Discussing life in Amman
© Rawan Da'as / Your Middle East
Discussing life in Amman
Last updated: April 29, 2013

Jordan’s fiscal distress

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A recent fiscal diagnosis revealed that in order for Jordan to tackle its mounting public spending deficit, it is going to have to resolve its energy crisis.

According to Nemat Shafik, the deputy head of the International Monetary Fund, this crisis developed from a chain of events triggered by the Arab Spring, stifling economic growth and at times sparking protests, which are rare in the kingdom. The added burden of the sizable influx of Syrian refugees escaping their own crisis has further weighed down an economy already on the ropes.

When the Arab Gas Pipeline, Jordan’s main source of natural gas from Egypt, was the target of repeated attacks, the kingdom was pressured into depending on expensive market-based alternatives to keep the fuel flowing. This has cost the nation an annual $2 billion since 2011 – a hefty bill for a country that imports 97% of its energy supply.

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Jordan has often been criticized by the regional community for being late in picking up the Arab Spring wake up call from its neighbors. The Muslim Brotherhood, known in Jordan as the Islamic Action Front, has boycotted recent elections, advocating a reform-oriented agenda from outside the system.

Protests have rarely hit headlines in this relatively stable nation. However, as of recently, this has been subject to change. Approximately 10,000 people took part in a protest on October 5last year, where the general theme was electoral reform. Economic hardship, which has been a key driver in other protests across the region, was is another main instigators in the current surge in opposition towards King Abdullah II’s government.

Fuel prices, youth unemployment, and decreasing purchasing power for middle class wages are only part of the list of challenges faced by the Jordanian authority. As an aid economy that is reliant on its diaspora for remittances, the market is often at the mercy of sporadic external shocks. The rampant political instability currently plaguing its neighbors, which include Syria, Iraq, Israel, Lebanon, and Egypt, has stagnated the aforementioned income sources.

In addition to this, foreign direct investment has also deteriorated, plunging from $2.81 billion in 2008 to $1.43 billion in 2011. Gas prices have subsequently steadily risen, raising fears of a vicious inflationary spike in this stagnating economy.

The IMF, with its intense loan program and financial rhetoric, is looking to implement wide-ranging reforms in the local economy. On August 3, 2012, the Fund approved a liquidity package for the Kingdom totaling $2 billion. Initially described as a “drip-feed,” it was designed to gradually consolidate Jordan’s fiscal budget and get the country back on track towards sustainable growth. The main target is the energy sector, which is considered a significant drain on government revenues and has been under pressure to cover costs.

Worsening investor confidence, a slumping tourism sector, and a bloated public sector have all contributed to the steady increase in Jordan’s current account deficit. The IMF is pushing Jordanian authorities to implement more economic reforms that could elevate the growth rate to 5% in 2015 and help counter the budget deficit, which hit 7.5% of GDP in 2012.

The IMF’s strategy consists of diversifying the nation's energy sources, which will subsequently alleviate public debt strains. It also calls for improving the current taxation system. According to Fund analysts, there is significant room for improvement in the Kingdom’s tax collection, which has declined by approximately 5% of GDP since 2007.

In order to meet these robust standards and lessen the publicly-owned power sector’s expensive import bill, King Abdullah II has slashed fuel subsidies, which has led to even more price increases at the pump. This pushed Jordanians to take to the streets, supporting protests such as the one mentioned earlier. Piggybacking on these economic woes, those opposing the current government have used these difficulties to further highlight their demands for governance reform.

While Jordanian authorities, particularly the King himself, have been pro-reform since the Arab Spring protests threatened to engulf the region, progress has not been up to par. The need for political dialogue is paramount, with agenda items such as the loan’s conditionality agreements and electoral reform taking center stage.

Jordan is expected to reach 4.5% growth in the medium term – added motivation for policymakers to stick to the IMF's strict plan. With economic growth comes reduced political instability, and in the meantime, authorities are hoping to make sure the IMF’s fiscal drip remain moist by openly expressing their commitment to the loan agreement.

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Bassam Aoun
Bassam Aoun is a Business Editor at Your Middle East. He is currently based in Abu Dhabi and holds a BA in Economics from the American University of Beirut and an MPP (Master of Public Policy) from the University of Chicago. He has written for the Chicago Policy Review and is interested in economic and fiscal policy in the Middle East.
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