Jordan’s economy witnessed several positive developments in 2014, including lower oil prices and a smaller current account deficit, but the ongoing instability in neighbouring Syria continues to put pressure on some sectors. While both Jordanian officials and the International Monetary Fund (IMF) expect respectable overall growth for 2015, much will depend on the Kingdom’s ability to maintain the momentum by reducing its vulnerability to external influences.
Oil Prices Provide Relief
Even after gains in recent weeks, global crude prices are down by more than 40% from a year ago, no small matter for a country that imports 96% of its energy needs, generates almost all of its electricity from fossil fuels and saw demand for power rise by 7% in 2014.
Lower oil and gas costs are not quite a panacea for the Kingdom’s complex energy situation, especially since one of their eventual effects could be to reduce the amount of cash flowing from the countries of the six-nation Gulf Cooperation Council (GCC). GCC governments and investors will have less capacity to maintain the flow of capital that has helped support growth in recent years, and Jordanian expatriates will thereby have less to send home in the form of remittances.
In addition, cheaper fuel imports will do little to overcome Jordan’s perennial problem with security of supply. Since 2011, only a third of contracted gas volumes have arrived via pipeline from Egypt, and now a deal to make Jordan the first foreign customer for Israel’s emerging gas sector may be derailed for political and diplomatic reasons.
There is the matter, too, of Jordan’s ambitious plans to wean itself off imports of fossil fuels by developing its own shale oil reserves, investing heavily in renewables like wind and solar, and even building a nuclear power plant. As each of these projects comes online in the years ahead, world oil and gas prices will become less and less important for Jordan’s economic performance.
However, that will be then, and this is now. Crude’s swoon appears already to have had a positive impact in several ways. The country’s current account deficit fell from just under 10% of GDP in 2013 to about 8% last year, and while the trade deficit widened by 1.4%, its rate of growth slowed radically in the fourth quarter as the effects of lower oil prices began to make themselves felt; in September alone, the value of imports dropped by 21% from a year earlier, largely due to cheaper fuel. Another telltale sign is that while imports from non-Arab Asian countries jumped by 9% in 2014, those from Arab nations rose by just 1.3%.
More such improvements can be assumed for at least the first several months of 2015, even if prices recover because much of the fuel ordered and/or purchased in the latter half of 2014 has yet to arrive. This is expected to mean substantial additional savings on fuel subsidies and smaller losses at the state-owned National Electric Power Co. (NEPCO), and therefore a welcome boost for public finances. It also means lower inflation, lower production costs and greater competitiveness for Jordanian exports.
Partly as a result of such expectations, IMF representative Kristina Kostial has predicted GDP growth of 3.8% in 2015, and Central Bank of Jordan (CBJ) Deputy Governor Maher Hasan forecasts an expansion of “between 3.5% and 4%”, up from 3.1% and 2.8% in 2014 and 2013, respectively. Hasan has also stated that inflation would drop from about 3% in 2015 to 2% or even 1.5% this year, partly because of lower prices for crude and other commodities. Amid all the short-term benefits and optimistic forecasts, however, lies the possibility that oil prices will stay low enough, long enough, to curtail the crucial flow of aid, investment and remittances from the Gulf.
What If It Lasts Longer?
Since 2012, several oil-rich GCC states have contributed to a $5 billion package of grants, loans and other financing that have helped bolster Jordan’s economy in the face of highly challenging conditions, both regionally and internationally. Remittances from Jordanians working in the Gulf are even more important, having added up to more than $3.6 billion in each of the past two years, equivalent to approximately 9% of GDP.
Ratings agency Standard & Poors reiterated in late February that continuing low oil prices were likely to undermine GCC economies, leaving fewer funds available for governments, investors and Jordanian expats. Faced with the possibility of less money coming from the Gulf, neither Jordan nor its international partners are standing pat. In early February, for example, Jordan took delivery of €100 million in soft loans under the European Commission’s Macro-Financial Assistance program. Along with a second tranche of €80 million expected at end-June, these funds will help the government stick to its economic reform targets and leave more funds available for other purposes.
About two weeks later, Amman’s Ministry of Information and Communication Technology inked a pact with the International Finance Corp., the private sector arm of the World Bank, and three local universities to help the latter improve their ICT curricula to better equip graduates. The same day, Hasan said the CBJ was close to signing a new $100 million loan agreement with the Arab Fund for Economic and Social Development, the latest in a series of finance deals aimed at increasing the amount of affordable credit available for the small- and medium-sized enterprises (SMEs). Noting that Jordan’s “underserved” SMEs create some 70% of new jobs, he also said that other efforts were proceeding as well, including the licensing of a private credit bureau and efforts to help universities impart entrepreneurial skills to their students.
For now at least, GCC states are still following through on their commitments. The Saudi Fund for Development, for instance, signed agreements in early February that will provide $176 million in grants for a variety of health-related development and infrastructure projects. As economist and former Lebanese Economy Minister Nasser Saidi recently observed, however, past bouts of low oil revenues have prompted Gulf oil producers to impose draconian cuts on government spending, often compounding the problem by damaging growth at home and magnifying the impact abroad.
Saidi, who also served as first vice-governor of the Lebanese Central Bank and as chief economist of the Dubai International Financial Centre, argues that this time could be different if GCC states seize the opportunity to undertake difficult but long-overdue reforms. These, he says, should include moves to diversify government revenues by introducing new value-added and excise taxes, using bond sales rather than current revenues to fund infrastructure and development projects, and – above all else – slashing fuel subsidies that absorb about 10% of Gulf GDP.
Hoping For The Best
Amman obviously hopes that GCC countries can engineer soft landings and stabler futures for themselves and various recipients of their largesse, but it cannot bank on their ability and willingness to do so. As of yet, there is no need to press the panic button, only to keep improving the Kingdom’s own budgetary position, priming the pump of domestic growth, and preparing contingency plans for a possibly dramatic drop in the resources at its disposal.