Balancing priorities: Working to maintain growth in fiscally challenging times

Facing low growth and a mounting fiscal burden, policymakers in Jordan are making preparations to support long-term economic recovery and to encourage greater investment in emerging business segments such as infrastructure and energy.

Just as recovery from the effects of the global financial crisis seemed on the horizon, the Arab Spring reinforced many of the economic strains felt during 2010, and problems with energy supplies from Egypt forced the government into a tight fiscal position, reducing its room for manoeuvre on domestic issues. The government spent much of 2011 working to balance priorities by supporting low-income families through tough times, while also reducing costly government subsidies to improve longer-term fiscal health.

Secure international relations are vital to Jordan’s stability and increasing fear of conflict in Syria and potentially Iran increased market jitters. Further afield, low growth in the EU reduced inflows of investment, although rising trade with the US and an uptick in grants from major donors added some relief.

ECONOMIC PERFORMANCE: The IMF forecasts economic growth of between 2% and 3% during 2012, as the country is expected to face challenges from high energy prices and rising sovereign financing costs. Average inflation is expected to hover around 5.5% due to a reduction in protection from international oil prices and rising food prices.

This follows a difficult year in 2011 when the IMF estimates GDP to have risen by 2.5%, down on growth of 2.9% in 2010, and 5.5% in 2009. Inflation of 4.5% reflected the reintroduction of price protection on energy in the domestic market. Unemployment was estimated at almost 13% and is expected to stay in this region due to muted short-term growth prospects. However, strong export growth of 13.4% during 2011, according to the Department of Statistics (DoS), highlighted underlying strength in the real economy, although the trade deficit widened as imports rose by 17.6% on 2010 due to increased energy imports.

SECTOR FIGURES: Figures from the DoS show the mining and quarrying sector recorded noticeable growth of 21.5% over the first three quarters of 2011. In turn, manufacturing increased by 4.1% on 2010, while trade, restaurants and hotels rose by 3.9% ( reversing a contraction of 2.3% in 2010). Agriculture grew at 4.7%, financial, insurance, real estate and business services by 3.7% and transport and communication by 3.1%. Construction followed a contraction of 2.2% in 2010 by decreasing a further 6.6%. Production of petroleum products, chemical acids and fertilisers all declined in 2011, whereas the production of phosphate and potash increased by 15.3% and 16.8%, respectively.

PROJECTIONS & THE BUDGET: According to Abdelhakim Shibli, the acting director of economic studies and policies at the Ministry of Finance, when the government prepared the 2012 national budget it was projected that revenues would grow over the coming year and, depending on economic growth, further revenues would be made from a windfall on the issue of new telecoms licences, the lifting of exemptions on real estate transactions for property of more than 120 sq metres and the consideration of levying an additional tax on certain luxury goods.

Shibli added that as the government is not expecting to finance any new projects the budget deficit is expected to be just over JD1bn ($1.4bn) for 2012.

Public debt was exacerbated by the need to import more fuel following the breakdown in supply of gas from Egypt. Therefore, debt increased from 61.1% of GDP in 2010 to 65% in 2011. This was caused mostly by the government guaranteeing borrowing of JD670m ($941.5m) for the National Production Company to secure oil for electricity production. According to Shibli, the aim is to gradually reduce public debt to 64.5% in2012, 63.5% in 2013 and 62% in 2014.

BALANCE OF PAYMENTS: Jordan’s current account deficit (including grants) for the first 11 months of 2011 amounted to JD738.9m ($1bn), according to statistics from the Central Bank of Jordan (CBJ). This compares to a deficit of JD801.8m ($1.1bn) for the same period in 2010. Contributing to this was a trade deficit of JD7.3bn ($10.3bn) for the year, offset by a rise in grants, which reached JD1.1bn ($1.5bn) through November, far higher than the JD401.7m ($564.5m) received in 2010 due to an unplanned grant from Saudi Arabia.

Travel receipts and payments decreased by 16.4% to JD2bn ($2.8bn) during 2011 and remittances declined by 5.2% to JD2.5bn ($3.5bn). As the government shifted spending away from capital expenditures to current expenditures such as energy and food subsidies, the current account deficit was forecast by Standard & Poor’s, ahead of official figures, to have widened to 7.3% of GDP in 2011.

The CBJ’s foreign currency reserves declined by 14.1% on December 2010 to stand at $10.5bn at the end of 2011, still enough to cover over six months of imports, and well above the internationally recognised safe standard of three months. The World Bank estimated that foreign direct investment (FDI) had declined by 32% in 2011 and tourism was down by 16%.

TRADE: The deficit in Jordan’s trade balance widened by 21.1% to JD7.3bn ($10.3bn) in 2011. Both imports and exports increased, but imports rose at a faster rate, mainly driven by the need to import more oil in the absence of reliable gas supply from Egypt.

According to the DoS, exports reached JD4.8bn ($6.7bn) during 2011 (up 13.4% on 2010) and reexports hit some JD874m ($1.2bn), also up by 13%. Major commodities that experienced an increase in their export value over the year were crude phosphate (up 118.8% on 2010), clothing (up 50.9%) and crude potash (up 29.8%). Clothing was the largest exported commodity by value, reaching JD65.5m ($92m), with the majority going to the US tariff-free under the US-Jordanian Free Trade Agreement.

Imports reached JD12.9bn ($18.1bn) during 2011, an increase of 17.6% on 2010. Energy requirements influenced imports most heavily. Disruption in the gas pipeline from Egypt, which was bombed multiple times in the Sinai region, resulted in a 66% drop in the value of natural gas imports, from JD186m ($261m) in 2010 to JD63m ($88.6m) in 2011. By the end of the year gas imports were virtually negligible. This led to a marked increase in imports of energy substitutes, including, most notably, JD1.67bn ($2.3bn) of petroleum crude, an increase of 30% on 2010, JD834m ($1.2bn) of gas oil, up 154% on 2010, and JD364m ($511.5m) of diesel oil, growth of 247%. Imported electrical energy also rose from JD54m ($75.9) to JD199m ($279.6m) between 2010 and 2011.

Saudi Arabia benefitted most from increased energy demand from Jordan, with its total export value increasing by 37% from JD2.2bn ($3.1bn) to JD3bn ($4.2bn) between 2010 and 2011. Imports from China were the next largest, growing 9% to JD1.3bn ($1.8bn), followed by the US, which saw imports rise by 24% to JD765m ($1.1bn). Imports from Russia and the UAE also increased by 76% and 138%, respectively, mostly of energy related products.

EXPORTS: Jordanian exports rose by 13.4% to JD4.8bn ($6.7bn) between 2010 and 2011 with a 12% increase to Jordan’s largest export market, the US, which was worth JD734m ($1.03bn) in 2011. Iraq was the next-largest export destination, up 10% to JD715m ($1bn), followed by a 12% increase in exports to India worth JD615m ($864.2m). Despite the uprising in Syria, trade until the end of 2011 was not severely affected. Indeed, Jordanian exports rose by 7% on 2010 to JD181m ($254.3m) for the whole of 2011 and transit routes to Lebanon were largely unaffected, with exports rising by 51% to JD209m ($293.7m).

However, signs of disruption were more apparent comparing December 2011 to December 2010, which showed imports from Syria dipped from JD24m ($33.7m) to JD16m ($22.5m). Jordanian exports to Syria remained steady at JD16.5m ($23.2m) in both months.

Regional developments have had a mixed impact on Jordan’s trade position. While the kingdom has suffered from turmoil in Egypt, Iraqi businessmen are increasingly using the country as a stable manufacturing base from which to export into Iraq. Materials and the cost of doing business are lower in Jordan than in Iraq, and there is easier export access to other markets in the region. In addition, Jordan’s favourable trade agreements are being used by Asian manufacturers, particularly those producing textiles to export to the US where domestic quotas have already been used up.

FOCUS ON BOOSTING INVESTMENT: Encouraging investment has long been a priority for the government. The Jordan Investment Board (JIB) is at the heart of ensuring investors are welcomed to the kingdom and provided with transparent investment structures and incentives to support their establishment.

According to latest information from the JIB, the total volume of investments in the kingdom reached JD1.1bn ($1.5bn) for the first half of 2011, of which JD614m ($862.8m) was registered with the JIB and the remaining in the development zones. Total FDI for 2011 rose by JD200m ($281m) on that registered for 2010, sending a strong signal that confidence is returning to investors. According to Elias Farraj, deputy CEO of the JIB, the foreign component of investments typically takes between one and three years to implement from the date of registration, so the actual impact of increased investment is likely to be felt in 2013.

SOURCES & DESTINATIONS: Foreign investment comes largely from Arab countries, with 43% of the total in 2011. The UAE was the largest regional investor at JD84m ($118m). Iraq and Lebanon were the next, although some way behind, with investments of JD13m ($18.3m) and JD7.3m ($10.3m), respectively. Canada was the largest foreign investor with JD120m ($168.6m), followed by the Netherlands at JD31m ($43.6m).

Despite a concerted effort to increase investment to the governorates, Amman received 82% of registered investment – JD503m ($706.8m) to 130 projects.

For the government, which is preparing a new regulatory framework for the development of solar, wind, oil shale and uranium power sources, one priority for investment is the energy sector. Plans for nuclear power production in Mafraq are under way and due to come on-line in 2020. The project has already received approval from neighbouring countries, but at the end of May 2012 the kingdom’s legislature put the brakes on when the lower house voted to suspend plans to build nuclear reactors until feasibility studies are completed and the necessary funding is in place. Meanwhile, mining of local uranium sources is set to rise to feed reactors, as well as for exports of so-called yellow cake, uranium in concentrated powder form.

Jordan’s drive to increase domestic energy production is attracting interest from a number of multinational corporations, including BP and Shell, which are eyeing the prospect of oil shale production. They are examining opportunities to produce 35,000 barrels per day (bpd) through individual projects. With Jordan’s current oil consumption at approximately 100,000 bpd, the kingdom would need just three projects to satisfy domestic consumption. Oil shale is economically viable so long as world oil prices stay above $75 per barrel. The target, according to the JIB, is to reduce reliance on oil imports from 60% to 40% by 2020.

Other large-scale projects are in the pipeline and include further airport expansion and the reconfiguration of Aqaba port, which is nearing capacity. Additionally, an ambitious project to connect the Red and Dead Seas through irrigation channels plans to return the latter’s water volume back to sustainable levels.

Furthermore, Jordan is looking to position itself as a regional centre for business process outsourcing, utilising its existing advantages in infrastructure and IT as well as its skilled workforce.

COMPETITIVENESS: As a country that relies heavily on foreign investment and grants, Jordan is well aware of the need to maintain economic competitiveness. In a move to further safeguard the flow of foreign investment, in early 2012 the government announced that all investment-related agencies would be merged into one entity. The prime agencies involved would be the JIB and Free Zones Development Commission.

The planned merger aims to reduce the number of institutions investors have to deal with when setting up projects in the kingdom. The announcement comes as Jordan readies itself for an expansion of public-private partnerships and the opening up of more sectors to full foreign ownership. Key among these will be energy, water and transport.

Promoting Jordan as a secure and stable investment destination to foreign markets is part of the government’s plan to increase the competitiveness of the economy. According to Farraj of the JIB, new efforts are being made to promote Jordan in China, Korea, Japan, as well as in emerging BRIC (Brazil, Russia, India and China) markets and other Arab countries.

The strategy is to promote knowledge-intensive sectors that can utilise Jordan’s high number of graduates in health care, pharmaceuticals and information and communications technology, while also encouraging more labour-intensive industries such as manufacturing to create opportunities for the semi- and unskilled labour force. In addition, education has been identified as key to increasing the competitiveness of the workforce, including helping unskilled workers move into skills jobs. Initiatives to create hospitality colleges have been successful in providing skilled local labour to the hotel industry, where foreign workers previously occupied the majority of positions.

In the World Bank’s 2012 “Doing Business” index, Jordan slipped one place to 96 out of 183 economies for its overall business environment. While Jordan scores particularly well for ease of paying taxes or availability of electricity, the World Bank identifies access to credit (where the kingdom ranked 150th) as an area for improvement. Opening a business takes an average of 12 days in Jordan, the same as the OECD average, and according to the JIB it now takes only 14 days to license a project, well down on the previous figure of 98 days. The government’s new target is to reduce this to just seven days.

JOB GROWTH: With public sector recruitment firmly on hold as the government reigns in spending, prospects for job growth sit firmly with the private sector. Unemployment levels have been in the 12-14% range for the past few years, and in light of the current economic environment it is unlikely private companies will be looking to recruit heavily in the near term. Jordan’s National Agenda, a 10-year development strategy, set an ambitious target to reduce unemployment from 14% in 2005 to 6.8% by 2015 by creating nearly 600,000 jobs. The target was set during the boom years when the economy grew at more than 6% per annum and before effects of the 2008 global financial crisis began to bite. While jobs have been created since 2005, many were either in the public sector or in the private sector and taken by foreign workers.

While unemployment rates are high, a more pressing concern is the number of Jordanians not looking for work. Approximately only 40% of Jordanians are either working or actively looking for work. This creates a high ratio of dependents for every earner and is a major factor in explaining the country’s relatively low income per capita. This phenomenon is characterised by low rates of female economic participation, indicating cultural drivers are largely at work.

A study of 30,000 employees in the private sector by management consultancy Hay Group in December 2011indicated that wages rose over the year. Salaries were up by an average of 6% during 2011. Based on evidence in the study the group forecasts a rise of 6.2% for 2012, roughly in line with real inflation.

PRIVATISATION SCRUTINY: In 2011 several cases of alleged business malpractice were referred to the Anti-Corruption Committee, prompting the government to take measures to clean up the system. The alleged infringements brought into question previous reforms to privatise state assets. Privatisation was driven largely by the debt-relief programme and accompanying structural reforms packaged together by the IMF in the early 1990s. The aim was to reduce growing national debt; however, it has been alleged that state assets were sold for much less than their real value.

With little experience in managing privatisation processes, the full potential of sectors such as telecommunications licences was not realised, although at the beginning of the 1990s very few countries expected mobile phones would grow so rapidly.

In addition, while further spending on valuations and management process could have brought in more revenue in the long term, at that time budgetary pressures were tight and expenditure on external consulting firms would have been politically sensitive. Proponents point out that the upside of the privatisations is many former state-owned companies are now profitable businesses that have garnered investment and created job. But critics argue that state monopolies were simply handed over to private ownership and there was no opening up of the market.

Despite rumours, it would be unthinkable for the government to buy back some of the sold assets in its current weak fiscal position. It would also send out the wrong signals to the private sector just as the state needs to encourage investors into the country.

OUTLOOK: Jordan is coming to terms with its short-term but severe economic challenges, and is laying foundations for sustainable growth in the longer term. Efforts to secure cheaper forms of fuel and the careful rebalancing of subsidies to favour spending on value-added segments of the economy shows a strong commitment by the government.

In the long term, ample investment opportunities are opening up in infrastructure and energy. In addition, government reforms aimed at increasing transparency and institutional efficiency will build on the already attractive investment climate. If 2012 looks to be a year for scoping out investment opportunities and laying foundations for the future, 2013 should see the start of a number of large-scale development projects and a return to stronger economic growth, both of which bode well for the kingdom and its investors.