Jordan’s macroeconomic performance was strong in 2008, with real gross domestic product (GDP) growth of 5.6 per cent. However, like the rest of the Middle East, the global financial crisis began to affect the kingdom in the fourth quarter of last year, causing its annualised GDP growth rate to fall to 4 per cent for the period, from 6.3 per cent in the third quarter.

Following this dip, Finance Minister Bassem Salem cut his projections for Jordan’s GDP growth to 3.5 per cent for 2009, in line with the International Monetary Fund’s (IMF) forecast of 3-4 per cent GDP growth for the year.

The government has drawn up an $8.6bn budget for 2009, an increase of $1.3bn on 2008, and is hoping to ease the impact of the financial crisis on the economy by boosting spending on public projects.

“Jordan is a small, open economy and it is therefore not surprising that it has been affected by the downturn,” Salem tells MEED. “But while we revised our projections for 2009, we continue to experience positive growth and this is a definite plus compared with a great number of other countries, both developed and developing.”

Falling revenues

The key contributors to Jordan’s GDP - foreign remittances, foreign direct investment (FDI) and exports - have all recorded lower growth rates as the global crisis has hit.

The slowdown across the Gulf is having a direct impact on Jordan’s economy as workers send less money home. In 2008, remittances accounted for 14.9 per cent of the kingdom’s gross national product. In April, they fell by 9.9 per cent to $273.4m, compared with the same month in 2008.

The majority of remittances have traditionally come from Jordanians working in GCC countries. Of the 600,000 Jordanians working in the Gulf, 260,000 live in Saudi Arabia, 250,000 in the UAE, 42,000 in Kuwait and 27,000 in Qatar, all of which have been hit by the global economic slowdown.

FDI from the Gulf, traditionally the largest source of FDI in Jordan, is also likely to fall as many Arab states seek to repatriate their capital in the wake of lower oil prices, which have fallen from a peak of $147 a barrel in July 2008 to about $65 currently, and tightening liquidity conditions.

FDI stood at $2.4bn in 2008, but the first-quarter figures of JD155m ($219m) for 2009 suggest the figures for the end of the year will be lower.

The impact of falling FDI can most clearly be seen in the slump in Jordan’s real estate sector. The value of transactions in this sector remains low, dropping by 34.3 per cent in the first five months of 2009 to JD1.63bn, from JD2.47bn for the same period in 2008.

“The construction sector has ground to a halt,” says Safwan Moubaydeen, managing partner at Amman-based law firm Safwan Moubaydeen, which has a formal association with the UK’s Denton Wilde Sapte. “They [real estate developers] are continuing what they started with but we are not seeing anything new. We have actually had some of our overseas clients coming to our office and cancelling their projects in Jordan.”

The downturn has also led to a marked soft-ening of global commodity prices, which, combined with weaker external demand, has led to predictions that Jordan’s exports will be badly hit. Total exports and re-exports have dropped from $2.27bn in the first four months of 2008 to $2.22bn in the same period this year.

Buoying exports

However, Jordan is a key trading partner with Iraq, and Baghdad’s $66bn pledge to rebuild its country’s infrastructure, which is currently being pushed through parliament, could not be more fortuitously timed.

Although local companies have been experiencing a sharp slowdown in orders domestically, Eyad Kodah, director general of the Jordanian Free Zones Corporation, says Iraq’s reconstruction is shoring up the order books of Jordanian firms. “They have been compensating with Iraqi orders, especially for infrastructure projects,” says Kodah.

In 2008, Iraq ranked as Jordan’s biggest trading partner, with private sector exports to the country amounting to more than $1.4bn.

“We are the main port of entry for products into Iraq,” says Khaled Saqqaf, director of UAE-headquartered law firm Al-Tamimi & Company in Jordan. “We are a major supplier of cement and bricks to Iraq, and they supply us with some of our oil at a preferential rate - about $15-18 [a barrel] below the market price.”

Amman has worked to encourage greater co-operation between Jordan and Iraq. In Feb-ruary, the Interior Ministry relaxed residency rules for Iraqis to make it easier for them to carry out business in Jordan.

Saad Hayyani, the Iraqi ambassador to Jordan, has predicted that the new legislation will more than double the volume of trade between the two countries.

Under the new regulations, Iraqi residents will be issued with cards that facilitate entry and exit at all border crossings.

“Most of the trade between the two countries is carried out by Iraqis residing in Jordan,” says Moubaydeen. “We have a lot of Iraqis living in Jordan who have businesses and factories here, from which they export a lot of goods to Iraq, hence Jordan has come to be known as the ‘lung of the Iraqi people’.”

The Jordanian private sector is expected to play a central role in the next phase of the reconstruction of Iraq.

Growing deficit

Data from Jordan’s Department of Statistics shows that the volume of trade between Iraq and Jordan increased by 38.4 per cent between January and April this year, while exports increased by 37 per cent and re-exports by 60.5 per cent.

“Most notably, we have seen increases in exports of building materials, manufactured items and agricultural products,” says Salem. “There is an opportunity for Jordan’s private sector to invest in all sectors including elec-tricity, water and sanitation, transportation, telecommunications and agriculture.”

Jordan’s Red Sea port of Aqaba is increasingly serving as an important conduit, with goods transported to Iraq enjoying a 40 per cent discount on handling fees.

However, trade with Iraq cannot fully compensate for the effect the global financial downturn is having on Jordan’s economy. The state budget has recorded a deficit of $490.1m over the first five months of the year, soaring from $136.6m in the same period in 2008. This is partly a result of a 17 per cent increase in public expenditure to $3.29bn for the year.

Government revenues in the first quarter of 2009 were 10 per cent lower than the budget forecast. “As a result of the global slowdown, I believe we could see a decline of $706m in revenues compared with 2009 budget estimates,” says Salem.

Despite the large fall in revenues, Salem has made it clear that the government remains committed to its expenditure plans because “any cutbacks would only deepen the recession”. But unlike its hydrocarbon-rich GCC neighbours, Jordan does not have a large cushion of reserves to draw on from six years of high oil prices.

In March, Prime Minister Nader Dahabi said the government had stopped internal borrowing and the Finance Ministry was looking to obtain further low-interest funding from international institutions.

To date, the government has secured loans worth up to $112.8m from Arab development funds and $250m from the World Bank to finance the budget shortfall.

While these loans are welcome under the current economic circumstances, Salem says the government’s priority is to stimulate the economy by attracting greater investment through reforms.

Salem is considering amending the laws governing investment promotion zones to encourage the private sector to play a far greater role in the country’s development.

“Lower marginal tax rates will improve the rate of return on new investment and therefore enhance Jordan’s competitive position in the region,” says Salem, who is also formu-lating a unified tax law that is expected to be ratified shortly.

The legislation to streamline the tax system seeks to introduce a single 12 per cent rate for the majority of corporate entities. Corporate taxes currently range from 15-35 per cent depending on the profit level of the business and the sectors in which it operates.

Salem is also looking at plans to reform income tax, as well as amending the sales tax law, which includes a proposed tax on fuels.

This proposal has met with considerable opposition from MPs, reminiscent of the hostility the government received in February last year when it introduced a fuel subsidy reduction plan. Although the move was deeply unpopular with many Jordanians, the government had little choice given its spiralling current account deficit, which led Amman to post a budget deficit of $1bn at the end of 2008.

The IMF has predicted a fiscal deficit of $1.1bn in 2009, about 5.3 per cent of GDP, but Salem predicts the deficit will widen to $1.55bn, equivalent to 7 per cent of GDP. However, Jordan is taking steps to curb the effects of the slowdown and, unlike most economies, it is still achieving growth.

One positive outcome of the slowdown is the significant drop in commodity prices, which has caused inflation to retreat to a more comfortable level. For the first five months of 2009 it was 1 per cent, compared with 11.6 per cent for the same period in 2008.

Inflation is expected to average 4 per cent this year, down from 15 per cent in 2008.

Furthermore, Jordan’s doubling of trade with Iraq will provide a significant boost to its economic performance in 2009. However, its vulnerability to economic circumstances beyond its borders has become increasingly apparent throughout the year.

In particular, its reliance on remittances from Jordanian workers in GCC states will constrain its performance this year. Its large current account deficit and low GDP per capita of $4,700 also pose major threats to its future economic stability.

Before the downturn, the Jordanian government’s coherent economic policies contributed to a robust GDP growth rate. Given the efforts now being made to shore up the economy and make Jordan a more attractive investment environment, growth is expected to pick up quickly once the downturn recedes.