An IMF outlook says Jordan faces a challenging economic situation ahead as political conflagrations rage in neighbouring countries and elsewhere in the surrounding region.
The Middle Eastern country’s economy grew at an average of 6.5% yearly from 2000 to 2009. However, the Hashemite kingdom’s growth rate faltered to 2.3% in 2010 and 2.5% in 2011, according to the International Monetary Fund.
“As one of the most open economies in the Middle East, Jordan remains highly dependent on commodity imports (oil and grains), tourism receipts, remittances and FDI flows, and external grants,” the IMF said in its latest report on the country.
“Jordan is also facing risks from a further deterioration in its terms of trade, unrest in neighbouring countries, and the prospect of further disruptions to natural gas pipeline flows from Egypt.”
Though the 2012 economic growth rate is set at 2.8%, it is still a hard cry from the glory years of the previous decade. Barclays Capital says it expects a 2.6% growth, while Citibank issued a pessimistic forecast of 2.5% GDP growth in 2012.
Improvement in the financial services’ performance and rising trade with Gulf countries will underpin much of the subdued growth.
Jordan is struggling to make fiscal ends meet thanks to rising oil prices.
The country’s treasury registered a 16% year-on-year fall in foreign exchange reserves in February due to a combination of weak external demand, high energy prices, and limited capital inflows.
“This is the largest annual fall in reserves in at least the past decade. FX reserve cover has come down from 10 months of imports at the start of 2011, to under seven months,” said the Middle Eastern analyst at Citibank.
“This prompted the Central Bank of Jordan to raise domestic policy rates by 50 basis points in January, the second hike in the past year, further putting the brakes on a fragile domestic economy.”
Country stirred by protests
The country’s rulers have initiated several political and economic reforms including empowering the elected parliament, introducing a constitutional court bill and anti-corruption legislations. However, sporadic ‘bread and freedom’ protests take place in the country, often inspired by revolutionary protests elsewhere in the region.
Anti-government groups complain hundreds of activists been arrested in the past few months for inciting riots and insulting King Abdullah II.
“We still do not expect the situation to escalate significantly in the near term, but maintain our view that the political situation will remain fragile in the absence of tangible progress on the reform agenda,” said Citibank’s Soussa.
The Jordanian parliament approved the 2012 budget after some political bickering. The budget posted a fiscal deficit of 4.6%, lower than last year’s deficit of 5.5%. However, the Jordanian government expected a 3% expansion of its GDP – a figure that failed to get approval from many independent observers.
The government also claimed it would cut its expenditure by 1.7% in the current fiscal year.
“We expect the government to meet its plan on the expenditure side, but forecast that total revenues including grants will fall 2.2% year-on-year compared to last year given the current political and growth environment,” Fahad Al-Turki, an analyst at Barclays Capital, wrote in a recent note.
Financing has taken a direct hit amid falling foreign direct investment, which shrank 18% year-on-year by September last year. Some analysts believe GCC states may step in to help the Hashemite kingdom if the fiscal situation continues to worsen despite the fact that Jordan’s application to join the GCC has not been approved yet. Jordanian government insists closer economic ties with the Gulf states will boost the country’s investment flows and lift off socio-economic pressures, including rampant unemployment and inflation.
“Given Jordan’s pivotal role for regional security, we expect support to be forthcoming, although a further deterioration in debt dynamics appears likely,” Barclay’s Al-Turki said in his statement.