Jordan's economy continues to grow in spite of regional instability and challenges

Despite facing a set of extraordinary external and internal challenges over the past several years, the Jordanian economy remained resilient in 2015. Although GDP growth fell to a six-year low as the kingdom grappled with a rising refugee population and regional volatility, the banking and industrial sectors continued to record a positive performance.

The dissolution of Parliament in May 2016 led to the appointment of Hani Al Mulki, a prime minister who is widely considered to be pro-business and who is expected to accelerate ongoing economic reforms aimed at boosting investment and private sector participation in a number of major planned infrastructure projects. At the same time, the international community’s growing recognition of the unique challenges facing Jordan will support the kingdom’s new refugee strategy.

The EU has moved to relax the rules of origin regulations to boost job creation and exports, while international commitments to the kingdom remain robust. Although public debt has risen markedly in the years since 2011, the Jordanian government is also working in partnership with the IMF to implement fiscal reform policies, supported by low global oil prices, which will aid efforts to reduce the kingdom’s fuel import bill. Combined, these measures should see GDP growth and major macroeconomic indicators post a moderate improvement over the course of 2016.

Growth In 2015

In April 2016 the IMF reported that although it faces a host of external challenges, Jordan’s economy has continued to perform favourably, with real GDP growth reaching 2.4% in 2015 despite the impact of conflicts in neighbouring Iraq and Syria. This was below earlier forecasts, which expected real growth of between 2.6% and 2.9%, and also marks a six-year low for the kingdom, with GDP growth falling from 8.18% in 2007 to 7.23% in 2008, 5.48% in 2009, 2.34% in 2010, 2.56% in 2011, 2.65% in 2012, 2.83% in 2013 and 3.1% in 2014. Declining food and fuel prices drove inflation to -0.9% in 2015, according to the IMF, while core inflation stabilised at 2%. According to Bank Audi, a Lebanon-based bank with a strong presence in Jordan, Jordan had not recorded annual deflation since 2009, reflecting low oil prices and volatile prices for food. Although rent increases were recorded as a result of the rising refugee population, the kingdom’s current fiscal conditions led the Central Bank of Jordan (CBJ) to reduce its rediscount policy rate to 3.75% in June 2015. The central bank is pushing commercial banks to pass the rate cuts on to borrowers in a bid to stimulate economic growth; however, a lack of access to credit, particularly at the small and medium-sized enterprise (SME) level, remains a persistent challenge (see Financial Services chapter).

Trade & Industry

Jordan’s Department of Statistics (DoS) reported that imports contracted by 11.3% in 2015, while exports simultaneously declined by 7.1%, cutting the kingdom’s trade deficit by 13.6%, although this has not translated into a more balanced current account deficit, with Bank Audi reporting it reached 9.4% of GDP during the first nine months of the year, compared to 7.1% at the end of 2014, as a result of lower remittance flows from Jordanians working abroad in the GCC and elsewhere.

In June 2016 Jordan Strategy Forum’s Investor Confidence Index fell by 3.1 points to 91.58. The index, which measures policy decisions and evaluates investor confidence in the economy, attributed the drop to a decrease in the CBJ’s foreign reserves, which reached JD12.1bn ($17bn) in June 2016. The sub-index of confidence in the real economy fell to 102.6 points, down from 103.57 points in May. The drop was attributed to a fall in productivity in both the manufacturing and construction sectors, with the number of construction permits issued falling by 18% in June.

One of Jordan’s most significant exports is fertiliser, owing to the kingdom’s robust supply of potash and phosphate. Fertiliser had an impact on the trade deficit in 2015, with the DoS reporting that exports faltered as a result of lower potash prices and reduced production (see Industry chapter).

As a result of land trade route closures between Jordan, Iraq and Syria, as well as a summer heat wave, agricultural exports also fell by 12.8% in the first half of 2016 compared to the same period in 2015 from JD230m ($323.5m) in the first half of 2015 to JD200m ($281.3m) during the first six months of 2016. According to the DoS, two other key exports, textiles and pharmaceuticals, have had a mixed first half of 2016. Pharmaceutical exports saw strong growth in the first five months of 2016, growing by 21%year-on-year to JD183.5m ($258.1m). Textile exports, however, have seen their value drop by 5% to JD345.1m ($485.3m).

In the first eight months of 2016 national exports and imports fell by 7.5% and 7.6%, respectively. The value of exports hit JD2.9bn ($4.1bn), while the value of imports stood at JD9.1bn ($12.8bn) during this same period.

Elsewhere in the economy, in current prices the industrial sector grew by 2% in 2015, up from 3.9% in 2014, as a result of a positive performance in the mining, manufacturing and electricity and water sectors, with mining and quarrying adding $739.5m to GDP at current prices during the first nine months of the year, a 23.5% increase over the same period in 2014. The sector’s contribution to GDP concurrently rose to 2.7%, against 2.3% during the first three quarters of 2014.

Public Spending

Jordan’s public finances have come under significant pressure in recent years, with the kingdom’s debt-to-GDP ratio more than doubling between 2011 and 2015, while external public debt nearly tripled from 2008 to 2014. The IMF has encouraged Jordan to set limits on capital expenditure. The majority of public expenditure continues to be spent on salaries – currently at more than 60% of total spending. Jordan’s public finances remained relatively weak in 2015, and though the oil price slump and a series of fuel subsidy reforms have reduced government spending, domestic tax and foreign grant revenue also contracted. Bank Audi estimates that government expenditure fell by 6.1% in 2015, accounting for 27.2% of GDP, which highlights ongoing efforts to improve fiscal rationalisation. However, government revenue simultaneously declined by 14.6% to comprise 23.1% of GDP, with the kingdom’s public debt-to-GDP ratio crossing the 90% threshold in 2015, at $34.7bn. As part of the government’s new IMF extended fund facility programme, one key aim is to reduce this ratio to 77% within the next three years.

Nepco

A critical factor in the kingdom’s recent debt boom is sovereign debt incurred by the National Electric Power Company (NEPCO), which has risen sharply in the years since 2011. Prior to then, Jordan imported natural gas, which met 87% of its electricity demand, from Egypt through a pipeline running across the Sinai Peninsula. Attacks on the pipeline began in 2011, and repairs were slow to come, with Egypt’s contribution to Jordan’s electricity supply falling to 14% by 2012, and imports halted as of 2014. This forced NEPCO to begin making expensive energy imports, with its contribution to the kingdom’s deficit reaching $1.36bn in 2013, more than 10% of the total budget, before falling to $783m in 2014. NEPCO’s deficit is forecast to ease to $530m in 2016 as the IMF and the Ministry of Finance roll out a new fiscal reform programme, supported by falling oil prices and austerity measures that boosted electricity tariffs by 7.5% for most industries and high-consumption households, although the Carnegie Endowment for International Peace (CEIP) reported in March 2016 that NEPCO still does not charge customers enough to cover its expenses.

Accumulated electricity debt stood at 17.8% of GDP as of January 2016, meaning Jordan’s debt-to-GDP ratio without NEPCO would be just 72% of GDP – below the government’s target of 77% by 2020.

At the same time, CEIP reports that if NEPCO were forced to balance its budget, most of the country would struggle to pay for basic utilities: a household with high usage pays over $200 per month, or 40% of the average family income, during the summer months if they use air conditioning, while low-income Jordanians have virtually free electricity, although just enough to cover lighting, with no heating or cooling.

The government is moving to address these challenges through a host of reforms, including its 10-year economic development plan, Jordan 2025, a new compact aimed at integrating its refugee population and creating thousands of jobs in labour-intensive industries. Perhaps the most significant development is an IMF-supported fiscal reform policy that aims to reduce losses at NEPCO, contain public wage growth and improve the kingdom’s investment climate.

Jordan Compact

In addition to new agreements with the IMF, Jordan is also set to receive a surge of new international assistance aimed at helping it mitigate the challenges of an enormous refugee population, which stood at 1.4m in September 2015, equivalent to 20% of the kingdom’s non-refugee population, according to the UN High Commission for Refugees. With Jordan’s refugee burden standing as one of the highest in the world proportionally, the international community is moving to help the kingdom support the influx of Syrians and Iraqis fleeing neighbouring violence.

In February 2016 Jordanian authorities announced the country had secured $1.7bn in grants and grant equivalents to launch a refugee response plan. According to Jordan’s official news agency, Petra, public officials attending a donor conference in London have secured the funding needed to launch the Jordan Compact and Response Plan (JCRP), with grant funding expected to reach $700m in 2016 alone, while additional pledges will provide a total of $700m over the course of 2017 and 2018, to be used for support programmes including the purchase-for-progress job creation plan. An additional $300m of grants and grant equivalents had already been committed, according to Petra.

Silver Lining

The JCRP, which covers the period between 2016 and 2018, adopts a holistic approach to dealing with refugees which is based on three interlinked pillars. The first seeks to transform the crisis into an opportunity for economic development by attracting investment and boosting trade, particularly through reforms to EU rules of origin regulations, which will in turn create jobs for both Jordanians and Syrians while supporting Syria’s post-conflict economy. The second pillar emphasises rebuilding Jordanian host communities, while the third pillar involves mobilising grants and concessionary financing to support macroeconomic growth, which will dovetail with the kingdom’s existing extended fund facility programme with the IMF.

At the same time, Petra reported that multilateral development banks have said they are open to increasing financing arrangements from current levels of $800m to roughly $1.9bn. Although this will not meet the kingdom’s entire shortfall – the JCRP sets Jordan’s financial needs for supporting its refugee population at $8bn annually between 2016 and 2018 – these commitments represent a step in the right direction in terms of international support for the ongoing crisis.

Eu Rules Of Origin

Another positive outcome from the London Conference occurred when EU and Jordanian officials announced the European Commission was set to relax rule of origin regulations that have constrained outbound Jordanian exports to the EU. The move is expected to help curb rising unemployment of Syrian refugees and Jordanians. The problem of youth unemployment is most pressing, with the unemployment rate reaching as high as 28.8% for those aged 15 to 24-year-old in 2014, according to World Bank data.

Under the previous regulations, products from Jordan entering EU markets must meet a 65% local content requirement, meaning at least 65% of the finished product is manufactured using locally produced materials. This is in contrast to Jordan’s free trade agreements (FTA), with the US and Canada, which set the local content requirement at just 35%.

The EU’s Association Agreement with Jordan was first signed in November 1997 and came into effect in 2002, establishing an FTA between Jordan and the EU over 12 years. An additional agreement on liberalisation of agricultural products entered into force in 2007, followed by a protocol on dispute settlement in July 2011. However, the kingdom’s then-prime minister, Abdullah Ensour, noted in February 2016 that Jordan has not benefitted from these agreements in comparison to its FTA with the US, which boosted exports to the country from $100m annually to $2bn after it came into effect in 2008. Jordanian exports to the EU are valued at just JD250m ($351.6m) annually, according to a February 2016 report in The Jordan Times, compared to JD3.3bn ($4.6bn) for goods imported from the EU.

Jordan Investment Fund Law

With official unemployment reaching 15.8% in the third quarter of 2016, the highest rate in 14 years, the government is eager to invest heavily in infrastructure projects to help create much-needed jobs. The passage of the Jordan Investment Law in the spring of 2016 should serve this purpose well by creating the Jordan Investment Fund (JIF). The law was originally established as a result of an agreement to start a Saudi-Jordanian Coordination Council earlier in the year. The Saudi government pledged to invest billions of dollars in major infrastructure projects in the kingdom.

Specific projects include the national railway system, the electricity interconnectivity project with Saudi Arabia and a real estate project in Matal in Aqaba. The fund’s board of director include the prime minister and several other government ministers. Sovereign funds, local banks and Arab and foreign investment funds can establish shareholding companies and invest in projects listed by the JIF, as well as other projects sanctioned by the fund’s board of directors. Al Mulki has been working to convince local investors to invest and has expressed a wish that the majority of the projects be completed by private companies.

Jordan 2025

The government is pursuing reforms to its investment and business environment. These are encapsulated in Jordan 2025, a 10-year economic development plan unveiled in May 2015, which seeks to support comprehensive and sustainable economic development, in addition to strengthening the kingdom’s social fabric – an important consideration given current levels of youth unemployment. The plan aims to boost GDP growth to 4.9% in 2017, 6.9% in 2021 and 7.5% in 2025 in addition to reducing the budget deficit to zero by 2025 and gradually bringing down overall public debt from more than 90% of GDP in 2015 to 47.4% in 2025 by boosting investment and exports.

Prepared over a 12-month period, in partnership with the private sector, Jordan 2025 includes over 400 policies and procedures to be implemented by the government, private sector and civil society organisations in the coming decade. The plan also re-established the prime minister’s Delivery Unit to ensure the public sector stays on track and on time in implementing proposed initiatives. More recently, King Abdullah II moved to dissolve parliament in May 2016, which saw Ensour replaced as prime minister with Al Mulki, who is expected to rigorously pursue pro-business policies.

Legal Reforms

Recognising the challenges facing potential investors in Jordan, the government is moving to implement a series of new reforms aimed at improving the business climate, boosting SME lending, promoting development of its high-potential ICT sector and delivering a number of new infrastructure projects that offer a host of significant knock-on benefits to broader economic growth.

New measures include the promulgation of Investment Law No. 30/2014, which expanded the number of sectors covered under previous investment promotion regulations to include crafts and services, manufacturing, agriculture, hospitality, health care, entertainment cities, research centres, media production, convention centres and events, air, sea and rail transportation, distribution, and distribution and extraction of water, gas and oil derivatives using pipelines.

Within these sectors, any materials, equipment or items needed to carry out the specific activity will be automatically exempt from any Customs fees and sales taxes. The Investment Law also established an investment window, which works as a one-stop-shop for investors and should help to cut down on bureaucracy and unnecessary paperwork.

The Jordan Investment Commission unites all investment-related institutions under one umbrella, which should allow for projects to be streamlined and reduce waiting times. According to the law, all requests for new investments should be processed within 30 days. This change is intended to encourage investors to move forward with projects that in the past could have been delayed by inefficiencies in the system.

The government also unveiled its new Public-Private Partnerships Law No. 31/2014, which aims to boost private sector participation in major infrastructure projects — a potentially important consideration given that the kingdom is currently developing the region’s first nuclear reactor, seeking to add thousands of megawatts of renewable-generated electricity to its national grid and working to find financing for its flagship Red Sea-Dead Sea freshwater and hydroelectric project, which will provide much-needed drinking water to northern communities with large refugee populations.

Sme Support

SME lending is also expected to rise as the government intensifies its focuses on supporting small businesses, which comprise 98% of all companies in operation in the kingdom. The CBJ announced in August 2015 that it has made JD1bn ($1.4bn) in credit available to SME lending programmes in recent years. However, the European Bank for Reconstruction and Development reported in 2015 that nearly 70% of SMEs surveyed in Jordan are classified as credit-constrained. The CEO of Arab Bank, Nemeh Sabbagh, told delegates at the 2016 Euromoney conference in Amman that the government is moving to improve the situation through measures including the December 2015 launch of the kingdom’s first credit bureau (see Financial Services chapter), as well as tripling the capital of the Jordan Loan Guarantee Corporation (JLGC), which was established in 1994 to provide export credit and finance guarantees to SMEs. In October 2015 Arab Bank also signed an agreement with Capital Bank under which the JLGC will guarantee SME loans granted by Capital Bank.

Outlook

Despite the ongoing challenges brought on by regional volatility, Jordan’s outlook for 2016 is positive, with the IMF projecting in the October 2016 World Economic Outlook that real GDP growth will reach 2.8%. Growth has been underpinned by low oil prices, rebounding confidence as a result of the JCRP and a relaxation of EU rules of origin regulations. However, a regional slowdown in response to low oil prices is nonetheless expected to impact remittances and foreign investment, while inflation is projected to hit between 1% and 1.5% owing to fuel price stabilisation.

Although ongoing reforms, particularly in the areas of fiscal policy, debt management, energy, credit access and the financial services sector, will be necessary to realise the country’s economic goals, the kingdom is well positioned to build on existing momentum and international partnerships as it moves into 2017.