

Furthermore, in 2003, Jordan and the US exchanged instruments of ratification for a bilateral investment treaty, with the aim of providing the highest investment protection standards.

As for our relationship with other trade partners, we have worked on strengthening our trade relations with several trade partners in the Arab world and the EU since these markets are important destinations for our exports.

For that we have signed a partnership agreement with the EU and free trade agreements with several Arab countries. Furthermore, we have joined the Free Trade Area for Arab Euro Mediterranean Countries (Agadir), signed a free trade agreement with European Free Trade Association countries, and many other agreements.

Q: Can you tell us about the diminishing role of the state in Jordan’s economy through privatisation and deregulation.

A: One of our key elements of reform has been to motivate the private sector role in economic activity and to create the right economic environment that is attractive to both foreign and domestic investment and conducive to sustainable economic growth.

The government has undertaken several measures to achieve this, one of which was to limit its direct intervention in market forces and withdraw from producing private goods and services.

To do so, the government initiated in 2000 a privatisation programme that is regarded by many international agencies and experts as one of the most successful in the region.

Through this programme, the government was able to privatise several major public companies with total proceeds of more than $2.5bn. The privatised companies include Jordan Telecommunications Company, Royal Jordanian Company, Arab Potash Company, Jordan Phosphate Mines Company, Jordan Cement Factories and the electricity sector companies.

Furthermore, the government has recently adopted a public-private partnership strategy to enable the private sector to be the main driving economic force and to take the lead in implementing major development projects, a role that used to belong to the government.

Q: What has been the impact of banking reform on wider economic growth in Jordan and the role of the central bank?

A: In recent years, the Central Bank of Jordan (CBJ) has made considerable progress in strengthening the regulatory and institutional framework for the Jordanian banking sector, most notably: the implementation of Basel II standards; the enactment of anti-money laundering legislation and its operational implementation; issuing new corporate governance regulations for banks; and finally, implementing the electronic cheque-clearing system.

The CBJ’s commitment to maintaining monetary and price stability is certainly conducive to the creation of an attractive investment environment for foreign and domestic investors, and therefore constitutes a cornerstone for achieving sustainable economic growth in Jordan.

Furthermore, through improving the efficiency of financial resource allocation, the CBJ supports robust economic growth. The banking sector in Jordan is well developed. There is no state ownership and foreign ownership is high. Currently, eight foreign banks are operating in Jordan. The presence of many foreign banks is a sign of the improved attractiveness and competitiveness of Jordan's banking environment.

Banking efficiency is also enhanced through promoting healthy competition in the provision of Islamic financial services. This is done through licensing new Islamic banks, including the planned step in transforming the Industrial Development Bank into a third major Islamic bank in Jordan.

Q: Can you tell MEED about the policies introduced to improve the investment environment for foreign investors and for local small and medium-sized enterprises (SMEs)?

A: Long ago, Jordan realised the importance of creating an environment that is conducive to foreign investors and local SMEs. To this end, the government has implemented several reforms, including reworking economic legislation, reforming tax systems, opening most sectors to foreign investors, removing all restrictions and approvals on capital mobility in and out of Jordan, inaugurating an investment promotion law, implementing judiciary reforms and improving the infrastructure.

Our efforts will not stop there as we will continue to implement further steps to create the right environment for foreign and local investments and to place Jordan among major investment destinations in the region. Several reforms are currently under process to achieve this goal:

  • The Finance Ministry is implementing a comprehensive revision of all tax systems in Jordan with the aim of simplifying them through reducing their number and combining them under a unified tax code.

  • The government is planning to create a new institutional framework for investment to create a better environment for investors.

  • An investment map for Jordan is being developed. This will include 75 pre-feasibility studies in 15 sectors that have been identified as offering good prospects.

  • A new investment strategy is being developed.

  • Jordan Investment Board is working on an intelligence project that will enable it to be more systematic in targeting overseas investors.

  • The government is implementing an action plan to establish development zones in different areas of the kingdom. Recently, three development zones have been established in Mafraq, Irbid and Maan.

Q: How is the dinar peg to the dollar affecting the economy at a time when the US currency is depreciating?

A: To build strong foundations for sustained economic growth with stable prices, the dinar has been effectively pegged to the dollar since 1995 (JD0.71/$1).

We realise that the depreciation in US currency has had negative effects on our economy, such as higher inflation, wider current account deficit and higher debt service. But we also realise that ending the dinar peg to the dollar will have yet greater negative effects such as lower exports, higher imports, lower foreign reserves, higher cost of factors of production, lower FDI and hence slower economic growth.

Consequently, I think maintaining the dinar peg to the US currency is of best interest to our economy until there is solid evidence that suggests otherwise.

Q: How can rising inflation in Jordan be managed?

A: A large part of our consumption basket is of imported goods. Therefore, the world inflation caused by the high increase in oil products has had a direct impact on domestic prices, especially after the government’s decision to eliminate most oil subsidies to maintain fiscal stability.

Nevertheless, we expect that the increase in inflation will be a one-time shift in 2008, and hopefully our inflation rate will return to its normal levels in 2009 and onwards.

Managing inflation is one of the challenges that the government is facing and, in general, requires tightening monetary and fiscal policy to reduce the amount of liquidity in the market. But this tightening should be to the extent where it does not negatively affect economic activity. There is high co-ordination between the Finance Ministry and the CBJ in this regard.

Q: What can be done to combat rising food and fuel prices, and reduce the impact of this on the budget deficit?

A: Jordan is a small, open economy and highly vulnerable to external shocks. The increase in food and fuel prices has had a direct impact on the livelihood of our citizens and our economy, alongside the economies of many other countries in the region and the world.

One of the things that can be done to combat rising food and fuel prices is to subsidise these commodities. Jordan has done so for many years, but with this massive increase in prices continuing, the subsidy policy was suicidal for the budget. Therefore, the recent decision to liberalise oil prices has been crucial to maintaining fiscal and economic stability in the country.

Another measure to combat the increase in prices is to minimise the effect of this increase on the citizens, especially the poor. In this regard, the government has implemented a social safety net that includes shifting from commodities subsidies to direct subsidies in the form of increased salaries to employees and aid to the poor. This safety net also includes tax exemptions on basic commodities, housing projects for the poor and many other measures.

Q: Has the impact of the influx of refugees from Iraq been positive or negative?

A: Let me emphasise first that when it comes to the Iraqi case, we in the government do not deal with it as an economic issue. On the contrary, we are pleased to have extended and continue to extend all the possible support to our Iraqi brothers.

Having said that, the repercussions of the Gulf wars created additional difficulties for Jordan's economy. Since 2003, refugees from Iraq have put a heavy pressure on the demand for private and public goods and services. The growing demand on public services, especially health and education, has required additional public spending on schools and health centres. This has had a direct impact on our budget. Furthermore, the increased demand on private goods and services has caused prices to go up, affecting the livelihood of our citizens.

Nevertheless, we should not forget the Iraqi refugees’ contribution to economic growth through investing in several sectors of the economy, especially the real estate sector.

Q: Can you tell us about the progress of new financial instruments to encourage investment and the development of financial services such as mortgage and insurance lending?

A: Jordan's financial sector is well diversified and comprises the CBJ, licenced banks, Amman Stock Exchange (ASE), insurance companies, money changers, specialist credit institutions and other non-banking financial institutions such as the Social Security Corporation, Jordan Loan Guarantee Corporation, Jordan Mortgage Refinance Company, Jordan Deposit Insurance Corporation, finance leasing companies, as well as the Development & Employment Fund and other micro-finance institutions.

Among relatively new financial instruments are lease finance and micro-finance initiatives. The lease finance market is one of the fastest-growing industries in Jordan's financial sector. Currently, there are 31 companies working in this activity, which provide a total funding for real estate, transport equipment and machinery transactions of JD230m under 1,254 signed contracts.

In addition, there are a variety of micro-credit initiatives operating in Jordan. Currently, the local micro-finance sector consists of a wide range of private, government and non-government institutions, funds and schemes.

As for the near future, the government is planning to establish two venture capital funds for both start-ups and existing SMEs, with a view to bridge the equity gap in Jordan's financial sector, especially for small and medium-sized high-technology enterprises. This step will be coupled with certain improvements in the legal and regulatory environment for the healthy development of this infant industry.

Q: Can you comment on the strength of capital markets in Jordan and the development of subsidiary exchanges for commodities and companies with a smaller capitalisation?

A: Jordan has made solid progress in pursuing its wide-ranging monetary and financial reforms since the late 1980s. By regional standards, Jordan currently ranks high among Middle East and North African countries in its level of financial development, which is comparable with that of many oil-rich Gulf countries.

As for the capital market, ASE is highly active in attracting private capital inflows, supported by a favourable investment climate. Non-Jordanian ownership in companies listed on the ASE by the end of April 2008 represented 50 per cent of total market value - 34 per cent for Arab investors and 16 per cent for non-Arab investors. At the sector level, foreign ownership in the financial sector was 51 per cent.

With a view to further internationalise the local stock exchange through enhancing transparency, the ASE launched in early 2008 the Dow Jones ASE 100 index. This is a broad benchmark index that tracks the performance of the 100 largest stocks listed on the ASE, based on free-float market capitalisation. This step will enhance the development of the broader capital market and help to deepen the secondary debt market.

As for the development of subsidiary exchanges for companies with a smaller capitalisation, the Securities Law of 2002 permits the establishment of new stock exchange markets. The licensing of such a trading market in securities is given by the Jordan Securities Commission.

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