|Another year of stellar growth for Jordan's economy
|The Jordanian economy performed exceptionally well in 2004, with real GDP growth estimated at more than 7 percent, the highest achieved since 1992. Last year's growth compares favorably with the 3.4 percent growth in 2003, 5.1 percent in 2002, and an average of 4.3 percent per year for the period 2000-2003.
The surge in business confidence, the expansionary fiscal policy, the increase in exports especially to the U.S., higher capital inflows especially from Iraqis, the rise in consumer lending, the higher remittances from Jordanians working in the Gulf, and the financial aid that the country is receiving will all contribute to strong economic performance in 2005 as well. Real GDP growth this year is likely to exceed 6 percent with nominal GDP growth of 8 percent and per capital income of JD 1,500 ($2,116). Jordan needs to maintain real GDP growth in excess of 6 percent for several more years to come in order to help absorb the new entrants to the labor force and reduce the existing high unemployment level.
All economic sectors performed well in the first three quarters of the year. The best performer was the construction sector which grew by 19.9 percent compared to a year ago level, manufacturing sector rose by 15 percent, and transport and telecommunication by 13 percent. Inflationary pressures remained subdued, rising in the first eleven months of the year at 3.2 percent. Exports surged by 43.4 percent in the first ten months of 2004 compared to a growth rate of 3.8 percent during the same period of 2003. Exports to the U.S., believed to have reached $1 billion in 2004, were mainly goods produced in the Qualified Industrial Zones (QIZs). The U.S. has become the largest market for Jordanian products, accounting for around 27 percent of Jordan's total exports. Iraq came second with 17.5 percent, followed by India with 6.3 percent and Saudi Arabia with 5.7 percent. Imports on the other hand rose by 36.2 percent in the first ten months of the year, compared to an increase of 6.9 percent in the same period of 2003. The surge in imports was underpinned by robust domestic activity and consumption demand, a rise in oil prices, an increase in the cost of euro- and yen-denominated products, as well as a growth in re-exports to Iraq.
The construction sector, which recorded strong growth in 2003, continued to rise last year as well. The growth in this sector is attributed to the large number of infrastructure projects being implemented and the rising number of housing and apartment buildings under construction. The area approved for residential and commercial construction rose by 21.1 percent in the first ten months of the year, while the total number of transactions for selling land, apartments and other real estate reached 97,000 by the end of October 2004, compared with 82,000 for the whole of 2003. The construction sector has strong forward and backward linkages with other sectors of the economy (building material, furniture, consumer durables, etc.) and has therefore had a positive impact on growth elsewhere in the economy.
A strong recovery was recorded in the tourism and transport sectors with visitors mostly from the Gulf and Iraq dominating the flow. Major hotels in Amman reported average occupancy rates of more than 70 percent in the first ten months of the year. It was a record year for Royal Jordanian Airlines in the terms of cargo and number of passengers, as well as profitability. The instability in Iraq encouraged Iraqis to operate out of Jordan. The kingdom became the gateway to and from Iraq with surging re-exports to that country, and with many Iraqis buying apartments and residing in Jordan. Telecom and information technology also did quite well, and so did services such as banking, medical care, education in private universities.
The solid rise in real estate prices, up in certain areas of Amman by around 35 percent last year, and the higher stock prices, with the market index surging by 62.4 percent in 2004, boosted the "wealth effect" of consumers and reflected positively on their consumption and investments expenditures. Rapid expansion in consumer loans, sizable remittances estimated at $2.5 billion in 2004, and higher expenditures by Iraqis living in Jordan also supported growth in domestic consumption.
The government revealed an expansionary budget for 2005, with total expenditures at JD 3,330 million, up 10.7 percent from the estimated actual spending in 2004 of JD 3,007 million. Current expenditures, which account for 76.4 percent of total expenditures and include wages, pension and interest payments, are set at JD 2,545 million, rising by 10.2 percent over last year's actual level. The growth in current expenditures in this year's budget are mainly geared to cover increases in pension payments and additional wages and salaries resulting from the raise in wages of civil servants in education, health and justice ministries, and the creation of new ministries and higher councils. Domestic revenues are estimated to grow by 8.2 percent to JD 2,000 million due to the envisaged economic growth in 2005 and the improved tax revenues, while foreign grants are forecast to rise by 35.2 percent to JD 1.06 billion.
This means current expenditures in this year's budget would exceed domestic revenues by 27 percent, a discomforting state of affairs as the government will once again be depending on aid and borrowing to finance more than one quarter of its current expenditures. It is unfortunate that this year's budget did not exhibit the fiscal discipline needed to put a freeze on current expenditures before reducing it gradually in the coming years to a level that does not exceed domestic revenues. Raising taxes to boost domestic revenues is not considered as a viable alternative. On the contrary, it could back fire given the high level of taxation in the country.
Capital expenditures, which include this year the JD 161 million earmarked for the social and economic transformation plan, are budgeted to increase by 12.6 percent on last year's actual level to JD 785 million. The budget is forecast to run a deficit of JD 270 million, which accounts for 3.3 percent of estimated GDP for 2005. The government envisaged a budget deficit of JD 293 million (3.9 percent of GDP) in 2004, but the actual deficit dropped to JD 277.8 million (3.6 percent of GDP).
Notwithstanding the strong economic growth conditions, Jordan remains highly indebted and will continue to depend on foreign grants for several more years in order to keep the government's budget deficit within safe financing limits. Jordan's domestic and external public debt dropped by 1.4 percent to JD 7 billion at the end of October 2004, from JD 7.096 billion at the end of 2003, accounting for 89.7 percent of the Kingdom's estimated GDP for 2004. The outstanding external debt at the end of October stood at JD 5.28 billion or 68.9 percent of the GDP for 2004 while the outstanding domestic debt stood at JD 1.718 billion representing 22.4 percent of the GDP.
The favorable macroeconomic conditions were underpinned by sound monetary policy. Allowing interest rates on the dinar to move in tandem with those on the dollar helped support stable JD exchange rate vis-a-vis the U.S. currency and encouraged capital repatriation. Foreign reserves at the Central Bank are at an all time high of close to $4.8 billion and the country's competitiveness remain adequate as evidenced by the robust export performance in recent years. The current fixed peg to the dollar is a natural anchor, given that much of Jordan's external current account inflows (aid, remittances, exports of phosphates, potash etc.) are all dominated in dollars or in currencies linked to dollar. The Central Bank should also be commended on its supervision of the banking sector, considered to be among the better regulated in the region, and on allowing leading Arab banks to have a presence in the Jordanian market.
Today, Jordan enjoys internal security and stability, has a free market oriented economy, an attractive investment climate, an advanced judiciary system, a world class infrastructure and communication, qualified and competitive human resources, a developed banking sector, and one of the most advanced and well regulated capital markets in the Middle East. This is why the kingdom is now well placed on the radar serene of investors both domestically and from abroad.
Henry T. Azzam is Chief Executive Officer at Jordinvest in Amman
Henri T. Azzam
The Daily Star