Vantage View: Jordan's growth prospects promising

After slowing down in the first quarter, economic activity in Jordan appears to have picked up momentum in the second quarter and the outlook for the year as a whole remains quite positive.

The bold leadership provided by His Majesty King Abdullah during the Iraqi crisis, the various economic reforms introduced by the government, the return of confidence to the domestic scene now that the war on Iraq is over, the expansionary fiscal and monetary policy being implemented, the continuing surge in exports and international aid to the country and good prospects for Jordanian companies in Iraq could see Jordan recording real GDP growth of 4 per cent to 4.5 per cent this year.

This is slightly lower than last year's growth of 4.9 per cent, but is close to the 4.2 per cent recorded in both 2000 and 2001.

The King's diplomacy and political skills managed to get 120,000 barrels of crude oil daily from Saudi Arabia, Kuwait and the UAE. The oil is free of charge and is intended to replace oil that Jordan used to get from Iraq at subsidised prices. The U.S. government gave Jordan $700 million in supplemental aid in May, on top of the annual package of $460 million in economic, military and food assistance.

Benefits

While the above benefits may not be sufficient to offset Jordan's loss of the Iraqi market that used to take 20 per cent of its exports, nevertheless they will help the Kingdom absorb the shock and assume its long-term growth prospects.

According to official figures, GDP in the first quarter of this year rose by 2.8 per cent at fixed prices and 3.9 per cent at current prices, compared with 4.3 per cent and 5.5 per cent respectively in the same period a year ago.

Consumer price index in the first five months of the year was up 5.1 per cent, reflecting mainly higher fuel and transportation prices, as well as the impact of the higher sales tax on certain goods and services and the weakening of the Jordanian dinar and dollar exchange rate vis-à-vis the euro.

The real GDP growth in the first quarter this year has been the lowest quarterly growth since the first quarter of 1999 when the economy recorded negative growth of 0.5 per cent.

The cloud of uncertainty that hovered over Jordan and the region because of the anticipated war on Iraq and the fact that several consumers and businesses delayed decisions to spend and invest until the situation became clearer, dampened growth in certain economic sectors, especially manufacturing, wholesale and retail trade, and restaurants and hotels.

More than 90 per cent of real GDP growth in the first quarter originated in three sectors: the transport and communication sector, the finance, insurance and real estate sector, and the government sector.

The manufacturing sector, which recorded real GDP growth of 10.7 per cent in the first quarter last year, saw growth slowing down to 0.2 per cent in the corresponding period of this year. Most of the drop was due to disruption of exports to Iraq and the harsh winter weather we had this year.

During the first four months of this year, total government revenues were 13 per cent lower than the corresponding period last year, while total government expenditures were 12.2 per cent higher, allowing the budget deficit to rise fourfold to 203 million dinars ($286 million) on a cash basis.

This has forced the government to take several corrective measures to boost revenues, including a controversial five per cent withholding tax on interest income, four per cent sales taxes on monthly bills of mobile phones, two per cent increase in sales tax applicable to several commodities and, above all, hiking prices of petroleum products.

The private sector is disappointed by the surge in taxes to finance rising public expenditures. It is true that 84 per cent of total government expenditures are current expenditures, mainly wages and salaries and interest payment, which need to be paid irrespective of the revenues generated.

Nevertheless, because of the various debt rescheduling agreements and the general decline in interest rates, at least the debt service portion of current expenditures should have been lower.

Besides, the government is expected to rationalise excessive expenditure, reduce waste, tackle the rising monthly allocation made for the pension of public sector employees and scale back the unduly large public sector.

Monetary policy

The Central Bank of Jordan has been following an expansionary monetary policy, with interest rates on the dinar moving in line with dollar interest rates. The prime lending rate for the major Jordanian banks has dropped to 6.5 per cent recently and the rediscount and deposit rate to 2.5 per cent from five per cent a year ago.

Interest rates on the dinar may continue to edge lower in the second half of the year, and should, therefore, help the expansion of credit facilities and boost activities in the interest-sensitive sectors of the economy.

The construction sector which recorded a growth rate of 11 per cent last year, continued to rise this year as well. The growth in this sector is attributed to the large number of infrastructural projects currently being implemented and the surge in the number of housing and apartment buildings under construction.

This sector has strong forward and backward linkages with other sectors of the economy (building material, furniture, consumer durables, etc) and will, therefore, have a positive impact on growth elsewhere in the economy.

With economic growth rising at four per cent to five per cent in the past few years and population growth rate close to 2.8 per cent, per capita income and the standard of living of Jordanians must be improving at around two per cent in real terms, the highest rate since the early 1980s.

Those who are working in the public sector and are mostly living on fixed wages and salaries are not feeling this improvement. On the contrary, higher direct and indirect taxes are eating into their gross income.

Furthermore, activities in the retail trade, restaurants and hotels sector continue to be subdued for the third year in a row, depriving participants in these sectors of any improvement in their standard of living. However, other private sector participants are clearly better off.

Given the good performance of the Kingdom's stock market, some 500,000 shareholders have seen their wealth rise on the average by 15 per cent in the first half of this year. This, together with the upturn in real estate prices, boosted the "wealth effect" and should reflect positively on general consumption and investment expenditures.

Jordan's future economic prospects look promising in light of the serious economic and legal reforms that were introduced in the past few years and the bold and enlightened leadership of King Abdullah. Jordanian companies stand to benefit from reconstruction and rehabilitation opportunities in Iraq.

The latest parliamentary elections mark a new drive for political stability and the quest for good governance in the country. Today, Jordan has a free market oriented economy, an attractive investment climate and an advanced judiciary system capable of coping with the recent dev