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Country Report Jordan

Country Report

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Economic growth is expected to remain subdued at around 3.5-4% in 2014. The budget balance is expected to improve slightly in 2014, but public finances remain too dependent on foreign aid. Meanwhile, Jordan’s position on the conflict in Syria remains uncertain. 

Strengths (+) and weaknesses (-)

(+) Strong international support

Jordan enjoys strong (financial) support from the US, the Gulf Cooperation Council (GCC) and Saudi Arabia in particular.

(-) Weak fiscal position

The low level of fiscal flexibility is caused by high deficits, modest revenue and weak expenditure flexibility.

 (-) High dependence on food and energy imports

The insufficiency of natural resources makes the country highly dependent on import of basic necessities, such as food, water and energy.  

Key developments

1. Economic growth remains subdued

Economic growth is estimated  at a sluggish 3% in 2013. The main reason is the lack of reforms in the Kingdom, which has resulted in continued high unemployment of around 14% in 2013. While economic growth of 3% is a slight improvement from the 2.7% growth in 2012, this is mostly due to a USD 5bn grant from the Gulf Cooperation Council (GCC). This allowed financing for several government projects, which supported gross fixed investment. Exports have been affected by weak demand from large trade partners, such as India and the US, while consumer demand continues to suffer from high unemployment.

Going forward, government capital spending is expected to boost economic growth in 2014 to 3.5-4%, while the contribution of other growth drivers are expected to remain roughly the same. Overall, the economy remains too reliant on the government to be the catalyst for growth. If no economic reforms are implemented, growth will remain subdued. Also, downward risks such as an escalation of the war in Syria and an increase in the tension between Israel and Iran remain significant in our one year forecast period.

Figure 1: Slower economic growth in 2013
Figure 1: Slower economic growth in 2013Source: EIU
Figure 2: Fiscal position
Figure 2: Fiscal positionSource: EIU

2. Government finances structurally depend on foreign aid

The budget deficit, including foreign grants, has shrunk in 13H1, falling to JD 309.2m compared to JD 416.7m in 12H1. The budget deficit is estimated at 10.4% of GDP for the whole year in 2013, which is very high. In the past years, the government has significantly hiked several tax rates, reduced fuel and electricity subsidies despite populist pressures and made significant efforts to broaden the tax base and increase collection efficiency. If this pays off in coming years, the budget deficit is expected to decrease to 8.7% of GDP in 2014.

However, in the longer term these reforms are not sufficient to put government finances on a more sustainable track. This is highlighted by the fact that foreign grants covered nearly 60% of the budget deficit in 2013 (JD 433.2m), indicating that the Jordan’s dependence on external assistance remains high. The high influx of approximately 580,000 Syrian refugees is a worrisome development as it further strains the fiscal position. The Jordanian government mentioned that the foreign assistance received to cope with the refugee influx covered less than 30% of the costs and was nowhere near the amount pledged. Jordan would need a further USD 850m in aid. If the pledged aid is not fully received, this will further pressure public finances.   

3. Jordan’s position on the Syrian conflict remains unspoken

In the past year, the Jordanian government has been extremely sensitive to any suggestions that it is becoming directly involved in the war in Syria. It had been attempting to maintain strict neutrality, but its regional Gulf Arab allies have placed political and financial pressure on Jordan to take a more active stance in support of the rebels. Rumour has it – but this is denied by the Jordanian government - that the CIA and US military, along with Jordanian forces, are engaged in training Syrian rebels in Jordan. Also, Jordan’s foreign minister Nasser Judeh explained in a press conference that Jordan does not interfere in the internal affairs of other countries. However, this press conference came just after a meeting of the friends of Ammam, which is a grouping of countries and international bodies aimed at brokering peace in Syria. This places Jordan firmly in the anti-regime camp, as the US, UK and Gulf Arab foreign ministers discussed that there would be no place for the current Syrian president, Bashar al‑Assad, in post-conflict Syria. Also, Mr. Judeh revealed that Jordan has asked for the placement of US Patriot missiles in the north of the country to protect against any possible missile attack from Syria and about 700 US troops are stationed in Jordan. While the government has downplayed the importance of US troops in Jordan, many Jordanians are concerned that this could be another step towards greater involvement in the war in Syria. Overall, it appears that Jordan supports the rebels in Syria, but has never explicitly stated its disapproval of the Assad regime, as the country fears any move in a direction which heightens the risk of Syrian attacks on Jordan. We believe Jordan’s foreign policy will continue to pursue neutrality, as it does not want to engage more in the conflict as Lebanon does. However, given Jordan’s small geopolitical clout and dependence on international donor aid, it is likely to succumb to the pressure of its international allies to implicitly support the rebels.

Factsheet of Jordan
Factsheet of JordanSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Jordan has a population of only 7.2 million and more than half of the total population is of Palestinian origin. Some have become Jordanian nationals, but still almost 2 million are registered as non-Jordanian Palestinian refugees. Jordan’s estimated GDP of USD 34bn in 2013 is among the smallest in the Middle East. There are insufficient supplies of water and the country has no oil resources and other natural resources, apart from potash and phosphates. Currently, the authorities are exploring nuclear power generation to prevent a worsening of the energy shortfalls in the long run. Social and economic challenges, including chronic high rates of poverty, unemployment, vulnerability to drought and shortfalls in infrastructure, typify Jordan as a developing country. Moreover, the government and economy have been highly reliant on foreign aid and more recently increasingly on foreign direct investment.

Power in Jordan is expected to remain firmly in the hands of the broadly respected king, Abdullah II, who will also retain the loyal support of the army and the security services. Since 1999, King Abdullah has strongly supported significant economic reforms, such as freer foreign trade, privatizations and cuts on fuel and food subsidies. This has made the country more attractive for foreign investors over the past decade. But with per capita income (adjusted for differences in price levels) at only 40% of world average and relatively high income inequality, the subsidy cuts have negatively affected the living standards of large segments of the population.

Economic indicators of Jordan
Economic indicators of JordanSource: EIU
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