Jordan Economy
Introduction
The economy of Jordan is classified as an emerging market economy. It is among the smallest in the Middle East, with insufficient supplies of water, oil, and other natural resources, underlying the government’s heavy reliance on foreign assistance. Other economic challenges for the government include chronic high rates of unemployment, budget and current account deficits, and government debt…
After King Abdullah II’s accession to the throne in 1999, liberal economic policies were introduced. Jordan’s economy has been growing at an annual rate of 8% between 1999 and 2008. However, growth has slowed to 2% after the Arab Spring in 2011. Substantial increase of the population, coupled with slowed economic growth and rising public debt led to a worsening of poverty and unemployment in the country. As of 2019, Jordan boasts a GDP of US$44.4 billion, ranking it 89th worldwide.
Jordan has Free Trade Agreements (FTAs) with the United States, Canada, Singapore, Malaysia, the European Union, Greater Arab Free Trade Agreement (GAFTA), the Euro-Mediterranean free trade area, the Agadir Agreement, and also enjoys advanced status with the EU.
Jordan’s economic resource base centers on phosphates, potash, and their fertilizer derivatives; tourism; overseas remittances; and foreign aid. These are its principal sources of hard currency earnings. Lacking coal reserves, hydroelectric power, large tracts of forest or commercially viable oil deposits, Jordan relies on natural gas for 93% of its domestic energy needs.
Jordan used to depend on Iraq for oil until the American-led 2003 invasion of Iraq. Jordan also has an excess of industrial zones producing goods in the textile, aerospace, defense, ICT, pharmaceutical, and cosmetic sectors. Jordan is an emerging knowledge economy.
The main obstacles to Jordan’s economy are scarce water supplies, complete reliance on oil imports for energy, and regional instability. Just over 10% of its land is arable and the water supply is limited. Rainfall is low and highly variable, and much of Jordan’s available ground water is not renewable.
Still, Jordan is considered one of the open economies in the region and is well integrated with its neighbors through trade, remittances, foreign direct investment (FDI), and tourism, and has especially strong links to the Arab Gulf economies. Jordanian policymakers aim to use the demographic opportunity of a well-educated, young population to build a dynamic, knowledge-based economy.
Despite its lack of sustainable natural resources, Jordan has a highly skilled workforce, and most of the people have strong English language skills and has business friendly environment.
Jordan is classified by the World Bank as an “upper middle income country. According to the Heritage Foundation’s Index of Economic Freedom, Jordan has the third freest economy in the Middle East and North Africa, behind only Bahrain and Qatar, and the 32nd freest in the world. Jordan’s banking sector is classified as “highly developed” by the IMF along with the GCC economies and Lebanon.
The official currency in Jordan is the Jordanian dinar and divides into 100 qirsh (also called piasters) or 1000 fils. Since 23 October 1995, the dinar has been officially pegged to the IMF’s special drawing rights (SDRs). In practice, it is fixed at 1 US$ = 0.709 dinar, which translates to approximately 1 dinar = 1.41044 dollar.
The Jordanian market is considered one of the most developed Arab market outside the GCC states. Jordan has been a member of the World Trade Organization since 2000. The Free Trade Agreement (FTA) with the United States that went into effect in December 2001 would phase out duties on nearly all goods and services by 2010.
Jordan has done well at minimizing the health impact of the COVID‐19 crisis. Soon after the outbreak, the Government of Jordan announced a first set of measures and incentives to address immediate liquidity and cost of financing concerns for various sectors/businesses, and measures to protect vulnerable households. Nevertheless, domestic lockdowns, the global economic slowdown, trade disruptions, and the suspension of international travel are likely to have a sizable impact on the Jordanian economy.
The unprecedented economic shock of COVID-19 has exacerbated existing structural weaknesses in the economy and unresolved social challenges and put pressure on country’s fragile macroeconomic stance.
Key challenges to Jordan’s outlook include the prolonged decline in economic activity from domestic lockdowns, which could escalate high unemployment levels. The speed of economic recovery in the medium-term largely depends on the evolution of the pandemic and whether reforms are put into effect.
Jordan’s economic growth slowed to 1.3% in the first quarter of 2020, reflecting only partially the impact of COVID-19 pandemic. Timid growth during the quarter resulted from an improvement in net exports and the marginal contribution of government consumption, while overall economic activity remained constrained by weak private demand and muted government investments.
Meanwhile, labor market indicators for the second quarter of 2020 reflect the significant disruptions of the COVID-19 crisis. The already elevated unemployment rate has risen to 23% in Q2-2020 compared to 19.3% in Q1-2020, while the labor force participation rate dropped by 0.4% during this period.
Looking ahead, the pandemic will have as disruptive an impact on the Jordanian economy and its prospects as it is having on Jordan’s trading partners and the MENA region as a whole; its gradual recovery over the medium-term could capitalize on lower oil prices and a steady momentum for reform to increase efficiency and boost productivity.
At the fiscal level, the pandemic is exacerbating the fiscal deficit, as revenue collection has subsided given the economic slowdown and domestic lockdown measures. Although the government has created savings— by curtailing the public sector wage bill—pandemic-related spending pressures and recurrent spending rigidities are limiting Jordan’s ability to confine the deficit.
As a result, the overall central government’s fiscal deficit (including grants and the use of cash) widened to 4% of GDP during the first five months of 2020, almost twice as high as during the same period in 2019. The sharp deterioration in government finances, together with the slowdown in economic growth, has elevated levels of public debt in central government (including debt holdings of the Social Security Investment Fund) to 105.3% of forecasted GDP at end-May 2020. In the medium-term, the fiscal stance is expected to improve once economic activity gradually recovers.
As for the external sector, the current account deficit (including grants) narrowed by 6.3% year-on-year during Q1-2020. For Q2-2020, an initial build-up of external sector pressure was alleviated: exports and imports returned to positive growth in June following contractions in April and May 2020. Remittance inflows, on the other hand, remained negative throughout the second quarter, while the suspension of commercial flights prevented any inflows of travel receipts.
Although the decline in international oil prices will support a lower import bill, the current account deficit is expected to widen significantly in 2020 due to subdued external demand and its spillover effects on the domestic economy through a decline in exports, remittances, travel, and foreign investments.
Reports
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