The hard economic road ahead for Jordan

Jordan’s slower economic growth and rising prices highlight the fiscal dilemmas facing oil-importing countries in the region. Published in MEED, 4 March 2011

The Desert Highway from Aqaba to Amman was shut on 20 February as a sandstorm whipped up by the winter winds made the country’s most important transport artery impassable. Trucks heading towards the capital from Jordan’s only port were forced to pull up by the side of the road or divert to the slower, winding King’s Highway to the west.

On the same day, the government withdrew its budget from parliament, before a vote had even been taken. The budget was finalised in November, but since then Amman has unveiled a JD460m ($650m) package of subsidies to try and keep food and fuel prices down and protesters off the streets. The extra spending meant the budget’s numbers did not add up anymore and the reality is that the entire economy might be switching onto a slower road.

Jordan’s economic slowdown

A revised budget has yet to be presented to parliament, but early indications suggest it will include JD6.4bn of spending and a deficit of JD1.2bn, equivalent to 5.5 per cent of gross domestic product (GDP), up from the 5 per cent originally planned.

The economy had already slowed significantly over the past two years, but the latest events mean the situation is getting harder for authorities to manage. To date, demonstrations on the streets of Jordan’s towns and cities have been small compared with those in other countries in the region and almost entirely peaceful. But unless the government can meet the economic and social aspirations of its people that could change.

“Jordan is a small country and has a small economy,” says Riad Saifi, chairman of the Amman Chamber of Commerce. “The economy is not healthy – not so bad, but not so good. We hope we will pass this period safely.”

Amman is far from unique in finding itself in difficulty. Most countries around the region are having to rethink their spending plans to cover the higher cost of importing food and fuel or to allow for the extra subsidies and cash handouts to prevent their citizens taking to the streets. The oil-rich countries can cope with the extra spending as their revenues are also jumping ahead. But oil importers such as Jordan, Morocco and others have no such cushion.

In 2010, Amman spent almost $2bn on importing food and another $2.7bn on oil and gas, according to figures from the Washington-headquartered IMF. With prices high and rising, the cost of paying for these imports and subsidising consumer prices means it will be far harder for the government to afford major infrastructure projects, which could prove vital for the longer-term health of the economy.

Work is continuing on the new terminal at Queen Alia International airport to the south of the capital and some key roads around the country are being widened. However, other major projects are now in real doubt. According to reported comments by Finance Minister Mohammed Abu Hammour, the revised budget includes substantial cuts in capital spending.

The problem for the government is that it has very little room for manoeuvre. Vast numbers of Jordanians are employed by the state, who cannot be sacked and must be paid – accounting for a significant proportion of total state spending.

Jordan’s bloated public sector

“A major structural problem is the large public sector of 788,000 public employees,” says Bassem Farradj, secretary-general of the Amman Chamber of Commerce.

“The budget is not elastic. When you basically have JD3bn out of JD6bn for salaries and pensions, what can you do? You could work a little on the running expenses, but I think it’s quite marginal. If there are grants and donations that countries are giving us then that will make a difference, but in all honesty, beyond that, there is not much to do.”

When Abu Hammour announced the original budget in 2010, he said it underscored the country’s efforts to be self-dependent and reduce its deficit. But the prospect now is that Jordan will become even more dependent on the outside world.

Credit ratings agencies have already given their verdict on the health of the economy, with several downgrades last month. On 8 February, both Moody’s Investors Service and Standard & Poor’s (S&P) dropped their ratings for the country. “We believe ongoing turmoil will lower Jordan’s medium-term growth prospects and damage its public finances,” said Luc Marchand, a credit analyst at S&P, at the time.

One of the few options open to the government is turning to its wealthier allies for help. Jordan plays a key role in the Israeli-Palestinian dispute and has proved a reliable ally of the US for decades. It retains close links to Saudi Arabia. Such factors lead analysts in the country to believe aid flows to Jordan will increase.

Aiding stability in Jordan

“It would be much more costly to the international community to see Jordan plunge into volatility than to support it now,” says Ralf Erbel, who heads up the local office of the Friedrich Naumann Foundation, a German organisation which promotes liberal, market economic policies. “While small, Jordan is a country of geo-strategic importance and it has served as a safe hub in a highly volatile region for many years. Its stability continues to be of much importance to the West and its Arab allies. Oil-rich Saudi Arabia, in particular, is a close friend of the Jordanian monarchy and would definitely not want to see the authorities there significantly challenged by a popular uprising.”

In the longer term, the country needs to develop its economy, but growth is stifled by a lack of water, energy and other natural resources, as well as a small local market, which does not allow for economies of scale.

There are some positive aspects to the economy, but they are limited. The local population is relatively well educated and there are significant deposits of phosphate, potash, uranium and oil shale. The financial services sector boasts one of the largest banks in the region, Arab Bank. Tourism and health tourism are also well-established industries, offering prospects for growth in the medium term, although regional political strife is currently harming the former and an absence of medical malpractice insurance the latter.

The government has attempted to harness the potential of some of these areas by developing a network of business parks, development areas and special economic zones, designed for companies involved in logistics, education, healthcare, tourism and heavy industry. To date, however, they have not been particularly successful. “It is a very expensive process to create,” says Farradj. “You cannot just create space and people will come. There are good ideas, smart people, but when it comes to fulfilling such projects, usually you find that finance is a key issue.

“The main challenge for Jordan is the lack of resources. Our only salvation is to make sure the private sector can generate enough to be the major contributor to the GDP of the country.”

Demographic concerns in Jordan

In Jordan, there is the added complication of social issues, which make this process more tricky than in most other places. There has been a long-standing, if unspoken, gentlemen’s agreement over the economic roles of the country’s two main groups, those from the East Bank of the River Jordan and those originating in the Palestinian lands to the west. Broadly speaking, the Palestinians have tended to dominate the private sector, while East Bankers have had the pick of public sector jobs. But with privatisation reducing the size of the public sector and the government unable to employ as many people as before, this equation is starting to become untenable.

“There is a sense of discontent with both East Bank Jordanians and Jordanians of Palestinian origin,” says Erbel. “A lot of East Bankers feel anxious about their future prospects and fear a gradual erosion of their community’s grip on power. At the same time, Palestinian Jordanians feel politically under-represented and disadvantaged when it comes to employment in the public sector. So both sides have their grievances. To somehow manage that complex situation is one of the biggest challenges facing authorities at the moment.”

Corruption also eats away at the country’s economy. “The trustworthiness of government institutions isn’t what it used to be,” says Nawaf Tell, director of the Center for Strategic Studies at the University of Jordan. “The issue of corruption is becoming one of the central issues for public opinion.”

In this context, the greatest risk for the authorities is that the government of Prime Minister Marouf al-Bakhit, which only took office on 9 February, will prove unable to balance the need for fiscal prudence with the need to prevent economic hardship translating into bigger demonstrations on the streets.

Sandstorms may be a work hazard for truck drivers on the Desert Highway, but the Jordanian regime, like many others in the region, can ill-afford for its wider economy to slow down.