- The ongoing regional turmoil continues to weigh down on economic activity. The crisis in Syria has disrupted trade and resulted in a large influx of refugees, putting a strain on public services, finances and labour market conditions. Natural gas inflows from Egypt, which have been severely disrupted since 2011, add significant downside risks to Jordan’s fiscal and current accounts. Furthermore, tensions in Iraq are likely to have a marked effect on trade, given that Iraq is a major export destination representing roughly 20 per cent of Jordan’s exports.
- The Jordanian authorities have managed to secure international support in the face of fiscal and external pressures. Jordan successfully sold US$ 1 billion worth of US-guaranteed five-year bonds in late June 2014, the second loan guarantee from the United States since October 2013. At the same time, the International Monetary Fund (IMF) has completed its third and fourth reviews under the Stand-By Arrangement.
- Significant progress has been made in energy sector reforms. The sector is fully unbundled, all distribution companies are privately owned and power generation has seen an increase in private sector participation. Electricity tariffs have been increasing since May 2012 and are expected to be raised further to bring the national electricity company, NEPCO, to cost recovery.
Key priorities for 2015
- Enhancing energy sustainability and the continuation of energy sector reforms are essential. There is a need to diversify energy sources, increase both transmission and distribution capacity, further liberalise fuel distribution markets and promote more energy-efficient production. Furthermore, continued implementation of the authorities’ comprehensive tariff reform plans will be required to bring NEPCO to cost recovery by 2017 and to reduce mounting arrears.
- Further reform measures are needed to enhance the business environment. While the authorities have worked to streamline the process of business start-ups, impediments still exist, particularly at the local government level. Doing business remains hampered by difficulties in enforcing contracts and resolving insolvencies, and in dealing with different layers of government bureaucracy.
- Reform gaps need to be addressed in the infrastructure sector. Decision-making in public utility companies remains largely centralised, and further commercialisation of these companies is needed to increase efficiency and attract capital. Private sector participation in these projects remains low and financing structures are sovereign only.
THE ONGOING REGIONAL TURMOIL CONTINUES TO WEIGH DOWN ON ECONOMIC ACTIVITY
THE JORDANIAN AUTHORITIES HAVE MANAGED TO SECURE INTERNATIONAL SUPPORT IN THE FACE OF FISCAL AND EXTERNAL PRESSURES
SIGNIFICANT PROGRESS HAS BEEN MADE IN ENERGY SECTOR REFORMS
Note: FI – Financial institution; ICT – Information and communication technology; Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.
Main macroeconomic indicators %
|Current account balance/GDP||-7.1||-10.2||-15.2||-10.3||-10.0|
|Credit to private sector/GDP||7.8||9.0||6.4||7.1||n.a.|
Note: Government balance excludes grants.
Economic performance in Jordan remains weak amid continued regional turmoil. Output growth stood at 2.8 per cent in 2013, below the average growth rate of 6 per cent over the last decade. Economic activity improved slightly in the first quarter of 2014, with GDP growing by 3.2 per cent year-on-year, driven by a somewhat stronger performance in agriculture, mining and utilities – though manufacturing weakened. The recovery in exports and tourism remains modest, reflecting weak external demand and regional turmoil. Consequently, output growth has not been sufficient to generate enough jobs, resulting in a persistent unemployment rate of about 12 per cent in the first half of 2014.
External imbalances decreased thanks to external financial support. The current account deficit narrowed to 9.8 per cent of GDP in 2013 from 15.2 per cent of GDP in 2012. This mainly comes on the back of an influx of grants from the Gulf Cooperation Council (GCC), as other sources of foreign exchange remain subdued. The current account deficit remained at 9.8 per cent of GDP in the first half of 2014. Notably, tourism exports picked up relative to last year, but the visible trade balance worsened on the back of higher goods imports.
The fiscal deficit has narrowed thanks to consolidation measures. The combined public sector deficit (excluding grants, but including NEPCO losses) dropped to about 6 per cent of GDP in the first quarter of 2014 from 9.3 per cent of GDP in 2013 and about 12.7 per cent in 2012. The authorities have been implementing a national economic programme (supported by the IMF), which is primarily focused on correcting fiscal and external imbalances through adjustments in fiscal and energy policies. The lower subsidy bill has freed up some fiscal space to increase capital expenditure, which rose by roughly 50 per cent in 2013. However, gross public debt, including publicly guaranteed debt, has increased substantially over the past two years, reaching about 86 per cent of GDP in 2013.
The authorities have secured international financial support. The IMF’s third and fourth reviews under the Stand-By Arrangement have been successfully completed, enabling the immediate release of US$ 258 million. This brings total disbursements under the programme to US$ 1.3 billion. In addition, Jordan has managed to secure foreign assistance, including pledges by the GCC countries to provide US$ 5 billion over five years for development projects. In late June, Jordan successfully sold US$ 1 billion worth of US-guaranteed five-year bonds, the second loan guarantee that the United States government has provided to Jordan since October 2013.
External factors and fiscal consolidation will constrain short-term growth. Externally, regional turmoil and relatively weak global demand will hamper exports, particularly of tourism, while ongoing fiscal consolidation will soften domestic demand. However, looking ahead the EBRD expects the external environment to improve, leading to growth edging up to 3.4 per cent in 2014. The main risks to the forecast revolve around deterioration in regional conditions, which would adversely affect trade and investment.
Major structural reform developments
The business environment in Jordan still faces significant difficulties. Jordan ranks 117th out of 189 countries in the World Bank’s Doing Business 2015 report for ease of doing business. Key obstacles remain in access to credit as well as in enforcing contracts and protecting investors. Although the minimum capital requirements for starting a business were significantly reduced in 2012, and cross-border trade has been facilitated, many bureaucratic impediments to doing business remain. Despite the fact that the Jordan Investment Board has worked to streamline the process of business start-ups, foreign and domestic investors still face extensive red tape and opaque procedures, particularly at the local government level. On a positive note, a draft investment promotion law, which sets up a one-stop shop for investors, has been approved by parliament. In addition, new draft laws on insolvency and bankruptcy are currently being reviewed.
Significant reform progress has been achieved in the energy sector. The government has made significant progress with energy sector reform. The sector is currently fully unbundled, all distribution companies are privately owned and power generation has seen an increase in private sector participation. Further commitments have been made to tackle the country’s high dependence on energy imports. Jordan’s National Energy Strategy has set a target to reduce energy consumption by 20 per cent by 2020. Electricity tariffs have been gradually raised since May 2012 and are expected to increase further over the next five years, to bring the heavily indebted national electricity company, NEPCO, to cost recovery (in 2013, the losses at NEPCO were estimated at 4.6 per cent of GDP). The government also prepared by-laws to help implement the 2012 Law on Renewable Energy, including a by-law on energy efficiency and on renewable energy pricing. Meanwhile, a liquefied natural gas (LNG) terminal is being built in Aqaba to enable alternative supplies of natural gas. The terminal is expected to be commissioned in 2014, and will be owned mainly by the private sector. The Jordanian government has announced the signing of a five-year agreement with Royal Dutch Shell to supply LNG to the terminal.
Jordan has taken further steps in its financial sector reforms, including the development of an appropriate regulatory and supervisory framework. The central bank has stepped up off-site monitoring of banks. However, the state’s heavy reliance on bank lending has increased banks’ sovereign exposures. Revisions have also been made to the corporate governance code, the securitisation law and the regulation on consumer protection. The country’s first credit bureau is envisaged to be licensed soon. However, activity and liquidity in the local capital markets remain limited, while corporate governance standards and enforcement by local authorities lag behind international standards. The stock market also suffers from excess volatility and is affected by poor corporate governance.
The privatisation plan has advanced, reducing government ownership across most economic sectors (transport, tourism, electricity and telecommunications). The completion in March 2014 of a high-level Privatisation Evaluation Committee report showcased the government’s willingness to assess the privatisation process in a transparent fashion and benchmark it to international best practices. Special economic zones and qualifying industrial zones have been established to host the country’s offshore trade sector and attract investments in the information and communication technology sector.
Major reforms are still needed in the water and wastewater sector. Water scarcity is a key development challenge for Jordan. The government-controlled Water Authority for Jordan (WAJ), which is responsible for large investments such as infrastructure construction, is heavily subsidised by the state, and tariffs are not reflective of either costs or water scarcity. Institutional reforms are necessary to enhance operational efficiency and reduce water waste. On a positive note, contractual relationships are evolving, as the Performance Monitoring Unit within the WAJ is developing benchmarks to be deployed across the water sector. Currently the management contract for the Yarmouk Water Company is based on four performance indicators.