Jordan: Increasing resilience

The Jordanian economy is coming under increasing pressure due to the high oil price. This has resulted in the deterioration of the current account and fiscal deficits. However, on the positive front, overall the Jordanian economy has continued to perform well. The ability of the economy to withstand shocks has increased as a result of the government's reform program. Furthermore, the country continues to benefit from increased FDI inflows, mostly from the GCC countries. Highlighting the strong performance, real GDP growth remained strong. According to the IMF, the economy expanded by an impressive 7.2% in real terms and inflation remained under control at 3.5%. This was despite the government reducing fuel subsidies twice in the year, although the full effect will mainly be felt in 2006.

Moreover, the IMF noted that the fiscal deficit did not widen as much as expected, especially given the twin shocks of high oil price and the marked fall in government grants. Foreign grants fell to 5% of GDP in 2005, compared to 11% in the previous year. Nevertheless, the government deficit widened to 5.2% of GDP in 2005, from 1.7% in 2004. Importantly, given the worsening fiscal position, the authorities have intensified their fiscal adjustment program, which is focused on reducing fuel subsidies and imposing expenditure restraints. Measures have also included broadening the General Sales Tax (GST) base, raising the GST on a new set of goods and services and lowering the minimum taxable income to JOD 50,000 from JOD 100,000 at the end of 2005.

Real GDP growth will remain relatively robust at 5.3% in 2006. Growth will be driven by buoyant private consumption, which continues to be boosted by strong remittances from the GCC countries and higher tourism earnings. The tourism sector remains the main employer in the country and accounts for 10% of the economy. The negative impact of the terrorist attacks on three five-star hotels in Amman in November has been short-lived and the sector has rebounded. This is partly due to the large number of visitors to the country from the Gulf countries, who are less sensitive to such incidents. The strong performance of exports is also supporting private consumption. Meanwhile, investment in the booming construction and real estate sectors will remain strong going forward. This is being fuelled both by domestic housing demand along with Iraqi nationals and foreign firms establishing bases in Jordan to conduct business in Iraq. There has also been robust demand from the GCC.

The deceleration in growth will partly be due to the base effect from the strong performance in the previous year. Furthermore, the impact of rising fuel costs will also dampen growth. The government approved a 12% to 65% price hike on fuel derivatives in April and further cuts in subsidies are forecast going forward. The government plans to reduce petroleum subsidies by
March 2007, although this will remain difficult if prices remain at the current level. Tighter monetary conditions will also result in economic expansion slowing. The Central Bank of Jordan increased its benchmark interest rate by 25bps to 7.25% in May. This follows a similar hike in February. These were in line with the rate hikes in the US. The central bank also indicated that the hike was aimed at containing increasing inflationary pressures. The inflation rate will increase in 2006 owing to higher fuel prices, along with the weakening of the US dollar against.

The higher oil price in 2006 will result in the fiscal and current account deficits increasing. We forecast a budget deficit equivalent to 6.0% of GDP. On the external front, the current account deficit widened substantially to 17.8% of GDP in 2005, compared with just 0.2% in 2004. Along with the rising oil bill, imports surged with the buoyant domestic demand. The shortfall is forecast to increase to 18.4% of GDP in 2006. The trade deficit rose by 31.4% y/y in Q1 to JOD 1.21bn. While exports rose by 15% y/y, imports grew at a faster pace of 22.9% y/y. Jordan's widening current account deficit and high debt pose medium-term economic challenges and the IMF has called on the government to accelerate the reform program. The weakening of Jordan's current-account position and the growing pressure on government finances were cited Moody's as the main reason factors behind their decision to change the outlook for Jordan's rating from stable to negative in early 2006.

Despite this current account deterioration, the overall balance of payments in being supported by capital inflows. This has meant that FX reserves have remained stable despite the widening trade deficit. FX reserves at the central bank stood at USD 5,387m in March 2006, compared to USD 5,317m a year earlier. Consequently the risks to the dinar's peg to the US dollar are minimal. Positively, capital inflows will remain strong in 2006, supported by increased inflows and the government's privatisation program. The Jordanian Investment Promotion Establishment said that the volume of investments in Jordan amounted to USD 443m in Q1 2006, up from USD 147m in the same quarter a year earlier. The government estimates that it will earn at least USD 1bn this year by selling sizeable holdings in state assets. This includes the sale of the government's remaining 41.5% stake in the country's sole fixed-line operator Jordan Telecom. France Telecom bought a 40% of the company in 2000. There are indications that a deal is imminent with France Telecom to acquire a further 11% to secure a majority 51% holding. The remaining 30.5% would go to Gulf Arab investors in a private placement and in a secondary offering in the Amman bourse. Privatisation receipts will also help to reduce debt levels. The IMF estimates net public debt equivalent to 83.7% of GDP in 2005. The funds raised cannot be used to finance the deficit, but will be utilised instead to pay down debt and thus reduce interest repayments.

Although the economy is forecast to cope with the increasing oil price in the short-term, albeit with deteriorating key indicators, a key area of concern is the growing unemployment level. Unemployment stood at 14.8% during 2005, according to Department of Statistics figures, while the average rate of unemployment is estimated at 28.7% amongst the Jordanians between the age category of 20-24 years. Failure to tackle this issue will lead to an increase in social tensions. It remains vital for the government to progress with reform program and improve the investment environment to attract greater investment in the country.