The kingdom is betting on foreign investment and clean energy to restart its economy.
When the pandemic broke out, Jordan’s government took severe steps to curtail contamination: It imposed one of the world’s strictest lockdowns, forced electronic bracelets on all travelers and closed its airport for several months. The response avoided a health disaster, but not without costs to the economy. Bankruptcies and unemployment rose. Overall, GDP contracted 3.4% in 2020.
That’s slightly ahead of the -4% growth globally. Yet Jordan entered 2020 after a decade of growth hovering around 2%. Despite its success containing Covid-19, the kingdom will be challenged to stimulate a recovery, due to its unsustainable fundamentals.
“The unprecedented economic shock of Covid-19 exacerbated existing structural weaknesses in the economy and unresolved social challenges and put pressure on the country’s fragile macroeconomic stance,” says one of the World Bank’s October 1st, 2020 assessments.
With barely any natural resources and 75% of its land a desert, the kingdom relies mainly on international aid from the US and oil-rich Gulf countries to make ends meet. And although Amman receives between $3 and $4 billion a year, it isn’t enough to cover the country’s needs.
In March 2020, the International Monetary Fund (IMF) approved a $1.3 billion four-year loan to Amman. Part of the money was intended for infrastructure that could support economic diversification, like a new airport to encourage tourism or desalination plants to boost agriculture. As the pandemic gained steam, those funds were put to more immediate use, and Jordan had to seek an extra $400 million.
For years now, international donors have been pushing the monarchy to carry out socioeconomic reforms. Although such moves have at times meant political struggle and popular discontent, the authorities have persisted.
“The government has been steadily reforming the legal and regulatory framework to attract business and improve competitiveness, with notable improvements in access to credit, registering a business, custom and tax procedures, the digital payment system, and entrepreneurship,” says Nemeh Sabbagh, CEO of Arab Bank, Jordan’s biggest bank.
Results are starting to show. Jordan’s global rank in the World Bank’s Ease of Doing Business listing advanced from 118th in 2017 to 75th in 2020.
Jordan could further enhance its economy by putting its women to work. In 2020, only 15% of Jordanian women held a job, even though most girls go to school and even university. According to the International Labour Organization, closing the gender gap would bring Jordan $11 billion annually in new revenue. Over the past few years, the monarchy has been trying to encourage women to join the workforce, with a series of new labor laws such as incentives for large companies to have a nursery; but employers are often reluctant to invest. For feminist organizations, the lack of female-friendly work environments and the unequal salaries are still major impediments to female employment.
A globally attractive business environment could be the key to transforming Jordan from a desert to an export-oriented country, and perhaps even a regional industrial hub. The sales pitch goes as follows: The kingdom offers a secure gateway to most Middle Eastern markets, with direct trade routes to Syria, Iraq, Israel and the Gulf Cooperation Council (GCC) as well as unique commercial advantages with the rest of the world. Since the 2000’s Jordan enjoys rare free-trade agreements with the United States, Canada and the European Union.
Jordan is trying to cash in on these strategic deals by setting up tens of industrial zones all over the country. Foreign investors—including a large number of Asians—have responded to the offer and built pharmaceuticals, cosmetics and clothes manufacturing plants whose entire production is destined to North America. The textile industry alone now accounts for over 80 factories producing $2 billion worth of products yearly.
Indian entrepreneur Sanal Kumar set up Classic Fashion Apparel Industry in 2003. He now employs over 26,000 people spread over 19 production sites in Jordan. He says 70% of his sale price is fabric and accessories whose costs are virtually the same all around the world, but he chose Jordan for its free-trade agreements.
“The whole competition is on the 30% of value-additional profit; and although the cost of manufacturing in Jordan is higher compared to, let’s say Bangladesh or Vietnam, still, we can compete because of the free-trade agreements,” says CEO Kumar. “Duty exemptions have a strong impact.”
To attract even more capital, the kingdom started a passport-against-investment policy in 2019. To be eligible, candidates must inject at least $750,000 into the Jordanian economy. By December 2020, the monarchy had delivered over 200 passports in exchange for investments worth $1.2 billion and 7,300 new job creations. Investors were mainly Syrians, Palestinians and Iraqi citizens who faced travel restrictions due to their nationalities.
Another card Jordan may pull to gain international trust is its robust financial system. Contrary to its war-torn neighbors, the monarchy always maintained political stability and its banks enjoy a positive reputation in the region. Jordanian lenders are relatively small in assets; but unlike GCC banks, which draw financial power largely from state-owned oil deposits, Jordanian banks are funded by customer deposits.
Throughout the pandemic, these deposits have continued to increase as individual and corporate spending slowed down under the effect of lockdown measures.
But in 2021, with limited lending opportunities, banks are expected to turn to the government and increase their exposure to sovereign risk and overall creditworthiness. A sharp increase in problematic loans and credit losses is also likely for Jordanian banks as the central bank starts removing the Covid-19 stimulus package.
“Since governments are likely to begin lifting these measures over the coming quarters, we expect to start observing asset quality deterioration in all of these countries over the next 12-24 months, as borrowers face more pressure on their debt-servicing capacity,” says global ratings agency Standard & Poors.
To build a sustainable economic model, Jordan must also free itself from the burden of hydrocarbon imports. Deprived of oil and gas resources, the kingdom traditionally buys its energy from aboard–notably from the GCC and Iraq. The energy bill weighs heavily on public spending and is growing increasingly unpredictable given the volatility of oil prices.
A few years back, Jordan embarked on a plan to reduce energy dependency by investing in the one natural resource it enjoys for free: the sun. This policy was supported by the government, local banks and the international community. Today, solar panel fields have become part of the scenery all around the country. They can be seen alongside roads, over the roofs of mosques and even beside refugee camps.
“Jordan has been a regional pioneer in expanding its renewable energy capacity. It developed a targeted early framework, including a dedicated renewable energy law in 2012 and related regulations, and provided supportive government facilitation. This allowed the government to launch public-private partnerships and attract investments for a sequence of windmills along with several rounds of solar photovoltaic competitive bids,” says Arab Bank’s Sabbagh. “Currently, renewable energy accounts for a fifth of the total installed power capacity in Jordan.”
Jordan hopes to soon export its surplus of energy to neighboring countries.
Though heavily reliant on international backers, Jordan is trying to play its cards right and convert foreign aid checks into sustainable economic assets. Recovery from the Covid-19 induced recession will take time, especially if lockdown measures should continue. The World Bank expects GDP growth to recover in 2022.