Surrounded by instability on its borders, Jordan’s economy is feeling the strain of the country’s unfortunate location. The Syrian conflict that erupted in 2011 has so far pushed more than 1 million refugees across the border to Jordan, and all but shut down trade with its neighbour.

In recent months, the Jordanian economy has been hit again by a deterioration in the security situation in Iraq, another key partner for cross-border trade.

“There are about 608,000 registered refugees in Jordan, but the government says there are about 1.3 million in total,” says Andrew Harper, Jordan country representative at the UN Refugee Agency (UNHCR). According to government figures, Syrian refugees make up 13 per cent of the country’s population.

“The political situation puts pressure on the economy,” says Maria Malas-Mroueh, Middle East analyst at the US’ Fitch Ratings. “The numbers are overwhelming. It places a huge burden on resources, infrastructure and public finances. A lot of aid is coming from the UN, the US, the IMF and the Gulf, but it’s still falling short.”

Competing for resources

Some Syrians are being accommodated in refugee camps, but the majority are competing for limited resources in Jordan’s urban areas. “More than 80 per cent of the refugees are outside the camps,” says Harper. “We’re concerned about the massive inflation in rents, and also about the longer-term consequences. There’s a lot of discussion over how much more Jordan can absorb.”

The IMF programme and eurobonds guaranteed by the US government in 2013 and 2014 have helped

Maria Malas-Mroueh, Fitch Ratings

It is not only the influx of refugees that is affecting Jordan’s economy, but also the detrimental impact of the conflict on trade and tourism. “Syria was the route for Jordanian goods to the north, and when that was shut off it was partially compensated by trade through Iraq,” says Harper. “But now that there is conflict there as well, two of the main corridors for Jordan’s trade have been cut off.”

The long-running Syrian conflict has affected all areas of Jordan’s economy. “It has taken a toll on GDP, exports and tourism,” says Mroueh. “Living standards are strained due to the rising cost of living. Business performance is weak compared with the years before the crisis, and not as strong as it needs to be to support an economic recovery.”

Fitch estimates that GDP growth for 2014 will be 3-3.5 per cent, compared with more than 5 per cent in 2009, while Byblos Bank in Lebanon expects growth of about 3.5 per cent in 2014, rising to 4.5 per cent in 2015. “Obviously, if the political situation continues like this we wouldn’t expect growth to improve at all,” says Mroueh.

In the context of such a challenging environment, Jordan’s economy has proved relatively robust. “Jordan has done well overall given the regional circumstances, and especially given recent developments in Iraq,” says Nassib Ghobril, chief economist at Byblos Bank. “It’s still a stable country with a stable economy.”

But the government is reliant on large tranches of funding from overseas to keep the economy afloat. Under an initiative called the Gulf Development Fund, the GCC has agreed to provide $5bn in grants and loans to Jordan over a five-year period beginning in 2012.

In December 2012, the Kuwait government signed three loan agreements worth a total of $695m to fund water, sanitation, renewable energy and other infrastructure projects. The following month, the Abu Dhabi Fund for Development signed an agreement with Amman to regulate $1.3bn in grants transferred from the UAE to the Central Bank of Jordan to help finance water, sanitation, health, energy, education and transport schemes.

Foreign funding

“The GCC grant disbursement is one of the main factors in the modest recovery of the economy from 2012,” says Mroueh. “The IMF programme and eurobonds guaranteed by the US government in 2013 and 2014 have also helped.”

US President Barack Obama launched an initiative in March 2013 to guarantee Jordan’s sovereign debt. In October 2013, Amman issued a $1.3bn US-backed eurobond with a seven-year term and interest of 2.5 per cent. A sovereign bond worth $1bn, also guaranteed by the US government, was issued in June with a term of five years and a coupon rate of just under 2 per cent.

Economic performance will depend on how much support [Jordan] has to offset the [refugee] burden

Maria Malas-Mroueh, Fitch Ratings

In August 2012, the IMF approved a $2bn stand-by arrangement for Jordan to support the country’s economic programme over a three-year period. The Washington-based organisation made the first $385m immediately available, with further transfers subject to quarterly reviews. The fund agreed in April to disburse the latest two tranches, worth a combined $264m.

As a result of the inflow of funds, foreign currency reserves have picked up considerably. Gross usable international reserves increased from $5.3bn in 2012 to $11.4bn in 2013, and are expected to continue to climb, reaching $12.7bn this year and $15.2bn by 2018, according to the IMF.

Jordan is still running double-digit deficits in both its current and fiscal accounts, but they are narrowing. The current account deficit dropped from 15.2 per cent in 2012 to about 10 per cent in 2013 and 2014, and is expected to narrow further to 6.9 per cent in 2015, according to the IMF.

The fiscal deficit increased from 8.9 per cent in 2012 to 11.1 per cent in 2013, but is expected to narrow to 10.3 per cent this year and to 6 per cent in 2015.

There has also been some positive side-effects to the influx of Syrian refugees into Jordan, particularly the boost to private consumption. “Private consumption is doing OK,” says Mroueh. “It’s hard to measure because a lot of it is from unregistered refugees. But it’s one of the things that supported growth in 2013.”

The negative impact of regional instability on tourism has, meanwhile, been mitigated by the displacement of tourists elsewhere.

“There is an element of diversion from Syria and to some extent from Lebanon because Jordan is seen as more stable,” says Mroueh. “But, although it’s hard to tell, there has probably been an overall decline. The latest indications for 2013 show a fall in both trade and tourism, and I’d expect it to continue to deteriorate in 2014.”

Relaxed policy

The government has done what it can to limit the impact of the regional situation on the economy through a mixture of monetary policy, fiscal reform and industrial development. “The central bank has adopted a relaxed monetary policy and started cutting its rates a year ago,” says Mroueh. “This should support a very modest economic recovery.”

While the fiscal and current accounts have been strongly supported by overseas grants, the fundamentals still remain weak. If grants are excluded from the current account balance, the deficit widens to 20 per cent in 2012, 16.5 per cent in 2013 and a forecast 14.2 per cent this year.

Jordan is also vulnerable to inconsistent gas supply from Egypt, which is costly to replace. “The current account deficit narrowed because of a drop in energy imports, but this is hard to sustain over a number of years, especially with growing domestic consumption and the arrival of refugees,” says Mroueh. “The fiscal situation is very weak. If grants are excluded then the government deficit widens due to a large transfer of funds to [state electricity company National Electric Power Company] Nepco.”

Nepco made losses of JD1.2bn ($1.7bn) in 2012, JD1.1bn in 2013, and a forecast JD1bn loss in 2014. “The government has said it will eradicate transfers to Nepco by 2016,” says Mroueh. “They have already started to increase energy tariffs, and there are plans for an LNG [liquefied natural gas] importing terminal.” The IMF predicts that Nepco losses will drop to JD600m in 2015 and to zero by 2017.

In order to restore Nepco’s profitability, the government will have to continue to phase out energy subsidies. Electricity tariffs for selected economic sectors and rich households have been increased three times since May 2012, and fuel pump prices were also liberalised in November 2012, alongside support for 70 per cent of the population in the form of cash transfers.

“If they are to meet IMF targets [to improve fiscal discipline – a condition of their finding], they will have to adopt additional measures equivalent to about 12 per cent of GDP between 2015-18,” says Mroueh. “This will be difficult, and it risks dampening the economic recovery.”

Reducing subsidies in a country where the poorer members of society are dependent on state assistance for the provision of basic services is a notoriously difficult task. “The government is gradually implementing several structural reforms to help narrow the fiscal deficit, including a reduction in subsidies and an increase in electricity tariffs,” says Ghobril. “The changes will be brought in carefully so as not to cause social disruption.”

Uncertain outlook

This cautious approach means it will take time for the reforms to take effect. In the meantime, the outlook for Jordan in the coming year remains uncertain.

“It’s very difficult to be sure that things will continue to improve in 2014 as the situation is changing every day and the uncertainty of the political situation is a real risk factor,” says Mroueh. “Amman is still very vulnerable, and economic performance will depend on how much support it has to offset the burden.”

In recent months, the flow of refugees from Syria to Jordan has slowed, but the risk remains of a further deterioration in the conflict. “The real threat is if the regime in Syria launches an offensive in the south towards Dera,” says David Schenker, director of the Arab politics programme at the Washington Institute for Near East Studies. “If this happens, there could be hundreds of thousands more refugees to Jordan.”

In such a scenario, overseas support will be even more crucial. “There’s a consensus that Jordan shouldn’t have to shoulder the cost by itself and that the international community needs to intervene,” says Mroueh. “Jordan has support from the GCC and the IMF, and that is expected to continue.”

Key fact

Jordan’s current account deficit fell from 15.2 per cent in 2012 to about 10 per cent in 2013 and 2014

Source: IMF