Jordan: Delicate economic balance

Officials remain confident of solid economic growth this year, although there are concerns that domestic and regional unrest will leave the kingdom falling short of its objectives for 2012.

At a meeting on September 20 with Masood Ahmed, director of the IMF’s Middle East and Central Asia department, Fayez Al Tarawneh, Jordan’s Prime Minister, said the kingdom was on the road to recovery, despite the difficulties posed by regional unrest. “We now have a practical and binding economic reform programme that will place the national economy on the right track and bring back growth rates to their anticipated levels,” Tarawneh said.

The IMF has predicted the Jordanian economy will expand by 2.8% in 2012, up on the 2.5% posted in 2011. While below the levels needed to soak up unemployed nationals and create employment for the increasing number of young Jordanians entering the workforce, such a rate of expansion – if achieved – is better than some of Jordan’s neighbours, and indeed, than many developed countries.

However, the rising tide of unrest in the region is lapping at Jordan’s borders, with the largest single threat being from Syria. Current estimates are that some 200,000 Syrians have taken refuge in Jordan, and some estimates predict this number could reach 1m.

In an interview with Agence France-Presse on September 12, King Abdullah II put forward the case for additional economic aid for Jordan as it deals with the crisis. “With the approach of winter and cold desert temperatures, the humanitarian prospect is dire,” he said. “Jordan has a record budget deficit, due mainly to the disruptions in the Egyptian gas supply. The demands on our services infrastructure and limited resources are also high.”

The conflict in Syria has also disrupted Jordan’s main land trade routes to Europe, cutting direct access to Turkey and destinations beyond. However, it is the repeated disruption to the supply of gas from Egypt that is the most costly to the national economy. In the past 18 months, the pipeline has been out of commission 14 times. As a result, industry, transport and basic services have all been impacted.

Concerns over these issues are weighing on the Jordanian public. According to a recent survey conducted by the Centre for Strategic Studies, 70% of citizens consider the economy to be the country’s leading problem, with 40% of respondents believing the economic situation will worsen in the coming months. Such a level of pessimism does not bode well for the retail and services sectors, which are vital to the Jordanian economy, as the public may be reluctant to spend or make investments if they fear a further downturn.

The rising cost of living in Jordan is fuelling fears, with inflation coming in at 4.11% in August, up from the year-on-year figure of 4.02% in July. Meanwhile, the latest reports on the projected deficit have also given cause for concern. In mid-September, Finance Minister Suleiman Hafez said the deficit could reach $4bn this year, taking Jordan’s total debt to $24bn by the end of 2012, up from $20.25bn at the end of 2011, when the budget deficit rose to some 6% of GDP.

Inflation, which the IMF has projected will reach almost 5% this year, could increase further if the government follows through with plans to reduce subsidies on many key products, such as fuel and basic foodstuffs. Recent moves to increase fuel prices, which were quickly reversed, sparked protests in the streets, while other proposals to bridge the deficit by hiking taxes and lower other subsidies have also been met with a cool reception.

However, the government has said it will have to resort to a mix of higher levies and an easing of price support, which currently costs some $3.4bn annually. In mid-September, Shabib Ammari, minister of industry and trade, said if international food and fuel prices rose further, there would be no option for the government but to pass on the costs to the public. “The only way out of the economic crisis is to lift subsidies on some commodities. There is no other option but to raise prices,” Ammari said.

While there may not be any alternative in the government’s efforts to balance the budget, any reduction of the subsidies regime will come at a cost, both political and economic, with a renewed bout of protests likely, along with higher inflation and a probable weakening of GDP growth. Though the government believes it has the policies to encourage growth and achieve a better fiscal position, it may struggle to accommodate the needs of its poorer citizens while also having to cope with tensions on its own borders.