Jordan reboots its economy, and foreign investors take note.
Reform is a ubiquitous word in the Middle East, but Jordan’s commitment to overhaul its economy is fueling optimism that the changes will attract much-needed foreign investment and boost sluggish growth. In February, Jordan’s parliament passed a 10.6 billion dinar (around $15 billion) budget for 2022, with a pledge to accelerate reforms in the wake of the Covid-19 pandemic that saw the economy contract 1.6% in 2020. But analysts say that on the road to reform, the Hashemite Kingdom will need to make unpopular decisions, including broadening the tax base and closing tax loopholes.
The pandemic decimated vital revenue sources such as tourism, though the International Monetary Fund (IMF) forecasts real GDP to grow 2.7% this year buoyed by “targeted fiscal and monetary measures,” up from 2% in 2021. Still, this year’s forecast for GDP is a long way from the 6.3% the kingdom averaged between 2001 and 2010, according to the IMF. IMF support has been crucial to both Jordan’s recovery and its stability. Since the beginning of the pandemic, the IMF has disbursed around $1.23 billion as part of a four-year $1.5 billion Extended Fund Facility (EFF).
But the IMF warns of headwinds and points to stubbornly high levels of unemployment, particularly among the youth, which may not only act as a drag on consumer spending but also lead to renewed social unrest. IMF estimates unemployment among Jordanians spiraled to nearly 25% by the middle of 2021. Last year, Jordan’s monarch, King Abdullah II, put down an alleged coup attempt from former Crown Prince Hamzah bin Hussein, who accused the ruling establishment of corruption.
“Prospects for durable and inclusive growth rest on continued progress on reforms to increase youth and female labor force participation, enhance labor market flexibility, promote competition, reduce the costs of doing business, and strengthen governance and transparency,” said Kenji Okamura, deputy managing director at the IMF, in a statement commenting on the fund’s January review of Jordan’s EFF arrangement.
A Calmer Neighborhood
Even so, Jordan’s regional role remains intact as hopes grow that neighborhood tensions may be easing. The kingdom’s delicate relationship with Israel has benefitted from the Abraham Accords, which saw the normalization of relations between Israel, the United Arab Emirates (UAE) and Bahrain in 2020. Jordan signed a declaration of intent in late November with Israel and the UAE to build a solar energy plant in Jordan. The kingdom will export electricity to Israel in exchange for desalinated water. Jordan also plans to export electricity to Lebanon through Syria.
The water agreement with Israel is also expected to boost trade and see Jordan’s exports to the Palestinian areas of the West Bank increase from about $160 million to more than $700 million. According to the Jordan News Agency, Petra, 425 Jordanian products worth around $500 million a year will have duty-free access to the Palestinian market. Israel’s economy minister traveled to Jordan earlier in November to cosign the trade agreement. This was the first visit by an Israeli economy minister in more than a decade.
A further 329 products worth about $230 million will be exempt from customs duties when exported to the Palestinian market, provided they meet Israeli specifications and technical requirements. Still, the deal must also be signed by the Palestinian Authority before it can take effect. These agreements indicate that Jordan’s uneasy relationship with Israel may have thawed. However, subsequent street protests over the proposed electricity and water deals may complicate attempts to deepen the economic relationship between the two countries.
Nonetheless, careful management of the relationship with Israel could reap early economic dividends, says Bruce Riedel, a senior fellow at the Brookings Institution. “If cooperation with Israel is politically palatable, that could be a game changer.”
According to Robert Mogielnicki, senior resident scholar at the Arab Gulf States Institute in Washington (AGSIW), if the deals with Israel are sustained, Jordan could also become a conduit for broader regional trade. “Previous agreements and cross-border initiatives haven’t exactly been transformative. However, this agreement better positions Jordan as a corridor between Israel and the Gulf countries.”
Elsewhere, the civil war in Syria looks to be winding down; although Jordan still hosts around 1.3 million Syrian refugees, according to Jordan’s latest census. Gradually improving relations between Amman and Damascus would benefit both sides economically. Syria recently signed a memorandum of understanding with China, which will see it included in President Xi Jinping’s signature Belt and Road Initiative. Reconstruction of Syria’s war-torn economy is expected to cost billions of dollars and improve Jordan’s wider economy. Brookings’ Riedel adds that the revival of the Iraqi economy and its regional reintegration would also boost Jordan’s finances.
However, public sector debt continues to weigh on the kingdom’s finances. The IMF calculated that debt levels reached 91.7% of GDP at the end of 2021, one of the highest in the emerging world. Around 45% of Jordan’s public sector debt is denominated in foreign currency, exposing the kingdom to global interest rates and related debt-servicing costs. Jordan’s high debt levels have attracted criticism from parliamentarians who are demanding more state jobs amid record levels of unemployment.
The IMF noted that Jordan’s tax revenues beat expectations last year, but pointed out that improving enforcement and curbing illicit activities would boost the economy. Closing tax loopholes, strengthening tax compliance, tackling cigarette and alcohol smuggling and reducing corruption among customs authorities could yield an additional 0.5% of GDP, the fund estimates.
Banking On It
Despite the strains on much of the broader economy under the pandemic, the banking sector has held up well. According to the IMF’s January review, “the banking system’s capital adequacy ratio remained strong at 18.3% as of end-June 2021, well above the regulatory minimum of 12%.” Moreover, bank profits are “back to their pre-pandemic level,” suggesting local banks are well placed to support reforms and bolster lending to small and midsize enterprises (SMEs).
Still, downside risks remain, with the full impact of the pandemic on the banking sector yet to be manifested and SMEs’ return to normalcy proving slow, according to the IMF. In response, the Central Bank of Jordan (CBJ) has extended subsidized lending for SMEs through June of 2022 and raised borrowing limits for specific sectors such as tourism and trade. Future strains on liquidity could force the CBJ to intervene in the domestic banking sector. The CBJ must remain flexible while supporting the dollar peg, the Washington-based multilateral lender adds.
Recent announcements from key players support the banking sector’s recovery. In January, Arab Bank, Jordan’s largest lender and a bellwether for the domestic banking sector, reported a 61% growth in net profits to $314.5 million in 2021. Then in February, a partnership between Capital Bank of Jordan and Codebase Technologies launched Blink, the kingdom’s first digital-only neobank—a development that could disrupt the local banking sector. And last month, Capital Bank listed a $100 million AT1 bond on the Nasdaq Dubai bourse to fund expansion and digitalization.
Jordan is also reportedly mulling its own central bank digital currency (CBDC) linked to the dinar. Such a move would be a significant change for one of the first countries to ban digital currencies in 2014. But analysts say regulating a CBDC and permitting cryptocurrency trading could stretch the kingdom’s financial infrastructure when compliance with international norms is under scrutiny.
In October, Jordan was placed on the Paris-based Financial Action Task Force watch list after strategic deficiencies were found in its anti-money laundering and terrorist-financing controls. Jordan has committed to resolving the deficiencies and exiting the watch list by October 2023.
Slowly, But Surely
A watch-and-wait policy may be applicable to the recovery of Jordan’s economy. But Ryan Bohl, senior Middle East and North Africa analyst at risk intelligence company Rane, believes the kingdom’s crucial regional role will steer it through uncertainty, despite debt levels. “The United States, Saudi Arabia and the United Arab Emirates are all deeply interested in ensuring Jordanian stability.”
High debt could force cuts in politically sensitive subsidies and civil service salaries. Ensuing public discontent, which is never far away from political discourse, could make for an erratic recovery. Even so, having governance under the control of the king will ensure international support, says Bohl. “In one form or another, an external guarantor will appear in a moment of crisis to bail out the country.”
Reforms aside, continuing pressure on the kingdom’s economy will likely persist in the short to medium term and is a more likely scenario than a quick rebound, AGSIW’s Mogielnicki adds. “Jordan just isn’t in a particularly strong position to build serious economic momentum and channel high-impact trade and investment flows.”