Jordan reboots its economy, and foreign investors take note.

Jordan’s Economic Reforms: Challenges and Potential

The term “reform” is frequently used in the Middle East, and Jordan’s commitment to overhauling its economy is generating cautious optimism. The Jordanian parliament approved a 10.6 billion dinar (approximately $15 billion) budget for 2022, aiming to accelerate reforms post-COVID-19. However, the economy contracted by 1.6% in 2020, and experts warn that Jordan will need to make difficult decisions, such as expanding the tax base and closing loopholes, to achieve its goals.

The pandemic significantly impacted key revenue sources like tourism. The International Monetary Fund (IMF) projects Jordan’s real GDP will grow by 2.7% in 2024, up from 2% in 2021, thanks to targeted fiscal and monetary policies. This growth is modest compared to the 6.3% average annual growth between 2001 and 2010. The IMF’s support, including a $1.23 billion disbursement from a four-year $1.5 billion Extended Fund Facility (EFF), has been vital for Jordan’s recovery and stability.

Despite this support, the IMF highlights several challenges. High unemployment, especially among youth, remains a significant issue, potentially affecting consumer spending and social stability. By mid-2021, unemployment among Jordanians had soared to nearly 25%. Additionally, political unrest, such as the alleged coup attempt involving former Crown Prince Hamzah bin Hussein, underscores the country’s volatile environment.

The IMF emphasizes that sustained and inclusive growth will depend on reforms to increase labor force participation, enhance market flexibility, foster competition, reduce business costs, and improve governance. Kenji Okamura, deputy managing director at the IMF, stressed these areas in the fund’s January review of Jordan’s EFF arrangement.

Regional Dynamics

Jordan’s regional role is evolving, with hopes that regional tensions might be easing. The Abraham Accords, which normalized relations between Israel, the UAE, and Bahrain in 2020, have positively impacted Jordan’s relationship with Israel. In November 2023, Jordan signed a declaration with Israel and the UAE to build a solar energy plant in Jordan, with plans to export electricity to Israel in exchange for desalinated water. Jordan also aims to export electricity to Lebanon through Syria.

The water agreement with Israel could boost Jordan’s trade and exports to the West Bank, potentially increasing from $160 million to over $700 million. The deal includes duty-free access for Jordanian products to the Palestinian market, but it still requires approval from the Palestinian Authority. The evolving relationship with Israel could potentially open new economic opportunities for Jordan, though protests over these agreements might create hurdles.

Regional developments also include Syria’s gradual recovery from civil war, which could benefit Jordan. Improved relations with Damascus and Syria’s inclusion in China’s Belt and Road Initiative could enhance regional trade and Jordan’s economic prospects. Additionally, the revival of the Iraqi economy and its regional reintegration would positively impact Jordan.

Economic Pressures and Opportunities

Jordan faces significant economic challenges, including high public sector debt, which reached 91.7% of GDP by the end of 2021. Nearly half of this debt is in foreign currency, making the kingdom vulnerable to global interest rate fluctuations and associated debt-servicing costs. There are calls from parliament for more state jobs amid high unemployment, adding to fiscal pressures.

The IMF notes that Jordan’s tax revenues exceeded expectations last year. However, improving tax enforcement and addressing issues like smuggling and corruption could boost the economy. Strengthening tax compliance and closing loopholes could contribute an additional 0.5% of GDP, according to the IMF.

Banking Sector Resilience

Despite broader economic strains, Jordan’s banking sector has shown resilience. The IMF’s review in January highlighted a strong capital adequacy ratio of 18.3% and a return to pre-pandemic profit levels for banks. Nevertheless, risks remain, particularly concerning the pandemic’s long-term impact on the sector and the slow recovery of SMEs. The Central Bank of Jordan has extended subsidized lending for SMEs and raised borrowing limits for key sectors.

Recent developments, such as Arab Bank’s significant profit growth and the launch of Jordan’s first digital-only neobank, Blink, indicate positive trends in the banking sector. Jordan is also considering a central bank digital currency (CBDC), which could be a significant shift from its 2014 ban on digital currencies. However, regulating a CBDC and managing cryptocurrency trading might challenge Jordan’s financial infrastructure.

Jordan was placed on the Financial Action Task Force’s watch list in October due to deficiencies in anti-money laundering and counter-terrorist financing controls. The country has committed to addressing these issues by October 2023.

Outlook

Jordan’s economic recovery is likely to be gradual. Ryan Bohl from Rane believes Jordan’s strategic regional role will help navigate uncertainty, despite high debt. The support of international allies like the United States, Saudi Arabia, and the UAE will be crucial.

High debt levels could lead to politically sensitive cuts and potential public discontent. Nonetheless, Jordan’s stability and governance under the king are likely to attract international support. Robert Mogielnicki of AGSIW suggests that while Jordan may face ongoing economic pressures, its strategic role could eventually help it become a key conduit for regional trade and investment.