Jordan - Economy

Jordan's economy has been profoundly affected by the Arab-Israeli conflict. The incorporation of the West Bank after the war of 1948 and the first exodus of Palestinians from the territory that became Israel tripled the population, causing grave economic and social problems. The loss of the West Bank in 1967 resulted not only in a second exodus of Palestinians but also in the loss of most of Jordan's richest agricultural land and a decline in the growing tourist industry. The 1970–71 civil war and the October 1973 war also brought setbacks to development plans. The steadying influence has been foreign funds. An estimated 80% of annual national income in the early 1980s came from direct grants from and exports to oil-rich Arab countries and from remittances by Jordanians working there. Also important to the economy has been Western economic aid, notably from the US, the UK, and Germany. The economy expanded rapidly during 1975–80, growing in real terms by an average of 9% a year, but the growth rate slowed to 5% in 1985, primarily from reductions in aid from other Arab states because of their declining oil receipts. The onset of the recession in Jordan in the mid-1980s followed by the economic collapse of 1988–89 and the Gulf conflict in 1990 left the country with an unemployment rate of approximately 30–35%, high inflation, and about 25–30% of the population living below the poverty line.

When in 1989 Jordan was unable to service its external debt due to 100 repayment commitments, the Jordanian government concluded an agreement with the IMF to pursue a series of economic reforms across a five year period (that is, by 1993) in exchange for bridge finance: the budget deficit was to be reduced from 24% of GDP to 10% of GDP; the current account balance was to improve from a deficit equivalent to 6% of GDP to a balanced position; export earnings were to grow from $1.1 billion in 1989 to $1.7 in 1993; and the rate of inflation was to drop from 14% in 1989 to 7% in 1993. The Gulf War interrupted this program, as the Jordanian government came out on the side of Iraq, and presumably in favor of a completely different way of solving its economic vulnerability; that is, through association with an enlarged and empowered Arab state. The international economic embargo against Iraq during the Gulf War meant that Jordan lost a lucrative export and re-export market. The loss of Iraq's oil supplies resulted in Jordan having to pay the market price for oil imports from Syria and Yemen. The balance of annual aid transfers, some $200 billion, promised by the Arab oil states in 1990, failed to take into consideration the influx of some 230,000 Jordanian nationals from Kuwait that resulted from the Iraqi invasion. They imposed a strain on government services, and added to the pool of unemployment.

In 1994 Jordan entered into another three-year structural adjustment program financed by IMF's Extended Fund Facility (EFF). On 26 October 1994 Jordan signed a peace treaty with Israel that contained protocols for economic reform and regional integration. The fiscal year 1994/95 saw real GDP growth of about 6% and inflation of only about 3% to 3.5%. In order to build on these gains, and to incorporate the opportunities offered by the peace accord, a new three-year program was negotiated under the EFF, which ran officially from 6 February 1996 to 8 February 1999. In this case, the program fell well short of its targets, as real GDP growth slowed to an annual average of 1%, and budget deficits as a percent of GDP increased to 10% instead of decreasing as envisioned.

In April 1999 another three-year structural adjustment program was embarked upon, this time with finance from both the EFF and the Compensatory and Contingency Financing Facility (CCFF) of the IMF. The program called for privatization, tax reform, trade liberalization and increased foreign investment. Advances were made in all these areas. The government divested itself of shares in over 50 corporations, among the most important being the sale of a 10.5% share in the Jordan Telecommunications (JT) in an initial public offering (IPO) on the 'Amman Stock Exchange (ASE) in October 1999, and a further sale of 40% to a France Telecom/Arab Bank Consortium in January 2001. All or portions of the subsidiaries of the national airline, the Royal Jordanian, were privatized including the sale of 80% of Aircraft Catering Center to the Alpha British Company. By November 2002, the ASE had attained a capitalization of over $7 billion. Tax reforms included the lowering of top rates on personal and business income taxes, the elimination or reduction of a number of subsidies and exemptions, phased introduction of a value-added tax (VAT) regime, and, in connection with trade liberalization reforms, the reduction of many customs and tariffs.

In 2000, Jordan acceded to the WTO, a condition of which was the elimination of most laws limiting foreign investment. On 28 September 2001 the US Congress passed a separate Free Trade Agreement (FTA) with Jordan. In the period 1999 to 2002, the biggest single stimulus to the Jordanian economy came from the Qualifying Industrial Zones (QIZs), a type of industrial estate authorized in a 1998 agreement among Jordan, Israel and the United States, whereby manufactured exports from a QIZ could enter the US market duty free provided it contained at least 35% local content. QIZs particularly have nurtured a fast growing textile export industry. The targets set by the IMF-monitored program for 1999–2002—including annual growth of 3–4%, inflation held to 2–3%, a budget deficit reduced to 4% of GDP by 2001, and a strengthening of the country's foreign reserve position—were all substantially met despite the eruption of the second Palestinian intifada in late 2000 and the global economic slowdown from 2001 forward. Real GDP growth rose steadily from 3.1% to 4% to a projected 5.2% from 1999 to 2002.

Inflation, as measured by consumer prices, was negligible, falling from 3.1% in 1998 to 0.6%, 0.7% and 1.8% 1999–2001. An increase in inflation in 2002 to 3.5% is attributable mainly to administered price increases, particularly for electricity and petroleum products, as subsidies were removed. The government's annual deficit as a percent of GDP was at 3.7% in 2001, better than the program's 4% target, but in this case progress was not uninterrupted: the deficit rose to 4.7% of GDP in 2000 and was projected at 4.1% for 2002. There was, however, uninterrupted progress in terms of net public debt as a percent of GDP, which fell from 105.1% of GDP in 1999 to a projected 88.2% in 2002. Part of this improvement stemmed from some debt forgiveness by the United States and the European Union. As of the end of 2002, five Paris Club reschedulings of Jordan's sovereign debt—from February 1992, June 1994, May 1997, May 1999, and July 2002, respectively— were being paid down. On its foreign reserve position, according to the IMF, Jordan's net usable international reserves in the period 1999 to 2002 were on average sufficient to cover a little over 7 months of imports, up from only a four-month coverage in 1998. In May 2002, Jordan's international reserves were close to $3 billion.

In November 2001, the government introduced its Plan for Social and Economic Transformation (PSET), a program of health and education spending and transfer payments to the poor amounting to 4% of GDP and to be financed in such a way from grants and revenues so as not to add to the country's debt. PSET particularly aims at dealing with Jordan's chronic unemployment problem, which due in part to Malthusian population growth dynamics, worsened slightly—from 12.7% in 1998 to 14.7% in 2001—during the latest period of economic growth. Population growth is such that the 8.6% growth in nominal GDP between 1999 and 2001 produced only a 2.4% increase in per capita income. In July 2002 the IMF announced a two-year stand-by agreement with Jordan for SDR 85.28 million (about $113 million) to support both the PSET and the continuing program of economic reforms. The Jordanian economy has managed to continue to improve in 2002, with the second Palestinian intifada unfolding next door.