Macrodev n° 10

September 2013 / No 10

IntroductionSince 2008, the countries of the Middle

East and North Africa (MENA) have beenaffected by different kinds of shocks. The inter-national financial crisis and then the euro-zonesovereign debt crisis have brought on a sharpslowdown in the growth of goods and servicesexports from the MENA countries. Thesemacroeconomic shocks were compounded by apolitical shock wave that impacted several ofthe region’s countries in the wake of the popularuprising in Tunisia in early 2011. These differentcrises have penalised their pace of growth, parti-cularly those countries that depend most oninternational business, such as Jordan.

Jordan is highly dependent on external financialf lows, which are exposed to internationaleconomic conditions and the turmoil of achanging regional environment. Worker remit-tances, a major resource for Jordan, arecontracting sharply, tourist receipts are followingsuit and foreign direct investment (FDI) hastaken a turn for the worse. As a result, since2008, the pace of Jordan’s economic growthhas more than halved, which has stunted theper capita level of wealth. In addition, as thecountry has scant oil and gas resources, itimports almost all of the energy it consumes.Moreover, the many sabotage attacks on thegas pipeline in Egypt – which supplies most ofJordan’s energy needs at preferential tariffs –have repeatedly disrupted power supplies tothe Jordanian Kingdom. The country has thus

Macroeconomics and Development

Jordan: the stakes of growthin a troubled regionalcontext

Slim Dali ([email protected])Macroeconomic Analysis and Country RiskUnit, AFD

been forced to source its energy at marketprices, which pushes up its energy bill and worsensits external balances. Faced with this slackeningactivity, the public sector has taken over fromthe private sector to drive growth. This, however,has certain l imits given that governmentfinances have deteriorated, with a very highlevel of debt that has been rapidly rising since2008.

Jordan’s specificity within this troubled regionbrings up the question of its socio-politicalenvironment, which is analysed in the first partof this study. In the second part, we exploreJordan’s economic growth regime and itsmedium-term prospects. Public finances areexamined in detail in the third part, followed byan analysis of Jordan’s financial system in thefourth part. The final part on external balancescompletes the study’s macroeconomic andfinancial diagnosis.

© AFD / Macroeconomics and Development / September 20132

Sommaire

1 / JORDAN EMBEDDED IN THE TURMOILOF A FAST-CHANGING REGIONALENVIRONMENT

1.1. The country’s long-standing exposureto its neighbours’ unrest 3

1.2. The potentially destabilising impact ofthe Syrian conflict 5

2 / THE PACE OF GROWTH HASSLACKENED SHARPLY SINCE 2008 8

2.1. The growth regime is running out ofsteam, leading to a downturn in percapita wealth 8

2.2. A growth model displaying signsof weakness to external shocks anddependent on the public sector atthe end of the period 10

2.3. A deteriorating economic context andchanging regional environment impactJordan’s sources of funding 12

3 / THE PUBLIC DEBT IS HIGHAND BRINGING IT UNDER CONTROLIS UNCERTAIN 15

3.1. The marked increase of domestic debthas weighed on total public sector debtsince 2008 15

3.2. The fiscal deficit is widening and fuellingcentral government indebtedness 18

3.3. An uneven history of payment promptscaution 21

4 / THE BANKING SECTOR PARTICIPATESIN FINANCING ECONOMIC ACTIVITYBUT LESS SO SINCE 2008 22

4.1. A downturn in the cycle of private sectorcredit since 2008, whereas public sectorcredit is on the rise 22

4.2. The banking system is well regulatedand adequately supervised by the CBJ 24

5 / DETERIORATING EXTERNAL ACCOUNTBALANCES DUE TO THE EFFECT OFREGIONAL TURMOIL 25

5.1. A growing external financing requirementis covered by drawing on foreign reserves 25

5.2. Pressures on external liquidity since 2011can be eased by support from external players 28

CONCLUSION 30

LIST OF ACRONYMSAND ABBREVIATIONS 31

REFERENCES 32

3

(commonly dubbed “one vote” or sawt al-wahid),whereby the voter is led to choose a single candidateand not a list of candidates.[3] However many seats arebeing contested in a constituency, the voter is limitedto choosing only one of the candidates. This votingsystem fosters the traditional mainstays of theJordanian regime, in other words the Bedouin tribes.[4]

The fracture lines in Jordanian society are visiblebetween (and among) (i) the East Bank Jordanians(so-called “original” Jordanians) and the Jordaniansof Palestinian origin (who account for half of the totalpopulation), (ii) the Bedouin tribes, (iii) the urbanand rural zones (Amman and the north-west of thecountry 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 socialfragmentation remain limited insofar as these groupsdo not enter into conflict with each other. Moreover,unlike the other MENA countries, where religiousdivisions are pronounced and likely to create deepantagonisms, the Jordanian population is relativelyhomogeneous (over 95 % of the population are SunniMuslims).[5]

The East Bank Jordanians and the Bedouin tribes arethe linchpins of the Hashemite Kingdom. Althoughthe Jordanians of Palestinian origin are not presentin the public sphere, they play an active role in theprivate sector and belong to some of the country’slarge business families.

Jordan is a parliamentary monarchy that concentratesnumerous powers in the king’s hands, notably thepower to appoint the head of the executive, dissolvethe Chamber of Deputies and appoint and dissolvethe Senate. Only 150 members of the Chamber ofDeputies are elected. Although political parties havebeen authorised since 1992, the electoral systemlimits access to the National Assembly to some ofthem.

The country’s long-standing exposureto its neighbours' unrest

Political vulnerabil ities and a a segmentedsociety

The Chamber of Deputies is renewed every four yearsbut early elections can be held if the king so decides.Normally, the parliamentary elections do not give riseto violence, despite past accusations of fraud.[1]

According to observers, the anticipated elections inJanuary 2013 unfolded satisfactorily mainly thanks tothe setting-up of an independent electoral commission.The Jordanian voting system has two particularities.The first is the absence of any regulation of politicalparty financing: there is no public funding for electionsand no cap on private funding. The second relates tothe electoral law promulgated in 1993 to curb theparliamentary influence of the main opposition party– the Islamic Action Front (IAF, the political arm ofthe Muslim Brotherhood) – and the left-wing parties,following the democratic experience of 1989.[2] Thislaw introduced a single non-transferable vote system

1.1.

1/ Jordan embedded in the turmoil of a fast-changing regional environment

[1 ] See Obeidat (2012). As the 2007 legislative elections were marred by accusations of electoral fraud, King Abdallah II demanded greater transparency forthe 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 politicalparty 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 /

4

Jordan’s specific location and the destabilisingwaves of refugees seem to present a geographicaland historical vulnerability for the country

The territory of Jordan was artificially created followingthe European plans to carve up the Ottoman Empire in1921; it became the Hashemite Kingdom of Jordan in1946. Due to its location, Jordan is highly exposed toregional conflict – for the most part, the conflict opposingits neighbour Israel and the Arab States. The Arab-Israeli wars [6] brought massive waves of Palestinianimmigrants into Jordan; many of these refugees obtainedJordanian nationality after King Abdallah I annexed theWest Bank in 1949. During the First Gulf War (1990-1991), King Hussein’s support to Saddam Husseintriggered the expulsion of many Jordanians andPalestinians working in Kuwait and other Gulf States.The Second Gulf War (2003) led to the arrival of severalthousand Iraqis in Jordan. Finally, the Syrian civil war,on-going since 2011, has resulted in a massive influx ofrefugees. These regional disturbances have thus translatedinto recurrent internal political tensions and the inherentdifficulties of constructing a national identity.Moreover, the political, social and economic integrationof Jordan’s Palestinian refugees has been a centralquestion for the Hashemite Kingdom and even createda fundamental ambivalence. [7 ]

Contained socio-economic vulnerabilities

Buoyant economic growth in the 2000s contributedto a substantial rise in per capita wealth (cf. Part 2)and a lessening of income inequality. From this point ofview, Jordan’s growth may be described as inclusive,given the limited extent of income distributioninequality and a poverty rate (USD2 a day) of 1.6% ofthe population. Moreover, the Jordanian State allocatesa sizeable share of its budget to subsidising foodprices and petroleum products (an average of 12.5%of its own-source budget receipts between 2000 and2011) and ensures social tariffs for electricity. Accessto education and government spending per studentare relatively high compared to the MENA region,with the enrolment rate reaching over 90% for primaryeducation and 85% for secondary. On the other hand,the employment rate is one of the lowest in theregion (36% of working-age population) and theunemployment rate fell only slightly during the boomyears of the 2000s, stagnating at around 13%. Theslackening of growth since 2008 has affectedemployment, particularly for young people andhigher education graduates. The latter accounted for33% of all unemployed workers in 2010 and thisfigure is growing significantly (cf. Box 1).


[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 Palestiniansbecame refugees after Israeli troops had extended their control over part of the zone that had been assigned to the Arab State of Palestine. Thesecond 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) andthe 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 PalestinianLiberation Organisation (PLO) demanded refugee status for them so that they could keep the right of refugees to return to their homeland.

5

1/Jordan embedded in the turmoil of a fast-changing regional environment


1Map

Source: Economic Intelligence Unit (EIU); mentions of regional crises added by theauthor.

The potentially destabilising impactof the Syrian conflict

Events likely to affect the socio-politicalenvironment

• Political domain

After the region’s popular uprisings in 2011, politicaland social demands also made themselves felt inJordan, prompting the Kingdom to engage inreform. It was in this setting that the electoral systemwas modified in July 2012. Yet, the reform did notalter the single non-transferrable vote election systemthat had been instituted by the 1993 Law. The mainopposition party, the Islamic Action Front (IAF), thusdecided to boycott the January 2013 elections. Thismeans that the demands for more political opennesswill likely continue.

• Economic and social domain

Fuel price subsidies – which all households receiveregardless of their income – were suppressed thenreplaced by a monthly price adjustment for theseproducts and by a subsidy mechanism targeting mainlypoor households and the middle class should the priceof a barrel of oil exceed USD100. Monthly rises in fuelprices resulting from this adjustment mechanism arelikely to rouse protests against the authorities, eventhough their decision is not of a political nature. Theproblems encountered by households to smooth theirenergy consumption may indeed give rise to protests, aswas the case of the demonstrations in November2012.[8]

The flat economic context and sluggish regionalconjuncture was exacerbated by the return of skilledJordanian workers and heightened labour markettensions. More specifically, the unemployment rate foryouth (who account for 28% of the total working-agepopulation in 2010) is increasing, particularly that forhigher education graduates, which exhibits a constantrise (33% of all unemployed in 2010). This context mayimpact the socio-political environment when viewedthrough the prism of the Tunisian situation, wheredemands for employment became the driving forcebehind the 2011 popular uprising (cf. Box 1).

1.2.

[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’s geographical locationand the region’s historical events

In September 1970, a bloody conflict known as“Black September” broke out between PLO fightersand the Jordanian Army, which at the time includedover 30% of Palestinian recruits. It was in the after-math of these offensive attempts of the PLO tooverthrow King Hussein – accused of obstructingthe Palestinian cause – that the Kingdom of Jordanlaunched military operations aimed at quashing thePLO’s influence in the refugee camps. Indeed, armedcommandos had been training inside the camps andwere about to carry out armed actions to raise theworld’s awareness of Palestinian demands. This civilwar, which lasted several months and led to thedeath of several thousand people, deeply traumatisedthe country and left a lasting mark on the collectiveunconscious.

6

September 2011 so as to improve the balance ofpower, following the political and social demandsspurred by the popular movements of 2011. Thisextended the prerogatives of the judicial authority,strengthened the powers of Parliament and createda Constitutional Court. The modification of theelectoral law of July 2012 provided for the setting-up of an independent electoral commission. Thisnew law also authorised an increase in the numberof seats in the National Assembly (from 120 to150 seats) as well as the introduction of somedegree of proportional representat ion (18%),which gives more access to Jordanians ofPalestinian origin.

Finally, it is in the full interests of several foreignplayers to protect Jordan as a political entity fromany kind of destabilising effects. On the one hand,the Gulf monarchies have an incentive to back theJordanian Crown, which is also Sunni, so as toafford themselves some degree of protection; onthe other hand, the Western powers – above allthe United States – will probably continue to offertheir financial and military support to protect theirJordanian ally, which is also the neighbour of theirIsraeli ally.

• Geopolitical domain

There has been a massive influx of Syrian refugeesinto Jordan. This movement accelerated after theresurgence of the civil war in late 2012. On 2 September2013, the United Nations High Commissioner forRefugees (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 tobetween 10% and 15% of Jordan's population. Ontop of the difficult social conditions to which theSyrian refugees are exposed, their presence exacerbatespressure on the country’s modest water and energyresources. In the light of historical factors, this massiveinflux of refugees thus represents a risk that couldpotentially destabilise Jordan.

Events that could ease the socio-politicalenvironment

Constitut ional reform was introduced in


[9] Estimate of the local authorities in January 2013.

7/ Jordan: the stakes of growth in a troubled regional context /

1/ Jordan embedded in the turmoil of a fast-changing regional environment

Growing tensions on the Jordanian labour market create risks for social order and the growth cycle1Box

Healthy economic growth between 2000 and 2008(6.9% annual average) generated a net increase of457,000 jobs, whereas the unemployment rate onlymarginally improved, standing at about 13% of theworking-age population (180,000 people in 2009).About 42% of this new employment was in the publicsector – which remains the country’s leading employer– and over half of the jobs created in the private sectorwere filled by foreign workers. The latter are estimatedto number from 350,000 to 500,000 and occupy low-skilled jobs. As for the Jordanians who have emigrated,the Ministry of Labour estimated their number at165,000 in 2009. They chiefly comprise skilled workers(55% of emigrants are higher education graduates) andtheir main destinations are Saudi Arabia (34.8%), theUnited Arab Emirates (22.7%) and the United States(12.1%).

The employment rate in Jordan is one of the lowestin the region and was estimated at 36% of the working-age population in 2010 (11.9% for women), whereasin the MENA region this is 43% (cf. Figure 1). Thislow employment rate induces a weak domesticsavings rate, which is structurally negative [10] (cf.Figure 2). In fact, domestic investment is financed byforeign workers’ savings, which appears exceptionallyhigh compared to other countries in the region (anaverage 19% of GDP between 2000 and 2011). The slowdown of the national economy and Jordan’s

dependency on regional activity may reduce workerremittances and impact domestic investment, hencegrowth. In fact, the gradual move in the Gulf States toemploy nationals rather than immigrants (to absorbthe young people entering the labour market in thesecountries) means that qualified Jordanian workers arereturning home. These then enter the increasinglystrained domestic labour market and add to the numberof already present qualified unemployed. Moreover,40,000 young higher education graduates enter thelabour market each year, but the Jordanian economycannot absorb them: 15,000 of them swell the numberof those unemployed or inactive. Against this back-drop of sluggish growth, the unemployment rate ofhigher education graduates is trending upwards (33%of all unemployed in 2010) and represents a socio-political risk, as was the case in Tunisia, where thedemands for jobs were key drivers in the 2011 popularuprisings.

[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 disposableincome, which implies a net increase of indebtedness.

1Figure

Employment rate (population aged 15 andabove, %)

55

50

45

40

35

30

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Jordan Tunisia Egypt MoroccoMENA Euro zone

Source: World Development Indicators (WDI); author’s calculations.

2Figure

Domestic savings rate, investment rateand remittances (average 2000-2011, %of GDP)

35

30

25

20

15

10

5

0

-5

* average 2005-2010

Source: WDI; author’s calculations.

Jordan Tunisia Egypt MENA*

Savings rate Investment rateWorker remittances

8

The 1989 debt crisis

Following the fall in oil prices in the early 1980s, thedynamism of the Gulf States’ economies ran out ofsteam. This impacted Jordanian exports to thesecountries and the remittances of Jordanian migrantsto their home country. To cope with this pronouncedregional slowdown, the Kingdom of Jordan introducedan expansionist budgetary policy at the end of the1980s based to a great extent on external debt. Thisreached 174% of GDP in 1989. Concurrent to thisdebt crisis came a exchange rate crisis, which requiredthe intervention of the International Monetary Fund(IMF) and the World Bank.

The growth regime is running out ofsteam, leading to a downturn in percapita wealth

The geographical situation of Jordan is such that itsgrowth has been hit by the turmoil that the regionhas experienced over the last forty years. [11]

Certainly, the singular geostrategic position of this“buffer State”, which has no oil or gas resources, hasenabled it de facto to harvest foreign aid that partlyoffset the effects of external shocks. Thus, between1980 and 2012, Jordan registered a relatively sustai-ned growth rate of over 6% per year on average, whilstexperiencing two major shocks (cf. Figure 4).

2.1.


3Figure

Unemployment rate in 2010(% of total working-age population)35

30

25

20

15

10

54 5 6 7 8 9 10 11 12 13 14

Sources: National Employment Strategy, Ministry of Labour (MOL), Ministry of Finance (MOF).

Total unemployment rate (%)

Youth unemployment rate (%) Tunisia

Egypt

JordanMENA

Lebanon

Morocco

East Asia

World Sub-Saharan Africa

Latin America and CaribbeanSouth East Asiaand Pacific

Developed eco.and Euro zone

Central and South EastEurope and CIS*

Syria

Growth rate required to absorbnew labour market entrants andthe currently unemployed (%)

Unemployment rate in 2010 12.5

Real annual GDP required 9.3

Real GDP (2000-2010) 6.1

Real GDP forecasts (2010-2017) 3.3

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 theunemployed.

Source: IMF 2012c.

1Table

2/ The pace of growth has slackened sharplysince 2008

[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 toJordan. 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 KingHussein’s repeated support for Saddam Hussein, and caused the expulsion of thousands of Jordanians and Palestinians working in Kuwait andthe Gulf States. The Second Gulf War (2003) drove several thousands of Iraqis into Jordan and the downfall of Saddam Hussein’s rule haltedthe supply of preferentially priced Iraqi oil. Finally, since 2011, the uprising of the Syrian people has led to the massive arrival of refugees, whomthe Kingdom of Jordan has to host.

9

mid-1980s, GDP per capita (in constant 2005 USD) fellsharply from 1987 to bottom out in 1991 at nearlyUSD3,000 (Figure 5). Thereafter, GDP per capitaprogressed and, in 2005, recovered its 1987 level(USD4,330). This has levelled off since the 2008 shockat USD5,300. A regional comparison shows that theJordanians’ level of wealth is lower than the MENAcountry average [13] (USD6,500 in 2009 in constant2005 USD), whereas it was quite close a little beforethe 1989 debt crisis (Figure 6). A comparison ofchanges in GDP per capita with Tunisia clearly showsJordan’s divergence from the average level of wealth ofthe Mediterranean countries since the 1989 shock. Infact, the levels of wealth of the Jordanians andTunisians were practically identical in 1980 but theshock of the debt crisis and the exchange rate crisis onthe Jordanian economy stalled the growth dynamic andtriggered this divergence from the early 1990s. A slowconvergence is nonetheless visible following the strongperformance of the Jordanian economy in the 2000s.On the other hand, the Jordanians’ level of wealth isclearly higher that that of sub-Saharan Africa’s averageover the entire period. When compared globally,Jordan’s GDP per capita has remained stable since themid-1990s.

The 2008 international crisis after ten years ofsustained growth

After the shock of 1989, reforms were implementedand, although temporarily hampered by the First GulfWar, these helped to develop the private sector.Jordan’s economy then embarked on a growth tra-jectory reaching an average 4.7% between 1990 and1999 (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 liberalisingreforms: the main state-owned entities wereprivatised, trade opened up, [12] foreign investment wasactively encouraged and the financial sector wasmodernised. With a supportive international economicenvironment, these reforms helped to accelerate theannual average growth rate to 6.9% between 2000and 2008. In the aftermath of the 2008 financial crisisand then the 2011 popular uprisings in some Arabcountries, the growth rate was more than halved(2.5% annual average between 2009 and 2012).

A fall-off in wealth per capita

In terms of wealth, the trends reflect the differentphases of Jordan’s development. After rising until the


2. The pace of growth has slackened sharply since 2008


4Figure

Real GDP growth and average annualgrowth rate (AAGR) (%)

20

15

10

5

0

-5

10

-15

1980

1984

1988

1992

1996

2000

2004

2008

2012

Average annual growth over 10 years

International crisisPopular uprisings insome Arab countries

Debtcrisis

[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.


5Figure

GDP per capita(constant prices, base 100 in 1980)

140

130

120

110

100

90

80

701980 1985 1990 1995 2000 2005 2010

10

In total, it seems that the slowdown of activity in theGulf States in the late 1980s together with the 1989crisis had a strong adverse impact on the Jordanianeconomy until the early 2000s, with a large drop inthe population’s living standards (divided by 1.4between 1987 and 1991, in constant Jordanian dinars[JD] [14]), whereas the other countries in the region(Tunisia, Egypt) followed a different growth trajectory.

A growth model displaying signsof weakness to external shocksand reliant on the public sector atthe end of the period

According to the World Bank’s sector decomposition,the evolution of the productive structure of theJordanian economy has been characterised since 1980by a fall of almost 3 percentage points in agriculture’sshare of GDP (Table 2). This shift occurred as of themid-1990s. The services sector held a preponderantposition in the Jordanian economy contributing tomore than 65% of GDP over the three decades consi-

2.2.



6Figure

GDP in purchasing power parity (% ofaverage GDP per capita for Tunisia,Morocco, Egypt, MENA, sub-SaharanAfrica and the world)

300

250

200

150

100

50

01980 1985 1990 1995 2000 2005 2010

Jordan/MENA (excl. Gulf) Jordan/TunisiaJordan/Egypt Jordan/MoroccoJordan/World Jordan/SSA

[14] The Jordanian dinar is the local currency. It is pegged to the US dollar: USD1 = JD0.709 since 1995.

GDP breakdown by sector(average, %)

ServicesIndustryAgriculture

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


*Private sector services: finance, insurance, real estate services, business services, others

Source: Department of Statistics of Jordan (DOS); author’s calculations.

2Table

“Private services” and public services have beenthe key components of GDP for three decades

A more detailed analysis of GDP breakdown by sectoraffords greater insight into the productive structureof Jordan’s economy, as well as the structural changesfollowing the 1989 and 2008 crises (Figure 7).

Detailed GDP breakdown by sector(average, %)

7Figure

25

20

15

10

5

0

1980-1989 1990-19992000-2008 2009-2011

Agriculture, Fisheries

Construction

Electricity, water

Mining

Manufacturing

Transport, Communications

Trade, restaurants, hotels

Private sector services*

Public sector services

11


strongest contributors over this period. The reformsundertaken in the 2000s most likely benefited themanufacturing sector more than financial services andinsurance (the major component of “private services”).Hence, the contribution of manufacturing to GDPgrowth increased from 0.92 percentage point of GDPover the 1990-1999 period to 1.9 percentage points ofGDP over the 2000-2008 period, whereas that of“private services” accounted for 0.87 percentage pointof GDP over the latter period. The twofold increase inthe manufacturing sector’s contribution during the2000s indicates increased manufacturing output overthis decade (pharmaceuticals, fertilisers, textiles, food -stuffs…). The development of this sector, mainly compri-sing small and medium-sized firms), was driven by theimplementation of liberal reforms and tradeagreements [18] and a supportive internationalenvironment. [19]

Over the entire thirty-year period, the activity of the“private services” (financial services, insurance, realestate services, business services) and public sectorservices accounts for the largest sectoral share ofJordan’s economy (42% on average over the 1980-2011 period). The 1989 debt crisis had few visibleimpacts on the transformation of the services sector.On the other hand, it seems that the 2008 crisis reducedthe “private services” share of GDP to an average 18%over the 2009-2011 period (compared with 22% overthe 2000-2009 period). After 2008, the public servicesactivity became Jordan’s largest sector, reaching anaverage 23% of GDP over the 2009-2011 period.Another remarkable structural change can be seen inthe manufacturing sector, whose share in total activityexceeded that of “private services” (averaging 19.5%over the 2009-2011 period). Growth in manufacturingis visible from the beginning of the 2000s and isconnected to the development of Qualified IndustrialZones (QIZ),[15] which bolstered the dynamism ofpharma ceutical, textile and fertiliser manufacturing.In the primary sector, few changes are to be seen after1980, except in the agricultural sector: the GDP shareof mining activities [16] and electricity and waterremained low, while that of the agricultural sector [17]

was halved between 1980 and 2011 (falling from anaverage 6% of GDP between 1980 and 1989 to 3%between 2009 and 2011).

After the strong but short-lived contributionof manufacturing to growth in the 2000s, the2008 shock impacted the private sector, whilethe public sector took over as the key growthdriver

A reading of the sectoral contributions to real GDPgrowth reveals that Jordan’s economic activity between1980 and 2008 was buoyed up chiefly by the privatesector (Figure 8). More precisely, while the contributionsof the primary sector and construction remainedrelatively weak, the “private services”, manufacturingand “transport and telecommunications” were the


*Private services: finance, insurance, real estate services, business services, others.Source: DOS; author's calculations.

Contribution to real GDP growth by sector(average, %)

8Figure

3,5

3,0

2,5

2,0

1,5

1,0

0,5

0,0

-0,5

1980-1989 1990-19992000-2008 2009-2011

Agriculture, Fisheries

Construction

Electricity, Water

Mining

Manufacturing

Transport, Communications

Trade, restaurants, hotels

Private sector services*

Public sector services

[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 nearly10 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 fragmentedand 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 GreaterArab 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 CentralBank of Jordan [CBJ]).

12

The buoyancy of domestic demand was sustained bya supportive international context that helped toincrease Jordan’s externally sourced revenues (Figure 10).Tourist receipts, remittances and grants (volatilecomponents) represented an average of 40% of GDPbetween 2000 and 2008. Buoyed by a favourableinternational conjuncture and promoted by Jordan’sprivatisation programme, [23] FDI was substantial overthis period (Figure 11). More specifically, investmentsfrom the Gulf States were particularly high between2005 and 2008, representing an average 17% of GDPover this period.

The slackening pace of growth following the 2008international crisis is primarily due to the contractionof manufacturing activity (by an average of 1.76percentage points of GDP between 2008 and 2011).Apart from the impact of the slowdown of activityworldwide, which adversely affected exportingcompanies, the dismantling of the Multi-FiberAgreement in 2005 significantly reduced the mainbenefits for textile exports from the Jordan’sQualified Industrial Zones.[20] This shock also pointedup the vulnerability of Jordanian manufacturingcompanies that rely heavily on imports for theirproduction, although some upgrading is underway incertain sub-sectors.[21] The effect of this growth shockon the private sector was cushioned by the publicservices sector, which has taken over as the key driverof the Jordanian economy since 2008 (the contributionof this sector to GDP growth showed a rise even after2008). The public sector, which is the country’s primeemployer, has been increasing its contribution toeconomic growth for over thirty years. Yet, thiscontribution has limits as the burden on publicfinances is becoming heavier. Moreover, in a contextcharacterised by the reduction of the fiscal deficit andgovernment debt expansionary fiscal policies willbecome increasingly rare.

The crucial question is whether or not this structuraldeformation is temporary and to what extent thepublic sector can continue to act as the driver ofeconomic growth.

A deteriorating economic contextand a changing regional environmentare affecting Jordan’s sources offunding

Jordan’s sustained pace of growth between 2000and 2008 (an annual average of nearly 7%) wasmainly bolstered by private consumption and, to alesser extent, by investment [22] (Figure 9).

2.3.


[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 publicutility services (WTO, 2008).

* GFCF: Gross Fixed Capital Formation** X-M: Net exports

Source: Ecowin; author’s calculations.

Real GDP growth by demand component(%)

9Figure

25

20

15

10

5

0

-5

-10

-15

Private Consumption Government Consumption GFCF* X-M ** Stocks GDP

2000 2002 2004 2006 2008 2010

13


Since the international financial crisis and the popularuprisings in some Arab countries, external revenueshave declined – particularly remittances, whichshrank by nearly 7% of GDP on average after 2008 [24]

– and FDI inflows dropped back closer to their historicallevels after a period of exceptional growth. As aresult, total private consumption and investmentsslowed down considerably and significantly contributedto the slackening pace of growth (an annual averageof 2.5% between 2009 and 2012). Moreover, afterthe 2011 uprising in Egypt, the repeated sabotage ofthe Egyptian gas pipeline (which supplies Jordan with80% of its energy needs) has led to a rise in theenergy bill, thus constraining growth (impact of 16%of GDP). It was in these tense circumstances thatJordan asked the IMF for aid, which materialised inAugust 2012 in the form of a Stand-By Arrangement(SBA) amounting to USD2 billion spread over thirty-six months.

Jordan’s growth is thus highly dependent on externaleconomic and financial flows, which have declined inan adverse economic context and changing regionalenvironment. Its energy dependency – imports cover95% of energy needs – is an additional source ofvulnerability (cf. Box 2). In 2012, economic growthwas set to reach 2.8% and IMF forecasts remain flat inthe medium term. This scenario of sluggish growth islikely in view of the following factors:

• decreasing tourism receipts due to the region’spolitical crisis [25]

• decline in remittances that will likely not reboundto their pre-crisis level

• probable stabilisation of FDI, at least in the shortrun; the country could nonetheless benefit from itsrelatively stable position compared to the turbulenceof neighbouring countries (Syria, Iraq, Egypt)

• limits to the role of key growth driver taken overby the public sector given the slackening privatesector (almost no budgetary leeway, implementationof the IMF programme conditionalities, cf. Part 3)

• energy imports, which remain a source of vulnera-bility (although Jordan plans to diversify its sourcesof supply).



Externally sourced revenue (% of GDP)

10Figure

25

20

15

10

5

0

Grants Remittances Tourism receipts

2000 2002 2004 2006 2008 2010

Source: WDI, IMF; author’s calculations.

Investment (% of GDP)

11Figure

25

20

15

10

5

0

GFCF Net FDI Public investment

2000 2002 2004 2006 2008 2010

[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 Arabcountries in 2012, without however reaching the 2010 level (source: CBJ).

14 © AFD / Macroeconomics and Development / September 2013

Energy-related vulnerabilities increase Jordan’s country risk2Box

Given that Jordan has no hydrocarbon or natural gasresources of its own, the country is highly dependent onenergy imports: 96 to 98% of consumed energy isimported. Until the Second Gulf War in 2003, Jordandepended on subsidised supplies of Iraqi crude oil. Sincethen, oil has been imported mainly from Saudi Arabia(97% of crude oil imports) and to a lesser extent fromIraq (10 000 barrels per day). For its power genera-tion, Jordan relies 80% on gas provided by Egypt. Giventhat there is a growing demand for energy (an annualincrease of 5.5% for primary energy and 7.4% for electri-city), this high level of energy dependency heightens thecountry’s vulnerability to external shocks.

The actors in Jordan’s energy sector

The state-owned refinery, The Jordan Petroleum RefineryCompany (JPRC), is the sole importer of petroleumproducts (crude oil and refined petroleum products). It isalso responsible for sales at an administered price nation-wide, including sales to energy producers.

As for the electricity sector, the reforms introduced in1999 and 2002 (under the General Electricity Law) haverestructured the sector by creating separate companiesfor electricity transmission, generation and distribution:

• the Electricity Regulatory Commission (ERC) is notablyresponsible for setting electricity tariffs and grantinglicences to electricity companies;

• four companies ensure power generation in Jordan:the Samra Electric Power Company (wholly state-owned), the Central Electricity Generating Company(CEGCO, partly privatised in 2007), AES-Amman EastPower Plant (IPP1) and QEPCO-Qatrana Power Plant(IPP2);

• electricity distribution is ensured by the JordanElectric Power Company (JEPCO), the Irbid DistrictElectricity Company (IDECO, partly privatised) andthe Electricity Distribution Company (EDCO, whollyprivatised in 2007). The distributors sell electricity toend users (households and businesses);

• the National Electric Power Company (NEPCO) is astate monopoly responsible for the transmission gridon national territory and for transporting electricityfrom production sites to the distribution companies’supply points. The company also ensures the connec-tion with neighbouring country grids (Egypt andSyria). Moreover, under its remit, NEPCO purchaseselectricity from different Jordanian and foreign produ-cers and sells it on to distributors at a price set by ERC.NEPCO debt is guaranteed by the State.

Energy price subsidies

There are two types of energy subsidies:

• subsidies to oil sector companies (mainly linked to fuelproduction/JPRC) out of the government budget. TheGovernment subsidises the difference between theselling price and the supply costs. Households benefitfrom these subsidies for liquefied petroleum gas(LPG), kerosene, gasoline and diesel. The subsidieshad been re-introduced in 2011 but were abolished forall fuels in November 2012. The prices applied arecurrently determined by a monthly fuel priceadjustment. Targeted subsidies will be re-instatedwhenever the price of oil exceeds USD100 per barrel;

• indirect subsidies to the power generation sector inthe 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 govern-ment budget item but as part of the public debt.Electricity tariffs were increased in June 2012 and thenext increases are planned for 2013 (as one of the condi-tions for the IMF’s Stand-by Arrangement, cf. Box 4).

Jordan’s energy crisis in the wake of the 2011 popularuprising in Egypt

The Egyptian gas pipeline supplying Jordan and Israelhas been subject to repeated sabotage since the popularuprising in Egypt in early 2011. With an 80% dependencyrate for power generation, Jordan has been directlyimpacted by these regional disturbances: the country’senergy bill was assessed at 16% of GDP in 2011 (anincrease due to the more costly substitutes for gassupplies, plus a 32% oil price hike). For 2012, the impacton 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 thatabsorbs all the sector’s losses. In fact, the company isobliged to apply tariffs set by the regulator, ERC, whoensures that the different operators remain profitable.As the average purchase price paid by NEPCO toproducers is higher than its average sales price to distri-butors, given the higher cost of imported energy, thecompany runs up large daily losses (in 2011, the cost forNEPCO of one day with no supply of gas was estimatedat JD3.5 million – almost the same figure in euros[EUR]). Cumulative losses for 2011 are valued at overone billion euros, equivalent to around 4.9% of GDP. For2012, losses will be higher: about 5.3% of GDP (5.8%,had measures to increase electricity tariffs not been putin place in June 2012). NEPCO’s losses further pushed

15

The marked increase of domestic debt has weighed on total public sector debtsince 2008

Total public debt is high and trending upwards

3.1.


up the public internal debt and represent 11% of grosspublic debt (cf. Part 3).

Jordan’s energy crisis thus impacts not only externalbalances but also public finances insofar as the Stateguarantees NEPCO’s deficits through bond issues on thecompany’s behalf. Certainly, the authorities are envisaging

a future round of electricity tariff rises and planning astrategy to diversify energy supply. However, the antici-pated increase in electricity demand by 2020 (7.4% peryear, equivalent to an annual average of 300 megawatts[MW]), as well as Jordan’s structural dependency onenergy imports, heightens the country’s vulnerability.

Sources: AFD (2012); WTO (2008).

3/ The public debt is high and bringing itunder control is uncertain

[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).

* The current 2012 GDP estimate used for the calculation is the MOF’s 2013Budget Law forecast.

Source: MOF; author’s calculations.

* The current 2012 GDP estimate used for the calculation is the MOF’s 2013 BudgetLaw forecast.

ST, MT, LT: short, medium, long term


12Figure

Public sector debt (% of GDP)

120

100

80

60

40

20

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012*

External debt Domestic debt (gross)

Buyback of the

Paris Club debt

Jordan’s gross public debt [26] is elevated: it represented79% of GDP in 2012 (Figure 12). The external publicdebt is on the other hand moderate (22% of GDP in2012) thanks to the debt rescheduling concluded

during the 1990s and 2000s, and the buyback of partof its Paris Club debt in 2008. The external publicdebt maturity structure has remained balanced overrecent years (Table 3). This means that the risk of theJordanian Government defaulting on its foreigncurrency debt is, a priori, limited.

Public debt maturity (% of GDP)

2012*201120102009

Gross domestic debt 41.9 42.5 48.8 57.0

ST (<1 year) 20.0 13.2 21.2 20.5

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

LT (>5 years) 13.1 11.7 10.1 9.9

3Table

Gross domestic debtof 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 debtof central government units 19.2 24.0 25.9 26.5 29.0 35.4 40.0 39.5 42.5 46.9

2- of which: gross domestic debt ofgovernment own-budget agencies 1.4 1.7 1.7 1.2 1.4 1.5 1.9 3.0 6.4 10.1

Total gross debt of central government 104.7 91.8 84.3 76.3 73.8 60.2 64.8 67.1 70.7 79.2

16

Since the 2008 buyback of the Paris Club externaldebt, the authorities have given precedence tousing domestic rather than external loans.Certainly, the uptrend of the gross domestic debtratio over the last twelve years accelerated after2008 to reach 57% of GDP in 2012 (against 48.8%in 2011 and 20.6% in 2000). The breakdown of

The government own-budget agencies’ debt as a shareof total domestic debt increased sevenfold since 2005(Figure 13).

The indebtedness of state-owned NEPCOweighs heavily on the central government’sdomestic debt

A dramatic rise in the debt of government own-budgetagencies has been seen since 2010 and this acceleratedin 2011 mainly due to the impact of the debt of thestate-owned enterprise, NEPCO. This company, whichis in charge of the electricity transmission grid onJordanian territory, purchases electricity from nationaland foreign producers, and then sells it on to thedistributors at a price set by the regulator (cf. Box 2).Following the repeated sabotage of the Egyptian gaspipeline since February 2011, the average electricitypurchase price that NEPCO pays producers is higherthan the average sales price that it charges distributors.This price more than doubled between 2009 and2011,[29] and generated a large debt for the stated-owned enterprise, which had operated with a profit


Central Government debt (% of GDP)

2012*201120102009200820072006200520042000

* The current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast. Source: MOF; author’s calculations.

4Table

[27] The domestic debt of public administrations is the central government domestic debt excluding the domestic debt of government own-budgetagencies. 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 own-budget agencies that operate in priority and strategic sectors (energy, natural resources…) and is guaranteed by the central government.

[29] Source: AFD (2012).

Source: MOF, author’s calculations.

Contribution to the increase in grossdomestic debt (%)

13Figure

65

55

45

35

25

15

5

-5

Central gov. units’ contribution to debtContribution Gov. own-budget agencies’ contributionto debtGross domestic debt

2005 2006 2007 2008 2009 2010 2011 2012

domestic debt reveals that its two main componentslargely contributed to the rise in the public debtratio after 2000 (Table 4): the domestic debt of thepublic administrations [27] rose by 28 percentagepoints of GDP and that of the public own-budgetagencies [28] by 9 percentage points of GDP after2000.

17

3/ The public debt is high and bringing it under control is uncertain


* The current 2012 GDP estimate used for the calculation is the MOF’s 2013Budget Law forecast.

Sources: NEPCO, MOF, author’s calculations.

14Figure

NEPCO debt (% of GDP)10

9

8

7

6

5

4

3

2

1

02010 2011 2012*

15Figure

Share of NEPCO debt in gross domesticdebt (%)

100

90

80

70

60

50

40

30

20

10

02010 2011 2012*

Government own-budgetagencies’ contribution todomestic debt

Central government’scontribution to grossdomestic debt

prior to the gas supply crisis. As this crisis continuedinto 2012, NEPCO’s already hefty debt doubled in2012: estimated at JD1.933 billion and equivalent to8.8% of GDP, compared with 4.7% in 2011 (Figure 14).The share of NEPCO’s debt in the total debt of govern-ment own-budget agencies amounted to 72.8% in 2011and 85.8% in 2012, whereas the share in 2010 was zero(Figure 15). This represents a contribution to centralgovernment debt of 9.5% in 2011 and 15.2% in 2012.

Moreover, total NEPCO debt includes a large fractionof 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 hadbeen repaid during the course of the year. [30] Interestpayments also place an increasing burden on NEPCO’sbudget (Table 5). NEPCO’s debt structure thusexposes it to the risk of running up higher debt in theevent of an interest rate shock, which would alsocause a proportional increase in central governmentdomestic debt. Moreover the large amount of arrearsof over sixty days reflects NEPCO’s difficulties insettling its electricity and fuel purchases. At the end of2011, arrears amounted to JD716 million (i.e. 3.8% ofGDP), including JD441 million owed to the nationaloil refining company, JPRC [31] (the debt’s principaland interest are not distinguishable). At the end of2012, the arrears totalled JD647 million (2.9% ofGDP).

NEPCO operating losses, interestpayment and short-term loans(JD millions)

2012201120102009

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.

5Table

The implications of NEPCO’s indebtedness forpublic finances are thus significant. Although thiscontingent liability is domestic, it puts additionalconstraints on the government’s already limitedscope of action. The elevated level of domesticdebt may also have implications for monetarypolicy in that the government could choose tofinance this debt through inflation. However, theCentral Bank of Jordan is compelled to adopt themonetary and rate policy of the United States inorder to safeguard the peg to the U.S. dollar (cf.Part 4). A debt ratio totalling 80% of GDP clearlyweakens the public sector’s capacity to act as a keygrowth driver in a context of sluggish economicactivity.

[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).

18

The fiscal deficit is widening andfuelling central governmentindebtedness

The revenue-to-GDP ratio is such that it does notrepresent a vulnerable point in the event of aneconomic shock. Public spending, however, is an over - riding constraint for the government’s managementof the public deficit.

Diminishing revenues since 2008

The level of government revenue – although satisfactory– has been declining since the fall-off of the growthrate in 2008, mainly due to lower tax receipts (30% in2007 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 between2000 and 2006, compared to 3.5% between 2007 and

3.2.


Structure of government expenditure and revenue (% of GDP)

2012**2011201020092008*20072006200520042003200220012000

* 2008 data are those of the IMF.

** The current 2012 GDP estimate used for the calculation is the MOF’s 2013 Budget Law forecast.


6Table

2012. Following the 2011 popular uprisings in someArab countries, Jordan received a substantial amount ofaid from the Gulf States (4.8% of GDP). The Gulfmonarchies, which are the main providers (togetherwith the United States) of international financialassistance to Jordan, did not make as high a contributionin 2012 as in the previous year. In fact, the GulfCooperation Council (GCC) whose members includethe main Gulf monarchies, now prefer to supportJordan through sector investments rather than viabudget support alone (cf. Box 3). To this end, theorganisation deposited USD1.750 billion with the CBJat the beginning of 2013 to fund development projects.Over the next five years, the GCC plans to feedUSD5.0 billion into this fund. As a result, the GCCfinancial contribution in 2013 and forthcoming yearswill mainly translate into an increase in capitalexpenditure and transit through the channel of budgetarygrants.

Budgetary revenueand 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

Grants, foreign aid 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

19



The GCC is a regional organisation created in 1981and comprising Saudi Arabia, Oman, Kuwait, Bahrain,the United Arab Emirates and Qatar. The club ofSunni oil-monarchies has traditionally supportedJordan mainly by allocating substantial financialassistance, estimated at about 3% of GDP on averagebetween 2000 and 2011 (2.2% of GDP by the UnitedStates). This financial support translates into budgetaryaid in the form of grants. In 2011, regional dis -turbances impacted Jordan’s public finances, whichprompted a large increase in the grants received fromthe Gulf States. This was not renewed in 2012.

The GCC extends its financial support to Jordanthrough the Gulf Development Fund in order tofinance the country’s development projects. TheGCC has planned to allocate USD5.0 billion in grantsspread over five years by way of deposits with theCBJ. At the beginning of 2013, the GCC depositedUSD1.750 billion, equivalent to 35% of the pledged

amount. These funds will only be disbursed withinthe framework of sectoral investments and not usedto meet government’s operating expenses. For example,the construction of a gas terminal at Aqaba (due tocome into operation in 2014) is financed by the GCCFund; in February 2013, Jordan’s Minister ofTransport announced that the GCC Fund wouldfinance transport projects: the Eshidiya railway project,a rapid bus transit service between Amman andZarqa, bus departure and arrival stations, as well asthe implementation of smart transport systems andservices (Source: French Embassy in Jordan,Economic Department, 2013).

These (US) dollar deposits, booked as CBJ liabilities,constitute large foreign currency entries and the dis-bursement of these funds will be made in local currency.This fund will thus enable the CBJ to undertake aform of money creation and at the same time buildup foreign reserves.

The GCC Fund, a mechanism for project funding and monetary creation for Jordan 3Box

Rationalisation of expenditure stalled by theregional turmoil of 2011

The high level of public spending, particularly currentspending, is a major constraint on managing the fiscaldeficit. Yet, the level of public spending relative tonational wealth declined until 2011, dropping from anaverage 38% of GDP between 2000 and 2007 to 33%between 2008 and 2011. This decrease was achievedmainly due to a reduction in current expenditure(Figure 16):

• salaries in the public administrations relative toown budget receipts decreased from 2003 to 2009;

• in 2008, the buyback of part of the Paris Club debtconsiderably reduced the external debt burden(average decrease of 2.6 percentage points of GDPfor interest payment on external debt);

• subsidies fell until 2011, under the effect of theelimination of fuel subsidies in 2008.


16Figure

Current expenditure (% of own budgetreceipts)

70

60

50

40

30

20

10

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Employee salaries Interest paymentSubsidies

Consequences ofregional turmoil


[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% forkerosene. The LPG subsidy does not entail any budgetary cost as the MOF has passed on the cost via the monthly adjustment of the other petroleumproducts 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 January2013 that hosting one refugee costs Jordan JD2,500 (USD3,526). On this basis, the cost of hosting these refugees in 2011 and 2012 is estimatedat 3% of GDP. Moreover, according to the Ministry of Planning and International Cooperation (MOPIC), the cost of hosting 178,000 Syrianrefugees is estimated at USD524 million (USD198.8 million for accommodation and USD325.7 million in capital expenditure), equivalent toUSD2,944 per refugee, including USD1,124 for accommodation (JD1,585). The figures quoted factor in the cost of running the camps, which areborne 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.

Cost to the Jordanian Governmentof hosting Syrian refugees

Estimatefrom nowuntil end2013

2 Sept.2013*

20122011

Number of Syrianrefugees 2,265 117,321 519,676 660,000

Total costin JD mill. 1.5 78 346 318

% of GDP 0.01 0.36 1.43 1.31

% of ownbudget receipts 0.04 1.65 6.55 6.01

Notes: calculations based on the government’s estimate for hosting onerefugee: USD226 million for 240,000 refugees and USD449.1 million for660,000 refugees. These figures are taken from a MOPIC note dated January2013: "Response Plan for the Government of Jordan".* number of refugees as on 28 March 2013. Estimates of GDP and budgetaryrevenue are taken from the 2013 Budgetary Law.

Sources: UNHCR, Economic Social Council; author’s calculations.

7Table

Hosting

costs

Since the uprisings in some Arab countries, therationalisation of public spending has been hindered by(i) social measures implemented in 2011 and (ii) thehosting of Syrian refugees :

• the social measures involve a rise in civil servicesalaries and pensions, and the reintroduction offuel price subsidies. In 2011, these subsidies costJD571 million, equivalent to 2.8% of GDP and14% of own budget receipts. For the year 2012,this cost is likely to be higher given the rise inpetroleum product prices at the beginning of theyear. However, since November 2012, fuel pricesare no longer subsidised [32] (except for LPG),which means that tariffs are at market prices. Thegovernment thus decided to bring in targetedsubsidies to help the poor and the middle class, assoon as the price of a barrel of oil exceedsUSD100;

• the armed conflict in Syria, which broke out in2011, has given rise to massive displacements ofpopulations seeking refuge in Jordan. Theexpenditures linked to government assistance tothese Syrian refugees are assessed at JD668(USD942) per refugee. [33] This estimate does notinclude the costs of setting up refugee camps ortheir running costs, the latter being borne by theUnited Nations agencies. For the Jordanianauthorities, the overall cost of hosting theserefugees is thus significant (Table 7).

Despite favourable debt dynamics, budgetimplementation has increased public indebted-ness

As shown in Table 6, the level of overall fiscal deficitsince 2008 is tied to the primary deficit, owing to unfa-vourable budget implementation particularly after2011. The gap between the GDP growth rate andinterest rates is positive and the debt dynamics hastherefore remained favourable in recent years. It is thusthe primary deficit that contributed to public indebted-ness after 2008 (the year of the buyback of a largefraction of external debt). Moreover, according to anIMF analysis of public debt sustainability, the primarydeficit needed to stabilise the debt ratio was estimatedat 3.1% [34] of GDP, whereas after 2008 it averaged4.1%. Thus, it is above all Jordan’s economic growth

21


that will ensure the sustainability of the country’sdebt. In these conditions, the question is to whatextent the differential between GDP growth and realinterest rates can remain positive in the mediumterm: a growth shock and/or interest rate shock couldlead to an uncontrolled surge in Jordan’s public debtratio.

Reducing NEPCO’s debt is an additional constrainton bringing down the public debt

Apart from the contribution of the primary deficit,it is necessary to reduce NEPCO’s debt in order tostabilise or reduce public indebtedness. RestoringNEPCO’s financial balance by 2017 – a condition ofthe IMF Stand-By Arrangement (cf. Box 4) – willnot be possible without increasing electricity tariffsand reducing the costs of the state-owned enter-prise.

• In June 2012, a first increase of electricity tariffswas introduced . However, to cover a l l thecompany ’ s losses and clear its outstandingarrears by 2017 (as the IMF recommends), electri-city tariffs need to be doubled in the very nearfuture. This is not practicable for the authorities,who plan step increases in tariffs (from 14% to18% for 2013).

• A reduction in the average price that NEPCOpays for electricity will depend on the level ofEgyptian gas supply in 2013, which should reachthe same level as before the crisis (Table 8). Inaddition, the coming-on-stream of the liquefiednatural gas (LNG) terminal at Aqaba, planned for2014, should reduce NEPCO’s costs by around20% (IMF, 2012a).

An uneven history of paymentprompts caution

Jordan’s has an unfavourable history of payment.The country in fact renegotiated its Paris Club debtsix times between 1989 and 2002. In 2008, part ofits Paris Club external debt was bought back(Figure 17). Currently, the total public external debtstands at a moderate level, as does the risk of adefault on the country’s foreign currency debt in theupper middle tranche.

3.3.


Supply through the Egyptian GasPipeline

2013*201220112010

Average flow of Egyptian gas(millions of m3/yr) 2,585 827 662 1,551

NEPCO operatinglosses (JD millions) 155 997 1,026 900

Share of NEPCOdebt in total grosspublic debt (%) 0.0 6.5 11.0 n.c.

* The 2013 figures were communicated to us during our interview withNEPCO. The assumption of an average gas flow in 2013 is that used bythe Government in the 2013 Budgetary Law. NEPCO drew on a morepessimistic supply assumption to establish the forecasts for its 2013accounts: an average of 414 million m3 associated with an operationalloss of JD1.8 billion.

Sources: NEPCO; author’s calculations.

8Table

Furthermore, the government is planning aEurobond issue ranging between USD1 and 2 billionand guaranteed by the United States, which couldincrease the external debt burden. These bonds willbe denominated in dollars and have a maturity ofbetween seven and ten years (EU, 2012). A firstissuance for USD500 million was launched on thedomestic market in February 2013.


Total external public debt (% of GDP)

200

150

100

50

01970 1975 1980 1985 1990 1995 2000 2005 2010

17Figure

Paris Club debtreschedulings

Buyback ofParis Club debt

The slowdown in the credit cycle since 2008 hasmeant that public sector financing needs havecrowded out credit to the private sector. Certainly,the banks are now seeking finance from the governmentas is shown by the steep rise in the volume of creditgranted to the public sector (+170% between January2008 and November 2012; cf. Figures 20 and 21).Given the deterioration of public finances, Jordan’sprivate banks are indeed exposing themselves tosovereign risk. In a situation where any interruptionof the adverse trend in public finance is heavilyconstrained, reliance on sovereign capacities certainlyhas its limits.



18Figure

Domestic credit to private sector(% of GDP) – regional comparison

100

80

60

40

20

01985 1988 1991 1994 1997 2000 2003 2006 2009

A downturn in the cycle of privatesector credit since 2008, whereaspublic sector credit is on the rise

The banks’ risk of holding increasing claims on thegovernment

Since the reforms that promoted private-sectordevelopment in the early 1990s (cf. Part 2), theJordanian economy has relied extensively on thebanking sector for its financing needs. Comparatively,Jordan’s credit activity is one of the most dynamic inthe region (Figure 18), but the 2008 financial crisisbrought on a downturn in the credit cycle, which hashalved the rate of economic growth (Figure 19).

4.1.

4/The banking sector participates in financingeconomic activity but less so since 2008

Jordan Tunisia MoroccoLebanon Egypt


19Figure

Domestic credit to private sector(% of GDP)

100

80

60

40

20

0

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

23

4/ The banking sector participates in financing economic activitybut less so since 2008


Source: CBJ; author’s calculations.

20Figure

Volume of credit, year-on-year (%)

70

60

50

40

30

20

10

0

-10

-20

-302001 2003 2005 2007 2009 2011 2013

Credit to private sector Credit to public sectorTotal credit

Source: CB; author’s calculations.

21Figure

Sector breakdown of credit(% of total credit)

60

50

40

30

20

10

0

Private sector Public sector

2005 2006 2007 2008 2009 2010 2011 2012 2013

Banks’ exposure tosovereign risk

[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 toborrowing 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 anupper 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).

Sectoral allocation of credit (%)

OtherFinancialservices

Publicservices

Tourism,hotels,

restaurants

TransportConstructionCommerceand trade

Manufact.industry

MiningAgriculture

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


9Table

public services (Table 9). This is chiefly due to the loansgranted to the state-owned enterprise NEPCO. [ 35 ]

In addition, an analysis of credit by sector of activityreveals a substantial rise in credit in the direction of

solvency ratio (regulatory capital to risk-weightedassets, CAR) remains much higher than the regula-tory requirement of Basle II and Basle III (8% and10.5% respectively).

ROA (Return on Assets) and ROE (Return on Equity)registered a downtrend. The figures for the first sixmonths of 2012 are similar to those for the previousperiod, [37] which suggests that the banking sector’sprofit ability will not be better than in 2011.

The downturn in the cycle of private sector credit post2008 resulted in a further drop in the banking sec-tor’s profitability, already in decline since 2005.

This decrease in the profitability of banking assets inthe wake of the financial crisis is linked to theincrease of non-performing loans (NPLs).[36] Yet, inline with CBJ directives, provisioning for NPLs hasconsiderably increased, rising from 52% in 2011 to63% in the first half of 2012 (Table 10). In addition, the

24

• The JD100 million increase in capital undertakenby several commercial banks in compliance withCBJ requirements implies a lower ROE.

Yet, criteria other than a decline in lending activity goto explain the low profitability of banking activity:

• Provisioning for NPLs rose significantly in 2012,which automatically decreased net banking incomeand hence ROE and ROA.


[38] 1 USD = 0.709 JD since 1995.[39] Cf. AMR (2011).

Financial soundness indicators for the banking sector (%)

2012*20112010200920082007

Regulatory capital to risk-weighted assets (CAR) 20.8 18.4 19.6 20.3 19.3 18.7

Ratio of non-performing loans 4.1 4.2 6.7 8.2 8.5 8.4

Level of provisions for non-performing loans 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

* 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 beencarried 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.

10Table

2012 drove a hefty rise in inflation. In December 2012,this stood at about 7% year-on-year, which is itshighest level since 2008. These inflationary pres-sures, which the authorities want to avoid, could leadthe CBJ to raise the rediscount rate (Figure 22).

The low rates of return on banking assets and equitydo not prevent the banks from making a profit.Certainly, profits increased continuously from thebeginning of the 2000s (rising from JD94.4 million in2001 to JD382 million in 2011).

The banking system is well regulatedand adequately supervised by the CBJ

The CBJ’s monetary policy is aimed at achieving twokey objectives: containing inflation and keeping theJordanian dinar pegged to the American dollar, [38] atthe same time attracting foreign capital. The peg tothe U.S. dollar means that Jordan has to adopt UnitedStates’ monetary and rate policies in order to maintaina substantial rate differential and discourage thedollarisation of capital. Since the strong inflationarypressure of 2008, the Jordanian authorities haveadopted a less accommodating monetary policy thanthe US central bank, the Federal Reserve Bank(FED),[39] which has notably led to an increasedexchange rate differential in favour of the CBJ.However, dollar deposits began to rise at the begin-ning of 2012. This trend was halted by the CBJ lastDecember by an increase in rates for local currencydeposits, making the Jordanian dinar more attractive.Additionally, the increase in fuel prices in November

4.2.


Key interest rate, interbank rate and inflationrate (%)

22Figure

8

7

6

5

4

3

2

1

0

Interbank rate Inflation rate Key interest rate

January 2010

June 2010

November 2010

April 2011

September 2011

February 2012

July 2012

December 2012

25

5/ Deterioration of external account balances due to the effect of regional turmoil

The CBJ imposes conservative prudential ratios and itsoversight of the commercial banks is relatively stringent.This conservative supervision is particularly warrantedin an adverse international economic context and aturbulent regional environment. Thus, as mentioned inthe previous section, the solvency of the banking systemis satisfactory with a 19% capital ratio, which enablesthe sector to absorb shocks. Commercial banks are wellcapitalised and their deposit holdings constitute themajor resources of Jordanian banks – which is a sign ofthe sector’s soundness (101% of GDP and 62% ofliabilities in 2012). These deposits are mostly denomi-nated in local currency (80%) and foreign currencydeposits are covered by foreign reserves (Figure 23).Moreover, the banking sector has a strong liquidityposition of around 150% and has increased provisionfor NPLs. Finally, the CBJ, which complies with Basle IIrecommendations, is now studying what effects theimplementation of Basle III would have on theJordanian banking system.


Sources: International Financial Statistics (IFS), Ecowin; author’s calculations.

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

5/ Deterioration of external account balancesdue to the effect of regional turmoil A growing external financing requi-rement is covered by drawing onforeign reserves

A high energy bill is widening the currentaccount deficit

Jordan’s current account balance displays a structuraldeficit. More precisely, the country is a net importerof goods, whereas the balance for services, currenttransfers and revenues is positive over the long term(Figure 24).

Energy imports rising steeply…

Goods imports chiefly comprise manufactured pro-ducts, energy products and, to a lesser extent, agri-food products, and represented an average 59% ofGDP between 2000 and 2010. This high dependency onimported goods exposes Jordan to all kinds of exoge-nous shocks. As a result, the regional disturbancessince 2011 triggered a shock on the country’s energybill (95% of energy imported) following the disruption

5.1.


Main current account components(balance, % of GDP)

24Figure

55

35

15

-5

-25

-45

2000 2002 2004 2006 2008 2010 2012

Goods Services Current transfersRevenue Current balance

23Figure

… and external revenues are flagging

Tourism receipts, remittances and grants (a volatilecomponent) constitute Jordan’s main external revenue,which has a positive balance; they represented 40%of GDP on average between 2000 and 2008 (Table12). Goods exports were dynamic over the 2000s,linked with the development of the manufacturingsector (cf. Part 2).

26

of its main source of supply. The Egyptian gas pipelinethat supplies 80% of Jordan’s gas needs at preferentialtariffs has been repeatedly sabotaged, which has obli-ged the Kingdom to purchase heavy fuel oil at marketprices. The increase in the energy bill went hand inhand with a sharp rise in imports of these products: invalue terms, the share of fuel imports in overall goodsimports rose from 22% in 2010 to 29% in 2011 [40] and32% in 2012 (Figure 25). Moreover, between 2009 and2012, the share of energy imports in national wealth wentup by nearly 10 percentage points of GDP, indicating thehigh additional cost linked to finding alternatives to theEgyptian gas supply (Table 11). Consequently, trade inpetroleum products has significantly contributed towidening the current account balance.


100

90

80

70

60

50

40

30

20

10

0

2000 2002 2004 2006 2008 2010 2012

Agri-food products Manufactured productsEnergy products Goods imports (% of GDP)

25Figure

[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’senergy 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 stoodat 49.5% of GDP (AMR calculations).

Composition of goods imports in valueterms (%)

Note: the current 2012 GDP estimate used for the calculationis the MOF’s 2013 Budget Law forecast. Source: DOS; author’s calculations.

Energy product imports andtheir contribution to the currentaccount deficit (%)

2012*201120102009

Energy imports(% of GDP) 9.5 11.5 16.8 19.2

Contribution of theenergy balance to thecurrent account deficitexcluding grants (%) -29.1 34.4 64.0 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 inthe 2013 Budgetary Law. NEPCO drew on a more pessimistic supply assumptionto establish the forecasts for its 2013 accounts: an average of 414 million m3

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.

Source: DOS; author’s calculations

11Table

External revenue by component(% of GDP)

2012201120102009Average2000-2008

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.

12Table

Since the 2008 financial crisis and the uprisings insome Arab countries, external revenue flows have loststeam, with a drop estimated at around 13 percentagepoints of GDP [41] compared to the 2000 and 2008period:

• Worker remittances declined due to the inter -national economic slowdown and the Gulf States’current shift to employing nationals: an averageloss of 6.7 percentage points of GDP since 2008compared to the pre-crisis annual average.

27



[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 bytravel 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 fellslightly by 3.5%: the decrease in European tourists’ spending (-9%) was partly offset by increased spending by tourists from Arab countries (+15%).

• Tourism receipts remained steady, despite thedeterioration of the regional environment (war inSyria, political crisis in Egypt): in 2012, the fall inreceipts from Western tourists [42] was partly offsetby the spending of tourists from Arabcountries,[43] although it did not reach its 2010level.

• Grants decreased by around 2 percentage pointsof GDP, despite the exceptional contribution ofthe Arab countries in 2011 to help the Kingdom ofJordan cover unforeseen expenditure incurred bythe consequences of the region’s popular unrest.Moreover, from 2013, the Arab countries’ contri-bution will take the form of project funding via theGCC Fund, and no longer be disbursed as budgetaryaid (cf. Box 3).

• Export of manufactured products suffered fromthe slowdown in international trade, mainly relatedto demand from the United States to which Jordanexports 16% of its manufactured products. TheSyrian conflict did not worsen Jordan’s balance of

trade, given that exports to Syria were low (4% oftotal goods). The loss of manufactured productexports since 2008 has been estimated at less than5% of GDP.

In sum, the current account deficit widened signifi-cantly, particularly from 2011, reaching one of itslowest historical levels: 12.0% of GDP in 2011(against 7.1% of GDP in 2010). For 2012, this deficit iseven more pronounced and estimated to reach 18.1%of GDP, which is much higher than its previous long-run average (4.3% of GDP on average between 1980and 2011).

Drawing on foreign reserves as a way of coveringthe external financing requirement

The widening of the current account deficit impliesthat Jordan’s external financing requirement (EFR) isgrowing. This doubled from 11% of GDP in 2010 to20% in 2011 (i.e. USD5.8 billion). In 2012, the EFR ishigher and estimated at nearly 22% of GDP (Table 13).

External financing requirement and coverage (% of GDP)

201220112010200920082007

1 - Current deficit (excluding grants) -19.7 -14.0 -7.2 -9.3 -18.0 -19.6

2 - Amortisation of external debt -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

2 - Debt-creating flows 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 - Errors and omissions 3.1 1.0 1.6 3.0 0.6 0.2

Variation in reserves (-/+ : positive/negative variation) -4.1 6.1 -3.4 -5.6 5.8 9.3


13Table

Pressures on external liquidity since2011 can be eased by support fromexternal players

This strategy of drawing on foreign reserves to securethe coverage of EFR seems preferable to contractingexternal debt, especially as the Jordanian authorities’interest is to limit the level of total debt and theinflation rate. However, a pronounced and constant fallin external liquidity will likely make it more difficult tosafeguard the peg of the dinar to the U.S. dollar(Figure 28). From 2010, Jordan experienced an accele-rating decline in its foreign reserves, which was haltedchiefly thanks to support from the IMF. The signature ofthe Stand-By Arrangement (SBA) (cf. Box 4) in August2012 led to the payment of the first tranche of USD384million (i.e. about 6% of the foreign reserves for July2012). The effect on external liquidity continued,resulting in a level of foreign reserves equivalent to fivemonths of imports at the end of 2012, but which is stillbelow its long-term level of over seven months ofimports. For 2013, the pressures on external liquidityshould ease due to the factors below, which are notexhaustive:

5.2.

In the 1980s, the current account deficit was basicallyfinanced by external borrowing (Figure 27); financingthrough external debt is what mainly brought on the1989 debt crisis and led to the numerous debtcancellations granted by the Paris Club creditors (cf.Part 3). Subsequently, the liberal reforms undertakenby the new King in the early 2000s gave rise (helpedby a favourable economic environment) to massiveFDI inflows and portfolio investments (PIs), particularlyfrom the Gulf States. These foreign investments thustook over from external borrowing as a means ofensuring the current account deficit. More specifically,it is the dynamic of FDI and PIs that engendered thedynamic driving the current account deficit: theinflows to Jordan translate into current accountexpenditure.[44] However, following the 2008 financialcrisis, the FDI and PI dynamic waned considerably,while at the same time the current account deficitcontinued to widen mainly due to the energy supplyshock. As a result, the financial account flows are nolonger sufficient to cover EFR. Since the slowdown inthe pace of growth, the Jordanian authorities havethus drawn on foreign reserves to cover the EFR.



26Figure

EFR and its coverage (% of GDP)

30

25

20

15

10

5

0

-5

-102000 2002 2004 2006 2008 2010 2012

[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.

Grants Portfolio flows FDI EFR

Source: World Economic Outlook (WEO), Ecowin; author’s calculations.

27Figure

Current account balance and FDI(% of GDP)

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

Current account balance Net FDITotal external debt (right-hand scale)

29



• Foreign currency inflows in the form of grants fromthe GCC Fund to finance development projects (cf.Box 3). An amount of USD1.750 billion was depositedat the beginning of 2013 as part of the totalUSD5.0 billion package scheduled over five years.

• USD200 million in budgetary aid from Saudi Arabiain the first quarter of 2013.

• A 2013 Eurobond issue ranging between USD1 and2 billion and guaranteed by the United States. InFebruary 2013, USD500 million was issued on thedomestic market.

• Payment of the second tranche worth USD384 millionin April 2013, provided the Jordanian authoritiesapprove the IMF’s proposed energy sector strategy.Several tranches representing a total of USD473 millioncould be paid in 2013, on condition that the measuresrecommended by the IMF are implemented (cf.Box 4). For 2014 and 2015, payment of a totalUSD805 million is scheduled;

• A possible USD150-million loan in 2013 from theWorld bank under its new Development PolicyLoans programme;

• The payment in 2013 of the second tranche ofAFD’s budget support for the energy sector, totallingEUR50 million.

Last points: March 2013 for the reservesSource: CBJ; author’s calculations.

28Figure

Foreign reserves

14

12

10

8

6

4

2

0

12

10

8

6

4

2

0

Reserves (USD billions)Reserves in months of imports (right-hand scale)

2006 2007 2008 2009 2010 2011 2012 2013

Source: IMF; author’s calculations.

Ratio of foreign reserves to external debt (%)

29Figure

2000

1800

1600

1400

1200

1000

800

600

400

200

0

Foreign reserves/Short-term external debt

2000 2002 2004 2006 2008 2010


Conclusion

turn for the worse, whilst at the same time the publicsector has taken over from the private sector as the keygrowth driver. The medium-term issue involves knowinghow far public spending can serve as a sustainablealternative.

The other consequence of this regional unrest is theworsening of Jordan’s external balances. These havebeen driven by an increase in the country’s energy billfollowing the repeated disruptions of its main source ofsupply. Certainly, this shock confirms Jordan’s highdegree of energy vulnerability and gives the authoritiesan incentive to undertake measures to diversify theirsources of supply. Moreover, faced with a decline inforeign investment – and wishing to avoid external debt– the country has drawn heavily on foreign reserves toensure that its hefty external financing requirement iscovered. However, the Kingdom of Jordan, due to itsposition as a “buffer State” enjoys the support offoreign countries and donors, which will help toimprove its external liquidity.

The geographical situation of Jordan is such that itseconomic growth has been impacted by the turmoilthat the region has experienced over the last fortyyears. These different shocks, particularly since the2008 financial crisis, have revealed the vulnerabilities ofa growth model that depends heavily on externalfinancing flows. Moreover, in Jordan, the disturbancesaffecting the region since 2011 have taken the form ofpolitical and social demands, as well as the massiveinflux of Syrian refugees. These refugees, fleeing theupsurge of violent conflict in their own country, areentering Jordan in increasingly large numbers andplacing greater pressures on the scarce water andenergy resources of their host country. In addition,some of these refugees are entering the Jordanianlabour market, which is already under strain: youthunemployment is rising steeply, particularly in the caseof higher education graduates.

Against this backdrop of a marked slowdown in eco-nomic activity, Jordan’s public finances have taken a

It was in a strained economic context – exacerbated bythe energy supply shock (leading to an increase in thepublic debt ratio and the deterioration of externalbalances) – that Jordan requested assistance from theIMF. The resulting Stand-By Arrangement, signed inAugust 2012, provides for the exceptional amount ofUSD2 billion to be paid over thirty-six months, whichis 800% of Jordan’s quota.

According to the IMF, this agreement could cover halfof Jordan’s external financing requirement and ensurea level of foreign reserves equivalent to four monthsof imports. The programme provides for payment inseveral tranches provided that measures are imple-mented to contain the central government’s primarydeficit 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 turnreduce central government indebtedness. In addition,the IMF has advised the Jordanian authorities to diversifyit sources of energy supply so as to reduce its exposureto external shocks.

Apart from covering part of the country’s externalfinancing needs, this arrangement has the advantageof encouraging the Jordanian authorities to introducea number of reforms, particularly in the energy sector.It is therefore planned to completely clear NEPCO’sarrears and lower its level of debt by doubling electri-city tariffs over several years. An 18% tariff increase isplanned for the end of the first half of 2013, but theauthorities have not yet decided on a strategy for anoverall tariff increase.

The IMF Stand-By Arrangement with Jordan4Box

Conclusion

31

List of acronyms and abbreviations

IPP2 Independent Power Producer - QEPCO -Qatrana Power Plant

JD Jordanian dinar

JEPCO Jordan Electric Power Company

JPRC Jordan Petroelum Refinery Company

LNG Liquefied natural gas

LPG Liquefied petroleum gas

MAE Ministère des Affaires étrangères (France)

French Ministry of Foreign Affairs

MENA Middle East and North Africa

MOF Ministry of Finance (Jordan)

MOL Ministry of Labour (Jordan)

MOPIC Ministry of Planning and International Cooperation (Jordan)

MW Megawatts

NEPCO National Electric Power Company

PI Portfolio investment

PLO Palestinian Liberation Organisation

NPL Non-performing loan

QIZ Qualified Industrial Zone

ROA Return on Assets

ROE Return on Equity

SBA Stand-by Arrangement

UNHCR United Nations High Commissionerfor Refugees

USD American dollar

WDI World Development Indicators

WEO World Economic Outlook

WTO World Trade Organization

AFD Agence Française de Développement

AMR Analyse macroéconomique et Risque pays (division, AFD)

AAGR Average annual growth rate

AFD Agence Française de DéveloppementFrench development agency

AMR Analyse macroéconomique et Risquepays (AFD)Macroeconomic Analysis andCountry Risk Unit

CAR Capital Adequacy Ratio

CBJ Central Bank of Jordan

CEGCO Central Electricity Generating Company

DOS Department of Statistics (Jordan)

EDCO Electricity Distribution Company

EFR External financing requirement

EIU Economic Intelligence Unit

ERC Electricity Regulatory Commission

EU European Union

EUR Euro

FDI Foreign direct investment

FED Federal Reserve Bank

FOB Free on board (value)

GAFTA Greater Arab Free Trade Area

GCC Gulf Cooperation Council

IAF Islamic Action Front

IDECO Irbid District Electricity Company

IFS International Financial Statistics

IMF International Monetary Fund

IPP1 Independent Power Producer - AES -Amman East Power Plant


List of acronyms and abbreviations


Conception et réalisation : Ferrari/Corporate – Tél . : 01 42 96 05 50 – J. Rouy/ Coquelicot- Septembre 2013.

References

IMF (2012c), “Jordan: Selected Issues”, IMF CountryReport No.12/120, Washington, D.C.

MINISTRY OF FINANCE, JORDAN (2013), GeneralGovernment Finance Bulletin, Amman.

MINISTRY OF FINANCE, JORDAN (2012), PublicDebt Bulletin, No.36, Amman.

MINISTRY OF LABOUR, MINISTRY OF PLANNINGAND INTERNATIONAL COOPERATION, JORDAN(2013), “Response Plan for the Government ofJordan”, Amman.

MINISTRY OF LABOUR, MINISTRY OF PLANNINGAND INTERNATIONAL COOPERATION, JORDAN(2012), “National Employment Strategy, 2011-2020”, Amman.

MUASHER, M. (2013), “Reform in Jordan: After theVote”, The Carnegie Endowment for InternationalPeace, Washington, D.C.

MUASHER, M. (2011), “A Decade of Struggling ReformEfforts in Jordan: the Resilience of the Rentier System”,The Carnegie Papers, The Carnegie Endowment forInternational 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), “JointJordan-UN Appeal”.

USAID (2012), “Nepco Debt Recovery Forecast”.

WORLD BANK (2012), “Hashemite Kingdom ofJordan: Options for Immediate Fiscal Adjustmentand Long Term Consolidation”, Washington, D.C.

WTO (2008), “Trade Policy Review: Report byJordan”, WT/TPR/G/206, Geneva.

AFD (2012), Note NCA CJO 1029, HONORÉ, A.(internal document)

AFD (2011), « Rapport de mission : analyse durisque-pays et du risque souverain de la Jordanie »,LETILLY, G., Paris.

AFD (2009), « Rapport de mission : analyse durisque-pays et du risque souverain de la Jordanie »,LETILLY, G. and T. LETREILLE, Paris.

ALISSA, S. (2007), “Rethinking Economic Reform inJordan: Confronting Socioeconomic Realities”, TheCarnegie Papers, The Carnegie Endowment forInternational Peace, Arab Reform Brief, Amman.

ANIMA (2010), « La carte des investissements enMéditerranée », Marseille, January.

BALANCHE, F. (2010), « L’Etat au Proche-Orientarabe entre communautarisme, clientélisme, mon-dialisation et projet de Grand Moyen Orient »,L’Espace Politique, No. 11, Reims.

BROOKINGS DOHA CENTER (2011), “How Stableis 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 theHashemite Kingdom of Jordan.

FRENCH EMBASSY IN JORDAN, ECONOMICDEPARTMENT (2013), « Projets de transportsfinancés sur don CCEAG », Amman.

IMF (2012a), “Request for a Stand-By Arrangement”,Washington, D.C.

IMF (2012b), “2012: Article IV Consultation”, IMFCountry Report No. 12/119, Washington, D.C.

References

MACRODEV (''Macroeconomics and Development'')This collection was launched by AFD’s Research Department to present thework produced in the field of development macroeconomics by AFD's Ma-croeconomic and Country Risks Analysis Unit (RCH/AMR) and AFD Groupeconomists . It publishes studies that focus on countries, regions or deve-lopment-related macroeconomic issues.

The analyses and conclusions in this document are the sole responsibility ofthe authors, and do not necessarily reflect the viewpoints of the AgenceFrançaise de Développement or its partner institutions.

Director of Publications:Anne PAUGAM

Editorial Director:

Alain HENRY

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Copyright: 1st quarter 2015ISSN: 2266-8187

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