While other Middle Eastern countries boast of oil, Jordan has the location and a stable political environment compared to its peers in the region.
The fact that the Hashemite Kingdom is one of the region’s most politically stable countries attracts the world’s attention and international investors have come to the country’s aid—so the West and regional powers have long valued their relationship with Jordan.
In June 2018, Jordanians took to the streets in protest against tough subsidy cuts and new taxes, the austerity measures backed by the International Monetary Fund (IMF). The civil unrest culminated in the appointment of Omar Razzaz as the new prime minister replacing Hani al-Mulki, whom protesters accused of ‘increasing prices to burn the country’.
According to a Bloomberg report, with unemployment running at a two-decade high of 18.4 per cent and a third of the population living below the poverty line for at least one quarter of the year, the people of Jordan felt they are suffering because of the failures of successive governments.
By December, the protesters stormed the streets again, chanting, “Our demands are bread, dignity and freedom,” complaining that Prime Minister Omar Razzaz was dragging his feet on promises to jail corrupt officials and businessmen. Jordan has one of the smallest economies in the Middle East and few natural resources.
It has lavished subsidies on its public thanks to the support of its richer Arab allies, however, an unprecedented influx of refugees from Syria, the Israeli occupation of the Palestinian territories and the yearlong closure of border with Iraq strained the country’s already fragile economy hence the attempt to introduce fiscal reforms to realign the economy.
The IMF said that Jordan has preserved macroeconomic stability in a most difficult environment, having weathered a series of severe and highly persistent shocks, including regional conflicts, domestic uncertainty, the hosting of Syrian refugees, the disruption of critical export markets and rising borrowing costs.
An enabling environment
Improved regional stability will enable the growth of exports. In the second half of 2018, the improved security conditions in neighbouring Iraq and Syria allowed for a reopening of Jordan’s border crossings into its neighbours.
A border crossing reopened with Syria in late 2018 and the updating of trade as well as border agreements with Iraq in 2019 following the reopening of the border in 2017 is already helping
Jordan’s exports. According to COFACE, “Iraq has traditionally been a key source of demand for Jordanian goods, accounting for 16.1 per cent of the Kingdom’s total goods exports in 2014 prior to Islamic State’s expansion as a result, we expect Jordanian goods exports to pick up substantially over the quarters ahead.”
Analysts said that Jordanian growth will remain moderate, partly due to the shaky confidence of private sector agents in the face of regional instability and as in the previous year, they expect economic activity to be driven by the mining and tourism sectors.
Similarly, as in the past, banking and insurance activities—which contributed 20 per cent of GDP in 2017—will be the main drivers of growth. In the financial sector, the IMF commended the Jordanian authorities for improving financial sector oversight and supervision, adding that the enactment of long-needed growth-enhancing reforms such as the secured transactions law, the bankruptcy law and the business inspections law are encouraging.
The Hashemite Kingdom’s wealthier circle is strongly backing Prime Minister Razzaz’s commitment to maintain the reform momentum, strengthen growth and reduce public debt. Additionally, the London Initiative on 28 February 2019 helped unlock essential budget grants and concessional financing to support the authorities’ reform programme.
Jordan’s external financing flexibility is a rating strength, underpinned by strong relations with the international donor community, multilateral organisations, and bilateral allies, including the US and partners in the GCC, said Fitch Ratings.
At the London Initiative, Japan promised to provide $730 million over the next five years, while France promised EUR 1 billion ($1.1 billion) between 2019 and 2022. The host government also chipped in, with UK ministers announcing several different programmes, the largest of which was the underwriting of a $250 million soft loan via the World Bank.
Fitch Solutions said that the ‘London Initiative’ conference provided the new government with a valuable opportunity to demonstrate to both development partners and investors its commitment to accelerate economic reforms.
The IMF stated that following on from that conference, the Jordanian authorities have received additional financing commitments of about $5 billion—which are critical in both supporting reform efforts and funding the programme.
The then British Prime Minister Theresa May said that a stable Jordan is a bulwark against the spreading of terrorist groups taking root and also strengthens the border security of neighbouring countries, that is why collective support for the country is so crucial.
In May 2019, the IMF completed the second review of Jordan’s economic performance under the 2016 extended arrangement under the extended fund facility, enabling the disbursement of SDR 120.085 million ($166.4 million), bringing total disbursements under the programme to SDR 223.015 million ($309 million). Additionally, Jordan’s wealthier GCC allies—Saudi Arabia, the UAE, Kuwait and Qatar—pledged a cumulative $3.5 billion in aid over the next five years, part of which will likely be channelled towards capital projects. According to the Saudi Press Agency, the package also includes guarantees to the World Bank and annual support for the budget of the Jordanian Government for five years.
The World Bank also extended $500 million in concessional financing, Bloomberg reported. The funds consist of a $111 million grant from the Global Concessional Financing Facility and a $389 million non-concessional portion with a final maturity of 35 years. Similarly, the World Bank further agreed to offer Jordan $1.2 billion loan to help reschedule its debts and improve investment in the public and private sectors, according to Jordan News Agency.
The European Investment Bank (EIB) is also weighing plans to invest EUR 850 million in Jordanian businesses. While the US committed to providing economic and military aid of at least $1.275 billion annually over five years, representing a 28 per cent increase from 2017 and the first five-year MOU with Jordan.
In March 2018, the US Congress also weighed in by approving aid of $1.52 billion, which is $250 million higher than the MOU amount—demonstrating the US’ strong commitment to Jordan.
The Saudi Jordanian Investment Fund signed an MoU with the Aqaba Special Economic Zone Authority to establish, develop and manage a railway connecting Aqaba, on the Red Sea to a future dry port in the Ma’an governorate, as Saudi Arabia is bolstering efforts to shore up the economy of a fellow Arab monarchy with a JOD 500 million ($705 million) joint investment in Jordan.
The IMF said that Jordan’s fiscal reforms are crucial to preserve macroeconomic and external stability as well as placing public finances on a sounder foundation while lessening the risks to debt sustainability.
The Hashemite Kingdom delayed several key fiscal reforms, however, the IMF stated that recent amendments to the income-tax law are encouraging and will be key in helping Jordan secure a fairer and more sustainable fiscal framework.
Jordan implemented its fiscal reforms under the terms of the IMF 2016 extended fund facility and Lloyds Bank lauded the authorities for the fiscal consolidation policies that subsequently reduced the budget balance to a deficit of 0.9 per cent of GDP in 2018, from 1.3 per cent in 2017.
The Kingdom is one of the few countries in the Middle East whose economy is not dependent on natural resources due to the scarcity of hydrocarbon and water, nevertheless, it is also one of the most committed to fiscal reforms within its region having taken steps to privatise the economy, introduce tax reforms as well as opening up the banking sector, said Fitch Solutions.
Moody’s expects Jordan’s (B1 stable) credit profile to gradually become more resilient with the resumption of fiscal consolidation this year and proposed structural reforms. The IMF projected the country’s GDP growth to gradually increase to 2.2 per cent in 2019 and 2.6 per cent over the medium term.
This export-led recovery hinges on the restoration of macroeconomic stability, a supportive external environment including official support as signalled in the London Initiative as well as lower cost of generating energy and stable international oil prices. Fitch also expects Jordan’s (BB- stable) growth to improve but remain moderate, at 2.3 per cent in 2019-2020, given fiscal constraints and gradual improvement in trading and investment conditions in the region.
The financial sector
Moody’s said that it expects the Central Bank of Jordan (CBJ) to further lower the main interest rate in the next 12-18 months and lower policy rates will lead to lower lending rates, which will relieve some negative pressure on banks’ asset quality by supporting economic activity, loan growth and borrowers’ loan repayment capacity.
A looser monetary policy and lower lending rates will support economic growth and help Jordan’s economic recovery. The rating agency expects the asset quality benefits of rate cuts to outweigh the negative pressure on banks’ lending margins.
Similarly, Fitch said that while the availability of external financing has helped the central bank to retain a significant stock of international reserves despite persistent current account, Jordan’s net external debt is rising. CBJ’s reserves fell in 2018 but remained robust at 7.1 months of current external payments, backing the dinar’s peg to the US dollar.
According to Fitch, the current account will average 6.3 per cent of GDP in 20192020 and for gross external financing needs of 15-16 per cent of GDP. Despite a prolonged economic slowdown, capital adequacy at 17.2 per cent is well above the regulatory minimum and non-performing loans have declined.
In the event of rising credit risk, the Jordanian central bank has a broad range of potential tools at its disposal such as risk-weight requirements and concrete limits on loan-to-value and debt-toincome ratios, said the IMF.
The authorities issued Basel III regulations on capital adequacy, including for domestically systemically important banks (DSIB) and on liquidity requirements. The Jordanian government has also been working with banks to ensure a smooth transition to IFRS9 accounting standards, however, it is expected to have a modest impact on capital ratios.
According to the IMF, financial inclusion indicators suggest a sizable payoff from reforms that facilitate access to finance, promote innovation and enhance financial literacy, particularly for SMEs.
The government published a financial inclusion strategy (benchmark) to enhance the quality, access and use of financial services in Jordan, including improving SMEs’ access to finance, developing credit bureau and payment system as well as enhancing digital financial services and improving access to microfinance. Under the administration of Prime Minister Razzaz, Jordan's economic outlook shows renewed momentum despite persistent challenges.
The country’s economy has survived years of instability at its doorstep such as wars in Iraq and Syria and a prolonged conflict in the Israeli-occupied West Bank. The instability worsened the economic environment of the country that is already poor in resources and hosts close to over one million Syrian refugees.
However, the administration of Prime Minister Razzaz has been negotiating with major donors and the World Bank for a while to secure new concessionary loans, grants and guarantees to repay a maturing debt to reduce high debt servicing that weighed heavily on its $13 billion budget. The economy is expected to recover steadily in the coming years helped by a pickup in exports and the reopening of Jordan’s border crossings with its war-torn neighbours.