A succesful combination of political and fiscal reform has helped to offset the impact of external pressures, the kingdom’s widening trade deficit, its dependence on energy imports
Political stability has always been a key strength of Jordan, but in recent years the country has been hit hard by the increased turmoil in the region. To invigorate a sluggish economy and improve the lives of Jordanians, King Abdullah II has implemented a 10-year economic blueprint built on existing reforms to steer the country toward long-term stability and prosperity.
Challenges are formidable: the country’s widening trade deficit, its dependence on energy imports, and a double-digit unemployment rate have been exacerbated by the adverse affects of war and political turmoil in neighboring countries.
However, Jordan’s economy has proven to be resilient thanks to a combination of political reforms and fiscal policy changes to promote social inclusion and sustainable economic growth, believes Minister of Finance Dr. Umayya Toukan.
Those changes helped Jordan in part to weather its own Arab Spring movement in 2011, when demonstrations were taking place across the country for higher wages and better benefits. “During that period we had to maintain a social balance and accommodate those demands, which made the budget deficit a real issue. We had to borrow to fund this deficit and our debt went up more than we would have liked,” says the minister.
Jordan has been successful at staving off the kind of extremism that has swept other Arab nations by handling social unrest professionally and instituting social reforms such as the right to free expression and assembly, which are still banned in other Arab countries.
“Our parliament is a very active parliament, we have opposition and they are highly critical at times. We also have an active media as well as rule of law,” says Dr. Toukan. “If you believe that you can get fair treatment through the law, then you will not become an extremist. People become extremists if they feel marginalized, excluded from the mainstream, or if they are not allowed to say what they want. The King is very open and encourages dialogue with everyone.”
There are plenty of pressing issues on the government’s agenda. Energy security has been particularly hard hit by volatility in the region. Repeated sabotage of the Arab Gas Pipeline in the Sinai Peninsula have disrupted natural gas flows from Egypt, forcing suppliers to revert to expensive energy substitutes. The rise of militant groups has also fueled political instability in the Middle East, weakening foreign investment and damaging tourism; civil war in neighboring Syria has driven more than a million refugees into the country, straining already limited resources.
These difficulties are reflected in Jordan’s balance sheets. Public debt rose from 65% of GDP to more than 75% of GDP in 2012, the budget deficit widened from 10.2% of GDP in 2011 to 15.2% in 2012, before shrinking in 2013 and 2014. Economic growth slowed to an average of 2.6% between 2010 and 2013, compared to an average of 6.5% over the previous decade. There were signs of recovery in 2014, with economic growth of 3%, although unemployment still lingered at rates above average compared to the rest of the region.
Jordan’s 10-year economic plan is aimed at addressing its fiscal challenges while making its economy resistant to external pressures. Policy changes introduced by the Central Bank of Jordan have been credited for making some headway in tackling these issues.
“We view Vision 2025 as a unique opportunity to consolidate proposed policies and best practices within an overarching macroeconomic framework,” says Dr. Ziad Fariz, Governor of the Central Bank of Jordan (CBJ). “The strategy aims to build synergies and to avoid duplication. It is based on recent studies of various sectors, including water and energy, and is being developed in coordination with the World Bank, which is working to identify the constraints that inhibit growth.”
The Jordanian plan focuses on fiscal consolidation and reducing public sector financing and public debt, while balancing the needs of Jordanians and mitigating the risk of a recession.
The elimination of generalized fuel subsidies, replacing them with targeted cash transfers to vulnerable parts of the population, thus ensuring support for those who really need it, is one of the measures that has proven to be very effective
Jordan was the first among the MENA (Middle East and North Africa) countries to implement such a measure and it had a dramatic impact. The fiscal deficit dropped from 8.2% of GDP in 2012 to 5.5% in 2013, and continued decline in 2014.
The government is also moving to balance the cost of electricity and water by gradually reducing the subsidies it provides, which keep prices artificially low.
The stability of Jordan’s currency is a critical component to its fiscal plan. “Monetary stability remains the CBJ’s most fundamental objective, with a stability-oriented strategy geared toward moderating inflation, maintaining exchange rate stability, and global competitiveness,” says Dr. Fariz. “The CBJ plays a critical role in enhancing the investment environment in Jordan by maintaining monetary and banking stability, which by reinforcing the domestic economy are key factors in attracting domestic and foreign investment.”
With 26 banks in operation, Jordan’s banking sector is one of the most crowded in the world. Despite the number of players, the sector is performing well partly due to a monetary policy framework that is geared toward giving its financial institutions greater flexibility.
The CBJ has introduced a set of new instruments, including weekly repurchase agreements through auctions to manage liquidity and to guide interests in the interbank market. The central bank also has incorporated outright open-market operations that enable it to buy and sell government securities in the secondary market with the aim of managing liquidity to meet market conditions. In addition, the CBJ has allowed banks, at their discretion, to conduct currency swaps with the CBJ to provide the necessary cash flow to meet local lending needs.
The new monetary framework has helped the Jordanian economy withstand several nominal shocks and sustained the objective of price and financial stability. After a severe decline in official foreign reserves due to regional uncertainty, foreign reserves have been replenished to a comfortable level, reaching in excess of $14 billion in 2014 compared to $6.6 billion in 2012.
Keeping prices and inflation in check requires continued vigilance. To this effect the CBJ is monitoring macroeconomic developments and reviews its interest rate policy regularly. The CBJ also keeps a close eye on credit growth rates and changes in assets and savings.
One of the priorities the government is undertaking is to reduce its dependence on energy imports, which is one of the factors driving costs and gobbling up as much as 40% of its GDP.
Jordan currently imports more than 90% of its energy needs and recent developments have only heightened concerns about the sector’s vulnerability, and the need to alleviate runaway energy costs. Efforts are underway to explore the feasibility of tapping the country’s own oil shale deposits and transitioning to alternative energy resources, including nuclear, solar and wind.
The government set some ambitious goals when it unveiled its master energy plan By 2020, 30% of all households are expected to be equipped with solar water heating units, and 7% of its energy needs will come from renewable sources, resulting in 20% savings to the country’s energy bill. Jordan plans to construct two nuclear reactors by 2022 that will provide 60% of its energy supply by 2035.
The 2012 Energy and Energy Efficiency Law passed in 2012 was one way to encourage private and foreign investors to help fund public work projects in this sector and drive much needed job growth. With unemployment among the country’s youth at 30%, authorities are stepping up efforts to address skill mismatches, a key factor behind the country’s high unemployment. Jordan has been updating its student programs, to align education curriculums with private sector needs and implementing more training programs to equip the unemployed with the necessary skills demanded in the modern market.
Jordan has few natural resources. But it does have one in the Dead Sea, from which it mines potassium chloride used in fertilizer.
The mineral has spawned one of the country’s largest and most successful industries. The Arab Potash Company, with its 2,000-strong workforce, has helped to make Jordan the eighth-largest producer of potash in the world and the only one in the Middle East.
“The potash business is unique. There are only about 13 countries that produce potash. There are high barriers to entry because it typically involves mining underground,” says Brent Heimann, General Manager of the Arab Potash Company.
The industrial sector like the rest of the country is looking for ways to control expenses, and high-energy costs are inhibiting the company’s ability to expand. High tax royalties are another factor stymieing growth.
“In light of this, the first thing we did was securing a gas deal with Noble Energy. It is a 15-year deal that should significantly reduce our energy cost. There is also the new dam that we are building to help decrease our water cost, along with a number of other initiatives to lower operational cost,” says Mr. Heimann.
The company’s Aqaba warehouse will help position itself as one of the biggest exporters of potash in the world.
“Nobody else is in the position quite like we are for getting potash to importers cheaper and faster from the Aqaba port. We do a bit of exporting to Europe, but India and China are some of our biggest importers. That is where the population growth is going to be. That is the underlying potential of potash. The future demand is going to be even higher in those markets, and we are well poised to serve them,” adds Mr. Heimann.
Other economic growth initiatives include expanding trade, which will support the backbone of Jordan’s economy: small and medium-sized enterprises, or SMEs.
The country has historically been a safe haven for migrants from Palestine, Iraq and now Syria. Many brought their savings and used their business know-how to establish small shops and companies. The inflow of immigrants has resulted in more demand for goods and services that feed the demand and supply side of the economy. Jordan is looking to make these businesses more competitive by searching out new markets for their goods.
According to the Jordan Enterprise Development Corporation (JEDCO), a body established by the state in 2006 to help enhance the competitiveness of the nation’s enterprises, 99% of all employers are SMEs, and 52% of the private sector workforce makes its living within the SME segment. In addition, SMEs also account for virtually all of the net new jobs in Jordan, and provide 96% of all goods exported from the country.
A free trade agreement with the United States has helped to make it Jordan’s largest trading partner. Jordan’s exports to the U.S. have increased by 9.3% from 2012 to 2013. The country also has trade relationships with its neighbors and has been actively pursuing enhanced trade arrangements globally, and is in negotiations with the European Union and Latin American countries for further enhanced trading
Keeping a watchful eye on Jordan’s progress is the International Monetary Fund, which has provided financial assistance to the tune of more than $2 billion. “I am happy to see the good progress made by the authorities in moving forward on the economic reform program under the stand-by arrangement with the IMF,’” says Christine Lagarde, Managing Director of the IMF. “We want to help the Jordanian authorities take the necessary steps to strengthen the economy and public finances.”
Strengthening the economy will have to go hand in hand with protecting the country in the wake of the growing threat from militants and Jordan’s role as a coalition partner in the fight against ISIS.
“Our security is number one,” said Finance Minister Toukan. “An equally important priority is the social safety net, unless you provide for the neediest in society, the social balance will not be stable. Those are my priorities.”