The Economy of Jordan: Problems and Solutions

1. The Economy of Jordan:Problems and Solutions Presented by Dr. Ohan Balian May 03, 2010 Amman

2. Outline • Global and regional growth • Economic indicators • The “Twin-Deficits” • Stabilization policies • Banking supervision • Industrial policy • Conclusion

3. Global and regional growthGlobal growth • Global GDP fell by 2.2% in 2009 (World Bank: Global Economic Prospects 2010) • Never such a fall since the Great Depression in 1929-1933 • Caused by the bursting of the real estate and stock market bubbles • These bubbles were caused by low interest rates/leveraging • A ‘liquidity trap’ situation

4. Global and regional growth (contd…)Regional growth • Regional growth rates, especially in GCC, at 3.2% in 2009 (United Arab Economic Report 2009) • Relatively 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 GCC GDP to fall by 30% - from $1.2 trillion in 2008 to $835 billion in 2009 • Inflation also fell sharply from an average of 11% in 2008 to 2% in 2009 • GCC and Arab countries are expected to grow by 5.2 % in 2010 (World Bank: Global Economic Prospects 2010) • Jordan has very strong links with the GCC countries in terms of remittances, trade, grants, and FDI

5. 2. Economic indicatorsSource: IMF Consultations Article IV 2009 • GDP (nominal) $22 billion • CPI inflation 4% • Investment 27.8% of GDP • Consumption 23.3% of GDP • Savings 17.0% of GDP • S/I balance -10.8% of GDP • Gov revenue 32.4% of GDP • Gov exp 37.7% of GDP • Budget Deficit -5.3% of GDP • Exports of goods $6.8 billion • Imports of goods $13.7 billion • Trade balance -$6.9 billion • Current account -$10.8 billion

6. 3. The “Twin - Deficits” • Internal (budget) and external (trade) deficits • In 2009, budget deficit was 5.3% of GDP and trade deficit was 6.9% of GDP • The implications of the twin-deficits is that it will eventually lead to higher interest rates and therefore reduce the rate of growth • The budget deficit is expected to increase to over 7% of GDP in 2010 caused by expansionary fiscal policies • The trade deficit is expected to improve slightly but will be below its long-term trend because of weak growth prospects regionally

7. 4. Stabilization policiesMonetary and Fiscal policies • Short-run policies to generate economic growth • The fixed exchange rate with the $US closely links the US interest rate (low) with the interest rate in Jordan • The increasing deficit in the budget limits the scope for expansionary fiscal policies • Both of these phenomena – the link with the US interest rate and the limited scope of fiscal policy – reduce the “degrees of freedom” of the Jordanian Authorities to conduct stabilization policies

8. 4. Stabilization policies (contd…)Monetary and Fiscal policies • Nevertheless, the authorities have succeeded in reducing fiscal spending considerably with further easing of liquidity • Very limited room for counter-cyclical fiscal policy - i.e. not able to use expansionary fiscal policies by increasing gov expenditures • Most of the fiscal policies will be conducted on the spending side – e.g. freeze of public sector wages and reductions in fuel and food subsidies • Monetary policy (expansionary) is more feasible because of low inflation (about 4% compared to over 10% in 2008) • Lower policy rates and reductions in reserve requirements to encourage lending and increase the money supply, in turn increasing aggregate demand

9. 5. Banking supervision • Banking system not affected much by the financial crisis • Primarily because of active supervision by the Central Bank of Jordan which has insulated the Jordanian banking system from exposures to troubled international banks, structured financial products, and from wholesale financial markets • This has allowed for a high build-up of international reserves (about $10.2 billion) • Bank deposits have also increased substantially with comfortable liquidity positions and low NPLs • And coming from Dubai, Jordanian banks have very little exposure to Dubai debt!

10. 6. Industrial policy • Role of government has been increasing due to the global slowdown. This intervention is known as Industrial Policy • But industrial policy should be conducted in the ‘right’ way using targeted gov support programs • ‘Embedded Autonomy’ – i.e. close relationship with the private sector without the gov losing its autonomy • Various ‘Principles’ need to be taken into account when designing effective industrial policies • This was the method used by the ‘Asian Tigers’ in the 1970’s and some GCC countries – clustering, free zones, support to SMEs, etc. • There have been suggestions that the recent crisis in Dubai was partly caused by inappropriate industrial policies.

11. 7. Conclusions • Given Jordan's strong links with the GCC (in terms of remittances, trade, grants, and FDI), the prospects in the short to medium terms look good as economic recovery in GCC countries takes strength. • Very limited room for fiscal policy as the deficits (internal and external) are high which will put upward pressure on interest rates and thus hold back growth. • But global recovery (although weak) is expected to reduce the trade deficit, and fiscal consolidation on the spending side should at least prevent the budget deficit from increasing further. • Industrial policies should be more targeted taking into account best practice design principles in designing the institutional framework of such policies.