Global drop in oil prices aiding Jordan's fiscal consolidation plans

The economy looks set to continue its positive trajectory in 2015, with the IMF praising the kingdom for its resilience in the face of challenging external factors, forecasting GDP growth of 2.5% and 4% over the medium term, from 3.1% in 2014. Fiscal space freed up by lower oil prices will help support expansion, with construction, mining, financial and agriculture activity expected to underpin moderate growth.

Resilience 

In its April 2015 Article IV consultation, the IMF reported that Jordan has performed well despite the conflicts in Syria and Iraq weighing on its economy. Growth in 2014 was driven by recovery in the industrial and mining sectors, as well as rising exports. Phosphate production reached an historic high of 746,200 tonnes in October 2014, while the quarrying sector expanded by 28.3% over the year, according to the Department of Statistics.

External factors have had a more noticeable impact on the economy in recent years, particularly in terms of the energy import bill. Supply interruptions in the Arab Gas Pipeline from Egypt have forced the National Electric Power Company (NEPCO) to import costly diesel and heavy fuel oil, with energy comprising up to 17.8% of GDP by year-end 2014. At the same time, Jordan has seen nearly 1.4m Syrians (627,287 registered refugees and over 750,000 not registered with the UN) cross its borders since 2011, contributing to higher inflation and straining local humanitarian capacity and public services.

Budget 2015

In March 2015 Jordan’s upper and lower houses of parliament endorsed the JD7.9bn ($11.11bn) budget, which projects a JD468m ($658.5m) deficit (including grants) and JD6.7bn ($9.4bn) in current expenditures. Public revenues are expected to reach JD7.4bn ($10.4bn), of which JD6.4bn ($9bn) will come from domestic revenues and JD1.13bn ($1.59bn) from foreign grants. One of the government’s main goals is fiscal consolidation to reduce the primary budget deficit to 2.5% of GDP in 2015, after it reached 3.5% in 2014, or 6.5% if NEPCO’s more than $1.6bn in recorded losses are taken into account. As a result, Jordan will focus on rationalising expenditure and increasing taxes in 2015, while lower oil prices will ease the pressure on its energy import bill, which stood at JD4.5bn ($6.33bn) in 2014.

Oil Drop

Lower oil prices are set to aid Jordan in its fiscal consolidation by helping offset shortfalls in gas supplies from Egypt and ultimately reducing both the import bill and NEPCO’s operating losses. In October 2014 the central bank governor, Ziad Fariz, told the Reuters Middle East Investment Summit that a 20% decrease in oil import costs would save the kingdom an estimated JD800m ($1.13bn) annually. The price of Brent crude slid from $88 per barrel in mid-October to under $60 in early 2015, a decline of over 30%.

Lower oil prices will also help reduce the inflationary risk of ongoing efforts to cut energy subsidies, which have already seen the government eliminate fuel endowments and raise electricity prices by an average of 15% per annum since 2012. The kingdom plans to remove all electricity subsidies by 2017, which should help balance NEPCO’s books, and if oil prices remain depressed, consumers are less likely to feel the effects. Indeed, inflation is expected to decline to 2% in 2015, from an average 3% in 2014, owing almost entirely to lower oil and commodity prices.

However, the decline in oil prices could be a double-edged sword. In addition to posing a challenge to domestic oil shale development (see Energy chapter), according to the IMF, weaker oil prices could hurt foreign remittances and have a negative impact on exports, tourism receipts and foreign direct investment from oil-exporting countries.

Nonetheless, with steady growth, continued stability and a robust performance anticipated in a variety of key growth sectors and markets, the kingdom’s mid-term outlook remains healthy, with the IMF forecasting GDP growth of 4.5% in both 2016 and 2017.