AMMAN, 15 December 2003 — After slowing down in the first quarter of 2003, economic activities appear to have improved in the second half of the year and the outlook for 2004 is also quite positive. Market participants are now dissociating Jordan from its unstable surroundings and are giving more emphasis to Jordan’s economic and political stability and its home grown growth factors. The various reforms introduced by the government in the legal, political, economic and education fields, the return of confidence to the domestic scene as reflected by the rise in share prices of more than 50 percent so far this year, the expansionary fiscal and monetary policy being implemented, the continuing surge in exports, international aid and workers’ remittances to the country, and a more settled regional environment could see Jordan recording higher real GDP growth of 5 percent next year.
Jordan managed this year to get free of charge around 120,000 barrels of crude oil daily from Saudi Arabia, Kuwait and UAE to replace the oil that Jordan used to get from Iraq at subsidized prices. The US government gave Jordan $700 million in supplemental aid, on top of the annual package of $250 million in economic assistance.
It paid $500 million in May 2003 and delayed the remaining balance of $200 million till 2004. An additional $100 million of aid endorsed recently by the US government is earmarked for the Socio-Economic Transformation Plan which has a JD530.8 million budget for 2004. Jordan’s economy has also been helped by a grant of €210 million from the EU. While the above benefits have not been sufficient to offset fully Jordan’s loss of the Iraqi market that used to take 20 percent of its exports, nevertheless, they helped the Kingdom to absorb the shock and assume its long-term growth path.
According to official figures, GDP at constant 1994 prices rose by 2.8 percent in the first quarter this year and by 3 percent in the second quarter, giving an average growth for the first half of the year of 2.9 percent. A growth rate of 4.5 percent is forecast for the second half of the year, giving a growth rate of 3.7 percent for the year as a whole. This is lower than last year’s growth of 4.9 percent, but is closer to the 4.2 percent recorded in both 2000 and 2001. With population growth rate close to 2.8 percent, per capita income must be rising at around 0.9 percent in real terms. This would have only a small impact on improving the standard of living of Jordanians. Jordan’s gross national income (GNP), i.e. income generated by nationals inside and outside the country, far exceeds income generated domestically (gross domestic product, GDP). This is mainly due to the sizeable amount of remittances transferred by Jordanians working abroad, which reached JD1,514 million ($213 billion) in 2002. Even though average living standards, as measured by gross national income per capita, have improved 17 percent in the past six years from JD1,365 million ($1.92 billion) in 1996 to JD1,600 million ($2.26 billion) in 2002, this corresponds to JD133 million ($188 million) a month which is still very low by international standards and does not reflect an equitable distribution of income.
The Central Bank of Jordan has been following an expansionary monetary policy, with interest rates on the dinar moving lower in line with dollar interest rates. The prime lending rate for the major Jordanian banks has dropped to 6 percent recently and the Central Bank overnight deposit window rate to 2 percent. Interest rates on the dinar are likely to remain close to current levels in the first half of 2004, before rising marginally in the second half. This should help the expansion of credit facilities and boost activities in the interest sensitive sectors of the economy, mainly construction, consumer durables, housing and the stock market. The expansionary fiscal policy is targeted to continue next year with the budget projecting a 6 percent increase in government expenditures from a readjusted 2003 spending estimate. This means a forecast budget deficit of JD293 million ($413 million), or 3.9 percent of GDP.
The construction sector which recorded a growth rate of 11 percent last year, continues to show strong growth. This is attributed to the large number of infrastructural projects currently being implemented in Aqaba, as well as, in the other regions of the Kingdom and the surge in the number of housing and apartment buildings under construction. This sector has strong forward and backward linkages with other sectors (building material, furniture, consumer durables, etc) and would therefore have a positive impact on growth elsewhere in the economy.
Those who are working in the public sector and are mostly living on fixed wages and salaries are not feeling much improvement. On the contrary, higher direct and indirect taxes are eating into their gross income. At 20 percent to 25 percent of income, the tax burden in Jordan is considered to be relatively high. Activities in the retail trade and hotels sector continue to be subdued for the third year in a row, depriving participants in these sectors from much improvement in their standard of living.
However, other more fortunate private sector participants are clearly better off. Given the good performance of the Kingdom’s stock market, shareholders have seen their wealth rise on the average by more than 50 percent so far this year. This together with the upturn in real estate prices boosted the “wealth effect” and should reflect positively on general consumption and investment expenditures next year.
The challenges facing Jordan include continuing large debt-service, growing pension liabilities for the public sector, high tax burden, paying for oil imports at market prices, the pressures for increased government spending on social services, the need to address rising unemployment and high population growth rate and persistent budget deficits leading to higher debt outstanding. There are also the possible impact of adverse regional developments that are beyond the government’s control.
(Henry T. Azzam is Chief Executive Officer at Jordinvest.)