Expectations for

the Jordanian Economy

Under the Rule of His Majesty

King Abdullah || 

An article prepared and submitted

to the Journal

"Arab Bank Review"

August, 1999

Introduction

   Growth, external public debt, poverty, unemployment, chronic trade balance deficit, and some other economic structural distortions are all major difficulties and challenges that the Jordanian economy is now facing.

   The succession of the late King Hussein by his son King Abdullah || comes at a very critical turn-point in the history of the Jordanian economy. This raises many conjectures and speculations concerning the future performance of the Jordanian economy under the new regime. The scope of expectations regarding the ability of the Jordanian economy to overcome the significant problems it faces varies widely. However, it is imperative to first evaluate the general characteristics and current conditions of the Jordanian economy, touch on the main features of the economic structural re-adjustment program, and examine the nature of challenges and difficulties Jordan faces before making any gestures concerning its ability to meet with such challenges.

An Overview of the Jordanian Economy:

   Jordan is a small country of a 4.5 million people comprising a dedicated and highly skilled labor force of 1.2 million. The economy suffers from scarce financial and natural resources, and is dominated by trade and services-related activities, which account for more than two-thirds of GDP, manufacturing, agriculture, mining and construction activities account for the remaining third.

    The current structure of the Jordanian economy exhibits the same traditional features of a small open economy, which makes it extremely vulnerable to regional as well as international pressures. Due to the geopolitical positioning of Jordan within the center of regional transformations, the current state of the Jordanian economy can be conceived as a fair reflection of developments in the economies of other countries within the region.

    In this regard, Jordan's high dependence on capital inflows, international financial assistance and workers' remittances has made the economy highly vulnerable to external factors. Aided by discrete and prudent administration of its political leadership, Jordan has been successfully able to capitalize on its geographical location and the warm relations it enjoys with most of its neighbors as well as other countries of the world.

   Four main development stages can be distinguished when studying Jordan's modern economic history extending form the year 1973 until present. These stages can be outlines as follows:

The Period from 1973-1982:

   This period was marked by high and unprecedented economic growth, which was boosted by sizeable external financial assistance, huge influx of workers' remittances and increased exportation. Vast amounts of funds were heavily invested in infrastructure projects and housing.

   The Gulf States provided extensive job opportunities for Jordanians, and presented highly consuming markets for Jordanian agriculture and industrial products as well. Economic growth, during this period, stood at an average of 24.5% in nominal terms and 11.6% in real terms. However, high spending, growing importation and expanding aggregate demand induced inflationary pressures and widening trade deficit, which was financed by a notable surplus in capital account.

The Period from 1983-1989:

    Being highly vulnerable to external factors, the sharp drop in oil prices during mid 1980s and the resulting retraction in the economies of the Gulf States have had severe repercussions on the Jordanian economy. The contractionary policies adopted by the Gulf States in the aftermath of the decline in oil prices and the subsequent slowdown in their economies have negatively affected Jordan's trade with these countries and the inflow of expatriate remittances and financial aid.

   On the macro-level, real economic growth slipped form an average of 11.6% annually during the period 1973/82 to an annual average of 2.2% during this period, indicating a sharp fall in per capita share of GDP. Towards the end of this stage, the deficit in the general budget up-surged to a very high level of 25% of GDP, which triggered excessive government borrowing, both domestically and internationally. Ultimately, Jordan's total outstanding external debt climbed up to more than 190% of GDP.

   The government could not continue to borrow for so long due to weakening credit worthiness, and the amounting deficits in trade balance and balance of payments have eventually led to the depletion of the Central Bank's foreign reserves and, subsequently, the devaluation of the Jordanian Dinar in 1988.

The Period from 1989-1995:

   During early current decade and in the aftermath of the 1988 financial crisis and the subsequent close collapse of its economy, Jordan found no other alternative but to re-examine its economic performance and pinpoint elements of weaknesses as a prerequisite towards the alleviation of structural imbalances in its economy.

   This period witnessed the embarking on of the first economic structural re-adjustment program initiated with the help of the World Bank and the International Monetary Fund (IMF) aiming at finding effective remedies to end economic suffering and external imbalances. However, this program was suspended in the aftermath of the second Gulf War and the destructive effects it had brought about to the Jordanian economy. In 1992, the difficult journey of economic re-adjustment was resumed again, and a new economic re-adjustment program with ambitious targets, aiming at restoring internal and external balances, was launched to cover the period 1992/98.

   During this period, many successful structural economic and legislative adjustments were undertaken, and the economy started to favorably respond to these adjustments. Aided by the expansion in aggregate demand and consumption, aroused by a huge number of Jordanian returnees from the Gulf States, Gross Domestic Product (GDP) grew at an average of 3.6% and 11.3% in real and nominal terms respectively during the period 1989/95.

The Period from 1996-1998:

   The outstanding performance of the Jordanian economy during the previous stage has initiated the government and the International Monetary Fund to review and reconsider economic targets stipulated for the last three years of the original economic readjustment program (1992/98). The most important among the new targets was to achieve a total GDP real growth of 20% over three years.

   This period was characterize by the application of tight monetary and fiscal policies aiming at curbing inflation and maintaining stability of the Jordanian Dinar, in addition to restoring internal as well as external balances. A high interest rate policy was prudently used by the monetary authorities in order to suppress consumption, encourage domestic savings and investments and enhance savers' attractiveness to assets denominated in Jordanian Dianr.

   Constrained by regional tensions, the partial loss of the Iraqi market, the crash in oil prices, the relapse of the peace process and the dominance of a climate of uncertainty and vague expectations, a state of deep economic recession dominated. These factors, together with the heavy debt burden, added to the fiscal deficit and negatively affected the balance of payments.

   Accordingly, the pace of local and foreign investments slowed down, and real economic growth fell substantially below target to 1% in 1996, 1.3% in 1997 and an official figure of 2.2% in 1998, which may well fall short to a flat level according to some estimates.

   The following table shows the wide fluctuations in the performance of the Jordanian economy over the period from 1976-1998:

  Early this year, Jordan ended the seven-year economic structural re-adjustment program initiated back in 1992 with partial success. While the period 1992/95 witnessed significant achievements in the field of economic growth and stabilization, annual growth rates during 1996/98 fell substantially below target (1.5% real economic growth against a stipulated target of 6.5%).

   Although the stated main objectives of the economic re-adjustment program were to achieve macro-economic stability and sustained economic growth, the retreat in economic performance during the last three years of the program has made the picture less vivid. However, moderately speaking, Jordan's average economic performance during the whole life of the seven-year program (1992/98) can be summed up as follows:

-         An average GDP growth rate of 5.6% p.a. in real terms.

-         Containment of inflation within a range of 3.5% p.a.

-         Maintaining the stability of the local currency in addition to other monetary indicators.

-         Increase in the Central Bank's net foreign reserves from less US$ 0.5 billion in 1995 to more than US$ 1.5 billion in 1998 covering Jordan's imports of 4 months.

-         Significant progress in the field of external debt (107.7% of GDP in 1993 to 94% of GDP in 1998).

  The historical performance of Jordan's macro-economic indicators during the period 1993/98 can be exhibited as follows:        

  The enhanced performance of the Jordanian economy, the lightening of its public external debt and the improved financial management have all earned Jordan a fair credit rating. Standard & Poor's sovereign rating for Jordan as of the start of the current year was as follows: 

Problems and Challenges Encountered by Jordan:

   Jordan has been encountered by some chronic economic difficulties, to which national authorities have been solemnly striving to find effective remedies. The major issues that have to be urgently addressed in this regard can be outlines as follows:

• Sustainable Growth:

  Despite the significant progress achieved in the field of real economic growth during the first half of the 1990s, Jordan has failed to maintain reasonable sustainable growth rates during the subsequent years (1996/98).

  Growth has been negatively affected by the constraints on exportation initiated by neighboring countries, the end of the construction boom and the limited volume of investments launched due to political uncertainties and constraints.

• General Budget Deficit:

  Jordan has been suffering from a chronic budget deficit for a long time. The level of public expenditure has always surpassed domestic revenues even after the inclusion of financial assistance and grants. Jordan has been conceived, by many economists, to live beyond its means, bringing about the issue of inconsistency between the country's income and aggregate spending.

  Despite calls to alleviate budget deficit through rationalizing public expenditure and enhancing domestic revenue, through tax reform and improvement of collection, the deficit continued to linger at very high levels (7.7% of GDP in 1997 and 10.7% in 1998).

• The Savings-Investment Gab:

  Jordan has always depended on external loans and financing to finance domestic investments. This is so since the level of domestic savings is not sufficient enough to meet investments. In 1998, the Gross Fixed Capital Formation represented 25.7% of GDP, while domestic savings accounted for only 4.4% GDP leaving a gab of 21.3% of GDP.

  This gab, in addition to the deficit in the general budget, has always raised the need for external financing and borrowing, which has further added to the problem of public debt.

• The Public Debt:

  The building up of Jordan's public debt was initiated back in mid 1980s as a way of compensating for the decrease in capital inflow following the retreat in the economies of the Gulf countries.

  Towards the end of the 1980s, Jordan's external public debt stood in the neighborhood of 190% of GDP with a very high debt service ratio. However, Jordan's efforts, within the context of the economic re-adjustment program, to alleviate this problem have made very limited success. The external public debt was lowered to 94.3% of GDP in 1998 with a debt service ration of 21.9%. This limited improvement was the outcome of the decrease in new borrowing, rescheduling of repayments, debt buy back and debt swap operations in addition to debt forgiveness extended by several creditors.

• Unemployment:

  High unemployment has been an immanent feature of the Jordanian economy almost throughout the different stages of development. This feature was the result of the high population growth rate accomplished by a limited absorptive capacity of the domestic economy. This fact has always raised the need to find more job opportunities for an increasing number of educated workers in other regional markets.

• The Deficits in Trade and Payment Balances:

  Given the scarcity of natural economic resources and its limited industrial and productive base, Jordan has always suffered a frequent deficit in its trade balance. The import bill has always constituted more than double the export earnings.

  Despite Jordan's continuous attempts to increase exports and diversify exportation base, success in this field remains partial. The country's ability to export its produce to traditional markets remains more or less a political issue rather than an economic one.

  The deficit in trade balance is alleviated by a sizable surplus in the services balance due to the significance of worker's remittances, which account for more than 75% of the services balance surplus.

On the other hand, the international process of economic and market globalization is an inevitable one that involves almost all countries of the world. Jordan is aware that it cannot detain its economy outside the circle that embodies more than 85% of the international economies. For that purpose, Jordan has already signed a partnership agreement with the European Union to be effectuated as if January 2000, and is now engaged in the process of finalizing negotiations for membership to the World Trade Organization (WTO), which is expected to take place before the end of 1999.

  However, many difficulties and challenges, already faced by Jordan, arise from the country's attempt to integrate its economy into the world economy through the globalization and deregulation of its domestic market.

• Foreign Competition:

  The Jordanian industrial sector is an infant one that has been raised within an atmosphere of high custom protection. The deregulation of external sector through the abolition of all forms of protection will put the Jordanian industries in direct confrontation with more developed economies. The fierce competition expected to arise from this confrontation will have severe repercussions on local industries if they do not adjust to become more efficient in terms of cost and quality.

• The Privatization:

  In accordance with the structural re-adjustment programs initiated during early 1990s, the Jordanian government launched a privatization program aiming at enhancing the efficiency and competitiveness of the economy, encouraging domestic as well as foreign investments and giving the private sector a larger role in economic activities. However, due to political considerations and the lack of consensus over the viability of the program, efforts to implement this program have been lax and at minimal levels. A clear and well-defined strategy to implement the program was only announced during 1996.

  Until now, the execution of the program has been limited to the sale of some government shares in selected companies and industries. Nonetheless, the government announced its determination to pursue the implementation of the privatization program and overcome opposition to it.

   These challenges and difficulties have to be firmly and efficiently dealt with in order to put the national economy on the fast-growth-track. In a rapidly changing global environment, slow economic growth is not an affordable luxury to Jordan.

  Jordan has to work hard and undertake committed difficult and swift arrangements in the field of structural re-adjustment, privatization, administrative reforms and legislative modernization.

The New Economic Re-adjustment Program (1999/2001):

  The domestic and regional political uncertainties, combined with large fiscal deficit and high burden of foreign debt service have put some pressure on foreign exchange reserves during the last months of 1998 and early months of 1999. this in turn triggered the need for further economic reforms to enhance self-dependency, consolidate previous achievements and sustain economic growth. The government has therefore stated its intention to continue pursuing all efforts to overhaul the entire economy.

  A new economic re-adjustment program, aiming at stabilizing the economy and sitting the stage for sustained recovery and resumption of structural reform, has thus been initiated. The program covers the coming three years with the following main features and objectives: 

Future Prospects of the Jordanian Economy:

   The most immanent factor that characterizes the Jordanian economy is its remarkable vulnerability to external influences and regional transformations. This actuality is not expected to change in the coming near future, and will continue to reflect on the performance of the Jordanian economy.

  Hence, the performance of the Jordanian economy on the domestic level cannot be looked at in separation of its performance on the regional as well as the international level due to the significance of the Jordanian external economy. From a political perspective, the dawdling in concluding a peace treaty between Israel on the one side and Lebanon and Syria on the other, the remote and unexpected lifting of economic sanctions imposed on Iraq and the distant normalization of trade relations between Jordan, Israel and the Palestinian Authority, are all major regional factors that will significantly influence the economic climate of Jordan. Such issues are not expected to be resolved in the coming near future and shall continue to have their negative implications on the Jordanian economy.

   Internationally, the trends towards globalization, deregulation and abolition of all sorts of barriers between world economies are picking up momentum. The new features of the world economic system are taking shape and becoming much clearer. These trends, expected to materialize in the longer-run, will have severe repercussions on the Jordanian economy after the adaptation period ends.

   During the coming three years, the Jordanian economy will be subject to a painful process of structural reform. The reforms to be implemented during this period will concentrate on the fields of privatization, taxation and introducing the VAT, and deregulation of trade external economy. The fruits of such a reform will materialize in the medium and long-term future.

   While the prospects for high economic growth in Jordan remain slim in the very near future, the longer-term outlook is more favorable. Even though the new economic re-adjustment program stipulates real GDP growth during 1999 at 2%, this rate is now being put within the region of 0.5%-0.8% according to some estimates. Such estimates lie primarily in the expected continuity of the negative regional factors already influencing the Jordanian economy.

   However, prospects for economic growth for the year 2000 and afterwards seem to be much brighter based on the expectations of increased exports, mainly from the mining and quarrying sector, and booming tourism. Tourism, in addition to other major services sectors, is expected to be one of the leading growth sectors of the economy.

The Jordanian Economy under the Regime of King Abdullah:

   The death of King Hussein marked the end of an important era in the history of the Jordanian economy. The change of leadership is usually associated with the predominance of an atmosphere of doubt and speculation in this part of the world. Fortunately, Jordan was an exception to this rule as the process of succession was remarkably smooth. However, an atmosphere of uncertainty and doubt was manifested by the less-than –expected performance of the Jordanian economy during the last three years of the economic re-adjustment program.

   Since assumed power, King Abdullah, who inherited a heavy economic burden, high market distortions, chronic structural imbalances in the trade and payment accounts, high rate of unemployment and poverty, has spared neither time nor effort to deal with this burden. Within two months of the new rule, Jordan concluded an agreement with the World Bank and the International Monetary Fund extend the economic re-adjustment program for another three years. The new King has stated his eagerness and enthusiasm to pursue economic reforms in the fields of economic growth, unemployment, administrative bureaucracy and corruption, public debenture, investment climate, and privatization.

   Many investment-related laws and legislation are now in the process of being amended to harmonize the Jordanian economy with the new international standards and requirements. Moreover, in spite of the high cost embodied into the drive towards eliminating quantitative and custom restrictions on trade, the government is persistent to further liberalize the economy and its external sector to meet with international requirements.

   King Abdullah || started his rule by visiting some Arab sates in an attempt to consolidate Jordan's relations with its neighbors and crowding support for the Kingdom's suffering economy. The king tried to capitalize on the high international support for Jordan after the tragic death of the late King Hussein. In doing so, he concentrated on restoring warm relations with major Arab states, which represent potential markets for the Jordanian agriculture and industrial products as well as Jordanian labor. He further called on Arab leaders to financially back up Jordan through providing finance to infrastructure and encouraging Arab investments in the country.

   On the international scene, King Abdullah visited some European countries and the USA in an attempt to gather international support for Jordan and the economic re-adjustment program it embraces. The fruits of this tour came out in the form of an international call to write off 50% of Jordan's debt to the Paris Club.  

Conclusion:

   To talk and speculate about the Jordanian economy under the new regime of King Abdullah || is premature, considering the short period of time since he has assumed power. The greatest part of the new King's efforts during the last six months concentrated on the restructuring of the internal house and the consolidation of Jordan's external relations with regional and international countries.

   The performance of the new King has far surpassed expectations. Despite the short period of the King's rule, some positive features of the new era have already started to evolve and materialize. The economy has been given an absolute priority over any other issues. The process of political and economic reform is picking momentum. Furthermore, Jordan's international relationships are now being re-arranged on the basis of economic considerations and benefits.