The Economy of Jordan:The Economy of Jordan:

Problems and SolutionsProblems and Solutions

Presented by Presented by

Dr. Ohan BalianDr. Ohan Balian

May 03, 2010May 03, 2010AmmanAmman

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OutlineOutline

Global and regional growth Global and regional growth Economic indicatorsEconomic indicators The “Twin-Deficits”The “Twin-Deficits” Stabilization policiesStabilization policies Banking supervisionBanking supervision Industrial policyIndustrial policy ConclusionConclusion

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1.1. Global and regional growthGlobal and regional growthGlobal growthGlobal growth

Global GDP fell by 2.2% in 2009 Global GDP fell by 2.2% in 2009 (World Bank: Global (World Bank: Global Economic Prospects 2010)Economic Prospects 2010)

Never such a fall since the Great Depression in Never such a fall since the Great Depression in 1929-19331929-1933

Caused by the bursting of the real estate and Caused by the bursting of the real estate and stock market bubblesstock market bubbles

These bubbles were caused by low interest These bubbles were caused by low interest rates/leveragingrates/leveraging

A ‘liquidity trap’ situationA ‘liquidity trap’ situation

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1.1. Global and regional growth Global and regional growth (contd…)(contd…)

Regional growthRegional growth

Regional growth rates, especially in GCC, at 3.2% in 2009 (United Regional growth rates, especially in GCC, at 3.2% in 2009 (United Arab Economic Report 2009)Arab Economic Report 2009)

Relatively low compared to 6.3% in 2007 and 5.9 % in 2008Relatively low compared to 6.3% in 2007 and 5.9 % in 2008 Price of oil fell from $96 in 2008 to $60 in 2009 which caused Price of oil fell from $96 in 2008 to $60 in 2009 which caused

GCC GDP to fall by 30% - from $1.2 trillion in 2008 to $835 billion GCC GDP to fall by 30% - from $1.2 trillion in 2008 to $835 billion in 2009in 2009

Inflation also fell sharply from an average of 11% in 2008 to 2% in Inflation also fell sharply from an average of 11% in 2008 to 2% in 20092009

GCC and Arab countries are expected to grow by 5.2 % in 2010 GCC and Arab countries are expected to grow by 5.2 % in 2010 (World Bank: Global Economic Prospects 2010)(World Bank: Global Economic Prospects 2010)

Jordan has very strong links with the GCC countries in terms of Jordan has very strong links with the GCC countries in terms of remittances, trade, grants, and FDIremittances, trade, grants, and FDI

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2. Economic indicators2. Economic indicators

SourceSource: IMF Consultations Article IV 2009: IMF Consultations Article IV 2009

GDP (nominal)GDP (nominal) $22 billion$22 billion CPI inflationCPI inflation 4%4% InvestmentInvestment 27.8% of GDP27.8% of GDP ConsumptionConsumption 23.3% of GDP23.3% of GDP SavingsSavings 17.0% of GDP17.0% of GDP S/I balanceS/I balance -10.8% of GDP-10.8% of GDP Gov revenueGov revenue 32.4% of GDP32.4% of GDP Gov expGov exp 37.7% of GDP37.7% of GDP Budget DeficitBudget Deficit -5.3% of GDP-5.3% of GDP Exports of goodsExports of goods $6.8 billion$6.8 billion Imports of goodsImports of goods $13.7 billion$13.7 billion Trade balance Trade balance -$6.9 billion-$6.9 billion Current account Current account -$10.8 billion-$10.8 billion

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3. The “Twin - Deficits”3. The “Twin - Deficits”

Internal (budget) and external (trade) deficitsInternal (budget) and external (trade) deficits In 2009, budget deficit was 5.3% of GDP and trade In 2009, budget deficit was 5.3% of GDP and trade

deficit was 6.9% of GDPdeficit was 6.9% of GDP The implications of the twin-deficits is that it will The implications of the twin-deficits is that it will

eventually lead to higher interest rates and therefore eventually lead to higher interest rates and therefore reduce the rate of growthreduce the rate of growth

The budget deficit is expected to increase to over 7% The budget deficit is expected to increase to over 7% of GDP in 2010 caused by expansionary fiscal policiesof GDP in 2010 caused by expansionary fiscal policies

The trade deficit is expected to improve slightly but will The trade deficit is expected to improve slightly but will be below its long-term trend because of weak growth be below its long-term trend because of weak growth prospects regionallyprospects regionally

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4. Stabilization policies4. Stabilization policies Monetary and Fiscal policiesMonetary and Fiscal policies

Short-run policies to generate economic growthShort-run policies to generate economic growth The fixed exchange rate with the $US closely The fixed exchange rate with the $US closely

links the US interest rate (low) with the interest links the US interest rate (low) with the interest rate in Jordanrate in Jordan

The increasing deficit in the budget limits the The increasing deficit in the budget limits the scope for expansionary fiscal policiesscope for expansionary fiscal policies

Both of these phenomena – the link with the Both of these phenomena – the link with the US interest rate and the limited scope of fiscal US interest rate and the limited scope of fiscal policy – reduce the “degrees of freedom” of the policy – reduce the “degrees of freedom” of the Jordanian Authorities to conduct stabilization Jordanian Authorities to conduct stabilization policies policies

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4. Stabilization policies 4. Stabilization policies (contd…)(contd…)

Monetary and Fiscal policiesMonetary and Fiscal policies

Nevertheless, the authorities have succeeded in reducing Nevertheless, the authorities have succeeded in reducing fiscal spending considerably with further easing of fiscal spending considerably with further easing of liquidityliquidity

Very limited room for counter-cyclical fiscal policy - i.e. Very limited room for counter-cyclical fiscal policy - i.e. not able to use expansionary fiscal policies by increasing not able to use expansionary fiscal policies by increasing gov expendituresgov expenditures

Most of the fiscal policies will be conducted on the Most of the fiscal policies will be conducted on the spending side – e.g. freeze of public sector wages and spending side – e.g. freeze of public sector wages and reductions in fuel and food subsidiesreductions in fuel and food subsidies

Monetary policy (expansionary) is more feasible because Monetary policy (expansionary) is more feasible because of low inflation (about 4% compared to over 10% in 2008)of low inflation (about 4% compared to over 10% in 2008)

Lower policy rates and reductions in reserve Lower policy rates and reductions in reserve requirements to encourage lending and increase the requirements to encourage lending and increase the money supply, in turn increasing aggregate demandmoney supply, in turn increasing aggregate demand

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5. Banking supervision5. Banking supervision

Banking system not affected much by the financial Banking system not affected much by the financial crisiscrisis

Primarily because of active supervision by the Central Primarily because of active supervision by the Central Bank of Jordan which has insulated the Jordanian Bank of Jordan which has insulated the Jordanian banking system from exposures to troubled banking system from exposures to troubled international banks, structured financial products, and international banks, structured financial products, and from wholesale financial marketsfrom wholesale financial markets

This has allowed for a high build-up of international This has allowed for a high build-up of international reserves (about $10.2 billion)reserves (about $10.2 billion)

Bank deposits have also increased substantially with Bank deposits have also increased substantially with comfortable liquidity positions and low NPLscomfortable liquidity positions and low NPLs

And coming from Dubai, Jordanian banks have very And coming from Dubai, Jordanian banks have very little exposure to Dubai debt!little exposure to Dubai debt!

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6. Industrial policy6. Industrial policy

Role of government has been increasing due to the global Role of government has been increasing due to the global slowdown. This intervention is known as Industrial Policyslowdown. This intervention is known as Industrial Policy

But industrial policy should be conducted in the ‘right’ way But industrial policy should be conducted in the ‘right’ way using targeted gov support programsusing targeted gov support programs

‘‘Embedded Autonomy’ – i.e. close relationship with the Embedded Autonomy’ – i.e. close relationship with the private sector without the gov losing its autonomyprivate sector without the gov losing its autonomy

Various ‘Principles’ need to be taken into account when Various ‘Principles’ need to be taken into account when designing effective industrial policiesdesigning effective industrial policies

This was the method used by the ‘Asian Tigers’ in the This was the method used by the ‘Asian Tigers’ in the 1970’s and some GCC countries – clustering, free zones, 1970’s and some GCC countries – clustering, free zones, support to SMEs, etc.support to SMEs, etc.

There have been suggestions that the recent crisis in There have been suggestions that the recent crisis in Dubai was partly caused by inappropriate industrial Dubai was partly caused by inappropriate industrial policies.policies.

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7. Conclusions7. Conclusions

Given Jordan's strong links with the GCC (in terms of Given Jordan's strong links with the GCC (in terms of remittances, trade, grants, and FDI), the prospects in the remittances, trade, grants, and FDI), the prospects in the short to medium terms look good as economic recovery short to medium terms look good as economic recovery in GCC countries takes strength.in GCC countries takes strength.

Very limited room for fiscal policy as the deficits (internal Very limited room for fiscal policy as the deficits (internal and external) are high which will put upward pressure and external) are high which will put upward pressure on interest rates and thus hold back growth.on interest rates and thus hold back growth.

But global recovery (although weak) is expected to But global recovery (although weak) is expected to reduce the trade deficit, and fiscal consolidation on the reduce the trade deficit, and fiscal consolidation on the spending side should at least prevent the budget deficit spending side should at least prevent the budget deficit from increasing further.from increasing further.

Industrial policies should be more targeted taking into Industrial policies should be more targeted taking into account best practice design principles in designing the account best practice design principles in designing the institutional framework of such policies.institutional framework of such policies.