Jordan: Firm hand on the economic reins

The Jordanian government is attempting a difficult balancing act, working to boost economic growth while imposing a series of austerity measures intended to curb public spending and debt levels. These measures may prove unpopular with many in the electorate but should serve to strengthen the economy in the longer term.

In late February, the House of Representatives approved a budget for 2012 focused on reining in public debt while at the same time promoting economic growth. Prime Minister Awn Khasawneh has described the budget as possibly the most austere in the country’s history and stated that belt-tightening was a matter of necessity rather than an option. Jordan had to choose whether to continue to increase spending and leave its fiscal problems unsolved, or take unpopular measures to avoid a looming deficit crisis, he said.

Though new austerity measures were necessary, Khasawneh said the national economy was moving in the right direction, with foreign reserves held by the central bank at comfortable levels and the ratio of public debt to GDP at 65% – well within international standards.

The budget foresees expenditure of $9.6bn for 2012, with revenues projected to be $8.1bn and a deficit of $1.5bn, around 3.5% of GDP. According to the budget drafted by finance minister Umayya Toukan, GDP should expand by 3% this year, in line with the lower-end estimate of the International Monetary Fund issued in early February.

The budget has factored in a consumer inflation rate of 5% and petrol prices averaged at $100 a barrel. Though the state will continue to provide subsidies, total outlays on price support have been reduced by 38%, with just $635m allocated to ease costs on fuel and a range of basic food stocks, compared to the $1bn spent in 2011. Of total expenditures, $1.4bn has been reserved for capital expenditure, a figure some critics of the government have said is insufficient to provide stimulus to the economy.

Moves by the government to close tax loopholes and increase revenue by improving collection procedures and imposing levies on a small number of non-basic commodities and services are expected to increase earnings, though they are unlikely to be welcomed by the public. Indeed, the government’s early 2012 decision to hike electricity tariffs was suspended this month after food merchants threatened to raise the price of foodstuffs by 20% to cover their increased power bills. The government had hoped the new price regime would cover the cost of higher outlays to maintain electricity distribution services.

A keynote of the Prime Minister’s address during the budget debate was the need for the economy to wean itself off its dependence on foreign aid to bridge budgetary deficits and underpin growth. Though the flow of assistance remained strong – a reflection of the confidence donor countries had in Jordan – the Kingdom should not continue to rely on receiving economic aid from overseas, Khasawneh said. Instead, Jordan needed to encourage growth by attracting investments and rationalising its spending, he said.

Amman’s efforts to reshape its own economy have not gone unnoticed or unrewarded. In late February, the EU announced it would be providing Jordan with $4bn worth of assistance over the coming three years, with $1.6bn of this to be made available in 2012. According to Jafar Hassan, the planning and international cooperation minister, the EU assistance and loans will serve as a major boost for the reform programmes the Kingdom is pushing through.

With local media also reporting that 2012 should see an increase in assistance from Gulf states and Japan, the government may actually find itself in a stronger fiscal position than it forecasts in its own budget. If it keeps to the promises made by Khasawneh, these funds may be reserved and used to promote economic development.

Of course, many of the government’s projections for the economy will be dependent on factors beyond its control. Rising tensions in Syria, a major trading partner, could spill across the border. Already Jordan is hosting some 80,000 Syrians who have fled the unrest in their own country, while vital land routes to Turkey and further north have been disrupted. Any spike in oil prices brought about by regional unrest will also hurt Jordan, which depends on imports for almost all its energy needs, and put pressure on the government to pump more funds into fuel subsidies. Unrest and any return to recession in global markets would also weaken Jordan’s tourism industry, which has already been harmed by events elsewhere in the region.

This uncertainty will test the government’s resolve to maintain austerity measures throughout the year, as could the Jordanian public’s response to the short-term pain the prime minister has said must be endured to ensure long-term economic gain.