Economy and Trade
Following World War I and the dissolution of the Ottoman Empire, the United Kingdom received a mandate to govern much of the Middle East. Britain separated a semi-autonomous region of Transjordan from Palestine in the early 1920s, and the area gained its independence in 1946; it adopted the name of Jordan in 1950, and was ruled by King Hussein from 1953 until 1999. King Abdullah II, the son of King Hussein, assumed the throne following his father’s death in February 1999. Since then, he has consolidated his power and undertaken an aggressive economic reform program. Jordan acceded to the World Trade Organization in 2000, and began to participate in the European Free Trade Association in 2001. Unlike other countries in the region, the Kingdom of Jordan has no oil of its own and few other natural resources. The economy depends largely on services, tourism, and foreign aid, for which the United States is the main provider. Yet Jordan has one of the best health services in the region.
Economic Policy over 12 Months
Since graduation from its most recent International Monetary Fund (IMF) program in 2002, Jordan has continued to follow IMF guidelines, practicing careful monetary policy, making substantial headway with privatization, and opening the trade regime. In December 2009, King Abdullah appointed a new premier, Samir Rifai, to push through economic reform, shortly after dissolving the parliament midway through its term. Under King Abdullah, Jordan’s reforms have already included taking the initiative for the phased elimination of fuel subsidies, passing legislation targeting corruption, and instituting tax reform.
In 2010, the government introduced austerity measures after the budget deficit doubled to US$2 billion in 2009—equal to 9% of GDP. It announced budget cuts of US$1.4 billion for 2010, with the aim of reducing the deficit to 6.3% of GDP. The administration also cut corporate taxes and introduced long-term tax breaks for foreign direct investment in industrial and free zones, which it expects will spur capital inflows and domestic investment.
Jordan operates an exchange rate peg that has been fixed to the US dollar since 1995. Nevertheless, there is some room for flexibility in operating monetary policy in the short run, where the Central Bank of Jordan has some autonomy in determining the spread between domestic and US interest rates. Following the onset of the global financial crisis in the final quarter of 2008, the central bank loosened monetary policy significantly. By April 2010, the central bank had cut rates by 250 basis points since November 2008 and the rate stood at 4.25%.
King Abdullah dissolved parliament in November 2009—halfway through its four-year term—citing its failure to carry out far-reaching political and economic reforms. Abdullah appointed Samir Rifai as a caretaker prime minister in early 2010. Rifai drafted a new constitution and set the date of November 9, 2010, for new elections. However, the Muslim Brotherhood and army veterans are calling for a boycott of the elections.
The Muslim group is demanding the inclusion of about 1.2 million Palestinians who came to Jordan after the 1967 Six Day War. The army veterans, who number more than 700,000, are totally opposed to the participation of those displaced Palestinians in the next elections, saying that Jordan would be taken over by Palestinians. The political crisis will inevitably have an impact on the economy.
Economic Performance over 12 Months
Jordan is a small open economy with a limited industrial base and it relies heavily on foreign aid and workers’ remittances for foreign currency resources; it has inevitably been affected by the downturn in global trade. Jordan’s macroeconomic performance was generally favorable in 2008. Real GDP growth averaged 7.8%, while sharply lower world fuel and food prices brought inflation down.
The economy expanded by just 2.8% in 2009, slowing from 7.8% growth in 2008, and its worst performance since an economic crisis in 1989 when the country was forced to seek help from the IMF. Growth accelerated in the second half of the year, with the economy expanding by 2.9% in the fourth quarter of 2009, up from a 2.1% rise in the third quarter. The construction sector is leading the revival, expanding by 12.8% in the final three months of 2009.
High fuel and food prices and softening domestic revenues put pressure on the fiscal position in 2008, with the deficit excluding grants reaching 11.2% of GDP, against 8.9% in 2007. Domestic demand, exports, tourism, and remittances from abroad all came under pressure in 2009, further undermining the government’s revenues, and resulting in a deficit of 9% of GDP.
In April 2010, the IMF forecasted that the Kingdom’s GDP would grow by 4.15% in 2010 and by 4.5% in 2011, compared to a Ministry of Finance prediction of 4% growth in 2010. The IMF predicted that the consumer price index (inflation) rate for Jordan would reach 5.3% in 2010, before easing to 4.6% in 2011. The Kingdom’s current account deficit was envisaged to rise from 8.9% in 2010 to 9.7% in 2011.
Jordan’s trade deficit in the first half of 2010 widened to 18% from the same period in 2009 to US$3.9 billion, due to a higher bill for imported Saudi oil, according to official data. The current account deficit has traditionally been covered by strong foreign direct investment and portfolio inflows, including remittances from tens of thousands of Jordanians living abroad, mainly in the Gulf Arab region.
The government’s finances also failed to improve as markedly as had been expected in 2010. Jordan’s tax revenues rose 1.8% to JD1.428 billion (US$2 billion) in the first half of the year, compared to the same period in 2009. Officials said that total taxes—corporate and sales tax—had been expected to rise at a faster pace, but projections of healthy growth have been slashed due to weak domestic demand and lower profitability by the country’s top firms.
Support for Inward Investment and Imports
The Jordan Investment Board (JIB) was established in 1995 as a governmental body enjoying both financial and administrative independence. Its aim is to encourage foreign direct investment into Jordan and to enhance local investment.
Tax exemptions are at the discretion of the Jordanian Council of Ministers, and depend on the sector invested in and its impact on the Jordanian economy. More information can be obtained from the JIB.
GDP growth: 2.8% (official, 2009)
GDP per capita: US$5,300 (2009)
CPI: 1.7% (2009 est.)
Exchange rate versus US dollar: JD0.709 (fixed)*
Unemployment: 13.5% (2009 est.)
FDI: US$17.81 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$1.401 billion (2009 est.)
Population: 6,407,085 (July 2010 est.)
* Jordanian dinar
Source: CIA World Factbook except where stated