Jordan: New tourism challenges

Despite a rebound in tourism revenues last year, the sector continues to face a difficult operating environment with both regional instability and the potential for increased government taxation weighing it down.

Tourism has long been a staple of the economy, accounting for 14% of GDP in 2010. The most recent information from the Jordan Tourism Board shows that the sector generated around JD2.5bn ($3.5bn) in revenues in 2012, an increase of 15.3% over the JD2.13bn ($3bn) recorded in 2011, despite a 7.3% fall in arrivals. There are also expansion plans in the works, with a number of large-scale projects underway in Aqaba and several luxury hotels under development in Amman.

But the sector is facing new challenges, including a decision by the government in late 2012 to cut the budget of the Ministry of Tourism. Then in late March, the former minister of finance, Suleiman Hafez, recommended to the cabinet that the hotel sales tax be raised to 16%. Three years ago the levy was lowered from 16% to 8% in an effort to boost the sector in the wake of the global economic recession.

The return to the higher rate would come on top of the 11% income tax that hotels pay on their profits. In an interview with local media, the Jordan Hotels Association executive director, Yasar Majli, said, “This decision will affect the sector, which is already suffering, and we will have to add the imposed raise onto the customer’s bill.”

Increasing taxes on hotels is just one way that the government is attempting to improve its fiscal position. It follows a reduction of state subsidies in late 2012 on certain fuels and other commodities, another move to try to cut the budget deficit. Subsidies for electricity are also expected to be lowered in 2013, which would push up operating expenses for hotels and other businesses.

For hotels that had negotiated deals with tour operators under very different economic circumstances, such cost increases – whether in the form of higher electricity prices or additional taxes – can be particularly damaging. As Munther Jwainat, CEO of International Hotel Development, told OBG, “The decision to raise hotel taxes to 16% affects the mathematics of our agreements with tour operators. This ad hoc approach to arbitrarily raising taxes on different sectors defies business logic and could potentially harm the tourism sector in a big way.” This uncertainty could also discourage foreign investment from international hotel chains, which might otherwise consider Jordan an attractive market.

Indeed, despite these challenges, the Kingdom offers some key advantages, chief among them a perception that it is a safe haven in an unstable region. As Bassam Maayeh, managing director of Arab International Hotels, told OBG, “With all the turmoil in the region, Amman will be well-positioned to become the tourism focal point of the Middle East, particularly for business travellers.”

Hotel occupancy rates are another bright spot in the Jordan tourism landscape. According to a report by consultancy Ernst & Young Middle East, occupancy rates for hotels in Amman rose from 56% to 70% between 2011 and 2012.

However, these figures could come down once properties that are under development come on the market. New facilities set to launch over the next two years include the 300-room Fairmont Amman, the St. Regis Amman and the 280-room West Amman Hotel. At present, there are nearly 24,000 hotel rooms in the country, according to data provided by Jordan Tourism Board.

New developments in the Dead Sea region and several large-scale real estate ventures in Aqaba, one of which will add 17 km of additional coastline through the construction of man-made lagoons, may help attract more visitors to the Kingdom. The recent expansion at the Queen Alia International Airport could also provide a boost to the sector. An increase in the number of visitors would help off-set lower profit margins for hotels facing higher expenses.