September 2013 /
N o 10
Macroeconomics and Development
Jordan: Introduction Since 2008, the countries of the Middle East and North Africa (MENA) have been affected by different kinds of shocks. The international financial crisis and then the euro-zone sovereign debt crisis have brought on a sharp slowdown in the growth of goods and services exports from the MENA countries. These macroeconomic shocks were compounded by a political shock wave that impacted several of the region’s countries in the wake of the popular uprising in Tunisia in early 2011. These different crises have penalised their pace of growth, particularly those countries that depend most on international business, such as Jordan. Jordan is highly dependent on external financial flows, which are exposed to international economic conditions and the turmoil of a changing regional environment. Worker remittances, a major resource for Jordan, are contracting sharply, tourist receipts are following suit and foreign direct investment (FDI) has taken a turn for the worse. As a result, since 2008, the pace of Jordan’s economic growth has more than halved, which has stunted the per capita level of wealth. In addition, as the country has scant oil and gas resources, it imports almost all of the energy it consumes. Moreover, the many sabotage attacks on the gas pipeline in Egypt – which supplies most of Jordan’s energy needs at preferential tariffs – have repeatedly disrupted power supplies to the Jordanian Kingdom. The country has thus
the stakes of growth in a troubled regional context Slim Dali (
[email protected]) Macroeconomic Analysis and Country Risk Unit, AFD
been forced to source its energy at market prices, which pushes up its energy bill and worsens its external balances. Faced with this slackening activity, the public sector has taken over from the private sector to drive growth. This, however, has certain limits given that government finances have deteriorated, with a very high level of debt that has been rapidly rising since 2008. Jordan’s specificity within this troubled region brings up the question of its socio-political environment, which is analysed in the first part of this study. In the second part, we explore Jordan’s economic growth regime and its medium-term prospects. Public finances are examined in detail in the third part, followed by an analysis of Jordan’s financial system in the fourth part. The final part on external balances completes the study’s macroeconomic and financial diagnosis.
Sommaire 1 / JORDAN EMBEDDED IN THE TURMOIL OF A FAST-CHANGING REGIONAL ENVIRONMENT 1.1. The country’s long-standing exposure to its neighbours’ unrest
3
1.2. The potentially destabilising impact of the Syrian conflict
5
2 / THE PACE OF GROWTH HAS SLACKENED SHARPLY SINCE 2008
8
2.1. The growth regime is running out of steam, leading to a downturn in per capita wealth 2.2. A growth model displaying signs of weakness to external shocks and dependent on the public sector at the end of the period 2.3. A deteriorating economic context and changing regional environment impact Jordan’s sources of funding
3 / THE PUBLIC DEBT IS HIGH AND BRINGING IT UNDER CONTROL IS UNCERTAIN 3.1. The marked increase of domestic debt has weighed on total public sector debt since 2008
2
8
4 / THE BANKING SECTOR PARTICIPATES IN FINANCING ECONOMIC ACTIVITY BUT LESS SO SINCE 2008
22
4.1. A downturn in the cycle of private sector credit since 2008, whereas public sector credit is on the rise
22
4.2. The banking system is well regulated and adequately supervised by the CBJ
24
10 12
15
5 / DETERIORATING EXTERNAL ACCOUNT BALANCES DUE TO THE EFFECT OF REGIONAL TURMOIL 25 5.1. A growing external financing requirement is covered by drawing on foreign reserves
25
5.2. Pressures on external liquidity since 2011 can be eased by support from external players
28
15 CONCLUSION
3.2. The fiscal deficit is widening and fuelling central government indebtedness
18
3.3. An uneven history of payment prompts caution
21
LIST OF ACRONYMS AND ABBREVIATIONS REFERENCES
© AFD / Macroeconomics and Development / September 2013
30 31 32
1/ Jordan embedded in the turmoil of a fastchanging regional environment Jordan is a parliamentary monarchy that concentrates numerous powers in the king’s hands, notably the power to appoint the head of the executive, dissolve the Chamber of Deputies and appoint and dissolve the Senate. Only 150 members of the Chamber of Deputies are elected. Although political parties have been authorised since 1992, the electoral system limits access to the National Assembly to some of them.
1.1. The country’s long-standing exposure to its neighbours' unrest Political vulnerabilities and a a segmented society The Chamber of Deputies is renewed every four years but early elections can be held if the king so decides. Normally, the parliamentary elections do not give rise to violence, despite past accusations of fraud. [1] According to observers, the anticipated elections in January 2013 unfolded satisfactorily mainly thanks to the setting-up of an independent electoral commission. The Jordanian voting system has two particularities. The first is the absence of any regulation of political party financing: there is no public funding for elections and no cap on private funding. The second relates to the electoral law promulgated in 1993 to curb the parliamentary influence of the main opposition party – the Islamic Action Front (IAF, the political arm of the Muslim Brotherhood) – and the left-wing parties, following the democratic experience of 1989. [2] This law introduced a single non-transferable vote system
(commonly dubbed “one vote” or sawt al-wahid ), whereby the voter is led to choose a single candidate and not a list of candidates. [3] However many seats are being contested in a constituency, the voter is limited to choosing only one of the candidates. This voting system fosters the traditional mainstays of the Jordanian regime, in other words the Bedouin tribes. [4] The fracture lines in Jordanian society are visible between (and among) (i) the East Bank Jordanians (so-called “original” Jordanians) and the Jordanians of Palestinian origin (who account for half of the total population), (ii) the Bedouin tribes, (iii) the urban and rural zones (Amman and the north-west of the country vis-à-vis rest of the country in particular) and (iv) the populations with no political representation, who come from recent migratory influxes (Iraqis, Egyptians, Syrians). Yet, the risks underlying this social fragmentation remain limited insofar as these groups do not enter into conflict with each other. Moreover, unlike the other MENA countries, where religious divisions are pronounced and likely to create deep antagonisms, the Jordanian population is relatively homogeneous (over 95 % of the population are Sunni Muslims). [5] The East Bank Jordanians and the Bedouin tribes are the linchpins of the Hashemite Kingdom. Although the Jordanians of Palestinian origin are not present in the public sphere, they play an active role in the private sector and belong to some of the country’s large business families.
[ 1 ] See Obeidat (2012). As the 2007 legislative elections were marred by accusations of electoral fraud, King Abdallah II demanded greater transparency for the following election (source: website of the French Ministry for Foreign Affairs [MAE]). [ 2 ] In the 1989 elections, the Muslim Brotherhood won 20% of the votes and 30% of the seats in Parliament. The sudden and clear entry of this political party into the lower house upset the balance to which the regime’s supporters had grown accustomed (cf. Brookings Doha Center, 2011). [ 3 ] This electoral system exists almost nowhere else in the world: only Afghanistan and Vanuatu apply this system apart from Jordan. [ 4 ] See Brookings Doha Center, 2011. [ 5 ] According to Balanche (2010) “Jordan has no community problems in the confessional or ethnic sense as 97% of the population are Sunni Arabs and the minorities are perfectly integrated.”
/ Jordan: the stakes of growth in a troubled regional context /
3
Contained socio-economic vulnerabilities Buoyant economic growth in the 2000s contributed to a substantial rise in per capita wealth (cf. Part 2) and a lessening of income inequality. From this point of view, Jordan’s growth may be described as inclusive, given the limited extent of income distribution inequality and a poverty rate (USD2 a day) of 1.6% of the population. Moreover, the Jordanian State allocates a sizeable share of its budget to subsidising food prices and petroleum products (an average of 12.5% of its own-source budget receipts between 2000 and 2011) and ensures social tariffs for electricity. Access to education and government spending per student are relatively high compared to the MENA region, with the enrolment rate reaching over 90% for primary education and 85% for secondary. On the other hand, the employment rate is one of the lowest in the region (36% of working-age population) and the unemployment rate fell only slightly during the boom years of the 2000s, stagnating at around 13%. The slackening of growth since 2008 has affected employment, particularly for young people and higher education graduates. The latter accounted for 33% of all unemployed workers in 2010 and this figure is growing significantly (cf. Box 1).
Jordan’s specific location and the destabilising waves of refugees seem to present a geographical and historical vulnerability for the country The territory of Jordan was artificially created following the European plans to carve up the Ottoman Empire in 1921; it became the Hashemite Kingdom of Jordan in 1946. Due to its location, Jordan is highly exposed to regional conflict – for the most part, the conflict opposing its neighbour Israel and the Arab States. The ArabIsraeli wars [6] brought massive waves of Palestinian immigrants into Jordan; many of these refugees obtained Jordanian nationality after King Abdallah I annexed the West Bank in 1949. During the First Gulf War (19901991), King Hussein’s support to Saddam Hussein triggered the expulsion of many Jordanians and Palestinians working in Kuwait and other Gulf States. The Second Gulf War (2003) led to the arrival of several thousand Iraqis in Jordan. Finally, the Syrian civil war, on-going since 2011, has resulted in a massive influx of refugees. These regional disturbances have thus translated into recurrent internal political tensions and the inherent difficulties of constructing a national identity. Moreover, the political, social and economic integration of Jordan’s Palestinian refugees has been a central question for the Hashemite Kingdom and even created a fundamental ambivalence. [7 ]
[6 ] The first Arab-Israeli war took place in 1948, directly after the declaration of the creation of the State of Israel. Following this 38-day war, 900 000 Palestinians became refugees after Israeli troops had extended their control over part of the zone that had been assigned to the Arab State of Palestine. The second 6-day war was waged in June 1967. The outcome was Israel’s occupation of the West Bank (this had been annexed by Jordan in 1949) and the expulsion of 200 000 Palestinian refugees to Jordan. [7 ] The Kingdom of Jordan considered that the Palestinians needed to be integrated to ensure the stability of the Crown, whereas the Palestinian Liberation Organisation (PLO) demanded refugee status for them so that they could keep the right of refugees to return to their homeland.
4
© AFD / Macroeconomics and Development / September 2013
1 / Jordan embedded in the turmoil of a fast-changing regional environment
Map 1
Jordan’s geographical location and the region’s historical events
1.2. The potentially destabilising impact of the Syrian conflict Events likely to affect the socio-political environment • Political domain After the region’s popular uprisings in 2011, political and social demands also made themselves felt in Jordan, prompting the Kingdom to engage in reform. It was in this setting that the electoral system was modified in July 2012. Yet, the reform did not alter the single non-transferrable vote election system that had been instituted by the 1993 Law. The main opposition party, the Islamic Action Front (IAF), thus decided to boycott the January 2013 elections. This means that the demands for more political openness will likely continue.
• Economic and social domain
Source: Economic Intelligence Unit (EIU); mentions of regional crises added by the author.
In September 1970, a bloody conflict known as “Black September” broke out between PLO fighters and the Jordanian Army, which at the time included over 30% of Palestinian recruits. It was in the aftermath of these offensive attempts of the PLO to overthrow King Hussein – accused of obstructing the Palestinian cause – that the Kingdom of Jordan launched military operations aimed at quashing the PLO’s influence in the refugee camps. Indeed, armed commandos had been training inside the camps and were about to carry out armed actions to raise the world’s awareness of Palestinian demands. This civil war, which lasted several months and led to the death of several thousand people, deeply traumatised the country and left a lasting mark on the collective unconscious.
Fuel price subsidies – which all households receive regardless of their income – were suppressed then replaced by a monthly price adjustment for these products and by a subsidy mechanism targeting mainly poor households and the middle class should the price of a barrel of oil exceed USD100. Monthly rises in fuel prices resulting from this adjustment mechanism are likely to rouse protests against the authorities, even though their decision is not of a political nature. The problems encountered by households to smooth their energy consumption may indeed give rise to protests, as was the case of the demonstrations in November 2012. [8] The flat economic context and sluggish regional conjuncture was exacerbated by the return of skilled Jordanian workers and heightened labour market tensions. More specifically, the unemployment rate for youth (who account for 28% of the total working-age population in 2010) is increasing, particularly that for higher education graduates, which exhibits a constant rise (33% of all unemployed in 2010). This context may impact the socio-political environment when viewed through the prism of the Tunisian situation, where demands for employment became the driving force behind the 2011 popular uprising (cf. Box 1).
[ 8 ] The decision by the Jordanian authorities to do away with fuel subsidies resulted in a 50% price rise for domestic gas canisters, 33% for diesel and 14% for kerosene. This triggered violent demonstrations in which three people died (one demonstrator and two law enforcement officers).
/ Jordan: the stakes of growth in a troubled regional context /
5
• Geopolitical domain There has been a massive influx of Syrian refugees into Jordan. This movement accelerated after the resurgence of the civil war in late 2012. On 2 September 2013, the United Nations High Commissioner for Refugees (UNHCR) reported 519,676 refugees, equivalent to 8% of Jordan’s total population. Their number may further increase to over 660,000, [9] or even 1 million by the end of 2013, equivalent to between 10% and 15% of Jordan's population. On top of the difficult social conditions to which the Syrian refugees are exposed, their presence exacerbates pressure on the country’s modest water and energy resources. In the light of historical factors, this massive influx of refugees thus represents a risk that could potentially destabilise Jordan.
Events that could ease the socio-political environment Constitutional
reform
was
introduced
in
September 2011 so as to improve the balance of power, following the political and social demands spurred by the popular movements of 2011. This extended the prerogatives of the judicial authority, strengthened the powers of Parliament and created a Constitutional Court. The modification of the electoral law of July 2012 provided for the settingup of an independent electoral commission. This new law also authorised an increase in the number of seats in the National Assembly (from 120 to 150 seats) as well as the introduction of some degree of proportional representation (18%), which gives more access to Jordanians of Palestinian origin. Finally, it is in the full interests of several foreign players to protect Jordan as a political entity from any kind of destabilising effects. On the one hand, the Gulf monarchies have an incentive to back the Jordanian Crown, which is also Sunni, so as to afford themselves some degree of protection; on the other hand, the Western powers – above all the United States – will probably continue to offer their financial and military support to protect their Jordanian ally, which is also the neighbour of their Israeli ally.
[ 9 ] Estimate of the local authorities in January 2013.
6
© AFD / Macroeconomics and Development / September 2013
1 / Jordan embedded in the turmoil of a fast-changing regional environment
Box 1 Growing tensions on the Jordanian labour market create risks for social order and the growth cycle Healthy economic growth between 2000 and 2008 (6.9% annual average) generated a net increase of 457,000 jobs, whereas the unemployment rate only marginally improved, standing at about 13% of the working-age population (180,000 people in 2009). About 42% of this new employment was in the public sector – which remains the country’s leading employer – and over half of the jobs created in the private sector were filled by foreign workers. The latter are estimated to number from 350,000 to 500,000 and occupy lowskilled jobs. As for the Jordanians who have emigrated, the Ministry of Labour estimated their number at 165,000 in 2009. They chiefly comprise skilled workers (55% of emigrants are higher education graduates) and their main destinations are Saudi Arabia (34.8%), the United Arab Emirates (22.7%) and the United States (12.1 %). The employment rate in Jordan is one of the lowest in the region and was estimated at 36% of the workingage population in 2010 (11.9% for women), whereas in the MENA region this is 43% (cf. Figure 1). This low employment rate induces a weak domestic savings rate, which is structurally negative [10] (cf. Figure 2). In fact, domestic investment is financed by foreign workers’ savings, which appears exceptionally high compared to other countries in the region (an average 19% of GDP between 2000 and 2011).
Figure
1
Employment rate (population aged 15 and above, %) Jordan MENA
Tunisia Egypt Euro zone
Morocco
55 50 45 40 35
2
Domestic savings rate, investment rate and remittances (average 2000-2011, % of GDP) Savings rate Worker remittances
Investment rate
35 30 25 20 15 10 5 0 -5 Jordan
Tunisia
Egypt
MENA*
* average 2005-2010 Source: WDI; author’s calculations.
The slowdown of the national economy and Jordan’s dependency on regional activity may reduce worker remittances and impact domestic investment, hence growth. In fact, the gradual move in the Gulf States to employ nationals rather than immigrants (to absorb the young people entering the labour market in these countries) means that qualified Jordanian workers are returning home. These then enter the increasingly strained domestic labour market and add to the number of already present qualified unemployed. Moreover, 40,000 young higher education graduates enter the labour market each year, but the Jordanian economy cannot absorb them: 15,000 of them swell the number of those unemployed or inactive. Against this backdrop of sluggish growth, the unemployment rate of higher education graduates is trending upwards (33% of all unemployed in 2010) and represents a sociopolitical risk, as was the case in Tunisia, where the demands for jobs were key drivers in the 2011 popular uprisings.
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10
20 00
30
Figure
Source: World Development Indicators (WDI); author’s calculations.
[ 10 ] The savings rate is the share of disposable income that is saved. A savings rate is negative if an individual’s consumption is higher than their disposable income, which implies a net increase of indebtedness.
/ Jordan: the stakes of growth in a troubled regional context /
7
Figure
3
Table 1
Unemployment rate in 2010 (% of total working-age population)
Growth rate required to absorb new labour market entrants and the currently unemployed (%)
Youth unemployment rate (%)
35
Unemployment rate in 2010
Tunisia
30
Egypt
12.5
Real annual GDP required
9.3
Real GDP (2000-2010)
6.1
Real GDP forecasts (2010-2017)
3.3
Jordan
25 MENA Lebanon
Syria
20
Central and South East Developed eco. Europe and CIS* and Euro zone South East Asia Morocco and Pacific Latin America and Caribbean
15
World
Note: This table, based on IMF data (2012c), is not only useful for its figures, but also because it highlights that growth is not sufficient to absorb all of the unemployed.
Sub-Saharan Africa
10 East Asia
Source: IMF 2012c.
5 4
5
6
7
8
9
10
11
12
13
14
Total unemployment rate (%)
Sources: National Employment Strategy, Ministry of Labour (MOL), Ministry of Finance (MOF).
2/ The pace of growth has slackened sharply since 2008 2.1. The growth regime is running out of steam, leading to a downturn in per capita wealth The geographical situation of Jordan is such that its growth has been hit by the turmoil that the region has experienced over the last forty years. [11] Certainly, the singular geostrategic position of this “buffer State”, which has no oil or gas resources, has enabled it de facto to harvest foreign aid that partly offset the effects of external shocks. Thus, between 1980 and 2012, Jordan registered a relatively sustained growth rate of over 6% per year on average, whilst experiencing two major shocks (cf. Figure 4).
The 1989 debt crisis Following the fall in oil prices in the early 1980s, the dynamism of the Gulf States’ economies ran out of steam. This impacted Jordanian exports to these countries and the remittances of Jordanian migrants to their home country. To cope with this pronounced regional slowdown, the Kingdom of Jordan introduced an expansionist budgetary policy at the end of the 1980s based to a great extent on external debt. This reached 174% of GDP in 1989. Concurrent to this debt crisis came a exchange rate crisis, which required the intervention of the International Monetary Fund (IMF) and the World Bank.
[ 11 ] The oil shocks of 1973 and 1979 caused a significant slowdown in the region’s activity through the trade channel. The Iran-Iraq War (1980-1988) redirected international financial aid to Iraq. In particular, the 1967 Six-Day War led to the displacement of a large number of Palestinians to Jordan. The First Gulf War (1990-1991) cut off Jordan’s access to the Iraqi market, put a stop to grants from the United States due to King Hussein’s repeated support for Saddam Hussein, and caused the expulsion of thousands of Jordanians and Palestinians working in Kuwait and the Gulf States. The Second Gulf War (2003) drove several thousands of Iraqis into Jordan and the downfall of Saddam Hussein’s rule halted the supply of preferentially priced Iraqi oil. Finally, since 2011, the uprising of the Syrian people has led to the massive arrival of refugees, whom the Kingdom of Jordan has to host.
8
© AFD / Macroeconomics and Development / September 2013
2. The pace of growth has slackened sharply since 2008
Figure
4
Real GDP growth and average annual growth rate (AAGR) (%) 20
Average annual growth over 10 years
15 10 5 0 -5
Debt crisis
International crisis Popular uprisings in some Arab countries
10
20 12
20 08
20 04
20 00
19 96
19 92
19 88
19 84
19 80
-15
Source: WDI; author’s calculations.
The 2008 international crisis after ten years of sustained growth After the shock of 1989, reforms were implemented and, although temporarily hampered by the First Gulf War, these helped to develop the private sector. Jordan’s economy then embarked on a growth trajectory reaching an average 4.7% between 1990 and 1999 (compared to 1.9% over the previous decade). In 1999, with Abdallah II’s accession to the throne, the economy was marked by some major liberalising reforms: the main state-owned entities were privatised, trade opened up, [12] foreign investment was actively encouraged and the financial sector was modernised. With a supportive international economic environment, these reforms helped to accelerate the annual average growth rate to 6.9% between 2000 and 2008. In the aftermath of the 2008 financial crisis and then the 2011 popular uprisings in some Arab countries, the growth rate was more than halved (2.5% annual average between 2009 and 2012).
mid-1980s, GDP per capita (in constant 2005 USD) fell sharply from 1987 to bottom out in 1991 at nearly USD3,000 (Figure 5). Thereafter, GDP per capita progressed and, in 2005, recovered its 1987 level (USD4,330). This has levelled off since the 2008 shock at USD5,300. A regional comparison shows that the Jordanians’ level of wealth is lower than the MENA country average [13] (USD6,500 in 2009 in constant 2005 USD), whereas it was quite close a little before the 1989 debt crisis (Figure 6). A comparison of changes in GDP per capita with Tunisia clearly shows Jordan’s divergence from the average level of wealth of the Mediterranean countries since the 1989 shock. In fact, the levels of wealth of the Jordanians and Tunisians were practically identical in 1980 but the shock of the debt crisis and the exchange rate crisis on the Jordanian economy stalled the growth dynamic and triggered this divergence from the early 1990s. A slow convergence is nonetheless visible following the strong performance of the Jordanian economy in the 2000s. On the other hand, the Jordanians’ level of wealth is clearly higher that that of sub-Saharan Africa’s average over the entire period. When compared globally, Jordan’s GDP per capita has remained stable since the mid-1990s.
Figure
GDP per capita (constant prices, base 100 in 1980) 140 130 120 110 100 90 80 70 1980
A fall-off in wealth per capita In terms of wealth, the trends reflect the different phases of Jordan’s development. After rising until the
5
1985
1990
1995
2000
2005
2010
Source: WDI; author’s calculations.
[ 12 ] Since 2000, Jordan has (i) signed bilateral free trade agreements (with the United States, the European Union), (ii) joined the World Trade Organisation (WTO) and (iii) developed trade ties with the countries in the zone under the Greater Arab Free Trade Area (GAFTA); cf. AMR, April 2009. [ 13 ] The Gulf States are not included in this average.
/ Jordan: the stakes of growth in a troubled regional context /
9
GDP breakdown by sector (average, %)
Table 2
Figure 6 GDP in purchasing power parity (% of average GDP per capita for Tunisia, Morocco, Egypt, MENA, sub-Saharan Africa and the world) Jordan/MENA (excl. Gulf) Jordan/Egypt Jordan/World
Jordan/Tunisia Jordan/Morocco Jordan/SSA
Agriculture
Industry
Services
1980-1989
6.5
26.8
66.7
1990-1999
4.8
27.1
68.1
2000-2008
2.7
29.5
67.8
2009-2011
3.3
31.3
65.5
300 Source: WDI; author’s calculations.
250 200
“Private services” and public services have been the key components of GDP for three decades
150
A more detailed analysis of GDP breakdown by sector affords greater insight into the productive structure of Jordan’s economy, as well as the structural changes following the 1989 and 2008 crises (Figure 7).
100 50 0 1980
1985
1990
1995
2000
2005
2010
Figure 7 Source: WDI; author’s calculations.
Detailed GDP breakdown by sector (average, %) In total, it seems that the slowdown of activity in the Gulf States in the late 1980s together with the 1989 crisis had a strong adverse impact on the Jordanian economy until the early 2000s, with a large drop in the population’s living standards (divided by 1.4 between 1987 and 1991, in constant Jordanian dinars [JD] [14] ), whereas the other countries in the region (Tunisia, Egypt) followed a different growth trajectory.
1980-1989 2000-2008
1990-1999 2009-2011
25 20 15
According to the World Bank’s sector decomposition, the evolution of the productive structure of the Jordanian economy has been characterised since 1980 by a fall of almost 3 percentage points in agriculture’s share of GDP (Table 2). This shift occurred as of the mid-1990s. The services sector held a preponderant position in the Jordanian economy contributing to more than 65% of GDP over the three decades consi-
10 5 0 Ag ric ult ur e, Fis he rie Co s ns tru Ele cti on ctr ici ty, wa ter M Tra ini M ng ns an po u fac rt, t Co ur ing mm Tra de un , re ica sta tio ns ur Pr an iva t s, te ho se tel cto s rs Pu e bli r v cs ice ec s* to rs er vic es
2.2. A growth model displaying signs of weakness to external shocks and reliant on the public sector at the end of the period
*Private sector services: finance, insurance, real estate services, business services, others
Source: Department of Statistics of Jordan (DOS); author’s calculations.
[ 14 ] The Jordanian dinar is the local currency. It is pegged to the US dollar: USD1 = JD0.709 since 1995.
10
© AFD / Macroeconomics and Development / September 2013
2. The pace of growth has slackened sharply since 2008
Over the entire thirty-year period, the activity of the “private services” (financial services, insurance, real estate services, business services) and public sector services accounts for the largest sectoral share of Jordan’s economy (42% on average over the 19802011 period). The 1989 debt crisis had few visible impacts on the transformation of the services sector. On the other hand, it seems that the 2008 crisis reduced the “private services” share of GDP to an average 18% over the 2009-2011 period (compared with 22% over the 2000-2009 period). After 2008, the public services activity became Jordan’s largest sector, reaching an average 23% of GDP over the 2009-2011 period. Another remarkable structural change can be seen in the manufacturing sector, whose share in total activity exceeded that of “private services” (averaging 19.5% over the 2009-2011 period). Growth in manufacturing is visible from the beginning of the 2000s and is connected to the development of Qualified Industrial Zones (QIZ), [15] which bolstered the dynamism of pharma ceutical, textile and fertiliser manufacturing. In the primary sector, few changes are to be seen after 1980, except in the agricultural sector: the GDP share of mining activities [16] and electricity and water remained low, while that of the agricultural sector [17] was halved between 1980 and 2011 (falling from an average 6% of GDP between 1980 and 1989 to 3% between 2009 and 2011).
strongest contributors over this period. The reforms undertaken in the 2000s most likely benefited the manufacturing sector more than financial services and insurance (the major component of “private services”). Hence, the contribution of manufacturing to GDP growth increased from 0.92 percentage point of GDP over the 1990-1999 period to 1.9 percentage points of GDP over the 2000-2008 period, whereas that of “private services” accounted for 0.87 percentage point of GDP over the latter period. The twofold increase in the manufacturing sector’s contribution during the 2000s indicates increased manufacturing output over this decade (pharmaceuticals, fertilisers, textiles, foodstuffs…). The development of this sector, mainly comprising small and medium-sized firms), was driven by the implementation of liberal reforms and trade agreements [18] and a supportive international environment. [19]
Figure
8
Contribution to real GDP growth by sector (average, %) 1980-1989 2000-2008
1990-1999 2009-2011
3,5 3,0 2,5 2,0 1,5
0,5 0,0 -0,5 Mi nin g Ma Tra nsp nu fac ort tur ,C ing om mu Tra n de ica , re tio ns sta ura n Pri t s , ho vat es tel s ect or ser Pu vic blic es* sec tor ser vic es
A reading of the sectoral contributions to real GDP growth reveals that Jordan’s economic activity between 1980 and 2008 was buoyed up chiefly by the private sector (Figure 8). More precisely, while the contributions of the primary sector and construction remained relatively weak, the “private services”, manufacturing and “transport and telecommunications” were the
1,0
Ag ric ult ure , Fi she rie s Co nst ruc tio Ele n ctr icit y, W ate r
After the strong but short-lived contribution of manufacturing to growth in the 2000s, the 2008 shock impacted the private sector, while the public sector took over as the key growth driver
*Private services: finance, insurance, real estate services, business services, others. Source: DOS; author's calculations.
[ 15 ] Five Qualified Industrial Zones were created to promote export industries and foreign investments (Anima, 2010). [ 16 ] Mining activities are concentrated on phosphate and potassium extraction. Jordan is the world’s sixth largest phosphate producer and second largest exporter after Morocco (according to the WTO). These minerals are used chiefly in fertiliser production. The output of these resources reached nearly 10 million tonnes in 2011 (source: Industrial Companies in Jordan; AMR calculations). [ 17 ] Jordan suffers from chronic water shortage and 90% of the Jordanian territory is in a semi-desert area (source: WTO). Farm holdings are fragmented and 40% of cultivated land is irrigated (source: AMR calculations based on DOS data). [ 18 ] Jordan has signed 38 trade agreements internationally including: the Association Agreement with the European Union (1997), membership of the Greater Arab Free Trade Area (1998), membership of the WTO (2000), Free Trade Agreements with the United States (source: Anima, 2010). [ 19 ] Pharmaceuticals, textiles and fertilisers represented 43% of the export value of goods in 2007 (source: AMR calculations based on data from the Central Bank of Jordan [CBJ]).
/ Jordan: the stakes of growth in a troubled regional context /
11
The slackening pace of growth following the 2008 international crisis is primarily due to the contraction of manufacturing activity (by an average of 1.76 percentage points of GDP between 2008 and 2011). Apart from the impact of the slowdown of activity worldwide, which adversely affected exporting companies, the dismantling of the Multi-Fiber Agreement in 2005 significantly reduced the main benefits for textile exports from the Jordan’s Qualified Industrial Zones. [20] This shock also pointed up the vulnerability of Jordanian manufacturing companies that rely heavily on imports for their production, although some upgrading is underway in certain sub-sectors. [21] The effect of this growth shock on the private sector was cushioned by the public services sector, which has taken over as the key driver of the Jordanian economy since 2008 (the contribution of this sector to GDP growth showed a rise even after 2008). The public sector, which is the country’s prime employer, has been increasing its contribution to economic growth for over thirty years. Yet, this contribution has limits as the burden on public finances is becoming heavier. Moreover, in a context characterised by the reduction of the fiscal deficit and government debt expansionary fiscal policies will become increasingly rare. The crucial question is whether or not this structural deformation is temporary and to what extent the public sector can continue to act as the driver of economic growth.
2.3. A deteriorating economic context and a changing regional environment are affecting Jordan’s sources of funding Jordan’s sustained pace of growth between 2000 and 2008 (an annual average of nearly 7%) was mainly bolstered by private consumption and, to a lesser extent, by investment [22] (Figure 9).
Figure 9 Real GDP growth by demand component (%) Private Consumption Government Consumption X-M ** Stocks
GFCF* GDP
25 20 15 10 5 0 -5 -10 -15 2000
* **
2002
2004
2006
2008
2010
GFCF: Gross Fixed Capital Formation X-M: Net exports
Source: Ecowin; author’s calculations.
The buoyancy of domestic demand was sustained by a supportive international context that helped to increase Jordan’s externally sourced revenues (Figure 10). Tourist receipts, remittances and grants (volatile components) represented an average of 40% of GDP between 2000 and 2008. Buoyed by a favourable international conjuncture and promoted by Jordan’s privatisation programme, [23] FDI was substantial over this period (Figure 11). More specifically, investments from the Gulf States were particularly high between 2005 and 2008, representing an average 17% of GDP over this period.
[ 20 ] According to the WTO (2008). [ 21] The value-added of the manufacturing industry (including mining) rose from 24% of GDP in 1994 to 29% in 2008 (source: DOS). Some sectors, such as pharmaceuticals, have recently moved up the value chain (source: Anima, 2010). [ 22 ] The average contribution of household consumption expenditure to GDP growth between 2000 and 2008 was 6.1% and that of investment 2.1% (AMR calculations based on Ecowin data). [ 23 ] Jordan embarked on its privatisation programme in 1996 in order to rebalance the public sector’s role in the economy and carried out several privatisations in the 2000s under the 2000 Privatisation Law (OECD, 2012). The programme focused on national infrastructure and public utility services (WTO, 2008).
12
© AFD / Macroeconomics and Development / September 2013
2. The pace of growth has slackened sharply since 2008
Figure 10 Externally sourced revenue (% of GDP) Grants
Remittances
Tourism receipts
25 20 15 10 5 0 2000
2002
2004
2006
2008
2010
Since the international financial crisis and the popular uprisings in some Arab countries, external revenues have declined – particularly remittances, which shrank by nearly 7% of GDP on average after 2008 [24] – and FDI inflows dropped back closer to their historical levels after a period of exceptional growth. As a result, total private consumption and investments slowed down considerably and significantly contributed to the slackening pace of growth (an annual average of 2.5% between 2009 and 2012). Moreover, after the 2011 uprising in Egypt, the repeated sabotage of the Egyptian gas pipeline (which supplies Jordan with 80% of its energy needs) has led to a rise in the energy bill, thus constraining growth (impact of 16% of GDP). It was in these tense circumstances that Jordan asked the IMF for aid, which materialised in August 2012 in the form of a Stand-By Arrangement (SBA) amounting to USD2 billion spread over thirtysix months.
Source: WDI; author’s calculations.
Figure 11 Investment (% of GDP) GFCF
Net FDI
Public investment
25 20
• decreasing tourism receipts due to the region’s political crisis [25]
15
• decline in remittances that will likely not rebound to their pre-crisis level
10
• probable stabilisation of FDI, at least in the short run; the country could nonetheless benefit from its relatively stable position compared to the turbulence of neighbouring countries (Syria, Iraq, Egypt)
5 0 2000
Jordan’s growth is thus highly dependent on external economic and financial flows, which have declined in an adverse economic context and changing regional environment. Its energy dependency – imports cover 95% of energy needs – is an additional source of vulnerability (cf. Box 2). In 2012, economic growth was set to reach 2.8% and IMF forecasts remain flat in the medium term. This scenario of sluggish growth is likely in view of the following factors:
2002
2004
2006
Source: WDI, IMF; author’s calculations.
2008
2010
• limits to the role of key growth driver taken over by the public sector given the slackening private sector (almost no budgetary leeway, implementation of the IMF programme conditionalities, cf. Part 3) • energy imports, which remain a source of vulnerability (although Jordan plans to diversify its sources of supply).
[ 24 ] The economic slowdown and the Gulf States’ policy of giving jobs to nationals have triggered the return of Jordanian workers to their home country. [ 25 ] Travel agencies offer many package holidays for Egypt-Jordan and Syria-Jordan. Egypt’s political crisis and the violent crises in Syria have been impacting bookings since 2011. The drop in receipts from Western tourists was nonetheless partially offset by spending by tourists from Arab countries in 2012, without however reaching the 2010 level (source: CBJ).
/ Jordan: the stakes of growth in a troubled regional context /
13
Box 2
Energy-related vulnerabilities increase Jordan’s country risk
Given that Jordan has no hydrocarbon or natural gas resources of its own, the country is highly dependent on energy imports: 96 to 98% of consumed energy is imported. Until the Second Gulf War in 2003, Jordan depended on subsidised supplies of Iraqi crude oil. Since then, oil has been imported mainly from Saudi Arabia (97% of crude oil imports) and to a lesser extent from Iraq (10 000 barrels per day). For its power generation, Jordan relies 80% on gas provided by Egypt. Given that there is a growing demand for energy (an annual increase of 5.5% for primary energy and 7.4% for electricity), this high level of energy dependency heightens the country’s vulnerability to external shocks.
The actors in Jordan’s energy sector The state-owned refinery, The Jordan Petroleum Refinery Company (JPRC), is the sole importer of petroleum products (crude oil and refined petroleum products). It is also responsible for sales at an administered price nationwide, including sales to energy producers. As for the electricity sector, the reforms introduced in 1999 and 2002 (under the General Electricity Law) have restructured the sector by creating separate companies for electricity transmission, generation and distribution: • the Electricity Regulatory Commission (ERC) is notably responsible for setting electricity tariffs and granting licences to electricity companies; • four companies ensure power generation in Jordan: the Samra Electric Power Company (wholly stateowned), the Central Electricity Generating Company (CEGCO, partly privatised in 2007), AES-Amman East Power Plant (IPP1) and QEPCO-Qatrana Power Plant (IPP2); • electricity distribution is ensured by the Jordan Electric Power Company (JEPCO), the Irbid District Electricity Company (IDECO, partly privatised) and the Electricity Distribution Company (EDCO, wholly privatised in 2007). The distributors sell electricity to end users (households and businesses); • the National Electric Power Company (NEPCO) is a state monopoly responsible for the transmission grid on national territory and for transporting electricity from production sites to the distribution companies’ supply points. The company also ensures the connection with neighbouring country grids (Egypt and Syria). Moreover, under its remit, NEPCO purchases electricity from different Jordanian and foreign producers and sells it on to distributors at a price set by ERC. NEPCO debt is guaranteed by the State.
14
Energy price subsidies There are two types of energy subsidies: • subsidies to oil sector companies (mainly linked to fuel production/JPRC) out of the government budget. The Government subsidises the difference between the selling price and the supply costs. Households benefit from these subsidies for liquefied petroleum gas (LPG), kerosene, gasoline and diesel. The subsidies had been re-introduced in 2011 but were abolished for all fuels in November 2012. The prices applied are currently determined by a monthly fuel price adjustment. Targeted subsidies will be re-instated whenever the price of oil exceeds USD100 per barrel; • indirect subsidies to the power generation sector in the form of a state guarantee of NEPCO’s debt. NEPCO has to apply a sales price set by the regulator. These subsidies are not booked in the central government budget item but as part of the public debt. Electricity tariffs were increased in June 2012 and the next increases are planned for 2013 (as one of the conditions for the IMF’s Stand-by Arrangement, cf. Box 4).
Jordan’s energy crisis in the wake of the 2011 popular uprising in Egypt The Egyptian gas pipeline supplying Jordan and Israel has been subject to repeated sabotage since the popular uprising in Egypt in early 2011. With an 80% dependency rate for power generation, Jordan has been directly impacted by these regional disturbances: the country’s energy bill was assessed at 16% of GDP in 2011 (an increase due to the more costly substitutes for gas supplies, plus a 32% oil price hike). For 2012, the impact on the energy bill will likely be of the same magnitude, despite the fact that gas supplies resumed in December (at below the pre-crisis level). Regarding the electricity sector actors, it is NEPCO that absorbs all the sector’s losses. In fact, the company is obliged to apply tariffs set by the regulator, ERC, who ensures that the different operators remain profitable. As the average purchase price paid by NEPCO to producers is higher than its average sales price to distributors, given the higher cost of imported energy, the company runs up large daily losses (in 2011, the cost for NEPCO of one day with no supply of gas was estimated at JD3.5 million – almost the same figure in euros [EUR]). Cumulative losses for 2011 are valued at over one billion euros, equivalent to around 4.9% of GDP. For 2012, losses will be higher: about 5.3% of GDP (5.8%, had measures to increase electricity tariffs not been put in place in June 2012). NEPCO’s losses further pushed
© AFD / Macroeconomics and Development / September 2013
up the public internal debt and represent 11% of gross public debt (cf. Part 3). Jordan’s energy crisis thus impacts not only external balances but also public finances insofar as the State guarantees NEPCO’s deficits through bond issues on the company’s behalf. Certainly, the authorities are envisaging
a future round of electricity tariff rises and planning a strategy to diversify energy supply. However, the anticipated increase in electricity demand by 2020 (7.4% per year, equivalent to an annual average of 300 megawatts [MW]), as well as Jordan’s structural dependency on energy imports, heightens the country’s vulnerability.
Sources: AFD (2012); WTO (2008).
3/ The public debt is high and bringing it under control is uncertain 3.1. The marked increase of domestic debt has weighed on total public sector debt since 2008 Total public debt is high and trending upwards Jordan’s gross public debt [26] is elevated: it represented 79% of GDP in 2012 (Figure 12). The external public debt is on the other hand moderate (22% of GDP in 2012) thanks to the debt rescheduling concluded
Figure 12
during the 1990s and 2000s, and the buyback of part of its Paris Club debt in 2008. The external public debt maturity structure has remained balanced over recent years (Table 3). This means that the risk of the Jordanian Government defaulting on its foreign currency debt is, a priori , limited.
Public sector debt (% of GDP) External debt
Table 3
Domestic debt (gross)
Public debt maturity (% of GDP)
120
2009
2010
2011
2012*
Gross domestic debt
41.9
42.5
48.8
57.0
80
ST (< 1 year)
20.0
13.2
21.2
20.5
60
MT (1-5 years)
20.0
27.7
26.5
35.7
LT (> 5 years)
1.9
1.7
1.1
0.8
External debt
22.9
24.6
21.9
22.2
ST (< 1 year)
2.0
2.2
2.3
2.2
MT (1-5 years)
7.7
10.6
9.5
10.1
13.1
11.7
10.1
9.9
100
Buyback of the Paris Club debt
40 20
20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 *
0
* The current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast.
Source: MOF; author’s calculations.
LT (> 5 years)
* The current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast. ST, MT, LT: short, medium, long term
Source: MOF; author’s calculations.
[ 26 ] Gross public debt is equal to net public debt less central government deposits with banks. In 2012, net public debt was assessed at 74.6% of GDP (against 65.4% in 2011).
/ Jordan: the stakes of growth in a troubled regional context /
15
Since the 2008 buyback of the Paris Club external debt, the authorities have given precedence to using domestic rather than external loans. Certainly, the uptrend of the gross domestic debt ratio over the last twelve years accelerated after 2008 to reach 57% of GDP in 2012 (against 48.8% in 2011 and 20.6% in 2000). The breakdown of
Table
4
domestic debt reveals that its two main components largely contributed to the rise in the public debt ratio after 2000 (Table 4): the domestic debt of the public administrations [27] rose by 28 percentage points of GDP and that of the public own-budget agencies [28] by 9 percentage points of GDP after 2000.
Central Government debt (% of GDP) 2000
2004
2005
2006
2007
2008
2009
2010
2011
2012*
Gross domestic debt of central government
20.6
25.7
27.6
27.7
30.5
36.9
41.9
42.5
48.8
57.0
1- of which: gross domestic debt of central government units
19.2
24.0
25.9
26.5
29.0
35.4
40.0
39.5
42.5
46.9
1.4
1.7
1.7
1.2
1.4
1.5
1.9
3.0
6.4
10.1
104.7
91.8
84.3
76.3
73.8
60.2
64.8
67.1
70.7
79.2
2- of which: gross domestic debt of government own-budget agencies Total gross debt of central government
* The current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast. Source: MOF; author’s calculations.
Figure 13
The government own-budget agencies’ debt as a share of total domestic debt increased sevenfold since 2005 (Figure 13).
Contribution to the increase in gross domestic debt (%)
The indebtedness of state-owned NEPCO weighs heavily on the central government’s domestic debt A dramatic rise in the debt of government own-budget agencies has been seen since 2010 and this accelerated in 2011 mainly due to the impact of the debt of the state-owned enterprise, NEPCO. This company, which is in charge of the electricity transmission grid on Jordanian territory, purchases electricity from national and foreign producers, and then sells it on to the distributors at a price set by the regulator (cf. Box 2). Following the repeated sabotage of the Egyptian gas pipeline since February 2011, the average electricity purchase price that NEPCO pays producers is higher than the average sales price that it charges distributors. This price more than doubled between 2009 and 2011,[29] and generated a large debt for the statedowned enterprise, which had operated with a profit
Central gov. units’ contribution to debt Contribution Gov. own-budget agencies’ contribution to debt Gross domestic debt 65 55 45 35 25 15 5 -5 2005
2006
2007
2008
2009
2010
2011
2012
Source: MOF, author’s calculations.
[ 27 ] The domestic debt of public administrations is the central government domestic debt excluding the domestic debt of government own-budget agencies. It corresponds to the debt of Ministries and other government departments. [ 28 ] The domestic debt of government own-budget agencies is assimilated into the public debt. It corresponds to the debt of certain government ownbudget agencies that operate in priority and strategic sectors (energy, natural resources…) and is guaranteed by the central government. [ 29 ] Source: AFD (2012).
16
© AFD / Macroeconomics and Development / September 2013
3/ The public debt is high and bringing it under control is uncertain
prior to the gas supply crisis. As this crisis continued into 2012, NEPCO’s already hefty debt doubled in 2012: estimated at JD1.933 billion and equivalent to 8.8% of GDP, compared with 4.7% in 2011 (Figure 14). The share of NEPCO’s debt in the total debt of government own-budget agencies amounted to 72.8% in 2011 and 85.8% in 2012, whereas the share in 2010 was zero (Figure 15). This represents a contribution to central government debt of 9.5% in 2011 and 15.2% in 2012.
Figure 14 NEPCO debt (% of GDP) 10 9 8 7 6 5 4
Moreover, total NEPCO debt includes a large fraction of short-term debt. At the end of 2012 (JD1.933 billion), this was lower than total operating losses since 2010, which suggests that part of this short-term debt had been repaid during the course of the year. [30] Interest payments also place an increasing burden on NEPCO’s budget (Table 5). NEPCO’s debt structure thus exposes it to the risk of running up higher debt in the event of an interest rate shock, which would also cause a proportional increase in central government domestic debt. Moreover the large amount of arrears of over sixty days reflects NEPCO’s difficulties in settling its electricity and fuel purchases. At the end of 2011, arrears amounted to JD716 million ( i.e. 3.8% of GDP), including JD441 million owed to the national oil refining company, JPRC [31] (the debt’s principal and interest are not distinguishable). At the end of 2012, the arrears totalled JD647 million (2.9% of GDP).
3
Table 5
2 1 0 2010
2011
2012*
Figure 15 Share of NEPCO debt in gross domestic debt (%) Government own-budget agencies’ contribution to domestic debt
Central government’s contribution to gross domestic debt
100 90 80 70 60 50 40 30 20 10 0 2010
2011
2012*
* The current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast.
Sources: NEPCO, MOF, author’s calculations.
NEPCO operating losses, interest payment and short-term loans (JD millions) 2009
2010
2011
2012
Operating losses
0.0
154.5
997.1
1,026.0
Interest payment
1.8
6.0
10.2
75.0
Short-term loans
23.0
36.6
153.7
n.c.
Source: NEPCO; author’s calculations.
The implications of NEPCO’s indebtedness for public finances are thus significant. Although this contingent liability is domestic, it puts additional constraints on the government’s already limited scope of action. The elevated level of domestic debt may also have implications for monetary policy in that the government could choose to finance this debt through inflation. However, the Central Bank of Jordan is compelled to adopt the monetary and rate policy of the United States in order to safeguard the peg to the U.S. dollar (cf. Part 4). A debt ratio totalling 80% of GDP clearly weakens the public sector’s capacity to act as a key growth driver in a context of sluggish economic activity.
[ 30 ] The NEPCO contacts we met during our mission confirmed that the state-owned company’s debt comprises mainly short-term debt. [ 31 ] Source: World Bank (2012).
/ Jordan: the stakes of growth in a troubled regional context /
17
3.2.
The fiscal deficit is widening and fuelling central government indebtedness
2012. Following the 2011 popular uprisings in some Arab countries, Jordan received a substantial amount of aid from the Gulf States (4.8% of GDP). The Gulf monarchies, which are the main providers (together with the United States) of international financial assistance to Jordan, did not make as high a contribution in 2012 as in the previous year. In fact, the Gulf Cooperation Council (GCC) whose members include the main Gulf monarchies, now prefer to support Jordan through sector investments rather than via budget support alone (cf. Box 3). To this end, the organisation deposited USD1.750 billion with the CBJ at the beginning of 2013 to fund development projects. Over the next five years, the GCC plans to feed USD5.0 billion into this fund. As a result, the GCC financial contribution in 2013 and forthcoming years will mainly translate into an increase in capital expenditure and transit through the channel of budgetary grants.
The revenue-to-GDP ratio is such that it does not represent a vulnerable point in the event of an economic shock. Public spending, however, is an overriding constraint for the government’s management of the public deficit.
Diminishing revenues since 2008 The level of government revenue – although satisfactory – has been declining since the fall-off of the growth rate in 2008, mainly due to lower tax receipts (30% in 2007 compared to 21% in 2012, cf. Table 6). In addition, international financial aid, which is a volatile component, has been shrinking: it averaged 7.4% of GDP between 2000 and 2006, compared to 3.5% between 2007 and
Table
6
Structure of government expenditure and revenue (% of GDP) 2000
2001
2002
2003
2004
2005
2006
2007
2008 * 2009
2010
2011
Budgetary revenue and grants
33.1
32.9
31.4
36.1
36.6
34.3
32.5
32.7
30.1
26.7
24.9
26.4
23.0
Own budget receipts
26.5
26.1
24.2
23.2
26.5
28.7
29.6
29.9
25.5
24.8
22.7
20.5
21.5
6.5
6.8
7.2
13.0
10.0
5.6
2.9
2.8
4.6
2.0
2.1
5.9
1.5
Expenditure
36.5
36.4
35.3
38.9
39.3
39.7
36.6
37.8
34.5
35.7
30.4
33.2
31.2
Current expenditure
30.9
30.1
28.0
29.9
29.4
32.6
29.2
30.9
28.7
27.1
25.3
28.0
28.1
Salaries
6.3
6.2
6.2
6.1
5.7
5.7
5.1
5.0
4.7
4.6
4.7
4.9
5.3
Interest payment
4.9
4.4
3.7
3.7
2.8
3.0
3.0
3.0
2.4
2.3
2.1
2.1
2.6
Grants
2.3
2.0
0.7
2.8
4.3
7.8
3.5
4.4
3.4
1.5
1.6
4.7
4.3
Military expenditure
8.9
8.4
8.1
9.0
8.1
7.8
7.4
9.3
9.7
9.7
9.1
8.8
7.9
Capital expenditure
5.6
6.3
7.3
8.9
9.9
7.1
7.4
6.9
5.6
8.5
5.1
5.2
3.1
Primary balance (incl. grants)
1.4
0.8
-0.1
1.0
0.1
-2.3
-1.2
-2.0
-2.0
-6.6
-3.5
-4.7
-5.6
Overall balance (excl. grants)
-3.4
-3.5
-3.2
-2.7
-2.7
-5.3
-4.2
-5.1
-4.4
-8.9
-5.6
-6.8
-8.2
Solde global (dons exclus)
-9.9 -10.3
-10.5
-15.7
-12.8
-10.9
-7.0
-7.9
-9.0
-10.9
-7.7
-12.7
-9.7
Grants, foreign aid
* 2008 data are those of the IMF. ** The current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast.
Source: MOF; author’s calculations.
18
© AFD / Macroeconomics and Development / September 2013
2012**
3/ The public debt is high and bringing it under control is uncertain
Box 3
The GCC Fund, a mechanism for project funding and monetary creation for Jordan
The GCC is a regional organisation created in 1981 and comprising Saudi Arabia, Oman, Kuwait, Bahrain, the United Arab Emirates and Qatar. The club of Sunni oil-monarchies has traditionally supported Jordan mainly by allocating substantial financial assistance, estimated at about 3% of GDP on average between 2000 and 2011 (2.2% of GDP by the United States). This financial support translates into budgetary aid in the form of grants. In 2011, regional dis turbances impacted Jordan’s public finances, which prompted a large increase in the grants received from the Gulf States. This was not renewed in 2012. The GCC extends its financial support to Jordan through the Gulf Development Fund in order to finance the country’s development projects. The GCC has planned to allocate USD5.0 billion in grants spread over five years by way of deposits with the CBJ. At the beginning of 2013, the GCC deposited USD1.750 billion, equivalent to 35% of the pledged
amount. These funds will only be disbursed within the framework of sectoral investments and not used to meet government’s operating expenses. For example, the construction of a gas terminal at Aqaba (due to come into operation in 2014) is financed by the GCC Fund; in February 2013, Jordan’s Minister of Transport announced that the GCC Fund would finance transport projects: the Eshidiya railway project, a rapid bus transit service between Amman and Zarqa, bus departure and arrival stations, as well as the implementation of smart transport systems and services (Source: French Embassy in Jordan, Economic Department, 2013). These (US) dollar deposits, booked as CBJ liabilities, constitute large foreign currency entries and the disbursement of these funds will be made in local currency. This fund will thus enable the CBJ to undertake a form of money creation and at the same time build up foreign reserves.
Figure 16
Rationalisation of expenditure stalled by the regional turmoil of 2011
Current expenditure (% of own budget receipts)
The high level of public spending, particularly current spending, is a major constraint on managing the fiscal deficit. Yet, the level of public spending relative to national wealth declined until 2011, dropping from an average 38% of GDP between 2000 and 2007 to 33% between 2008 and 2011. This decrease was achieved mainly due to a reduction in current expenditure (Figure 16):
70
• salaries in the public administrations relative to own budget receipts decreased from 2003 to 2009;
30
Interest payment
60 Consequences of regional turmoil
50 40
20 10 0 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12
• in 2008, the buyback of part of the Paris Club debt considerably reduced the external debt burden (average decrease of 2.6 percentage points of GDP for interest payment on external debt);
Employee salaries Subsidies
• subsidies fell until 2011, under the effect of the elimination of fuel subsidies in 2008. Source: MOF; author’s calculations.
/ Jordan: the stakes of growth in a troubled regional context /
19
• the social measures involve a rise in civil service salaries and pensions, and the reintroduction of fuel price subsidies. In 2011, these subsidies cost JD571 million, equivalent to 2.8% of GDP and 14% of own budget receipts. For the year 2012, this cost is likely to be higher given the rise in petroleum product prices at the beginning of the year. However, since November 2012, fuel prices are no longer subsidised [32] (except for LPG), which means that tariffs are at market prices. The government thus decided to bring in targeted subsidies to help the poor and the middle class, as soon as the price of a barrel of oil exceeds USD100; • the armed conflict in Syria, which broke out in 2011, has given rise to massive displacements of populations seeking refuge in Jordan. The expenditures linked to government assistance to these Syrian refugees are assessed at JD668 (USD942) per refugee. [33] This estimate does not include the costs of setting up refugee camps or their running costs, the latter being borne by the United Nations agencies. For the Jordanian authorities, the overall cost of hosting these refugees is thus significant (Table 7).
Table
7
Cost to the Jordanian Government of hosting Syrian refugees
2011
Number of Syrian refugees
Hosting costs
Since the uprisings in some Arab countries, the rationalisation of public spending has been hindered by (i) social measures implemented in 2011 and (ii) the hosting of Syrian refugees :
2012
2 Sept. 2013 *
2,265 117,321 519,676
Estimate from now until end 2013
660,000
Total cost in JD mill.
1.5
78
346
318
% of GDP
0.01
0.36
1.43
1.31
% of own budget receipts
0.04
1.65
6.55
6.01
Notes: calculations based on the government’s estimate for hosting one refugee: USD226 million for 240,000 refugees and USD449.1 million for 660,000 refugees. These figures are taken from a MOPIC note dated January 2013: "Response Plan for the Government of Jordan". * number of refugees as on 28 March 2013. Estimates of GDP and budgetary revenue are taken from the 2013 Budgetary Law.
Sources: UNHCR, Economic Social Council; author’s calculations.
Despite favourable debt dynamics, budget implementation has increased public indebtedness As shown in Table 6, the level of overall fiscal deficit since 2008 is tied to the primary deficit, owing to unfavourable budget implementation particularly after 2011. The gap between the GDP growth rate and interest rates is positive and the debt dynamics has therefore remained favourable in recent years. It is thus the primary deficit that contributed to public indebtedness after 2008 (the year of the buyback of a large fraction of external debt). Moreover, according to an IMF analysis of public debt sustainability, the primary deficit needed to stabilise the debt ratio was estimated at 3.1% [34] of GDP, whereas after 2008 it averaged 4.1%. Thus, it is above all Jordan’s economic growth
[ 32 ] The halt of fuel subsidies announced in November 2012 resulted in a 50% price increase for household LPG cylinders, 33% for diesel and 14% for kerosene. The LPG subsidy does not entail any budgetary cost as the MOF has passed on the cost via the monthly adjustment of the other petroleum products since January 2013. [ 33 ] Several estimates have been made of the cost of hosting Syrian refugees. A study of the Economic and Social Council of Jordan reported in January 2013 that hosting one refugee costs Jordan JD2,500 (USD3,526). On this basis, the cost of hosting these refugees in 2011 and 2012 is estimated at 3% of GDP. Moreover, according to the Ministry of Planning and International Cooperation (MOPIC), the cost of hosting 178,000 Syrian refugees is estimated at USD524 million (USD198.8 million for accommodation and USD325.7 million in capital expenditure), equivalent to USD2,944 per refugee, including USD1,124 for accommodation (JD1,585). The figures quoted factor in the cost of running the camps, which are borne by the United Nations agencies. Finally, the IMF deplores the Jordanian authorities’ lack of communication on the assessment of these costs. [ 34 ] If the real GDP growth rate and the real interest rate remain at their historical average - Article IV of IMF of May 2012.
20
© AFD / Macroeconomics and Development / September 2013
3/ The public debt is high and bringing it under control is uncertain
that will ensure the sustainability of the country’s debt. In these conditions, the question is to what extent the differential between GDP growth and real interest rates can remain positive in the medium term: a growth shock and/or interest rate shock could lead to an uncontrolled surge in Jordan’s public debt ratio.
Reducing NEPCO’s debt is an additional constraint on bringing down the public debt Apart from the contribution of the primary deficit, it is necessary to reduce NEPCO’s debt in order to stabilise or reduce public indebtedness. Restoring NEPCO’s financial balance by 2017 – a condition of the IMF Stand-By Arrangement (cf. Box 4) – will not be possible without increasing electricity tariffs and reducing the costs of the state-owned enterprise. • In June 2012, a first increase of electricity tariffs wa s i n t ro d u ce d . H o we ve r, to co ve r a l l t h e c o m p a n y ’ s losses and clear its outstanding arrears by 2017 (as the IMF recommends), electricity tariffs need to be doubled in the very near future. This is not practicable for the authorities, who plan step increases in tariffs (from 14% to 18% for 2013). • A reduction in the average price that NEPCO pays for electricity will depend on the level of Egyptian gas supply in 2013, which should reach the same level as before the crisis (Table 8). In addition, the coming-on-stream of the liquefied natural gas (LNG) terminal at Aqaba, planned for 2014, should reduce NEPCO’s costs by around 20% (IMF, 2012 a ).
3.3. An uneven history of payment prompts caution Jordan’s has an unfavourable history of payment. The country in fact renegotiated its Paris Club debt six times between 1989 and 2002. In 2008, part of its Paris Club external debt was bought back (Figure 17). Currently, the total public external debt stands at a moderate level, as does the risk of a default on the country’s foreign currency debt in the upper middle tranche.
Table
8
Supply through the Egyptian Gas Pipeline 2010
2011
2012
2013 *
Average flow of Egyptian gas (millions of m3/yr)
2,585
827
662
1,551
NEPCO operating losses (JD millions)
155
997
1,026
900
Share of NEPCO debt in total gross public debt (%)
0.0
6.5
11.0
n.c.
* The 2013 figures were communicated to us during our interview with NEPCO. The assumption of an average gas flow in 2013 is that used by the Government in the 2013 Budgetary Law. NEPCO drew on a more pessimistic supply assumption to establish the forecasts for its 2013 accounts: an average of 414 million m 3 associated with an operational loss of JD1.8 billion.
Sources: NEPCO; author’s calculations.
Furthermore, the government is planning a Eurobond issue ranging between USD1 and 2 billion and guaranteed by the United States, which could increase the external debt burden. These bonds will be denominated in dollars and have a maturity of between seven and ten years (EU, 2012). A first issuance for USD500 million was launched on the domestic market in February 2013.
Figure 17 Total external public debt (% of GDP) 200 Paris Club debt reschedulings
150
100
50 Buyback of Paris Club debt
0 1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: WDI; author’s calculations.
/ Jordan: the stakes of growth in a troubled regional context /
21
4/The banking sector participates in financing economic activity but less so since 2008 4.1. A downturn in the cycle of private sector credit since 2008, whereas public sector credit is on the rise The banks’ risk of holding increasing claims on the government
Figure 19 Domestic credit to private sector (% of GDP) 100 80
Since the reforms that promoted private-sector development in the early 1990s (cf. Part 2), the Jordanian economy has relied extensively on the banking sector for its financing needs. Comparatively, Jordan’s credit activity is one of the most dynamic in the region (Figure 18), but the 2008 financial crisis brought on a downturn in the credit cycle, which has halved the rate of economic growth (Figure 19).
60 40 20 0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Figure 18 Source: WDI; author’s calculations.
Domestic credit to private sector (% of GDP) – regional comparison Jordan Lebanon
Tunisia Egypt
Morocco
100 80 60 40 20 0 1985
1988
1991
1994
1997
2000
2003
2006
2009
The slowdown in the credit cycle since 2008 has meant that public sector financing needs have crowded out credit to the private sector. Certainly, the banks are now seeking finance from the government as is shown by the steep rise in the volume of credit granted to the public sector (+170% between January 2008 and November 2012; cf. Figures 20 and 21). Given the deterioration of public finances, Jordan’s private banks are indeed exposing themselves to sovereign risk. In a situation where any interruption of the adverse trend in public finance is heavily constrained, reliance on sovereign capacities certainly has its limits.
Source: WDI; author’s calculations.
22
© AFD / Macroeconomics and Development / September 2013
4/ The banking sector participates in financing economic activity but less so since 2008
Figure 20
Figure 21
Volume of credit, year-on-year (%)
Sector breakdown of credit (% of total credit)
Credit to private sector Total credit
Credit to public sector
Private sector
Public sector
60 70 50
60 50
40
40 30
30
Banks’ exposure to sovereign risk
20 20
10 0
10 -10 -20 -30 2001
0 2005 2003
2005
2007
2009
2011
2006
2007
2008
2009
2010
2011
2012
2013
2013 Source: CB; author’s calculations.
Source: CBJ; author’s calculations.
In addition, an analysis of credit by sector of activity reveals a substantial rise in credit in the direction of
Table
9
public services (Table 9). This is chiefly due to the loans granted to the state-owned enterprise NEPCO. [ 35 ]
Sectoral allocation of credit (%) Agriculture
Mining Manufact. Commerce Construction industry and trade
Transport
Tourism, hotels, restaurants
Public Financial Other services services
2010
1.5
0.4
13.3
24.9
21.9
3.3
3.2
7.3
2.8
21.4
2011
1.4
0.5
14.5
23.8
21.9
3.4
3.1
7.2
2.7
21.5
2012
1.5
0.4
14.5
21.2
21.2
3.1
2.7
11.3
2.8
21.3
Source: CBJ; author’s calculations.
The downturn in the cycle of private sector credit post 2008 resulted in a further drop in the banking sector’s profitability, already in decline since 2005. This decrease in the profitability of banking assets in the wake of the financial crisis is linked to the increase of non-performing loans (NPLs). [36] Yet, in line with CBJ directives, provisioning for NPLs has considerably increased, rising from 52% in 2011 to 63% in the first half of 2012 (Table 10). In addition, the
solvency ratio (regulatory capital to risk-weighted assets, CAR) remains much higher than the regulatory requirement of Basle II and Basle III (8% and 10.5% respectively). ROA (Return on Assets) and ROE (Return on Equity) registered a downtrend. The figures for the first six months of 2012 are similar to those for the previous period, [37] which suggests that the banking sector’s profit ability will not be better than in 2011.
[ 35 ] According to the people we met at the Arab Bank, 60 to 70% of the increase in credit (in value) in 2012 can seemingly be attributed entirely to borrowing by the state-owned enterprise NEPCO and by an oil refinery. [ 36 ] In the framework of the analysis conducted by AMR, a NPL rate below 5% is considered to indicate a sound banking system, whereas a rate over an upper threshold of 10% is a sign that the quality of the system is poor. [ 37 ] Over the first half of 2009 and 2010, ROE stood at 4.7% and 4.5%, while ROA was 0.6% over both periods (CBJ, 2010).
/ Jordan: the stakes of growth in a troubled regional context /
23
Yet, criteria other than a decline in lending activity go to explain the low profitability of banking activity: • Provisioning for NPLs rose significantly in 2012, which automatically decreased net banking income and hence ROE and ROA.
Table 10
• The JD100 million increase in capital undertaken by several commercial banks in compliance with CBJ requirements implies a lower ROE.
Financial soundness indicators for the banking sector (%) 2007
2008
2009
2010
2011
2012*
20.8
18.4
19.6
20.3
19.3
18.7
4.1
4.2
6.7
8.2
8.5
8.4
67.8
63.4
52.0
52.4
52.3
63.3
Return on assets (ROA)
1.6
1.4
1.1
1.1
1.1
0.6
Return on equity (ROE)
12.6
11.5
8.8
8.8
8.3
4.8
Regulatory capital to risk-weighted assets (CAR) Ratio of non-performing loans Level of provisions for non-performing loans
* The last observation is for June 2012. ROA and ROE are equal to the ratio of net banking income to, respectively, total assets and equity. This calculation seems to have been carried out by the CBJ using the net banking income for the first six months. These figures should thus be interpreted with caution. Source : CBJ; author’s calculations.
Key interest rate, interbank rate and inflation rate (%) Interbank rate Key interest rate 8 7 6 5 4 3 2 1 0
Source: CBJ; author’s calculations.
[ 38 ] 1 USD = 0.709 JD since 1995. [ 39 ] Cf. AMR (2011).
24
Inflation rate
Ju ne 20 10 No ve mb er 20 10 Ap ril 20 Se 11 pt em be r2 01 1 Fe br ua ry 20 12 Ju ly 20 12 De ce mb er 20 12
The CBJ’s monetary policy is aimed at achieving two key objectives: containing inflation and keeping the Jordanian dinar pegged to the American dollar, [38] at the same time attracting foreign capital. The peg to the U.S. dollar means that Jordan has to adopt United States’ monetary and rate policies in order to maintain a substantial rate differential and discourage the dollarisation of capital. Since the strong inflationary pressure of 2008, the Jordanian authorities have adopted a less accommodating monetary policy than the US central bank, the Federal Reserve Bank (FED), [39] which has notably led to an increased exchange rate differential in favour of the CBJ. However, dollar deposits began to rise at the beginning of 2012. This trend was halted by the CBJ last December by an increase in rates for local currency deposits, making the Jordanian dinar more attractive. Additionally, the increase in fuel prices in November
Figure 22
20 10
4.2. The banking system is well regulated and adequately supervised by the CBJ
2012 drove a hefty rise in inflation. In December 2012, this stood at about 7% year-on-year, which is its highest level since 2008. These inflationary pressures, which the authorities want to avoid, could lead the CBJ to raise the rediscount rate (Figure 22).
Ja nu ary
The low rates of return on banking assets and equity do not prevent the banks from making a profit. Certainly, profits increased continuously from the beginning of the 2000s (rising from JD94.4 million in 2001 to JD382 million in 2011).
© AFD / Macroeconomics and Development / September 2013
5/ Deterioration of external account balances due to the effect of regional turmoil
The CBJ imposes conservative prudential ratios and its oversight of the commercial banks is relatively stringent. This conservative supervision is particularly warranted in an adverse international economic context and a turbulent regional environment. Thus, as mentioned in the previous section, the solvency of the banking system is satisfactory with a 19% capital ratio, which enables the sector to absorb shocks. Commercial banks are well capitalised and their deposit holdings constitute the major resources of Jordanian banks – which is a sign of the sector’s soundness (101% of GDP and 62% of liabilities in 2012). These deposits are mostly denominated in local currency (80%) and foreign currency deposits are covered by foreign reserves (Figure 23). Moreover, the banking sector has a strong liquidity position of around 150% and has increased provision for NPLs. Finally, the CBJ, which complies with Basle II recommendations, is now studying what effects the implementation of Basle III would have on the Jordanian banking system.
Figure
23
Coverage of foreign currency deposits (foreign reserves/foreign currency deposits, %) 500 450 400 350 300 250 200 150 100 50 0 2000
2002
2004
2006
2008
2010
2012
Sources: International Financial Statistics (IFS), Ecowin; author’s calculations.
5/ Deterioration of external account balances due to the effect of regional turmoil Figure 24
5.1. A growing external financing requirement is covered by drawing on foreign reserves
Main current account components (balance, % of GDP)
A high energy bill is widening the current account deficit
Goods Revenue
Jordan’s current account balance displays a structural deficit. More precisely, the country is a net importer of goods, whereas the balance for services, current transfers and revenues is positive over the long term (Figure 24).
55
Energy imports rising steeply…
-5
Goods imports chiefly comprise manufactured products, energy products and, to a lesser extent, agrifood products, and represented an average 59% of GDP between 2000 and 2010. This high dependency on imported goods exposes Jordan to all kinds of exogenous shocks. As a result, the regional disturbances since 2011 triggered a shock on the country’s energy bill (95% of energy imported) following the disruption
Services Current transfers Current balance
35 15
-25 -45 2000
2002
2004
2006
2008
2010
2012
Source: Ecowin; author’s calculations.
/ Jordan: the stakes of growth in a troubled regional context /
25
of its main source of supply. The Egyptian gas pipeline that supplies 80% of Jordan’s gas needs at preferential tariffs has been repeatedly sabotaged, which has obliged the Kingdom to purchase heavy fuel oil at market prices. The increase in the energy bill went hand in hand with a sharp rise in imports of these products: in value terms, the share of fuel imports in overall goods imports rose from 22% in 2010 to 29% in 2011 [40] and 32% in 2012 (Figure 25). Moreover, between 2009 and 2012, the share of energy imports in national wealth went up by nearly 10 percentage points of GDP, indicating the high additional cost linked to finding alternatives to the Egyptian gas supply (Table 11). Consequently, trade in petroleum products has significantly contributed to widening the current account balance.
Figure 25 Composition of goods imports in value terms (%) Agri-food products Energy products
Manufactured products Goods imports (% of GDP)
100 90 80 70 60 50 40 30 20 10 0
Table 11
Energy product imports and their contribution to the current account deficit (%) 2009
2010
2011
2000
2002
Contribution of the energy balance to the current account deficit excluding grants (%)
9.5
11.5
16.8
2006
2008
34.4
64.0
2012
2012*
External revenue by component (% of GDP)
19.2 Average 2009 2000-2008
-29.1
2010
Note: the current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast. Source: DOS; author’s calculations.
Table 12 Energy imports (% of GDP)
2004
18.9
* The 2013 figures were communicated to us during our interview with NEPCO. The assumption of an average gas flow in 2013 is that used by the Government in the 2013 Budgetary Law. NEPCO drew on a more pessimistic supply assumption to establish the forecasts for its 2013 accounts: an average of 414 million m 3 associated with an operational loss of JD1.8 billion. Note: the statistics on energy imports have been adjusted to their free-on-board (FOB) value to bring them closer to the current account balance statistics.
2010
2011
2012
Remittances
18.2
13.1
12.0
10.5
10.1
Tourism receipts
11.3
12.3
13.6
10.4
11.2
Grants
6.8
4.1
4.2
7.0
4.8
Goods exports
31.1
26.8
26.7
27.8
25.5
Sources: DOS, CBJ; author’s calculations. Source: DOS; author’s calculations
… and external revenues are flagging Tourism receipts, remittances and grants (a volatile component) constitute Jordan’s main external revenue, which has a positive balance; they represented 40% of GDP on average between 2000 and 2008 (Table 12). Goods exports were dynamic over the 2000s, linked with the development of the manufacturing sector (cf. Part 2).
Since the 2008 financial crisis and the uprisings in some Arab countries, external revenue flows have lost steam, with a drop estimated at around 13 percentage points of GDP [41] compared to the 2000 and 2008 period: • Worker remittances declined due to the inter national economic slowdown and the Gulf States’ current shift to employing nationals: an average loss of 6.7 percentage points of GDP since 2008 compared to the pre-crisis annual average.
[ 40 ] According to the IMF, the substitution of Egyptian gas by petroleum products, coupled with a 32% hike in the price of oil, pushed up the Kingdom’s energy bill by 50%, with a total cost of 16% of GDP in 2011 (source: IMF, 2012b). [ 41 ] On average, between 2000 and 2008, the balance-of-payments current account revenues represented 62.7% of GDP. Since 2008, these have stood at 49.5% of GDP (AMR calculations).
26
© AFD / Macroeconomics and Development / September 2013
5/ Deterioration of external account balances due to the effect of regional turmoil
• Tourism receipts remained steady, despite the deterioration of the regional environment (war in Syria, political crisis in Egypt): in 2012, the fall in receipts from Western tourists [42] was partly offset by the spending of tourists from Arab countries, [43] although it did not reach its 2010 level. • Grants decreased by around 2 percentage points of GDP, despite the exceptional contribution of the Arab countries in 2011 to help the Kingdom of Jordan cover unforeseen expenditure incurred by the consequences of the region’s popular unrest. Moreover, from 2013, the Arab countries’ contribution will take the form of project funding via the GCC Fund, and no longer be disbursed as budgetary aid (cf. Box 3). • Export of manufactured products suffered from the slowdown in international trade, mainly related to demand from the United States to which Jordan exports 16% of its manufactured products. The Syrian conflict did not worsen Jordan’s balance of
Table 13
trade, given that exports to Syria were low (4% of total goods). The loss of manufactured product exports since 2008 has been estimated at less than 5% of GDP. In sum, the current account deficit widened significantly, particularly from 2011, reaching one of its lowest historical levels: 12.0% of GDP in 2011 (against 7.1 % of GDP in 2010). For 2012, this deficit is even more pronounced and estimated to reach 18.1 % of GDP, which is much higher than its previous longrun average (4.3% of GDP on average between 1980 and 2011).
Drawing on foreign reserves as a way of covering the external financing requirement The widening of the current account deficit implies that Jordan’s external financing requirement (EFR) is growing. This doubled from 11% of GDP in 2010 to 20% in 2011 ( i.e. USD5.8 billion). In 2012, the EFR is higher and estimated at nearly 22% of GDP (Table 13).
External financing requirement and coverage (% of GDP) 2007
2008
2009
2010
2011
2012
-19.7
-14.0
-7.2
-9.3
-18.0
-19.6
-3.6
-13.0
-1.8
-1.9
-2.0
-2.1
EFR
23.2
27.0
9.0
11.2
20.0
21.7
Coverage of EFR
27.3
20.9
12.4
16.7
14.1
12.4
1 - Non-debt-creating flows
22.8
20.1
9.2
11.2
12.0
6.9
a - FDI
15.1
12.8
9.9
6.2
5.0
4.5
b - Portfolio flows
4.9
2.6
-2.7
2.9
1.0
0.9
c - Grants
2.8
4.6
2.0
2.1
5.9
1.5
1.4
-0.2
1.6
2.5
1.5
5.3
a - Public sector debt
1.3
1.0
3.9
2.9
1.3
4.8
b - Private sector debt
0.0
-1.2
-2.3
-0.4
0.2
0.6
3.1
1.0
1.6
3.0
0.6
0.2
-4.1
6.1
-3.4
-5.6
5.8
9.3
1 - Current deficit (excluding grants) 2 - Amortisation of external debt
2 - Debt-creating flows
3 - Errors and omissions Variation in reserves (-/+ : positive/negative variation) Source: Ecowin; author’s calculations.
[ 42 ] The decreasing number of Western tourist entries is linked to the drop in bookings for package holidays to Egypt-Jordan and Syria-Jordan, offered by travel agencies. [ 43 ] The number of tourists declined by 28% between 2010 and 2012 (all nationalities). On the other hand, over the same period, tourism receipts fell slightly by 3.5%: the decrease in European tourists’ spending (-9%) was partly offset by increased spending by tourists from Arab countries (+15%).
/ Jordan: the stakes of growth in a troubled regional context /
27
In the 1980s, the current account deficit was basically financed by external borrowing (Figure 27); financing through external debt is what mainly brought on the 1989 debt crisis and led to the numerous debt cancellations granted by the Paris Club creditors (cf. Part 3). Subsequently, the liberal reforms undertaken by the new King in the early 2000s gave rise (helped by a favourable economic environment) to massive FDI inflows and portfolio investments (PIs), particularly from the Gulf States. These foreign investments thus took over from external borrowing as a means of ensuring the current account deficit. More specifically, it is the dynamic of FDI and PIs that engendered the dynamic driving the current account deficit: the inflows to Jordan translate into current account expenditure. [44] However, following the 2008 financial crisis, the FDI and PI dynamic waned considerably, while at the same time the current account deficit continued to widen mainly due to the energy supply shock. As a result, the financial account flows are no longer sufficient to cover EFR. Since the slowdown in the pace of growth, the Jordanian authorities have thus drawn on foreign reserves to cover the EFR.
Figure 26 EFR and its coverage (% of GDP) Grants
Portfolio flows
FDI
EFR
30 25 20 15 10 5 0 -5 -10 2000
2002
2004
2006
Source: Ecowin; author’s calculations.
2008
2010
2012
Figure 27 Current account balance and FDI (% of GDP) Current account balance Net FDI Total external debt (right-hand scale) 30 25 20 15 10 5 0 -5 -10 -15 -20 -25
250 200 150 100 50 0
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Source: World Economic Outlook (WEO), Ecowin; author’s calculations.
5.2. Pressures on external liquidity since 2011 can be eased by support from external players This strategy of drawing on foreign reserves to secure the coverage of EFR seems preferable to contracting external debt, especially as the Jordanian authorities’ interest is to limit the level of total debt and the inflation rate. However, a pronounced and constant fall in external liquidity will likely make it more difficult to safeguard the peg of the dinar to the U.S. dollar (Figure 28). From 2010, Jordan experienced an accelerating decline in its foreign reserves, which was halted chiefly thanks to support from the IMF. The signature of the Stand-By Arrangement (SBA) (cf. Box 4) in August 2012 led to the payment of the first tranche of USD384 million (i.e. about 6% of the foreign reserves for July 2012). The effect on external liquidity continued, resulting in a level of foreign reserves equivalent to five months of imports at the end of 2012, but which is still below its long-term level of over seven months of imports. For 2013, the pressures on external liquidity should ease due to the factors below, which are not exhaustive:
[ 44 ] As the balance of payments is a statement that partly follows double-accounting rules, any operation theoretically gives rise to two book entries: one on the credit side, the other on the debit side. Discrepancies between transactions create “errors and omissions” in the balance of payments.
28
© AFD / Macroeconomics and Development / September 2013
5/ Deterioration of external account balances due to the effect of regional turmoil
Figure 28
• Foreign currency inflows in the form of grants from the GCC Fund to finance development projects (cf. Box 3). An amount of USD1.750 billion was deposited at the beginning of 2013 as part of the total USD5.0 billion package scheduled over five years. • USD200 million in budgetary aid from Saudi Arabia in the first quarter of 2013.
Foreign reserves Reserves (USD billions) Reserves in months of imports (right-hand scale) 14
12
12
10
• A 2013 Eurobond issue ranging between USD1 and 2 billion and guaranteed by the United States. In February 2013, USD500 million was issued on the domestic market.
10
• Payment of the second tranche worth USD384 million in April 2013, provided the Jordanian authorities approve the IMF’s proposed energy sector strategy. Several tranches representing a total of USD473 million could be paid in 2013, on condition that the measures recommended by the IMF are implemented (cf. Box 4). For 2014 and 2015, payment of a total USD805 million is scheduled;
4
8
8 6 6 4 2
2
0
0 2006
2007
2008
2009
2010
2011
2012
2013
Last points: March 2013 for the reserves Source: CBJ; author’s calculations.
• A possible USD150-million loan in 2013 from the World bank under its new Development Policy Loans programme;
Figure 29 Ratio of foreign reserves to external debt (%)
• The payment in 2013 of the second tranche of AFD’s budget support for the energy sector, totalling EUR50 million.
Foreign reserves/Short-term external debt 2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 2000
2002
2004
2006
2008
2010
Source: IMF; author’s calculations.
/ Jordan: the stakes of growth in a troubled regional context /
29
Conclusion
Box 4
The IMF Stand-By Arrangement with Jordan
It was in a strained economic context – exacerbated by the energy supply shock (leading to an increase in the public debt ratio and the deterioration of external balances) – that Jordan requested assistance from the IMF. The resulting Stand-By Arrangement, signed in August 2012, provides for the exceptional amount of USD2 billion to be paid over thirty-six months, which is 800% of Jordan’s quota. According to the IMF, this agreement could cover half of Jordan’s external financing requirement and ensure a level of foreign reserves equivalent to four months of imports. The programme provides for payment in several tranches provided that measures are implemented to contain the central government’s primary deficit and reduce the debt of state-owned NEPCO. The objective of the programme is thus to rebalance
the company’s finances by 2017, which would in turn reduce central government indebtedness. In addition, the IMF has advised the Jordanian authorities to diversify it sources of energy supply so as to reduce its exposure to external shocks. Apart from covering part of the country’s external financing needs, this arrangement has the advantage of encouraging the Jordanian authorities to introduce a number of reforms, particularly in the energy sector. It is therefore planned to completely clear NEPCO’s arrears and lower its level of debt by doubling electricity tariffs over several years. An 18% tariff increase is planned for the end of the first half of 2013, but the authorities have not yet decided on a strategy for an overall tariff increase.
Conclusion The geographical situation of Jordan is such that its economic growth has been impacted by the turmoil that the region has experienced over the last forty years. These different shocks, particularly since the 2008 financial crisis, have revealed the vulnerabilities of a growth model that depends heavily on external financing flows. Moreover, in Jordan, the disturbances affecting the region since 2011 have taken the form of political and social demands, as well as the massive influx of Syrian refugees. These refugees, fleeing the upsurge of violent conflict in their own country, are entering Jordan in increasingly large numbers and placing greater pressures on the scarce water and energy resources of their host country. In addition, some of these refugees are entering the Jordanian labour market, which is already under strain: youth unemployment is rising steeply, particularly in the case of higher education graduates. Against this backdrop of a marked slowdown in economic activity, Jordan’s public finances have taken a
30
turn for the worse, whilst at the same time the public sector has taken over from the private sector as the key growth driver. The medium-term issue involves knowing how far public spending can serve as a sustainable alternative. The other consequence of this regional unrest is the worsening of Jordan’s external balances. These have been driven by an increase in the country’s energy bill following the repeated disruptions of its main source of supply. Certainly, this shock confirms Jordan’s high degree of energy vulnerability and gives the authorities an incentive to undertake measures to diversify their sources of supply. Moreover, faced with a decline in foreign investment – and wishing to avoid external debt – the country has drawn heavily on foreign reserves to ensure that its hefty external financing requirement is covered. However, the Kingdom of Jordan, due to its position as a “buffer State” enjoys the support of foreign countries and donors, which will help to improve its external liquidity.
© AFD / Macroeconomics and Development / September 2013
List of acronyms and abbreviations
List of acronyms and abbreviations AFD
Agence Française de Développement
IPP2
AMR
Analyse macroéconomique et Risque pays (division, AFD)
Independent Power Producer - QEPCO Qatrana Power Plant
JD
Jordanian dinar
AAGR
Average annual growth rate
JEPCO
Jordan Electric Power Company
AFD
Agence Française de Développement French development agency
JPRC
Jordan Petroelum Refinery Company
LNG
Liquefied natural gas
AMR
Analyse macroéconomique et Risque pays (AFD) Macroeconomic Analysis and Country Risk Unit
LPG
Liquefied petroleum gas
MAE
Ministère des Affaires étrangères (France) French Ministry of Foreign Affairs
CAR
Capital Adequacy Ratio
CBJ
Central Bank of Jordan
MENA
Middle East and North Africa
CEGCO
Central Electricity Generating Company
MOF
Ministry of Finance (Jordan)
MOL
Ministry of Labour (Jordan)
DOS
Department of Statistics (Jordan)
MOPIC
EDCO
Electricity Distribution Company
Ministry of Planning and International Cooperation (Jordan)
EFR
External financing requirement
MW
Megawatts
EIU
Economic Intelligence Unit
NEPCO
National Electric Power Company
ERC
Electricity Regulatory Commission
PI
Portfolio investment
EU
European Union
PLO
Palestinian Liberation Organisation
EUR
Euro
NPL
Non-performing loan
FDI
Foreign direct investment
QIZ
Qualified Industrial Zone
FED
Federal Reserve Bank
ROA
Return on Assets
FOB
Free on board (value)
ROE
Return on Equity
GAFTA
Greater Arab Free Trade Area
SBA
Stand-by Arrangement
GCC
Gulf Cooperation Council
UNHCR
United Nations High Commissioner for Refugees
IAF
Islamic Action Front USD
American dollar
IDECO
Irbid District Electricity Company WDI
World Development Indicators
IFS
International Financial Statistics WEO
World Economic Outlook
IMF
International Monetary Fund WTO
World Trade Organization
IPP1
Independent Power Producer - AES Amman East Power Plant
/ Jordan: the stakes of growth in a troubled regional context /
31
References
References AFD (2012), Note NCA CJO 1029, H ONORÉ , A. (internal document)
IMF (2012 c ), “Jordan: Selected Issues”, IMF Country Report No.12/120, Washington, D.C.
AFD (2011), « Rapport de mission : analyse du risque-pays et du risque souverain de la Jordanie », L ETILLY, G., Paris.
MINISTRY OF FINANCE, JORDAN (2013), General Government Finance Bulletin , Amman.
ALISSA, S. (2007), “Rethinking Economic Reform in Jordan: Confronting Socioeconomic Realities”, The Carnegie Papers , The Carnegie Endowment for International Peace, Arab Reform Brief , Amman. ANIMA (2010), « La carte des investissements en Méditerranée », Marseille, January. BALANCHE, F. (2010), « L’Etat au Proche-Orient arabe entre communautarisme, clientélisme, mondialisation et projet de Grand Moyen Orient », L’Espace Politique , No. 11, Reims. BROOKINGS DOHA CENTER (2011), “How Stable is Jordan?”, Doha. CARIM (2010), « Jordanie - Profil migratoire », Florence. CENTRAL BANK OF JORDAN - CBJ (2010), Financial Stability Report , Amman. ECONOMIST INTELLIGENT UNIT - EIU (2012), “Country Report-Jordan”. EUROPEAN UNION - EU (2012), “Economic report, September-November 2012”, Delegation to the Hashemite Kingdom of Jordan. FRENCH EMBASSY IN JORDAN, ECONOMIC DEPARTMENT (2013), « Projets de transports financés sur don CCEAG », Amman. IMF (2012a), “Request for a Stand-By Arrangement”, Washington, D.C.
MINISTRY OF FINANCE, JORDAN (2012), Public Debt Bulletin , No.36, Amman. MINISTRY OF LABOUR, MINISTRY OF PLANNING AND INTERNATIONAL COOPERATION, JORDAN (2013), “Response Plan for the Government of Jordan”, Amman. MINISTRY OF LABOUR, MINISTRY OF PLANNING AND INTERNATIONAL COOPERATION, JORDAN (2012), “National Employment Strategy, 20112020”, Amman. MUASHER, M. (2013), “Reform in Jordan: After the Vote”, The Carnegie Endowment for International Peace, Washington, D.C. MUASHER, M. (2011), “A Decade of Struggling Reform Efforts in Jordan: the Resilience of the Rentier System”, The Carnegie Papers, The Carnegie Endowment for International Peace, Washington, D.C. OBEIDAT, S. (2012), “Jordan: A Flowerless Spring”, Arab Reform Brief , Amman. OECD (2012), “Jordan: Investment Policy Review”, Paris. UN, GOVERNMENT OF JORDAN (2012), “Joint Jordan-UN Appeal”. USAID (2012), “Nepco Debt Recovery Forecast”. WORLD BANK (2012), “Hashemite Kingdom of Jordan: Options for Immediate Fiscal Adjustment and Long Term Consolidation”, Washington, D.C. WTO (2008), “Trade Policy Review: Report by Jordan”, WT/TPR/G/206, Geneva.
IMF (2012 b ), “2012: Article IV Consultation”, IMF Country Report No. 12/119, Washington, D.C.
MACRODEV (''Macroeconomics and Development'')
Director of Publications: Anne PAUGAM
This collection was launched by AFD’s Research Department to present the work produced in the field of development macroeconomics by AFD's Macroeconomic and Country Risks Analysis Unit (RCH/AMR) and AFD Group economists . It publishes studies that focus on countries, regions or development-related macroeconomic issues.
Editorial Director:
The analyses and conclusions in this document are the sole responsibility of the authors, and do not necessarily reflect the viewpoints of the Agence Française de Développement or its partner institutions.
32
© AFD / Macroeconomics and Development / September 2013
Alain HENRY Translator: Gill GLADSTONE Agence Française de Développement 5, rue Roland Barthes – 75598 Paris cedex 12 Tél. : 33 (1) 53 44 31 31 – www.afd.fr
Copyright: 1st quarter 2015 ISSN: 2266-8187
Conception et réalisation : Ferrari/Corporate – Tél . : 01 42 96 05 50 – J. Rouy/ Coquelicot - Septembre 2013.
AFD (2009), « Rapport de mission : analyse du risque-pays et du risque souverain de la Jordanie », L ETILLY, G. and T. L ETREILLE , Paris.
