T he Economy of

Jor dan:
Pr oblems and Solutions
Presented by

Dr. Ohan Balian

May 03, 2010

Amman
Outline

 Global and regional growth

 Economic indicators
 The “Twin-Deficits”
 Stabilization policies
 Banking supervision
 Industrial policy
 Conclusion

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1. Global and regional growth
Global growth

 Global GDP fell by 2.2% in 2009 (World Bank: Global Economic

Prospects 2010)

 Never such a fall since the Great Depression in

1929-1933
 Caused by the bursting of the real estate and stock
market bubbles
 These bubbles were caused by low interest
rates/leveraging
 A ‘liquidity trap’ situation

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1. Global and regional growth
(contd…)
Regional growth
 Regional growth rates, especially in GCC, at 3.2% in 2009 (United
Arab Economic Report 2009)
 Relatively low compared to 6.3% in 2007 and 5.9 % in 2008
 Price of oil fell from $96 in 2008 to $60 in 2009 which caused
GCC GDP to fall by 30% - from $1.2 trillion in 2008 to $835 billion
in 2009
 Inflation also fell sharply from an average of 11% in 2008 to 2% in
2009
 GCC and Arab countries are expected to grow by 5.2 % in 2010
(World Bank: Global Economic Prospects 2010)
 Jordan has very strong links with the GCC countries in terms of
remittances, trade, grants, and FDI

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2. Economic indicators
Source: IMF Consultations Article IV 2009

 GDP (nominal) $22 billion

 CPI inflation 4%
 Investment 27.8% of GDP
 Consumption 23.3% of GDP
 Savings 17.0% of GDP
 S/I balance -10.8% of GDP
 Gov revenue 32.4% of GDP
 Gov exp 37.7% of GDP
 Budget Deficit -5.3% of GDP
 Exports of goods $6.8 billion
 Imports of goods $13.7 billion
 Trade balance -$6.9 billion
 Current account -$10.8 billion

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3. The “Twin - Deficits”

 Internal (budget) and external (trade) deficits

 In 2009, budget deficit was 5.3% of GDP and trade
deficit was 6.9% of GDP
 The implications of the twin-deficits is that it will
eventually lead to higher interest rates and therefore
reduce the rate of growth
 The budget deficit is expected to increase to over 7%
of GDP in 2010 caused by expansionary fiscal policies
 The trade deficit is expected to improve slightly but will
be below its long-term trend because of weak growth
prospects regionally

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4. Stabilization policies
Monetary and Fiscal policies

 Short-run policies to generate economic growth

 The fixed exchange rate with the $US closely
links the US interest rate (low) with the interest
rate in Jordan
 The increasing deficit in the budget limits the
scope for expansionary fiscal policies
 Both of these phenomena – the link with the
US interest rate and the limited scope of fiscal
policy – reduce the “degrees of freedom” of the
Jordanian Authorities to conduct stabilization
policies
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4. Stabilization policies (contd…)
Monetary and Fiscal policies

 Nevertheless, the authorities have succeeded in reducing fiscal

spending considerably with further easing of liquidity
 Very limited room for counter-cyclical fiscal policy - i.e. not able
to use expansionary fiscal policies by increasing gov
expenditures
 Most of the fiscal policies will be conducted on the spending
side – e.g. freeze of public sector wages and reductions in fuel
and food subsidies
 Monetary policy (expansionary) is more feasible because of low
inflation (about 4% compared to over 10% in 2008)
 Lower policy rates and reductions in reserve requirements to
encourage lending and increase the money supply, in turn
increasing aggregate demand

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5. Banking supervision

 Banking system not affected much by the financial crisis

 Primarily because of active supervision by the Central
Bank of Jordan which has insulated the Jordanian
banking system from exposures to troubled
international banks, structured financial products, and
from wholesale financial markets
 This has allowed for a high build-up of international
reserves (about $10.2 billion)
 Bank deposits have also increased substantially with
comfortable liquidity positions and low NPLs
 And coming from Dubai, Jordanian banks have very
little exposure to Dubai debt!

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6. Industrial policy

 Role of government has been increasing due to the global

slowdown. This intervention is known as Industrial Policy
 But industrial policy should be conducted in the ‘right’ way
using targeted gov support programs
 ‘Embedded Autonomy’ – i.e. close relationship with the private
sector without the gov losing its autonomy
 Various ‘Principles’ need to be taken into account when
designing effective industrial policies
 This was the method used by the ‘Asian Tigers’ in the 1970’s
and some GCC countries – clustering, free zones, support to
SMEs, etc.
 There have been suggestions that the recent crisis in Dubai
was partly caused by inappropriate industrial policies.

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7. Conclusions

 Given Jordan's strong links with the GCC (in terms of

remittances, trade, grants, and FDI), the prospects in the
short to medium terms look good as economic recovery in
GCC countries takes strength.
 Very limited room for fiscal policy as the deficits (internal
and external) are high which will put upward pressure on
interest rates and thus hold back growth.
 But global recovery (although weak) is expected to reduce
the trade deficit, and fiscal consolidation on the spending
side should at least prevent the budget deficit from
increasing further.
 Industrial policies should be more targeted taking into
account best practice design principles in designing the
institutional framework of such policies.
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