Despite facing considerable external and domestic headwinds, Jordan’s economy remains resilient, and growth projections for 2015 are positive, with the World Bank forecasting real GDP growth to come in at 2.5%. Over the past five years, the kingdom has been saddled by a rising energy bill and existing challenges have been exacerbated by regional instability. Falling oil prices in the latter half of 2014 and into 2015, which were expected to significantly improve the situation, were offset to a degree by the drop in tourist numbers and the decline in Jordan’s exports to neighbouring countries after key trade routes were lost. The number of overnight visitors to Jordan decreased in the first three months of 2015 by 9.5% compared to the same period in 2014, while exports to Arab countries dropped by an average of 14.4% in the first five months of 2015, with the largest drop in exports to Syria (-37%) and Iraq (-31%).
Postive Trajectory
However, Jordan’s position as a stronghold of regional stability and security has had a positive impact on foreign reserves, which reached $14.97bn by the end of July 2015, marking the highest level in the kingdom’s history, despite the growing pressure of new refugee arrivals. Although GDP growth slowed in 2010, with the kingdom’s economy performing below its pre-global economic crisis highs, an IMF-led reform programme initiated in 2012 and the kingdom’s commitment to economic reform and diversification of its resources have seen fiscal and current account deficits narrow considerably in recent years. Domestic growth was robust in 2014, at 3.1% – the highest rate in all oil-importing MENA nations. This was driven by rising exports and a strong performance in the mining and agriculture sectors. Moreover, ongoing economic liberalisation has also improved growth prospects, with private sector power projects set to reduce the energy bill.
Legal and fiscal reforms have also brightened mid-term economic projections. A new income tax law should significantly bolster domestic revenues, and the kingdom plans to eliminate costly electricity subsidies in the medium term, freeing up fiscal space. A new public-private partnership (PPP) law and a 10-year economic strategy are also set to support growth, as the government targets billions in foreign investment, offering lucrative opportunities.
These reform measures provided the necessary platform for the kingdom to relaunch its economy during the MENA World Economic Forum that was hosted at the Dead Sea in May 2015. Almost $7bn worth of projects were signed during the event and nearly $20bn worth of new investment opportunities that would create over 180,000 jobs by 2020 were announced with the aim of unleashing the kingdom’s potential and realising its full economic capabilities. New initiatives include programmes such as Jordan Relaunched, which seeks to reverse enormous financial pressures brought on by recent regional turmoil.
Reforms & Recovery
Jordan has recorded sharp economic gains since the turn of the century. According to figures from the IMF, the country’s GDP rose from $8.5bn in 2000 to $35.8bn in 2014, while GDP per capita increased from $1742 to $5357 over the same period. However, the kingdom was hit hard by the global financial crisis and recent regional conflicts, and real annual GDP growth declined from an average of 7.4% between 2005 and 2009 to 2.3% in 2010 and remained below 3% until year-end 2013.
Interim recovery has been steady though, particularly after Jordan implemented a series of reforms under its agreement with the IMF. As part of the three-year, $2bn stand-by arrangement, which was completed by the end of July 2015, the fund has advocated for fiscal consolidation to reduce Jordan’s twin deficits, as well as tax and subsidy reforms. Noticeable improvements have since been made; GDP growth is expected to rise to 3.5% in 2015 (see analysis), and in November 2014 Standard & Poor’s revised its credit outlook from negative to stable, affirming its long-term and short-term foreign and local currency sovereign ratings at “BB-/B”. The agency expects Jordan’s fiscal and external balances to stabilise in 2015 and improve moderately over the medium term, while falling oil prices, subsidy reforms and energy diversification will further improve its economic standing, especially if regional turmoil starts to recede.
Eye Of The Storm
Escalating tensions in Iraq, Syria and the Gaza Strip have weighed heavily on the economy in recent years, driving up inflation, expenditures and, perhaps most significantly, the energy import bill, in addition to dampening regional exports. As Jordan relies on imports for 96-97% of its energy needs, supply interruptions to the Arab Gas Pipeline from Egypt have proven costly. Forced to turn to expensive diesel and heavy fuel oil imports to meet the shortfall, Jordan’s energy import bill rose to JD4.5bn ($6.33bn) in 2014, the equivalent of 17.8% of GDP or around 85% of the country’s total exports by value.
Egypt halted shipments of natural gas in mid-2013, and no alternative supply route has been found. Plans to construct an $18bn, 1700-km crude oil pipeline to Iraq were suspended in 2014, and exports to both it and Syria have fallen. The Ministry of Industry and Trade reported that exports to Iraq fell by 31.5% year-on-year (y-o-y) in the first five months of 2015, from JD386.1m ($543.28m) to JD264.3m ($371.9m), while a UN Development Programme report from July 2014 estimated that the fiscal impact of the Syrian crisis on Jordan’s education, health, electricity and water sectors exceeded $850m in 2012 and 2013 alone, with agricultural exports to Syria falling by 25%.
Refugees
A rising tide of refugees has also put upwards pressure on certain inflation markers in recent years. Bank Audi reported that the housing category of the consumer price index rose by 3.5% on average in 2014, driven by a 6.3% increase in housing and related expenses, as rents rose due to refugee demand. Meanwhile, the clothing and footwear category jumped 9.9% over the year, while goods and services were up 2.3% on a 6.9% increase in medical care.
Significant pressure was also exerted on the kingdom’s educational and health sectors due to an influx in refugees. A total of 129,058 Syrian refugee students are registered in public schools and refugee camp schools for the 2014/15 academic year, with an additional 30,000 Syrian refugee students eligible for education still on waiting lists for enrolment. Countrywide, 46% of schools are now overcrowded, up from 36% in 2012/13. Moreover, continuous arrival of refugees in Jordan continues to place ever-increasing demands on the national health system.
At the same time, the kingdom’s humanitarian network is experiencing significant constraints in administering services and a lack of funding. The World Food Programme, for example, has already slashed coupons to Syrian refugees in Jordan twice, from $27 to $18 a month, and is expected to cut that one more time if no additional funding can be secured. The government formulated a National Resilience Plan to mitigate the impact on its citizens, 14% of whom live below the national poverty line, but the plan hinges on international funding, which has been unreliable in recent years. The UN High Commission for Refugees reported that as of July 2014 it had received just 33% of its annual requirements for the Syrian crisis, leaving a $2.5bn shortfall. In addition, the Jordan Response Plan for 2015 requested $2.99bn, of which only $1.02bn, or 34%, has been pledged or committed.
Total international foreign aid commitments to Jordan, which reached $1.74bn in the first 11 months of 2014, are expected to fall to JD1.2bn ($1.7bn) in 2015, though this government forecast came ahead of the February 2015 announcement of US plans to increase annual aid to Jordan from $660m in 2014 to $1bn in 2015-17. The labour market has also been affected, particularly among less skilled workers, as Syrian refugees willing to accept lower wages and longer working hours are crowding out locals.
Silver Lining
Jordan has seen some benefits, however measured, from the sharp rise in new residents and continues to receive financial support. Even as Nasser Judeh, deputy prime minister and minister of foreign affairs and expatriate affairs, warned that Jordan was nearing “host-country fatigue” in October 2014, the kingdom’s stable position in a tumultuous neighbourhood has also offered some advantages. An influx of skilled Syrian labour is one of them, and the establishment of new factories and housing in border regions has aided some local economies. Capital inflows from Syria, Iraq and the Palestinian Territories, meanwhile, saw foreign reserves rise nearly 18% from January to October 2014 to reach a record $14.4bn, or 7.5 months of import cover.
The kingdom has also benefitted from a $5bn grant unveiled by the GCC in 2011, of which only $3.75bn was dispersed in the end, with authorities reporting that the country had spent 92% of the money allocated for 2014, or JD650m ($914.6m). Another JD773m ($1.1bn) of the grant was put towards projects from 2012 to 2014, including the Azraq-Omari road and an expansion of the King Hussein Cancer Centre. Ibrahim Saif, the former minister of planning and international cooperation, reported that JD500.6m ($704.4m) has been allocated to fund 75 new projects in 2015.
Positive Indicators
The adjustment in oil prices has brightened the near-term forecast for economic growth, with the kingdom set to save over $1bn on fuel; the past year has seen oil prices weaken from over $100 per barrel in mid-2014 to less than $50 in January 2015, before rebounding to around $50 per barrel as of late 2015. Despite the rising refugee burden, inflation was contained in 2014 thanks to declining oil and food prices, and higher foreign reserves.
Although external factors have played a more prominent role in recent years, domestic growth remains strong, with the Department of Statistics (DoS) reporting improvements in all major sectors in 2014. According to DoS figures, financial services and manufacturing contributed 24.6% and 23.2% of GDP derived from domestic industry, respectively, in 2014. Manufacturing activities expanded by 4.4% to reach JD4.25bn ($5.98bn) in 2014, while financial services grew by 7.4% to JD4.5bn ($6.3bn), led by 9.3% growth in real estate activities, which were valued at $2bn.
Meanwhile, transport, storage and communications accounted for 16.2% of GDP derived from domestic industry, and are expected to see steady growth in 2015 as a result of the expansion at Queen Alia International Airport (QAIA) and the roll-out of new 4G LTE broadband services. According to Bank Audi, international arrivals at QAIA were already up 9% y-o-y in 2014, at 7.1m, with long-term sector growth to be supported by new PPPs aimed at delivering major infrastructure projects.
Debt Challenge
With total public debt expanding to $29bn by the end of 2014, for a debt-to-GDP ratio of 80.8%, according to Bank Audi, reducing the twin current account and fiscal deficits remains a key priority for the government. The year 2014 saw steady progress on both fronts; IMF figures show the fiscal deficit declining from 11.1% of GDP in 2013 to a projected 9.1% in 2014, with the government introducing a number of fiscal reforms in recent years, including eliminating fuel subsidies in 2012 and executing plans to remove costly electricity subsidies by 2017.
Public finances were marked in 2014 by reduced fiscal imbalances despite pressures arising from the refugee population, with domestic revenues up 18% y-o-y in the first 10 months of 2014 at JD4.88bn ($6.87bn). According to the IMF, revenues and grants totalled a projected 29.9% of GDP in 2014, up from 24.1% in 2013, while expenditures also increased from 35.3% of GDP to an estimated 39%.
Trade
The kingdom’s current account deficit also narrowed in 2014, to a projected 7.3% of GDP, down from 15.2% in 2012 and 10.3% in 2013, in large part due to a falling import bill, decreased government expenditure and steady domestic growth. Bank Audi expects this to narrow further in 2015, with low oil prices continuing to trim the overall balance of payments deficit to 5.9% of GDP in 2015.
Export growth will also underpin efforts to reduce the trade deficit, with the DoS reporting a 7.5% y-o-y increase in national exports in 2014 to JD5.2bn ($7.3bn), supported by increases in crude phosphate, agricultural and textile exports. The Ministry of Agriculture reported that fruit and vegetable exports were up 12% y-o-y, with the 888,000 tonnes of produce exported in 2014 expected to exceed 1m tonnes in 2015. The strongest growth was recorded in exports of clothing (12.1%), crude phosphate (24.7%) and fertilisers (28.8%). Despite these promising figures, rising fuel and machinery imports saw the nation’s trade deficit increase by 1.4% in 2014 to reach JD10.2bn ($14.4bn). In addition, the complete suspension of the main trade route with Iraq in 2015 is expected to increase the trade deficit significantly.
Tax Reforms
Moving forward, tax reforms present the most significant opportunity to balance the books. Jordan levies a 16% general sales tax on a wide variety of consumer products, including some basic commodities, and prior to 2014 a 7% general income tax was levied on all individual income up to JD12,000 ($16,885) and 14% on taxable amounts of more than JD12,000 ($16,885). However, according to the Phenix Centre for Economic and Informatics Studies, tax avoidance remains a problem, with income tax revenues totalling less than 4% of GDP, short of the internationally recommended minimum of 8%. According to the IMF, less than 3% of Jordanians pay income tax.
The long-awaited Income Tax Law No. 34 of 2014 became effective January 1, 2015. Notable changes under the law include an increase in the withholding tax for non-resident service providers from 7% to 10%, as well as the abolishment of a 5% withholding tax on real estate rent. With a JD12,000 ($16,885) tax-free allowance for individuals and JD24,000 ($33,770) for households in place and an additional JD4000 ($5628) in exemptions (for expenses related to health care, education, interest on loans, etc) – the latter being perhaps more relevant as most workers are married – the law taxes individual income at 7% for the first JD10,000 ($14,071); 14% for income of between JD10,000 ($14,071) and JD20,000 ($28,142); and 20% for any income above JD20,000 ($28,142).
Tapping FDI
New private sector investment should also help to drive growth, with the government launching a host of new initiatives aimed at increasing foreign direct investment (FDI) and reducing barriers to market entry. Jordan rose four spots in the World Economic Forum’s “Global Competitiveness Report 2014-15”, ranking 64th out of 144 countries, with the forum highlighting the economic benefits and strong regional advantage of its well-educated population and lively domestic markets.
According to the report, Jordan could further capitalise on its geographic proximity to the GCC – historically its largest source of FDI. Moreover, recent reforms have created the necessary fiscal space to dedicate more resources to productivity advances. The forum recommended boosting labour efficiency and further opening the economy to international trade and investment as the best strategy for long-term growth, noting that both tariff and non-tariff barriers remain problematic.
Investment Rising
Jordan offers a number of benefits to investors, including a liberalised trade system and full ownership of investment, which is permitted in most sectors apart from a handful of industries including news publications, stone quarries, construction industry supplies and land transport. Special economic areas, including Qualifying Industrial Zones and the Aqaba Special Economic Zone, offer tax incentives for foreign investors, while PPP investors are granted a tax exemption on income generated from the export of goods or services, and free repatriation of capital, profits and salaries.
Jordan has also undergone an accelerated privatisation programme, with the majority of major government assets, including utilities companies, Royal Jordanian Airlines and management of QAIA, already privatised. This has seen billions in investment pour in since 2004, particularly from Gulf countries.
Concentrated in the real estate, utilities, financial services and tourism sectors, foreign investment has acted as a major driver of economic activity in the kingdom. However, the impact of the global financial crisis of 2007-08 and the ongoing instability in the region, combined with the recent crises in Syria and Iraq, have affected investors’ appetite for risk, causing FDI to slow in recent years; inflows totalled just under $1.8bn in 2014, according to figures from the UN Conference on Trade and Development, compared to an average of $2.7bn between 2005 and 2007. This was also reflected in the drop in FDI in the first quarter of 2015, which fell by 5.5% to reach JD179.4m ($252.43m), as compared to JD189.9m ($267.21m) during the same period the previous year.
Doing Business
Jordan slid one spot on the World Bank’s “Doing Business 2015” report, to 117th out of 189 countries. This was due to declines in categories such as starting a business (from 82nd to 86th), getting electricity (41st to 44th) and protecting minority investors (143rd to 154th). The government has established a one-stop shop for foreign investors, which aims to reduce the time needed to get a business permit, but its impact has not yet been fully felt. “The procedures are not fully integrated, and it can be a headache for investors, although we anticipate the new single-window system mandated in the government’s Investment Law will provide better services,” Ruba Jaradat, CEO of Jordan Strategy Forum, told OBG.
However, economic liberalisation continues, with policies like the National Energy Strategy ( 2007-20) targeting significant private investment in the national power grid, while the nation’s PPP law, which went into effect in November 2014, will provide a framework for large-scale private investments and reduce the time it takes to establish new PPPs. In addition, the government has also recently expanded the authority of the head of the Jordan Investment Commission to ensure it has the ability to take prompt decisions to facilitate investment.
Jordan 2025
The much-anticipated economic development plan, Jordan 2025, was made public in May 2015 and emphasises private sector participation in economic development, as well as social services and reforms to the public sector. The plan notably outlines two different growth scenarios, one based on 4.8% annual growth in the coming decade called the “base scenario”; the other on 7.5% growth by 2025 known as the “target scenario”.
The strategy is the result of a public letter written by King Abdullah II ibn Al Hussein to the prime minister in early 2014, mandating the creation of a 10-year economic development plan. Formulating the strategy has involved intensive collaboration between public and private stakeholders, with the first national conference for its development hosted in September 2014. The strategy will tackle several key areas, including health, education and employment, and public sector performance. It will be implemented in three stages; the first and second will run for three years each, while the third stage will be executed in the four years to 2025.
Outlook
Although external challenges have had a significant and serious impact on the economy, reform initiatives, diversification of energy sources, falling oil prices, and steady growth in industry and services have enabled the kingdom to remain resilient and successfully navigate international crises, despite the negative effects they have had on the budget. With foreign investment and assistance on the rise, Jordan’s liberalised economy and stable political environment should underpin healthy growth.
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