The Jordanian Economy

Revival Amid Regional Uncertainty

By:

Mufleh M. Akel

Executive Regional Manager

Jordan and Palestine Credit Division

Arab Bank – General Management

April, 2003

The Jordanian Economy

Revival Amid Regional Uncertainty

Introduction:

The birth of the third millennium marked the inception of a series of major world political and military events.  The September 11^th attacks, followed by the US-led military expedition on Afghanistan and the subsequent Anglo-American war on Iraq, which broke out in mid March and still underway, have all had serious repercussions on the world economic order in general, and the Middle Eastern region in particular.  The intensity of these successive events has led to a remarkable deterioration in the international as well as the regional economic situation and prospects.

Within this context, the recorded growth in world economic output slipped from 4.7% in year 2000 to 2.2% in year 2001.  Simultaneously, economic growth in the Middle Eastern region fell back from 5.7% in year 2000 to 4.2% in year 2001 and further to an estimate of 2.2% in 2002.  Jordan was no exception to these globally overwhelming developments.  Official data showed that economic growth during the fourth quarter of 2001 relapsed to around 3.1% from an average of 4.6% recorded during the first three quarters of the year.

However, the success with which Jordan has been able to weather the negative impacts and repercussions of the above mentioned world events, while continue to achieve comparatively high economic growth rates is an issue that is worth of being praised and evaluated.  The core purpose of this article is to shed enough light on Jordan’s economic performance during 2002 and prospects of growth in 2003.

Overview of the Jordanian Economy:

Jordan is a country of 5.3 million inhabitants comprising a well dedicated and highly skilled labor force of around 1.45 million.  The economy suffers from limited financial and natural resources, and is dominated by trade and services-related activities, which account for approximately two thirds of the GDP.  Due to its relatively small size, openness and geopolitical positioning within the center of regional transformations, the Jordanian economy is rather fragile and highly vulnerable to exogenous factors and shocks.

Economic performance has thus been relatively volatile during the past decade, manifested partially by Jordan’s heavy reliance on trade with high-income oil exporting countries as well as capital inflows from abroad in the form of foreign aid, financial grants and workers’ remittances.  Jordan’s industrial base is moderately thin, whereas its natural resources, mainly potash, phosphate and limestone do account for a sizeable stake of its national exports.  Labor remittances and financial assistance from Arab as well as foreign countries have, over the years, influenced the country’s income levels and economic activity.

The slowdown in the economies of major Gulf States in the aftermath of the acute drop in oil prices during the mid 1980s has had severe repercussions on the Jordanian economy.  The domestic economy underwent a critical fall in the flow of workers’ remittances, external financial assistance as well as the volume of trade routed to these economies.  In line with these developments, the recorded economic growth slipped to 2% in nominal terms, deficits in the current account, payments balance and general budget also widened, and net foreign currency reserves fell to extremely worrying levels.  This financial crisis eventually led to the devaluation of the domestic currency by around 45% in the late 1980s.

Since then, Jordan has been vigorously engaged in carrying out an IMF-guided economic re-adjustment program, with the aim of restoring fiscal and monetary stability and reforming structural imbalances within its domestic economy.  The first program, initiated back in 1989, was disrupted by the second Gulf war that broke out in 1990/91 and the subsequent imposition of strict economic sanctions on Iraq – Jordan’s primary trade partner.  The heavy economic and financial burden brought about by these changes, ranging from a sharp drop in workers’ remittances to the suspension of foreign assistance together with an excessive pressure on the country’s limited resources and public utilities emanating from the huge influx of Jordanian returnees following the war, had been alleviated by the vast amounts of financial funds injected into the economy by those returnees, an act that initiated a construction-led boom in Jordan.

Subsequently, the economic restructuring program was revised to cover the period 1992/98, which together with the economic expansion fueled by the Jordanian returnees’ attempts to initiate new businesses, caused GDP to grow by 16.1% in 1992.  In early 1999, Jordan ended the program with partial success.  While the stabilization policies, incorporated into the program, were very successful in restoring the stability of major monetary indicators, the structural re-adjustment policies were less successful in introducing needed reforms in the fields of economic liberalization, taxation, world integration and privatization.

Additionally, the contractionary nature of the program, the widespread state of uncertainty and regional political tension, together with the weakening of traditional export markets have all contributed to a slowdown in economic performance.  While macro-economic indicators showed a fair improvement (real economic growth averaged 5.6% p.a. and inflation ranged around 3.5%), micro-economic indicators reflected a widening and deepening recession.  Moreover, encountered by serious difficulties to join the WTO and integrate within the world new economic order, Jordan resolved eventually to pursue further economic re-adjustment, and managed to extend the program, with the help of the IMF and World Bank, for an additional three years ending in year 2002.

Averagely speaking, Jordan’s economic performance during the second half of the 1990s discloses less-than-expected success in achieving growth targets.  Average GDP growth lingered around 3% p.a. in real terms.  However, on the brighter side, annual CPI inflation remained below 3%, and stability of the Jordanian Dinar and other major monetary indicators had been enhanced.  Also, net foreign exchange reserves showed significant increase from US$ 0.7 billion in 1996 to US$ 2.8 billion in 2000 covering an eight-month imports bill.  Jordan’s external public debt, in turn, has notably improved, with its outstanding balance slipping from 95% of GDP in 1996 to 80% in year 2000.

On the other hand, the regional turbulence, originating from the political impasse on the Palestinian front and the continued economic embargo imposed on Iraq have been mitigated by the warm and friendly relations with Arab neighbors and the support from many other foreign countries.  Jordan’s internal stability has been reinforced by the popularity of the monarch, who has been keenly and persistently pushing towards further political and economic reform, in addition to improving relations with other Arab states.

Economic Performance During the Period 2001/02:

Prior to the September 11^th incident in the USA, the Jordanian economy seemed to be on track.  Signs of economic recovery had already been surfacing, wherein real economic growth climbed from 3.1% in 1999 to 4.2% in year 2000.  Similarly, GDP in real terms grew by 4.2% during year 2001 despite the worldwide economic slowdown and the negative spill outs of the September 11^th attacks.  Yet, it is worth noting that growth during the fourth quarter of 2001 descended to around 3.1% from an average of 4.6% evidenced during the first three quarters of the year.

The September 11^th events have had an adverse effect on so many sectors of the Jordanian economy.  Tourism in Jordan has been the mostly impacted sector as denoted by the major drop in the number of incoming tourists, especially those western tourists with high spending capabilities, and the consequent fall in hotel rooms occupancy rates and total tourism revenues.  The increase in the number of Arab tourists, mostly transit visitors, has failed to compensate for the decline in the number of western tourists.  Additionally, the slowdown in tourism activities has negatively impacted the civil aviation industry in Jordan.  On the other hand, the inflow of foreign investment has been interrupted by the growing tension on the international arena.  This, in fact, has been associated with a noticeable deceleration in the pace at which the privatization program is being implemented.

Nonetheless, the overall performance of the Jordanian economy has been satisfactory in light of the many challenges and difficulties encountered.  The following table illustrates the progress in macro-economic indicators over the past few years:

US$ Million

Source:      Ministry of Finance, Government Finance Bulletin, March 2003.

                  Central Bank of Jordan, Monthly Statistical Bulletin, March 2003.

Reasonably good economic results and achievements continued through year 2002.  Preliminary estimates indicate that the Jordanian economy has been able to grow by 4.9% in real terms during year 2002, while maintaining CPI inflation within an acceptable level of 1.8%.  This economic growth rate surpassed growth rates arrived at by many other countries of the region; i.e., Syria 3.9%, Tunisia 3.8%, Bahrain 4.1%, Egypt 2%, Lebanon 1.5%, Oman 3.3%, Qatar 3% and Saudi Arabia 0.7%.

Having Gross Domestic Product grew at 4.9% in real terms, while population grew at 2.8% last year, living standards in Jordan have been better off and per capita income has shown a fair improvement over year 2002.

Jordan has successfully managed to narrow down its trade deficit by 13.2% in 2002 in light of the significant increase of 19.6% in total exports versus a minor increase of 2.3% in the volume of imports.  A substantial part of the increase in national exports could be attributed to the vast deployment of Qualifying Industrial Zones (QIZ) in Jordan, through which domestic industries can export quota and custom free to the US market.  Within this context, the Jordanian exports to the USA continued to grow from US$ 7 million in 1997 to around US$ 408 million in 2002.  The surge in national exports has positively reflected on the performance of the industrial sector, whose production index rose by 10.6% in 2002.

The diminishing trade deficit, accompanied by a sizeable increase in the inflow of workers’ remittances and foreign assistance have all contributed to an improvement in the current account status, which exhibited a surplus of around US$ 405 million in year 2002.  Jordan has also succeeded in building up convenient and comfortable reserves of foreign currencies, the net of which recorded an unprecedented level of US$ 3.5 billion covering around 9 months of the imports bill.

Despite regional and domestic difficulties, banks in Jordan have been successfully able to provide an efficient mechanism for facilitating the pooling of domestic savings, attracting foreign investment and directing it to the most efficient, productive and profitable projects.  Within this context, total banking deposits rose by 7.5% to reach an equivalent US$ 13.2 billion by the end of 2002, whereas banking credit showed an increase of 3.7% to reach an equivalent of US$ 7.2 billion.  The Jordanian banking sector stands to be one of the most sophisticated and highly regulated sectors of the economy, if not the whole region.

In the field of global integration and enhancing access to international markets, Jordan’s success in joining the World Trade Organization (WTO) has been further supplemented and firmed up by its successful negotiation of a Free Trade Agreement with the USA rendering Jordan the fourth country, after Canada, Mexico and Israel, to entertain a privileged status for its industrial and services sectors in freely accessing the US market.  In parallel, Aqaba has been announced a Special Economic Zone, providing generous exemptions and incentives for all sorts of enterprises, with the hope of transforming Jordan’s only port on the Red Sea into a regional hub that is capable of hosting foreign as well as domestic industrial and services investments.

Alternatively, Jordan’s efforts to achieve other preset economic targets have rather fallen short of the stipulated levels.  The fiscal deficit has a little bit widened due to a planned relaxation of the fiscal policy and the resultant increase in public expenditures.  In addition, the outstanding external public debt increased by US$ 540 million during 2002 – an 8% increase over 2001 figure – which can partially be attributed to a decrease in the value of the Jordanian Dinar against other foreign currencies.  Moreover, despite the continued fall in the officially announced unemployment rate from about 20% in the early 1990s to 14.7% in year 2001, other official estimates put the current unemployment figure in the region of 17 – 20%.  On the other hand, Jordan has not been able to proceed with its privatization program at the desired pace.  This could be blamed on the continued deterioration in the regional and global economic and political conditions and the dominance of an unfavorable investment climate.

Yet, in light of the overall positive performance of the Jordanian economy under the past structural re-adjustment program that ended in April 2002, the government has been able to conclude an agreement with the IMF to extend the expired program for an additional period of two years (2002/04).  This extension has allowed Jordan to reschedule US$ 1.2 billion in debts that are due to Paris Club over the period 2002/07, an act the is believed to alleviate mounting pressure on Jordan’s public budget and payments balance.

As such, Jordan has been able to maintain its credit rating by Standard & Poor’s, however with a downgrading of its foreign currency outlook from “Positive” to “stable”.  This downgrading was meant to reflect the continued regional tension and conflict, which might obstruct and cause a delay in the implementation of the economic re-adjustment program.

Prospects for Year 2003:

To discuss and speculate the future state of the Jordanian economy in the aftermath of the US-Iraqi war is quite premature in light of the continued military actions against Iraq, bearing in mind the strong economic relationships that tie together Iraq and Jordan.  Both countries are commercially connected via a US$ 400 million – trade protocol that renders Iraq as Jordan’s main trading partner.  The Iraqi market has always ranked first for major exporting industries in Jordan, while Iraq has been the sole provider of crude oil and related derivatives for Jordan, half of which comes at no cost while the other half is preferentially priced.

Prior to the Anglo-American war against Iraq that broke out in mid March, prospects of economic growth in Jordan had seemed more favorable with GDP growth rate anticipated at around 5% in real terms, while CPI inflation forecasted within the region of 2.5 – 3.0%.  National exports and imports have initially been planned ahead at 15% and 5% in respective terms.

However, the impact on the Jordanian economy of the regional political turbulence and the going on war in Iraq could already be felt in many ways.  Jordan’s industrial exports to Iraq have already been brought to a halt.  The flow of Iraqi crude oil into the kingdom has been disrupted.  At the same time, Saudi Arabia, Kuwait and the United Emirates undertook to provide Jordan with oil at no cost for the coming three months.  This will provide a temporary relief for Jordan, after which the country will have to pay for its annual 50-million barrel imports bill.  Even though the price at which Jordan is supposed to pay against its oil imports is not yet known, it will most certainly have a negative impact on the kingdom’s Balance of Payments.

Tourism, on the other hand, has been severely hit with a significant fall in the number of tourists, hotel rooms’ occupancy rates and the total volume of tourism income.  This has been accompanied by a slowdown in the activities of the domestic aviation industry, whereby the Royal Jordanian – Jordan’s national air carrier – has undergone a drop in the number of passengers, while bearing the extra costs associated with the increase in both the insurance premiums and the length of some route lines.  

Other negative spill outs are expected to materialize and become more visible over the weeks and months to come.  The termination of military actions against Iraq will bring an end to the economic sanctions long imposed on Iraq, which in turn will partially end Jordan’s trading intermediary role between Iraq and the rest of the world.  Besides, the Jordanian industries are expected to lose part of their privileged exporting status, extended via the trade protocol, which in itself is expected to be called off, as competition within the Iraqi market heats up with other industries from neighboring as well as foreign countries.  This should not be comprehended as a discontinuation of Jordan’s trade existence within the Iraqi trade market.  Rather, the Jordanian products will have to compete on equal footing with other products from various origins.  Hence, “competition” and “competitive advantage” would be the title of the forthcoming period in connection with the Jordanian industries’ ability to export to the Iraqi market.

Also, with the expected operation of the Iraqi Um Qaser port and the possible use of other neighboring ports in Kuwait, Syria and Turkey, the Aqaba port is expected to lose a major part of the trade passed on to Iraq.  This, in addition to the disruption of the inflow of Iraqi oil, would entail severe adverse effects on Jordan’s land transport sector.  To illustrate, the cessation of the daily transport of around 125 thousand barrels of crude oil from Iraq to Jordan and the fall in the volume of commodities passing through Jordan to Iraq, estimated at around 650 thousand tons per annum, signifies a serious threat to more than 13 thousand Jordanian trailer trucks and tanks in addition to the interrelated domestic vehicle service sector.

On the other hand, the possible movement of some Iraqi nationals residing in Jordan, estimated at approximately 300 thousand Iraqis comprising a large number of businessmen and investors, to Iraq for permanent settlement after restoring peace and stability is expected to negatively impact the Jordanian economy in many ways.  This is so as this movement is expected to involve a portion of the banking deposits, credit facilities and investments belonging to those Iraqis.

Yet, economic growth prospects and outlook for year 2003 seem on the positive side although less brighter than in 2002.  The Qualifying Industrial Zones are expected to take a major role in further boosting Jordan’s exports to the US market.  The inflow of foreign aid, assistance and workers’ remittances is believed to support Jordan’s current account and overall economic performance.  Value added within the agricultural sector is anticipated to grow positively with a more than average rainy season.  On a regional level, the forthcoming reconstruction operations in Iraq, in the aftermath of the war, is expected to carry some benefits to selected sectors of the Jordanian economy; i.e., IT sector, engineering companies, local contractors and banks.  Tourism activities, on the other hand, are expected to gradually pick up more momentum with the restoration of peace and stability in the area.  It is worth mentioning here that long-term political stability remains key to sustainable economic development and growth.

Conclusion:

The Jordanian economy has been able to perform exceptionally well during year 2002.  GDP grew by 4.9% in real terms, which outstripped growth rates realized by other countries of the region.  Jordan has been successfully able to withstand the negative repercussions of the September 11^th events thanks to many factors.  A surge in domestic demand, fueled by expansionary fiscal and monetary policies, an increase in capital inflows, in the form of workers’ remittances and foreign assistance, and a boost in national exports, which can be attributed to the significant expansion in QIZs’ activities directed to the US market, were all the main engines of growth during the past couple of years.

Credit should also be given to the prudent management of the Jordanian economy as well as the personal initiatives of H.M. King Abdulla II, who spares no effort or time in regionally and internationally marketing Jordan as a potential investment hub.  In this regard, H.M. King Abdulla has participated in the first international videoconference via satellite that took place a few months ago for the purpose of marketing Aqaba and Jordan as a free commercial center capable of attracting domestic and foreign investments alike.

Nevertheless, Jordan’s ability to cope with regional and international transformations with utmost flexibility should not be overlooked or underestimated.  Jordan has been able to weather the recent global and regional economic slowdown, and still realize high real GDP growth rate that surpassed rates achieved by many other countries of the region.  This achievement was the direct outcome of a long and tedious process of economic structural reform that targeted almost all aspects of financial, investment and legislative environment, and meant to enhance the business climate and attractiveness of the domestic economy to foreign as well local investors.  Time has come to reap the benefits of structural reforms introduced.

References:

¤            Central Bank of Jordan, “Monthly Statistical Bulletin”, March 2003.

¤            Central Bank of Jordan, “Annual Report 2001”, April 2002.

¤            Department of Statistics, “Statistical Yearbook”, Several issues.

¤            International Monetary Fund, “World Economic Outlook”, September 2002 & April 2003 issues.

¤            Ministry of Finance, “Government Finance Bulletin”, March 2003.

¤            Moody’s Web Site, “Moody’s Investors Services: Country Ratings”, 2002.