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Path of Progress
Jordan has made progress in reforming its economy and has the backing of the international donor community, but pressing challenges remain
While other countries in the Middle East boast of crude oil, which has mostly traded above the $80 mark since February, Jordan has the location and a stable political environment.
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The Hashemite Kingdom is still in recovery territory, though a rebound in tourism, remittances and higher exports of fertiliser have cushioned the economy from the prolonged pandemic and the economic knock-on effects of the war in Ukraine.
According to the World Bank, the country’s real gross domestic product (GDP) is projected to grow by 2.1% this year after it expanded by 2.2% in 2021 following a 1.6% contraction in 2020.
The fact that Jordan is one of the Middle East’s most politically stable countries attracts the world’s attention and international investors have come to the country’s aid. The Western and regional powers have long valued their relationship with the kingdom.
Jordan has made progress in reforming its economy, but pressing challenges remain. The country’s crucial fiscal reforms that were unveiled at the 2019 London Initiative to reduce the budget deficit and get the economy back on track are starting to yield results. The resignation of Prime Minister Omar al Razzaz, who was replaced by a veteran diplomat and palace aide Bisher al Khasawneh in 2020, threatened to damage investor confidence as the country grappled with COVID-19.
However, the country enjoys financial support from multilateral lenders such as the International Monetary Fund (IMF), the World Bank and the European Investment Bank.
The Hashemite Kingdom has one of the smallest economies in the Middle East and few natural resources. Previously, the country has lavished subsidies on its public thanks to the support of its GCC and Western allies, however, an unprecedented influx of refugees from Syria and Iraq as well as the Israeli occupation of the Palestinian territories has strained its already fragile economy.
The IMF lauded the Jordanian authorities for preserving macroeconomic stability in a most difficult environment as the country implements key structural reforms, especially in its public finances.
Friends in high places
Jordan’s friends in high places are strongly backing Prime Minister Khasawneh’s commitment to maintain the reform momentum, strengthen growth and reduce public debt.
Khasawneh reshuffled his cabinet in October 2021 for the fourth time since taking office a year ago, creating a new investment ministry as part of strategy
analysts said will give the prime minister more scope to tackle the country’s social and economic crisis.
Fitch Ratings said in August that Jordan’s external financing flexibility is a rating strength, underpinned by strong relations with the international donor community, multilateral organisations and bilateral allies, including the US, Europe and oil-rich partners in the Gulf.
Last year, foreign grants and concessional support loans were more than $3 billion, accounting for 7.3% of the kingdom’s GDP and slightly higher than 2020. Jordan receives $1.1 billion in budget support grants from the US, and President Joe Biden also announced his government’s intention to enter into a new Memorandum of Understanding to fund Jordan economically and militarily, with an annual commitment of around $1.45 billion in grants between 2023 and 2029.
The IMF approved the fourth review of Jordan’s Extended Fund Facility arrangement in June 2022, increasing this year’s disbursements by $165 million to over $500 million, including augmentation of access by $100 million. The programme is set to last until March 2024, with remaining disbursements in 2022-2024 of around $570 million, more than 1% of GDP. “Jordan enjoys strong relations with the IMF and its programmes have provided a policy anchor,” said Fitch.
The World Bank also released $350 million in additional financing for Jordan’s COVID-19 Emergency Response Project earlier this year to mitigate the impact of the pandemic on poor and vulnerable households. The Washington-based lender approved another $85 million for the Jordan Support for Industry Development Fund Project in May to promote investments and exports in the manufacturing sector.
The European Investment Bank unveiled $30 million in partnership with Jordan Commercial Bank in March to support entrepreneurs and businesses as part of the country’s broader economic recovery strategy. Jordan secured a $10 million Green Economy Financing Facility from the European Bank for Reconstruction and Development, the European Union and Green Climate Fund to promote its transition to an environmentally sustainable, low-carbon and climate-resilient economy.
The Hashemite Kingdom also received funding from its allies to enhance security and stability including a joint $1.9 million from France and The Netherlands in June and $50 million from Germany.
Meanwhile, Jordan is still a recipient of the five-year $730 million funding that was promised by Japan at the London Initiative on 28 February 2019, $1.1 billion that was pledged by France and as much as $250 million in soft loans from the UK.
Jordan’s senate passed the country’s 2022 budget in February and the country is forecasting $15 billion in state expenditure and total revenues of $12.6 billion—68% from tax returns, 10% from foreign grants and 22% from non-tax resources.
– Fitch Ratings
Financial metrics
Jordan’s financial services sector is another dependable performer. The Central Bank of Jordan (CBJ) raised its key interest rate on various monetary
policy instruments by 50 basis points (bps) and 75 bps on overnight deposit rate after the US Federal Reserve (Fed) hiked its interest rate by 75 bps earlier in June to curb inflation and maintain fiscal stability.
– The IMF
S&P Global projected at least three back-to-back 50 bps hikes for the remainder of 2022 and four to five hikes in 2023 as inflationary pressures have soared to record highs with the US registering a fresh 40-year high of 8.6% in May. The increase in inflation will likely force the Fed to extend an aggressive series of interest-rate hikes which will push the CBJ to take similar actions given that the Jordanian dinar is pegged to the dollar.
Banks in the region have been consolidating to improve economies of scale, reduce operating and funding costs as well as boost profitability and efficiency. Jordan’s Capital Bank Group agreed to acquire 100% of Societe Generale Bank Jordan (SGBJ) in February, in its second foray within a year to expand its foothold regionally and domestically. The acquisition of SGBJ, which is 87.7% owned by Societe Generale de Banque au Liban, follows the takeover of Lebanese Bank Audi’s businesses in Iraq and Jordan.
Saudi Arabia’s wealth fund, Public Investment Fund (PIF), also signed a subscription agreement with Capital Bank in June to acquire a 23.97% stake for $185 million in a deal that is expected to help the lender expand its operations in Jordan, Saudi Arabia, Iraq and other markets.
“Jordan’s commitment to economic reforms, the full reopening of the economy, rising demand for exports and a rebound in tourism will support economic growth,” Moody’s said in July. The ratings agency said that the rebound in the Jordanian economy has helped to improve operating conditions for the country’s financial institutions and continues to support the banking sector’s stable outlook.
Banks in Jordan have weathered the pandemic storm and analysts say that the banking sector has the footing to move forward with new lessons and strategies for success including digitalisation—which was accelerated by COVID-19.
– Moody’s
Structural reforms
The IMF said that Jordan’s fiscal reforms are crucial to preserve macroeconomic and external stability as well as placing public finances on a sounder foundation while lessening the risks to debt sustainability.
The Hashemite Kingdom outperforms regional peers on government effectiveness and control of corruption—characteristics that won broad-based international support in the form of budgetary grants, concessional financing and technical assistance. The government’s key fiscal reforms, backed by efforts to close tax loopholes and combat tax evasion, have started bearing fruit.
“On the back of recently implemented legislative reforms aimed at broadening the tax base and administrative efforts, domestic revenues overperformed 2021 projections by 0.5% of GDP, with tax revenues up 13% year-on-year,” said the IMF.
Jordan is one of the few countries in the Middle East whose economy is not dependent on natural resources due to the scarcity of hydrocarbons and water, nevertheless, it is also one of the most committed to fiscal reforms within the region having taken steps to privatise the economy, introduce tax reforms as well as opening up the banking sector.
The visit by Saudi Arabia’s Crown Prince Mohammed bin Salman in June is highly expected to unlock as much as $3 billion in investment projects that the Gulf state committed to in recent years but never materialised. Jordan is also on the investment radar of UAE-based including AD Ports and sovereign wealth funds ADQ and Mubadala.
ADQ said in May that it will allocate $10 billion in investment for projects with Egypt and Jordan and the partnerships will focus on agriculture, pharmaceuticals, minerals, petrochemicals and textiles. The Abu Dhabi-based wealth fund also launched a $100 million technology-focused venture capital fund in June to support Jordan’s burgeoning digital economy.
Jordan remains largely shielded from the fallout of the Russia-Ukraine war by long-term gas supply agreements, large strategic wheat reserves, soaring fertiliser exports and a strong recovery of its tourism sector. The Hashemite Kingdom is working to attract foreign investment and shift away from a public sector-dependent model to create more sustainable job growth for its youthful population.
– The World Bank
