The strong fundamentals of the Jordanian economy help mitigating the impact of the current crisis

In its latest brief on economic and financial developments in Jordan, National Bank of Kuwait (NBK) noted the Jordanian economy has undergone remarkable results in recent years and has begun to reap the fruit of structural adjustments and steady progress with reforms. The economy has grown by more than 12% per annum over the last four years, which resulted in a 10% annual improvement in per capita income over the same period. Real growth averaged 7.8% despite external challenges which have taken their toll on the economy in recent years. The prospects for the Jordanian economy look promising, though will not be insulated from the negative effects of the global financial crisis and recession. Economic growth, exports, and tourism are expected to suffer slowdowns, as should workers remittances though to a lesser degree. Furthermore, Jordan still needs additional measures to address major issues where efforts so far have met with limited success. Unemployment, poverty, and the considerable vulnerability of the economy to external factors remain key challenges.
Political stability and security are the backbone of the Jordanian economy, as is the government’s commitment to reform. The creation of a market-oriented economy, privatization drive, WTO membership, enhanced transparency, investment in education and, most importantly, Jordan’s firm stance on reform, have all contributed to the transformation of the country’s economy over the past 20 years. Confidence, as evidenced by the number of domestic and foreign investors engaged in huge projects, has been well leveraged and Jordan can be seen as something of an example in the area of privatization.
Jordan has, however, been adversely affected by the rise in oil prices between 2002 and mid-2008 as reflected in the government budget and current account. The rise in the oil imports bill has caused a significant deterioration in the current account, causing it to shift from a surplus of 5.7% of GDP in 2002 to a deficit of 18% in 2007, which is estimated to widen further in 2008. On the positive side, receipts from tourism and workers remittances climbed considerably, benefiting from the regional abundance of liquidity. The budget deficit also increased from 3.2% in 2002 to 5.2% in 2007 in light of the expansionary fiscal policy and oil subsidies introduced by the government. The estimated deficit for 2008 is expected to exceed the original budget forecast of 5.6% of GDP as a result of the substantial increase in government salaries in early 2008. However, the projected budget deficit of 4.6% of GDP for 2009 may force the government to rein in spending and adopt a more conservative approach.
NBK mentioned that the extraordinary performance of exports in recent years has been the result of a free trade agreement with the US that was signed in 2000. Since 2003 the US has become a major destination for Jordanian exports absorbing 28% of total exports in 2007. Apparel is the main export. However, with the ongoing liberalization of trade, and especially in the light of the WTO agreement on textiles and clothing that have led to an increasing number of countries forming free trade areas with the US, as well as the weakness in the US economy, it is likely that the domestic textile industry could face a rough ride. This is already evident in the drop in Jordanian exports to the US by 17% during the first half of 2008.
Jordan has been a beneficiary of the boom in the Gulf Cooperation Council (GCC) countries, which has resulted in abundant liquidity and unprecedented levels of private capital inflows. The GCC economic boom has had another positive influence on Jordan, namely the rise in remittances that reached 17% of GDP, given that an estimated 350 thousand Jordanians are believed to work there. Tourism has also been a beneficiary. Unfortunately, the global scene does not bode well for continued growth in this area.
Over the last two years, NBK noted that oil prices have been the second major contributor to the surge in inflationary pressures. Inflation, as measured by the change in the consumer price index, is expected to climb to a record 12% in 2008. This increase is the result of the lifting of fuel and petroleum product subsidies last February, which amplified the impact of higher oil and food prices. Greater relief, however, is expected from the recent sharp drop in oil, food, and other commodity prices. Other contributors to rising inflation in recent years have been growing domestic demand, expansionary fiscal and monetary policies, as well as the acute depreciation of the Jordanian dinar against major non-dollar currencies.
Jordan is poor in natural resources, and is essentially a service oriented economy that is highly competitive regionally in the areas of skilled labor, information technology, health, education, and tourism. However, the recent slump in the world economy is likely to dampen the outlook slightly in the near term.
According to NBK, the monetary policy of the CBJ moves in line with that of the US Federal Reserve because of the strict peg of the domestic currency to the US dollar. The CBJ cut the re-discount rate and the overnight deposit rate by 0.75 percentage points over the two years ending September 2008 to 6.75% and 4.50%, respectively, and cut the interest rate on repurchase agreements by 2 percentage points to 6.50%. Rates were cut again in November by another 50 basis points. The anticipated reduction in the rate of inflation in the last quarter of 2008 and 2009 led the CBJ in November to cut the obligatory required reserves by one percentage point and ease constraints imposed on credit growth.
While the banking sector in Jordan is considered sound and well supervised, confidence in banks was recently enhanced by the government’s recent move to fully guarantee bank deposits until the end of 2009. Bank profits are expected to remain at comfortable levels this year, but have been negatively affected by the severe losses in the stock market in recent months. The price index of Amman stock Exchange lost 31% of its value since the start of October 2008 through December 26.
However, the Jordanian economy still faces a number of challenges. The persistent double-digit unemployment rate tops the list of problems. Even with the remarkable economic growth, unemployment remained at 13% in 2007 and during the first nine months of 2008, a reflection of a mismatch in the labor market. Foreign workers outnumber unemployed Jordanians.
NBK noted that Jordan has implemented several measures to alleviate its unemployment and poverty problems. However, one school of thought maintains that the unemployment problem would be far worse had a significant portion of the labor force not chosen to emigrate (estimated to be 25% of the labor force). There may be some truth in the argument but with large numbers of skilled laborers leaving to work abroad, it is undoubtedly having a negative impact on the long-term development of the country. Jordan suffers badly from a brain drain according to the World Competitiveness report. Jordan may wish to take its lead from some South Asian countries which provided significant incentives for its wealthy and skilled migrants to return home and participate in the development of their countries resulting in further job creation.
Another major concern is that the Jordanian economy is very susceptible to external shocks, though it has enjoyed a higher level of resilience in recent years. In the last few years, Jordan has become more dependent on external private inflows to finance its current account deficit, in contrast to its dependence on foreign grants and loans in earlier years.
In March 2008, Jordan concluded an agreement to buyback $2.4 billion of its debt owed to the Paris Club at an estimated 11% discount rate, using funds from the proceeds of privatization and through partial assistance from other GCC countries. This agreement is anticipated to reduce the ratio of foreign debt to GDP by a quarter to 36%. Debt service obligations are expected to decline accordingly by around $240 million annually.
Outlook
According to NBK, the established and strong record of reforms and liberalization is expected to lessen the impact of the global financial crisis on the Jordanian economy relative to other countries in the region. The economy is expected to continue recording satisfactory growth rates in the medium term, ranging between 4% and 5%. Domestic demand will be the main driver of this growth, and will partially compensate for the reduction in exports especially to advanced countries as a result of the global recession. However, there are some risks surrounding the outlook. The global recession may turn out to be more severe than originally envisaged, especially in the US, the main destination for Jordanian exports. In addition to bringing down economic growth, such a scenario would rule out any improvement in the unemployment rate, keeping it around its current level of 13%, if not worse.
The current account deficit is expected to shrink from an estimated 20% of GDP in 2008 to 12% in 2009. The sharp fall in oil and food prices that started in the third quarter of this year should lower the import bill in 2009 more than offsetting the slowdown in exports. This should also help moderate inflationary pressures from an estimated 12% in 2008 to around 6% in 2009.
However, some major components of the current account are expected to be negatively affected; mainly tourism, workers’ remittances, and transport.  Private capital flows, from Gulf countries in particular, may see a setback if investors start repatriating funds in response to the tight credit conditions at home, intensifying pressures on the financing of the current account deficit, as well as the country’s foreign reserves.
The budget deficit is also expected to decline in 2009 and over the medium term, benefiting from the reduction in external debt service in the light of early debt buyback that took place early this year, the full liberalization of oil prices in the domestic market, the anticipated reduction in food subsidies, as well as other revenue-enhancing measures. The estimated deficit should drop to 4.6% as projected in the 2009 preliminary budget.