Jordan At A Crossroads

A new IMF funding package and anticipated economic reforms offer a ray of hope for the kingdom’s battered economy.

Jordan’s political and economic woes are piling up following nearly a decade of sluggish growth. In the 10 years prior to 2010, GDP in the Hashemite kingdom was a lofty 6.5%; since then, it has averaged just 2.4%, according to Moody’s Investors Service. The malaise has stirred discontent.

The government closed a deal in January with the International Monetary Fund for a $1.3 billion, four-year loan package, stirring hopes for macro and fiscal reforms that could help lure crucial foreign direct investment. While Jordan sits at the crossroads of an unstable region, the deal offers hope that the small but influential kingdom can regain economic growth and alleviate unemployment among younger workers.

The World Bank has lauded the kingdom for its prior reform efforts, bumping it up 29 spots in the 2020 Doing Business rankings, to 75th out of 190 countries, Jordan’s highest position in more than 10 years. The country was also selected by the Washington headquartered multilateral lender as one if the top three business-climate improvers.

With a current account deficit of  7% of GDP, however, Jordan needs more than accolades. National debt has soared to 94% of GDP, one of the highest in the emerging world, according to London-based Capital Economics. The Economist reports that youth unemployment ballooned to around 41%, and some 700,000 refugees have fled to Jordan since Syria’s bloody civil war began nine years ago.

Land borders with Iraq, Israel, Syria, Saudi Arabia and the disputed West Bank territories, meanwhile, conjure a political nightmare for King Abdullah II, whose relations with his country’s Palestinian Arab majority have become fragile. The kingdom’s tense relationship with Israel was underscored in January when Parliament unanimously passed a law banning Israeli gas imports under a previously agreed 15-year, $10 billion deal. The deal was slated to generate $500 million in sav-ings, but instead unleashed street protests.

The ever present threat of domestic unrest places the survival of the monarchy ahead of Jordan’s economic angst, and for now, the prime minster and cabinet are lightning rods for popular discontent. “The drivers include outrage over the Jordanian government’s recent agreement to import gas from Israel amid continued Israeli annexation [in the] West Bank,” says Emily Hawthorne, Middle East and North Africa analyst at Austin, Texas–based Stratfor. “There is also public anger whenever the government talks about implementing any kind of economic austerity measure.”

The prime minster is appointed by the king but must be approved by the popularly elected Parliament.

Hail the IMF—or Maybe Not

Under the term of the IMF deal, Jordan will receive nine installments ranging from $140 million to $150 million over four years, with a first $140 million tranche due by the end of March, according to Jordan’s official news agency, Petra. But Jordan’s security and economic alarm bells have been sounding for some time. So, rather than being used to generate growth and investment, the IMF funds will likely be used to shore up the kingdom’s precarious balance sheet at the same time as the government tightens fiscal policy. In a February note, Capital Economics anticipated that a period of austerity will rein in growth, forecast at 2% to 2.5% in 2020-2021. Modest growth is better than nothing in the context of Jordan’s faltering state-led economy, but it may not be enough to quell popular unease.

The survival of the dinar’s peg to the U.S. dollar will be a signpost of progress, although the currency remains vulnerable to swings in risk appetite and a slowdown in capital inflows. As rumors of corruption swirl around the government, any sudden change in sentiment could undermine confidence in the dinar. Still, Capital Economics believes the peg will survive. “We expect the dollar peg to remain intact for the foreseeable future—but this will come at the cost of weaker economic growth,” according to Capital Economics.

Hard Necessities

Like many others in the Middle East and North Africa, Jordan’s government faces the necessity, not the option, of engaging in reforms, says Hawthorne. “Amman will have no other choice but to put in place structural economic-reform measures,” she adds, “even though they will drag their feet on implementation because they know the political cost will be high.”

Parliament previously voiced reluctance to implement new taxes in 2020, even though this is likely necessary, she says. The IMF agreement will be a powerful inducement to the government to raise taxes; yet such a move isn’t likely to be received well by Jordanians.

However, the kingdom’s small but incremental steps toward getting its fiscal house in order should help attract badly needed capital, as foreign investors warm to the prospect of higher yields.

Key changes have been to improve the legal rights of borrowers and lenders and to widen access to credit information by providing credit scores to banks, financial institutions and borrowers. New regulations governing insolvency should help unviable firms exit the market efficiently, and motivate viable but financially distressed firms to reorganize operations and restructure debt—a move that raises the bar, according to the World Bank.

“It is encouraging to see Jordan is adopting international best practices in business regulation, laying the foundation for private sector-led growth,” Saroj Kumar Jha, the World Bank’s Mashreq Regional Country director, said in a statement. According to Moody’s, Jordan’s scores for government effectiveness and control of corruption have been improving since 2013. 

Long term, the IMF agreement should put Jordan on a more sustainable path to growth, argues Alexander Perjessy, vice president and senior analyst at Moody’s. “While details of the program haven’t yet been made public,” he says, “we expect the new program will have greater emphasis on structural reforms with the aim of raising Jordan’s potential growth rate, which is stuck at around 2%, and with less emphasis on further fiscal tightening.”

Striking a Regional Balance

In the past, Jordan has relied on aid from the US and the hydrocarbon-rich Gulf states, but it may be reconsidering some of these ties. Saudi Arabia and the United Arab Emirates are longstanding donors but caught in a power struggle with energy titan Qatar, their neighbor. They are also supporters, albeit reluctantly, of US President Donald Trump’s controversial Middle East peace plan, which remains out of bounds for Jordan.

In March, Jordan’s Prime Minister Omar Razzaz said Trump’s so-called “Peace to Prosperity” initiative could jeopardize the kingdom’s peace treaty with Israel. As a sign of Jordan’s realignment, Qatar recently pledged to create 10,000 jobs for Jordanians after the two states restore full diplomatic ties.

A Bet on Banking

As Amman negotiates a way past its internal and external threats, the banking sector emerged as a bright spot. Arab Bank, Jordan’s largest lender, is a major player in MENA’s highly competitive banking sector, accounting for close to 20% of Jordan’s assets. Last year, net profits after taxes climbed to $846.5 million from $820.5 million, according to Reuters. Revenue grew 4.6% year-on-year, to $2.23 billion, at a time of increasing consolidation in the Middle East.

Local and international banks are expected to benefit from a revamped public-private partnership framework. The PPP pipeline includes an expansion of the national broadband network, a new bridge terminal between Jordan and the Palestinian West Bank, construction of a desalination plant and a water conveyance network in Wadi Husban, and a pilot project for privately operated schools. Larger projects, slated to commence this year, include the national water carrier for desalinated water from Aqaba to Amman and a new city airport in Amman for low-cost carriers that is expected to boost tourism.

Whether these initiatives multiply and yield real progress for the economy and the population depends greatly on the success of the IMF bailout and the government’s fiscal program—not to men-tion the region’s ability to stabilize. This last factor won’t be within the kingdom’s power to dictate. Although Jordan will always play an outsize role. n