Jordan’s economy remains in jeopardy
Jordan’s social and economic dynamics are severely affected by the Syrian crisis, while the government is making progress in consolidating the budget and reducing reliance on a limited number of energy sources.
Strengths (+) and weaknesses (-)
(+) Strong international support
Jordan enjoys strong (financial) support from the US, the Gulf Cooperation Council (GCC) and Saudi Arabia in particular.
(+) Tourism potential
Jordan is a popular destination for tourists, especially from the GCC, due to historical sites, for example the ancient city of Petra.
(-) Weak fiscal position
The low level of fiscal flexibility is caused by high deficits, modest revenue and weak expenditure flexibility. However, deficits are decreasing and the government has taken actions to increase revenue.
(-) 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.
1. Geopolitical risk and social risks remain high
The main short-term as well as long-term risk remains the conflict in Syria and Iraq, which could potentially lead to political instability in Jordan. This would reduce tourism, investments and increase the fiscal deficit. The effect on tourism is especially important since that is a sizable part of Jordan’s economy and an important source of foreign reserves. But also the effect on Jordan’s fiscal deficit, which could balloon again as military expenses to fight IS might increase, and a further influx of refugees puts increasing pressure on the government’s resources. Refugees from Syria already amount to around 640,000, while also 600,000 other Syrians have moved to Jordan (population 7.7m). The Jordan Response Plan for the Syrian Crisis 2016-2018 requires USD 2.6bn, whereas only USD 1.1bn has been raised thus far. Compounding this pressure on society are the Palestinians (roughly 3.2 million) that have fled from Palestina and Israel over the past decade. In a sense, this means the country and its population are experienced in taking in these amounts of refugees. Nonethelesse, as the country is currently suffering from record unemployment rates (13%, highest since 2008), the social situation could worsen rather quickly.
2. Economic growth remains subdued
Pre-crisis growth numbers were impressive, with four consecutive years of +8% real GDP growth per year. Since the crisis, however, growth declined to about 2-3% (Figure 1). In 2014, growth was 3.1%, but in 2015, the number dipped below 3% again, and some expect even lower numbers for this year. The main downward driver remains the regional geopolitical situation, severely affecting the country’s trade ties with Iraq. Furthermore, the country remains highly reliant on foreign aid, with energy and water needs to be fulfilled by other Arabic countries and Israel.
3. The government is continuing actions to increase energy diversification
As part of the National Energy Strategy, Jordan’s government has taken actions to reduce its dependence on oil imports as the major source of energy. Last year, a contract for the supply of liquid natural gas (LNG) was signed with Shell, which should meet about 15% of Jordan’s energy need. This will make Jordan less dependent on LNG supply from Egypt, for which Jordan signed a 15 year contract in 2002, but which has been unpredictable in its delivery track record in recent years. Also, Jordan signed a contract with Algeria to provide LNG. Finally, another contract was signed with Saudi Arabia, which is coping with a huge excess supply of electricity and will allow Jordan to tap into its electricity network. Domestically, Jordan is investing heavily in solar and wind energy, while also opting to use Russian technology to increase its nuclear power capacity. In fact, nuclear energy should supply half the energy needs of the country in 2025.
4. The government has taken actions to reduce the fiscal deficit
Jordan’s fiscal deficit has been steadily improving since 2012, when it was 12.7% of GDP (Figure 2). This has declined to 6.6% in 2015, partially due to fiscal reforms taken as part of Jordan’s USD 2 bn Stand-By-Arrangement with the IMF, including for example liberalization of fuel prices and an increase in electricity tariffs for rich households. Nevertheless, the overall debt level is increasing, and therefore the dependency on international financing remains high. As Jordan plays a pivotal role in the region, international institutions and other countries have provided Jordan with capital at very benevolent conditions.
Jordan has a population of only 7.7 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 GDP of USD 39bn in 2015 is among the smallest in the Middle East. There are insufficient supplies of water and the country has no oil resources or other natural resources, apart from potash and phosphates. Currently, the authorities are exploring nuclear power generation and clean energy to prevent a worsening of the energy shortfalls in the long run. Social and economic challenges, including chronically 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 61% of world average and relatively high income inequality, the subsidy cuts have negatively affected the living standards of large segments of the population.