Jordan's national strategy to reinvigorate economic growth

Macroeconomic growth hit a 25-year low in 2016 as ongoing regional volatility continued to constrain trade, exports and investment. The Syrian refugee crisis has exacerbated existing pressures on fiscal stability and social infrastructure, while public debt has been on an upward trend as the government attempts to cover the costs associated with hosting over 657,000 refugees.

However, 2016 may have also marked a turning point, with authorities making significant progress in implementing an IMF-backed reform agenda, which enabled Jordan to reduce its budget deficit from 3.5% of GDP in 2015 to 2.6% in 2017, and reduce or eliminate costly fuel, electricity and tax subsidies.

The government is now turning its attention to green and digital expansion as it moves forward on a new mid-term economic development agenda, with the aim of improving the business climate and attracting new investment to support double-digit growth in the manufacturing, electricity, water, transportation, ICT and construction sectors. Combined with ongoing fiscal reforms, this new strategy is expected to double GDP expansion by 2022, pushing the kingdom to become a regional leader in post-oil economic development in the face of prolonged geopolitical and domestic issues.

Services-Driven

Averaging 55% of GDP between 2007 and 2016, the services sector was expected to continue being the principal driver of growth in 2017. Indeed, data from the Department of Statistics (DoS) showed expansion in the contribution of key tertiary industries – including wholesale and retail trade; restaurants and hotels; transport; storage and communications; finance, insurance and business services; real estate; and community, social and personal services – which together recorded JD4.5bn ($6.4bn) in value added over the first three quarters of 2017, compared to JD4.3bn ($6.1bn) over the same period of 2016.

The industrial sector was also expected to contribute handsomely to growth, having accounted for roughly 26% of GDP on average since 2007. The sector, broken down into agriculture, hunting, forestry and fishing; mining and quarrying; manufacturing; electricity and water; and construction, registered value added of JD2.43bn ($3.48bn) in the first three quarters of 2017, up from JD2.38bn ($3.43bn) the previous year.

Growth Story

The country experienced robust economic advancement in the early 2000s, with GDP growth averaging 6.5% annually between 2000 and 2009. However, recent turmoil in the region has kept macroeconomic expansion well below pre-determined targets outlined in the Jordan 2025 (also known as Vision 2025) programme. Unveiled in March 2015 the long-term economic strategy forecast GDP growth would reach 4.9% in 2017, 6.9% in 2021 and 7.5% in 2025. However, according to the Ministry of Finance (MoF), real GDP growth of 2.2% was registered in 2017 – less than half the targeted level – with an uptick to 2.5% forecast by the IMF for 2018.

While financial services have been on a steady upwards trajectory in recent years (see Financial Services chapter), trade activity and government services are slipping in the wake of multiple external headwinds, contributing to sluggish economic expansion and prompting rounds of fiscal, trade and tax reforms.

External Headwings

While the 2008 global financial crisis and the Arab Spring uprisings have both played a role in dampening the economy, the Syrian crisis has had perhaps the most profound impact by affecting trade, social infrastructure and the kingdom’s fiscal balance, prompting a series of internationally supported interventions and reforms.

The conflict has resulted in more than 11m Syrian refugees leaving their homes between 2011 and early 2018, with Jordan hosting a disproportionately large number of displaced people. About 657,000 Syrian refugees were registered in the kingdom as of February 2018, though the government estimates there are 1.3m Syrian refugees in total, with the majority living in the northern urban areas of Amman, Mafraq and Irbid.

In February 2016 the World Bank estimated that the cost of hosting refugees amounted to more than $2.5bn per year, which equates to 6% of GDP or 25% of annual government revenues. Furthermore, the bank reported that each refugee costs the kingdom an estimated $3750 per year.

Trade Impact

The regional conflict forced the authorities to close borders to Syria and Iraq in June 2016, leading to a 32% decline in exports to Iraq and a 64% fall in those to Syria in 2016, according to the World Bank. In August 2017 the main border crossing with Iraq was reopened after the Iraqi armed forces gained control of key areas of the country, although, as of March 2018, trucks crossing the frontier were restricted by unloading procedures.

As inflation picked up in 2016 and 2017, exports to the Gulf countries decreased by 12.9% year-on-year (y-o-y) in the first eight months of 2017. The economic slowdown in Saudi Arabia, Jordan’s second-largest export market, was responsible for almost three-quarters of this contraction. Exports were expected to recover in the latter half of 2017 following the UAE and Kuwait lifting their temporary ban on agricultural imports from Jordan in July and September, respectively. However, according to the DoS, total exports to the Gulf recorded a decline from JD1.09bn ($1.54bn) in 2016 to JD1.02bn ($1.44bn) in 2017.

Primary commodities also faced challenges in 2016, as lower international potash prices saw exports from Jordan fall by 30.6%, while phosphate exports declined by 17%. Indeed, the value of total trade leaving the country dipped by 8.4%, according to the DoS, while the IMF found that freight-on-board exports had been on a downward trend since 2014, sinking from $8.4bn that year to $7.8bn in 2015 and $7.5bn in 2016.

DoS data for the January to November period of 2017 showed total commodity exports fall by 1.3% y-o-y to JD4.8bn ($6.8bn). Rakan Madi, managing director for Jordan and Iraq at global shipping company Maersk Line, believes an upswing could be facilitated by further streamlining trade activities. ”Customs clearance procedures have seen significant progress in recent years. However, there is still space for automation and digitalisation to ease the process while maintaining a high level of security,” he told OBG.

Hydrocarbons have traditionally played a big part in determining Jordan’s trade balance, and 2017 was no different, with inbound trade of crude oil and its derivatives rising 21.2% y-o-y in the first 11 months to JD2.1bn ($3bn). Despite a narrowing of the trade deficit since 2015, the first 11 months of 2017 saw it rise by 9.7% y-o-y to JD8.3bn ($11.7bn), owing to a 5.4% y-o-y increase in commodity imports to JD13.1bn ($18.5bn).

Macro Picture

In 2016 the current account deficit widened to 9.3% of GDP, against 9.1% in 2015, as the kingdom recorded a 0.8 percentage point decrease in its services account, caused by falling tourism revenues and a 2.7 percentage point decline in current transfers. Although its income account and trade-in-goods deficit improved by 0.4 and 2.9 percentage points, respectively, over the same period, current account losses, driven by a 2.4% contraction in remittances – equal to 0.5% of GDP – offset these gains. In the first nine months of 2017 the current account deficit narrowed to 8.4% of GDP, suggesting a better year-end position than 2016.

With energy import costs increasing and government debt rising, average annual GDP growth slowed to 2.5% between 2010 and 2017. Concurrent rises in public debt exceeded macroeconomic expansion, pushing gross public debt as a percentage of GDP to 95.3% at the end of 2017, against 61% in 2010. Nonetheless, real GDP showed improvement in 2017, hitting JD11.9bn ($16.8bn), which equated to 2.2% growth, up from 2% in 2016. The IMF forecasts this will rise further to 2.5% in 2018. Economic expansion across the MENA region averaged 3.2% in 2016, although this was estimated to have fallen to 1.8% in 2017.

The DoS reported in early 2018 that unemployment increased from 15.3% in 2016 to 18.5% in 2017. According to the “Jordan Economic Monitor Fall 2017” report by the World Bank, labour force participation stood at 39.7%. The labour market as described as “weak”, with vulnerabilities for women and young people.

Social Infrastructure

Regional conflicts have long affected service provision in Jordan. The cost of energy imports to supply the already underserved national grid spiked in 2011 as conflict in Egypt cut supply from a regional pipeline, with the cost of consumed energy amounting to 19.6% of GDP in 2011 and 21.1% in 2012. Primary energy costs peaked at JD4.64bn ($6.6bn) in the same year, with rising energy import costs leading to $1.36bn in net loss at the state-owned National Electric Power Company (NEPCO) in 2013.

More recently, the Syrian crisis has strained utilities and social infrastructure, exacerbating macroeconomic, fiscal and labour market pressures. As a result, water demand has risen by 21% across Jordan and by 40% in its northern governorates, as recorded in late 2016.

In the health and education spheres, the US Agency for International Development (USAID) reported that an estimated annual budget of $532.6m is needed each year for 2016, 2017 and 2018 to improve the health status of refugee host communities. According to UNICEF in early 2018, 85% of Syrian refugee children in Jordan were living in poverty. Slightly more than half of the 657,000 registered Syrian refugees were under the age of 17, with the government reporting in January 2017 that a total of 170,000 Syrian refugee children were enrolled in the formal education system. According to UNICEF, however, this figure was likely closer to 125,000, meaning that approximately 38% of Syrian refugee children were not attending school.

Foreign Intervention

As of March 2018, Jordan hosts around 2.8m refugees, roughly 13% of refugees in the world. The kingdom has played a critical role in maintaining regional stability and the international community remains a partner for Jordan in its response to the Syrian refugee crisis. The key development partners include the IMF, World Bank, UN, EU, USAID, Department for International Development, and the European Bank for Reconstruction and Development.

One of the most important funding commitments was made at a February 2016 conference in London to support the three-year Jordan Response Plan. The plan was designed to mitigate additional burdens caused by the large number of Syrian refugees. Bilateral partners, banks and international donors provided an estimated $1.46bn of soft loans and grants to the kingdom for 2016. In February 2017 Imad Fakhoury, the minister of planning and international cooperation, reported that slightly more than 60%, or $923.6m, of commitments had been received, compared to the realisation of 36% of international pledge commitments made in 2015.

In February 2018 the government continued its efforts concerning the refugee crisis, endorsing the Jordan Response Plan for 2018-20, which will require a budget of about $7.3bn over the three years.

Jordan Compact

One of the most important commitments was made at the February 2016 Supporting Syria and the Region conference in London, where the international community and the Jordan government agreed on the Jordan Compact work permit programme. The compact’s four main components are: economic opportunities, education, macroeconomic stability and the Jordan Response Plan. The Jordan Response Plan is a revolving comprehensive plan designed to mitigate additional burdens caused by the large number of Syrian refugees on the local and national system. Support for the plan reached $1.72bn, or 64.9% of the required $2.65bn in 2017, up from 62% in 2016 and 36% in 2015.

With the goal of creating 200,000 jobs for Syrian refugees, the EU-Jordan Association Council agreed to simplify the rules of origin for trade on July 19, 2016, which would remain in effect through to 2026. It will be applied to exports originating from Jordan that are manufactured in 18 designated development zones, and industrial areas and estates. The majority of Jordanian products will be able to access the EU market, which is expected to create job opportunities due to increased exports and investments. For businesses to benefit from the relaxed rules of origin, they must have at least 15% of Syrians constituting their workforce during the first two years upon signing the agreement, which will be increased to 25% thereafter.

The effort has been criticised, however, for failing to offer quantifiable benefits. The rules of origin agreement only covers 52 categories of products, and SEZs are located well outside of urban centres, which are home to the majority of Syrian refugees. Getting to and from work is also an issue, as the qualifying free zones are not well served by public transportation.

“Factories in these zones must prove that at least 15% of their workforce is composed of Syrians. However, many Syrians are reluctant to obtain a work permit because they are concerned that it will cause them to lose their refugee status, which would then prevent them from seeking asylum in Europe,” Wissam Rabadi, chief of staff for USAID’s Jordan Competitiveness Programme, told OBG. “In addition, many refugees find it more financially rewarding and more flexible to work within the informal sector – in industries such as construction, agriculture and services – compared to working in manufacturing.”

Jordanian exports to the EU are also at a competitive disadvantage due to the longer, more complicated shipping routes and higher transport costs. EU-bound goods can only access the sea via Aqaba, and must then travel through the Suez Canal to reach European ports. As a result, by end of 2017, only 10 Jordanian companies managed to meet the eligibility criteria of the rules of origin scheme, out of which only two companies exported to the EU with a total value of around €1.6m.

As for job creation for Syrians, the Jordan government has introduced several policy reforms to facilitate access of Syrian refugees into the formal labour market, including waiver of work permit fees, flexible work permits in the agriculture and construction industries, and the freedom to move from one sector to the other. By the beginning of 2018, more than 88,000 work permits had been granted to Syrian refugees.

IMF Reforms

Other donor-supported programmes targeting fiscal reforms have been met with more success, although financial consolidation measures – including tax increases – pose a socio-economic risk. In a collaborative effort with the IMF, the government launched an Extended Fund Facility (EFF) programme in August 2016, which included a $723m facility aimed at lowering the country’s debt levels and fiscal imbalance, and enhancing conditions for more inclusive growth. This followed the successful completion of a $2.06bn stand-by arrangement with the IMF between 2012 and 2015. The IMF’s reforms have largely focused on tax and subsidy reforms, and significant progress has been made in reducing the budget deficit and containing public debt, with the former dropping from 3.5% of GDP in 2015 to 2.6% in 2017.

Critically needed energy reforms constituted one of the most important components of the original IMF reform agenda launched in 2012. Government moves to gradually phase out fuel subsidies have played an important role in reducing losses at NEPCO, while the opening of a liquefied natural gas (LNG) import terminal in Aqaba in 2015 has also had a tremendous impact by generating 82% of the country’s electricity in 2016 and encouraging enhanced connectivity in the region.

Ongoing infrastructure developments are set to move this process forward. Construction of the dry port in Ma’an was estimated to cost $38m and will facilitate transport of passengers and commodities from Aqaba. “Now that the Ma’an dry port is under development, the Hejaz railway project linking Aqaba to Ma’an becomes an essential means of enhancing the dry port’s connectivity and enabling it to reach its full potential,” Hussein Krishan, CEO of the Ma’an Development Area, told OBG.

Revenue Generation

As part of its 2016 EFF, the kingdom has committed to generating more revenue in an effort to narrow the fiscal deficit and reduce public debt to 77% of GDP by 2021, although alternate estimates from the Economic Policies Council put its 2017 revenue increase target at JD635m ($895.8m).

In its July 2017 Article IV consultation on Jordan, the IMF projected that government revenue as a percentage of GDP would rise from 22.5% in 2016 to 25% annually between 2017 and 2020, with the government implementing a host of revenue-raising measures in early 2017. These included removing tax exemptions for a larger set of goods and services, including internet and telecoms provision, for which sales tax was raised from 8% to 16%. The state also increased Customs duties on non-essential imported goods by 5%, rolled out fuel price hikes of between 3% and 8%, increased passport fees from JD20 ($28) to JD50 ($71), added new taxes to tobacco products and introduced a 10% tax on carbonated beverages.

Budget

Also under the EFF agreement, authorities have moved to contain current expenditure, with the World Bank reporting that measures introduced in 2017 included a 10% reduction in civil servant salaries over JD2000 ($2820) per month, as well as a JD3500 ($4940) monthly cap on public sector salaries. In its 2018 draft budget, endorsed by the senate in January 2018, the government includes a social safety network worth JD171m ($241.2m) to balance the rising cost of living.

Although spending in the 2017 budget was originally forecast to increase by 7.5% to reach JD8.95bn ($12.6bn), current and capital expenditures were subsequently cut by JD133m ($187.6m), and a further JD204m ($287.8m) in May 2017, with the MoF reporting a JD700m ($987.5m) y-o-y reduction in public expenditure during the first half of 2017. Revenue collection declined by 6.8% over the same period to stand at JD3.45bn ($4.9bn), less than half of the full-year target of JD7.43bn ($10.5bn) (see analysis).

This provides new opportunities for private sector investment, as capital expenditure projects that had their budgets cut in 2017 are slated for advancement under a public-private partnership (PPP) model. In early 2017 the government established the Train the Trainers programme for public investment management to support PPP-backed infrastructure, as envisioned by the kingdom’s most recent five-year economic development strategy (see Construction chapter).

Tax Reforms

With the government falling short of its 2017 collection targets, additional EFF objectives include a more progressive personal income tax reform. Existing income tax thresholds, which are currently more than three times the per capita income, preclude 95% of the population from paying any portion of their income to the government. Moreover, the current sources of tax revenue are highly concentrated: funds from sales tax constituted approximately 70% of overall tax revenues in 2017 (see analysis).

However, as unemployment rose, per capita GDP fell by 3.3% between 2013 and 2017, from $4147 to $4013, and efforts to increase prices and reduce tax subsidies have proven unpopular with the general public. This negative reception might have been compounded by the fact that unemployment has been consistently high throughout the years. Having hit 14.8% in 2005 before falling slightly to 13% in 2015, the overall unemployment rate climbed to 18.5% by the end of 2017, although this trend could be reversed by more consistent and stronger long-term real economic growth.

Nonetheless, tax revenue from salaried employees rose in 2017, from JD118.7m ($167.5m) to JD129.8m ($183.1m). Overall tax revenue increased from JD4.25bn ($6bn) in 2016 to JD4.34 ($6.1bn) the following year. The IMF has recommended that income tax thresholds for individuals and families be reduced, and taxes on other sources of income be increased. IMF-supported legal reforms also include making the personal income tax rate schedule more progressive, unifying corporate income tax rates for non-bank corporations and aligning the unified rate with the maximum personal income tax rate. Tax law reforms were submitted to Parliament in September 2017 and are expected to come into effect in 2018, as stipulated by the EFF agreement.

Corporate Taxes

Expanding corporate tax reforms and cracking down on business tax evasion could also offer a solution. In the banking sector, for example, net profits after taxes rose by 25.9% between 2012 and 2016, to reach JD521.4m ($735.5m), according to the Central Bank of Jordan. Meanwhile, net profit before taxes was JD750.3m ($1.1bn) in 2016, meaning the effective tax rate stood at 30.5%. This represented a fall from 2015, when net profit before taxes and after taxes stood at JD862m ($1.22bn) and JD582m ($821m), respectively, indicating an effective tax rate of 32.48%.

The income tax rate for banks in 2017 was set at 35%. To compare, primary telecoms, electricity generation and distribution, mining, insurance and financial brokerage companies are taxed at 24%; construction contractors, trading and services sectors are subject to a 20% rate; and the industrial sector pays 14%.

At a March 2017 forum hosted by the Jordan Transparency Centre, the MoF’s Income and Sales Tax Department reported that total tax losses in 2016 stood at JD3bn ($4.2bn), with the Amman Chamber of Commerce highlighting that small and medium-sized enterprises (SMEs) are disproportionately affected by market distortions caused by tax evasion. Estimated tax losses are significantly higher than the JD800m ($1.1bn) Jordan earns from sales taxes each year.

Inflation

Jordan’s three-year deflation trend reversed in June 2016, with inflation rising from -2.2% to hit 4.6% in February 2017 as a result of price and tax hikes. The rate then eased to 3.3% by the end of 2017 and is forecast to stabilise at 2.5% by the end of 2018.

The upswing was also the result of an increase in the minimum wage and rising prices for electricity, alcoholic beverages, water sanitation, household furnishings, restaurants and hotels. Inflation averaged 3.8% during the first quarter of 2017, reaching its highest level since the fourth quarter of 2013. This came at a time of increased dollarisation, with the rate reaching 19.5% at the end of March 2017. The share of dollar deposits in the money supply rose by 100 basis points (bps) in December 2016 alone, to hit 18.9%, compared with 17% a year earlier. By the end of March 2017 it reached 19.7%, the highest rate since December 2013.

Lower inflows, exchange rate pressure and dollarisation have affected foreign reserves, which fell by 9% in 2016 to $12.9bn, and by a further 4.9% to stand at $12.3bn at the end of December 2017.

Rate Increases

In an effort to maintain the dinar-to-dollar spread, the central bank raised its key rates by an accumulative 1.25% over a period from mid-December 2016 to July 2017. The most recent raise was implemented in February 2018, with all categories increasing once more by 25 bps.

The hikes, which were intended to support the dinar as an attractive tool for domestic savings, had not achieved their goal by the end of 2017, with the total level of domestic savings in dinar falling from JD25.97bn ($36.6bn) at end-2016 to JD25.64bn ($36.2bn) a year later. Savings in foreign currencies rose by approximately 8% between December 2016 and the same month in 2017, to JD7.6bn ($10.7bn).

Due to rising inflation, real interest rates remain relatively low and SMEs continue to struggle with access to credit, which has weighed on both banking and broader macroeconomic expansion in recent years (see Financial Services chapter).

Growth Plan

In June 2016 the government created the Economic Policies Council, a 15-member body comprising public and private sector stakeholders, operating under the direct supervision of King Abdullah II bin Al Hussein and tasked with formulating new policies to stimulate the economy. Following a council meeting in May 2017, King Abdullah II announced the Jordan Economic Growth Plan (JEGP) 2018-22, which aims to roll out targeted reforms and new fiscal programmes in support of stronger macroeconomic potential, and put the government back on track towards meeting the targets of its Vision 2025 programme. The JEGP addresses 19 policy areas and identifies 95 specific actions that should be taken to tackle challenges. These will be implemented through 85 government projects costing an estimated $8.8bn, as well as 27 private sector investment projects with a combined value of $13.3bn.

With the economy dominated by the public sector, the progress of which remains constrained by fiscal consolidation reforms, productive areas such as manufacturing, electricity and water, transportation, ICT and construction must be stimulated. The key objective of the plan is to attain double-digit growth in each of these sectors by 2022. Sectoral objectives are detailed further in an associated policy, the National Green Growth Strategy, which targets attracting up to $1.3bn in investment and creation of 51,000 new jobs in the green economy over the medium term (see analysis).

Private investment opportunities are woven into the JEGP, with the plan’s infrastructure agenda highlighting PPPs as a preferred model for many new projects, most notably water and electricity. Authorities have already made considerable progress in new solar-power projects using the PPP model, with the World Bank reporting that Jordan now holds a pioneering position in regional renewable energy (see Energy chapter).

Together with the IMF’s EFF programme, the JEGP is set to place the economy on a sustainable upward trajectory, with the goal to double the 2010-16 average GDP growth rate of 2.5% to 5% over its five-year period.

Outlook

Although the government’s reform approach has not been without criticism, Jordan’s economy is expected to remain resilient despite challenging external and domestic environments. While the state will continue to grapple with exigent reforms aimed at improving revenue earnings and reducing debt, the midterm outlook remains positive, with the IMF projecting that real GDP growth at market prices will increase to 2.5% in 2018, 2.9% in 2019 and 3% in 2020. Although these projections are below the targets outlined under the JEGP, if achieved they would leave the kingdom well positioned to expand upon its economic strengths and mitigate financial risks, potentially paving the way for robust post-oil, post-conflict economic development.