Why plunging oil prices are both good news and bad news for the Jordanian economy
Jordan is the third largest recipient of remittances in the Middle East and North Africa (MENA) from Gulf states, according to World Bank report.
Jordan is the third largest recipient of remittances in the Middle East and North Africa (MENA) from Gulf states, according to World Bank report, which warned that falling oil prices could slow cash inflows in the medium term.
The World Bank's MENA quarterly economic brief, on the impact of plunging oil prices, said that Jordan follows Yemen and Egypt in terms of the size of remittances from members of the Gulf Cooperation Council (GCC) as 65.7 per cent of transfers come from the oil-rich countries.
According to the report, e-mailed to The Jordan Times Saturday, 19.3 per cent of overall remittances to Jordan are from Europe and 12 per cent from the US.
Official figures estimate that the annual size of remittances in the past two years exceeded $3.6 billion and that there are over 450,000 Jordanian professionals working in oil-rich Gulf countries.
MENA countries receive 43 per cent of their remittances from GCC countries, 29 per cent from Europe and 8 per cent from the US. The top MENA remittance-recipient countries from Gulf countries in absolute and relative terms are Yemen (86.2 per cent), Egypt (72.9 per cent) and Jordan. They are also the most vulnerable to changes in remittances from GCC countries, said the report.
On the positive impact of falling oil prices on Jordan's economy, the World Bank said in the short run it would result in lowering production costs and price pressures on citizens and refugees, reducing fiscal pressures related to oil imports for energy, negating the need for oil subsidy payments from the government to households and ultimately reducing the twin (fiscal and trade) deficits.
However, in the medium term and depending on the length of the oil price slump, the net effect could turn negative primarily from lower grants from the GCC on which Jordan is somehow dependent to fund its fiscal deficits, and lower remittances from its diaspora in oil-producing countries.
The overall and primary fiscal deficits (excluding grants), which were expected to widen by the end of 2014 to 14.7 per cent and 11.1 per cent of the gross domestic product (GDP) could be contained given that lower oil prices will reduce losses to the National Electric Power Company (NEPCO).
“Disruptions to gas imports from Egypt in 2014 had caused NEPCO to resort to increased imports of more expensive fuel oil, further dampening cost recovery efforts and hurting external and fiscal accounts. While a lower oil price will improve the fiscal balance, this may be counteracted by lower grants from the GCC to Jordan in the medium term,” said the report.
If the price of oil remains low, this would affect GCC government revenues and possibly their willingness to provide outside grants, originally expected at 2.7 per cent of Jordanian GDP in 2015.
As a net oil importer, Jordan’s widening trade deficit in the first nine months of 2014 was anticipated to decelerate in the last quarter of the year on account of lower oil prices. While imports dropped by 21.1 per cent in September 2014 as a result of the decline in international oil prices, this was outweighed by an 18.7 per cent rise in energy imports during the first eight months of 2014 due to the disruption of cheap Egyptian gas.
Given the recent sharp drop in oil prices, the World Bank projects that the growth rate of the trade deficit will decline in the fourth quarter of 2014.
Jordan is currently benefiting from a positive supply shock represented by the large drop in oil prices, lowering production costs. Also, in November 2014, and at 2.4 per cent, headline inflation dropped to its second lowest level since December 2009 on account of the pass-through of oil prices to fuel and transport prices.
Further oil-driven reductions in headline inflation are expected, said the report.
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