Gulf aid calms tensions in Jordan but economy needs structural reforms

While reforms remain essential to address the debt and limit corruption, some economists say that is not enough.
Sunday 17/06/2018
A long row to hoe. A big Jordanian flag flutters in front of Amman’s Jabal al-Qala district. (AFP)
A long row to hoe. A big Jordanian flag flutters in front of Amman’s Jabal al-Qala district. (AFP)

Saudi Arabia, the United Arab Emirates and Kuwait pledged $2.5 billion to support Jordan’s economy after protests trying to stop an income tax increase shook the kingdom. The largess could stabilise the country in the short term but does not remediate Jordan’s long-term structural problems.

In a strong show of support, the three Gulf countries offered Jordan a package of aid including a deposit in the Central Bank of Jordan, guarantees to the World Bank on Jordan and a 5-year budgetary support to Jordan.

“The Jordanian economic situation is challenging with low growth, a high unemployment rate, large deficits and an elevated level of public debt. Public finances have been strained by a nearly 50% increase in public spending on social benefits accompanying the arrival of approximately one million Syrian refugees since the 2011 start of the Syrian conflict. Refugees now comprise about 20% of Jordan’s population and the increase in government spending on social benefits has occurred amid a decline in foreign grants since 2014,” said Nassib Ghobril, chief economist at Byblos Bank.

To counter the downward trend Jordan had agreed to a $723 million Extended Fund Facility from the International Monetary Fund (IMF) to stabilise public finances. The loan was dovetailed with conditions to reform the economy, including the introduction of new income taxes.

That plan was denounced during nationwide protests. Jordanian Prime Minister Hani Mulki, who had pushed for the reforms, had to step down and the government announced it would withdraw the bill.

“The recent protests, contrary to…. those of 2011 after the ‘Arab spring,’ were held by the middle class, which was the hardest hit by the reforms,” said anthropologist Wael Khateeb.

The Gulf cash infusion — three times as big as Amman’s IMF loan — could reduce tensions in Jordan.

Besides its economic woes, another of Jordan’s structural problem is its historic dependence on foreign aid, which often gave leaders leeway to avoid reform and address corruption. When protests erupted in 2011, Gulf countries rushed to the assistance of regional monarchies, including Jordan, with a 5-year agreement worth more than $5 billion.

However, in the past two years, with the threat of “Arab spring” receding and the prioritisation of gulf countries of the Yemen war, instead of the Palestinian cause, Jordan lost the large financial back-up it had enjoyed.

That lessened financial aid to Jordan, which faces enormous economic pressure. Amman must pay $1.2 billion a year in interest accrued from its $40 billion debt.

While reforms remain essential to address the debt and limit corruption, tax fraud and tax evasion, some economists say that is not enough. There is also a need in Jordan to promote growth and development.

“Growth could improve if supply-side measures to stimulate domestic and foreign demand, and foreign direct investment, as well as if structural reforms are implemented to improve the business environment and the investment climate and if political tensions in the region subside, which would lead to a recovery in domestic private and foreign investment. Also, over the longer term, the Jordanian economy will benefit from the reconstruction efforts in Iraq and Syria,” said Ghobril.

The meeting in Mecca could save Jordan for now but Jordan expert Kirk Sowell, principal at Utica Risk, said that even with Arab aid, Amman will continue to run deficits and the debt/GDP ratio will increase.

If this aid allows Jordan to avoid structural reforms, including reductions in the electricity subsidy, in just a few years Jordan will be right back in crisis,” he said.