Uncertainty holds back growth in Jordan

05 December 2011

The political unrest and lingering effects of the economic crisis continue to stunt growth in Jordan. Increasing the role of the private sector would reduce risk from external shocks

Key fact

Jordan’s real gross domestic product is expected to grow 2.9 per cent in 2012

Source: IMF

Jordan’s King Abdullah II appointed his second new government in nine months in October, under growing pressure to accelerate political reform. As the regional unrest impresses itself on the country’s political sphere, the uncertainty continues to have an adverse impact on its economy.

The problem with Jordan’s economy is that it is very vulnerable to external shocks

Regional economic analyst

Jordan’s real gross domestic product (GDP) is forecast to grow by just 2.5 per cent in 2011, a 4.7 percentage point drop on the 7.2 per cent growth achieved in 2008. The outlook next year is only slightly better, with marginal growth of 2.9 per cent, predicted by the Washington-headquartered IMF.

Unlike many of the region’s economies, Jordan has few natural resources of its own and its economic stability is at the mercy of global or regional conditions. The regional political turmoil in 2011 has led a fall in exports and business investment in Jordan, which has resulted in low levels of economic growth. Meanwhile as an energy importer, Jordan’s costs have risen sharply with oil prices surging above $100 a barrel.

GCC support for Jordan

Jordan’s economic prospects received a boost in September after the GCC met to discuss Amman joining the organisation. But with no clear timetable set for its accession, the country will not benefit economically in the short term.

In the meantime, increasing the role of the private sector remains vital if Jordan is to reduce its susceptibility to external shocks in international markets and achieve sustainable economic growth.

Until the global financial crisis struck in 2009, Jordan had enjoyed steady economic growth for the best part of a decade. Between 2000 and 2005, average annual GDP growth was 6 per cent. In 2006-07, this rose to more than 8 per cent. Jordan’s strong trade links with countries both within the Middle East and the rest of the world enabled sustained growth, despite lacking oil reserves.

Jordan real GDP growth 
GDP=Gross domestic product; f=Forecast. Source: IMF

The growth was broadly based in the manufacturing, construction, real estate and services sectors. In addition to favourable external conditions, the strength of Jordan’s economy during this period was assisted by significant reforms implemented by King Abdullah since his accession to the throne in 1999. Those reforms include facilitating trade, privatising state-owned companies and eliminating most fuel subsidies. The opening up of the country’s economy was successful in attracting foreign investment and creating new jobs.

However, this openess is one of the key factors behind the country’s economic slowdown since the global recession and the start of the Arab uprisings. “The problem with Jordan’s economy is that it is very vulnerable to external shocks, and as an oil importer it is also affected by swings in energy prices,” says a regional economic analyst.

Jordan has strong economic links within the Middle East, especially with GCC countries, through trade, tourism, grants and capital flows. There is a strong correlation between Jordan’s GDP growth and growth in GCC member states, especially with regards to the non-oil sector. Since 2009, non-oil growth has declined significantly in some GCC countries. The UAE is a prime example, with its non-oil GDP growth falling from 9.5 per cent in 2006 to 2.1 per cent in 2010. The fall in the non-oil sectors of GCC countries has also been felt in Jordan.

The uncertainty in the regional economy has affected Jordan’s export trade, with the exports of goods and services from Jordan in 2011 expected to increase by only 6.1 per cent from 2010, according to the IMF. This compares with the 10.9 per cent increase in the imports of goods and services in the same period.

Economic drivers in Jordan

Tourism revenue and remittance payments have made an important contribution to Jordan’s economy in recent years. But both sectors have been severely impacted by the regional unrest.

Total tourist arrivals in Jordan dropped by more than 22 per cent for the first eight months of 2011 compared with the same period in 2010, according to data from Lebanon’s Bank Audi and the Washington-based Institute of International Finance (IIF).

“With all of the political unrest happening, tourists are staying away from the Middle East, and Jordan has been heavily affected by this,” says the regional analyst.

Jordan’s tourism industry is one of the country’s most important sectors, contributing 18.3 per cent of GDP and accounting for 16.7 per cent of total employment in 2009. Regional stability is vital if this sector to realise its potential and grow its contribution to the country’s economy.

Remittances from expatriate Jordanians have accounted for almost 20 per cent of the country’s GDP in recent years. During the global recession, many expatriates working in the Gulf lost their jobs.

The political unrest has continued the decline in remittance payments to Jordan, with the IIF reporting that total remittances dropped to $2bn for the first seven months of 2011, a fall of 4.8 per cent on the same period in 2010. A slowdown in Jordan’s construction sector has also had a significant impact on growth. According to data from the IIF, Jordan’s construction sector contracted by 11 per cent for the first six months of 2011, compared with the same period in 2010.

The $630m-worth of construction contracts awarded in Jordan in 2011 is about 76 per cent less than the $2.7bn of deals that were awarded in 2010.

“The slowdown in the construction sector has been caused by a fall in foreign investment. During times of uncertainty, investors stop putting money into schemes,” says an economist based in Lebanon.

Jordan’s widening deficit

A widening fiscal deficit is also becoming more of a problem for the Jordanian government. The deficit has increased from 3.5 per cent of GDP in 2006 to 6.1 per cent in 2011.

“The fiscal deficit is a continuing problem for Jordan. It is something that needs to be addressed. The deficit stabilised in 2010 after the recession in 2009, but has now started to widen again,” says a regional economist.

In its September 2010 report, the IMF said that it was critical that Jordan meets its objective of reducing the fiscal deficit to about 3 per cent of GDP in the next five years to reduce the economy’s vulnerabilities and encourage private sector growth. With the deficit only projected to fall to 5.9 per cent in 2012, this will not be an easy task.

The deficit will make it harder for Jordan to reduce its debt levels. Early reforms from King Abdullah II and sound economic management have resulted in the level of gross government debt falling from 95.4 per cent in 2000-05 to 60.2 per cent in 2008. However, the recession and political unrest has caused the projected gross debt level rising to 68.5 per cent for 2011. In September, the GCC met to discuss a five-year development aid programme for Jordan and to discuss the possibility of the country joining the bloc. GCC membership would enable Jordan to further develop its already strong trade links with the GCC and would offer several other major economic benefits.

“The economic impact for Jordan could be considerable,” says Nael Shehadeh, associate researcher at the Geneva-based Gulf Research Centre. In addition to increased trade and more aid packages, Shehadeh says Jordanian workers could benefit from GCC membership.

“Jordan has a highly trained workforce that suffers from high levels of unemployment and the accession to the GCC could see an increase in Jordanians working in GCC countries, which would result in increases in remittances,” says Shehadeh.

Membership of the GCC could also help Jordan reduce some of its import costs.

“A potential decrease in trading barriers would see [Jordan] decrease some of its energy costs,” adds Shehadeh. Increasing the role of the private sector is crucial if Jordan is to achieve sustainable economic growth and cut debt.

The implementation of structural reforms and improving the business environment for the private sector are viewed as key ways to stabilise Jordan’s economy.

The IMF report emphasis the importance of putting a sound framework in place to control financial risks for public-private partnerships (PPP).

Private partnerships for infrastructure projects

Jordan has used the PPP model to fund major infrastructure projects such as the Queen Alia airport expansion. It is now looking to use PPP to procure several major power and transport schemes over the coming years.

While Amman has achieved some early success with PPP schemes, progress with the model has been delayed by the frequent changes in government. The PPP law, first drafted in 2008, is also still awaiting approval.

“The government has to be careful that when pushing political reforms forward, it does not neglect the implementation of economic policy,” says an economist based in Amman.

Vulnerability to external shocks has stunted Jordan’s economic growth, since the onset of the global economic downturn in 2009 and the civil unrest in 2011.

When political and financial stability returns to global and regional markets, Jordan’s trade and tourism sectors will start to pick up. However, the government will need to focus on internal reforms to boost its economy in the short term. At the same time, the new government will have to ensure that the drive for political liberalisation does not distract it from pressing economic reforms.

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