Jordan: Increasing resilience (page 1 of 2)

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.