Saudi support key to Jordan’s economic recovery
One cannot visit Jordan without hearing the latest mutterings about austerity measures. Jordan’s prime minister recently appeared on national TV, announcing a cut in public salaries and setting a salary ceiling.
This was not news to the visiting Saudi monarch, King Salman, and his delegation, given the Kingdom not too long ago embarked on similar cost-cutting measures and government expenditure rationalization. Just like in Saudi Arabia, the economy of Jordan has slowed down. Unlike Saudi Arabia, the fiscal profile of Jordan is fragile, given its falling tourist receipts and remittances.
Since 1948, Jordan welcomed countless Palestinians, followed by Iraqis in the 1990s and more recently Syrians. The crisis in Syria and Iraq has affected Jordan’s economy, including the closure of trade routes with the two countries. Jordan is hosting more than 657,000 registered refugees, a number closer to 1 million including those who are unregistered. Jordan has limited resources and a population of 9.5 million people, of which 3 million are foreign displaced persons. According to the Jordanian minister of finance, the Syrian crisis since 2011 has cost Jordan $2.5 billion. This is not a small amount for an economy sized at $38 billion.
However, the Syrian refugee crisis can be turned into a development opportunity for Jordan. At a donor conference in February 2016, the international community pledged $1.7 billion in grants and loans in return for Jordan opening up its labor markets to Syrian refugees. Jordan was also promised access to tariff-free trade with the EU.
A year later, Jordan secured a bit more than $900 million in funding, including $147 million in World Bank loans and a cash transfer of $500 million from the US in December 2016. It was expected that the Jordanian garments industry — which accounts for 20 percent of the country’s gross domestic product (GDP) and hires predominantly Asians — would have been able to provide employment to Syrians. So far, it has been proven hard to hire Syrians in many sectors, including the garments industry, which caters, mainly, for the US market due to the Jordan-US free-trade agreement.
Growth over the last few years was below 3 percent and this year the government is estimating GDP growth at around 2 percent. But Jordan needs to at least double its growth in order to address its unemployment rate of more than 15 percent. Also relevant to this is the $732 million arrangement under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) approved in August 2016, which focuses on fiscal consolidation toward a reduction of the debt-to-GDP ratio to 77 percent by 2021.
Interestingly, Saudi Arabia is going through its own phase of fiscal consolidation as it looks to reach a budget surplus. However, in the case of Saudi Arabia, it is in a very different position as its debt-to-GDP ratio is in the single digits.
As Jordan has been trying to adjust to new fiscal realities, King Salman’s visit could not have come at a better time, boosting confidence in the local economy. The visit to Jordan by King Salman was important. On his Twitter account, Jordan’s King Abdullah said: “Pleasure to welcome my brother @KingSalman to his home, Jordan.”
With Amman trying to adjust to new fiscal realities, King Salman’s confidence-boosting visit could not have come at a better time.
Saudi Minister of Commerce and Investment Majid Al-Qassabi said at the Saudi-Jordanian Economic Forum in Amman that he had “been instructed by the Custodian of the Two Holy Mosques to do everything possible to boost joint investments with Jordan, which we consider a very important business partner for Saudi Arabia.”
Saudi Arabia has always tried to spearhead fiscal support to Jordan. In 2011, a $5-billion grant was provided from the Gulf states. In the difficult 2011-12 period some $1.4 billion worth of cash injections was also provided by Saudi Arabia and other Gulf donors in addition to another $1.5 billion of deposits in Jordan’s central bank. According to the Jordanian Chamber of Industry (JCI), bilateral trade reached $3 billion in 2016. Jordanian exports to Saudi Arabia were at $996 million, while imports from the Kingdom reached $2.3 billion.
During King Salman’s visit, a series of 15 economic agreements were signed between the two countries, led by the memorandum of association that will run the Saudi-Jordanian Investment Fund, which will invest $3 billion in projects in Jordan.
Saudi Arabia is Jordan’s biggest Arab commercial partner, noted Yarub Qudah — Jordan’s industry, trade and supply minister — who also remarked that Saudi investments in Jordan surpassed $10 billion.
Containing the fiscal deficit and improving the macroeconomic environment will be important for growth prospects. Despite slower growth, the Central Bank of Jordan (CBJ) has managed the monetary conditions well. Tourism revenues and expatriate remittances stood at $7.8 billion in 2016, according to the central bank. Against 2015, remittances and tourism receipts dropped by 2.4 percent and 0.5 percent, respectively. This is justifiable given regional tensions as well as the drop in oil prices and slower economic growth and labor nationalization policies in the Gulf.
As per the IMF, five countries — Egypt, Yemen, Lebanon, Jordan and Syria — receive about 90 percent of Saudi Arabia’s remittances outflows to the Middle East and North Africa (MENA). As Saudi Arabia and other economies in the Gulf push through fiscal consolidation and labor market reforms translate into lower employment of expatriate labor, remittances into Jordan will be compressed.
The Jordan 2025 development plan, announced in May 2015, identifies eight clusters for development: Construction and engineering, transport and logistics, tourism and events, health care, life sciences, digital and business services, educational services and financial services. There is much that Saudi Arabia and Jordan can do to complement each other — and King Salman’s visit underscored this.
• John Sfakianakis is the director of economic research at the Gulf Research Center (GRC) in Riyadh.