Improving bank capitalization
AFTER 15 YEARS of IMF-directed reforms, Jordan's economy looks ready to stand on its own two feet. With the completion of its latest stand-by arrangement in July 2004, the country has now officially graduated from a series of Fund-supported programmes. The IMF's role will be scaled back to one of macroeconomic policy monitoring and the provision of technical assistance.
Jordan was forced to turn to the IMF after a severe financial crisis back in 1988, caused by military overspending as the country attempted to modernize its army. By the time the Fund stepped in, the Jordanian dinar had lost half of its value, gold reserves had dropped to zero, the budget deficit had reached 24% of GDP, inflation was out of control, and unemployment had skyrocketed to 30%.
In return for substantial loans, the IMF demanded that Jordan implement far-reaching economic reforms. The tax system was overhauled and a sales tax introduced, subsidies on utilities and food staples were abolished, the Jordanian dinar was further devalued, and several public utilities were privatized. In 1993, Jordan rescheduled $895 million of its debt to the London Club of commercial creditors.
Looking back at a decade and a half of IMF-guided economic development, Adel Satel, general manager at Moody's Investors Service, concludes: "Years of reform and sound economic policies have pulled Jordan out of the chronic economic slump that characterized the 1990s." GDP growth rates have now picked up, and finance minister Mohammed Abu-Hammour (pictured) tells Euromoney: "We expect that real GDP growth will be 5.5% and 6% in 2004 and 2005 respectively." He adds: "The key growth sectors in the Jordanian economy include transport, storage and telecommunications; manufacturing; finance, insurance, real estate and business services; and producers of government services."
In a July statement, Anne Krueger, the IMF's first deputy managing director, noted that "Jordan's economic performance has strengthened and its outlook improved substantially in the aftermath of the war in Iraq, supported by prudent macroeconomic management."
She added: "The combined effect of surging exports, rebounding domestic demand, and a revitalized tourism sector has led to a strong recovery in real economic activity in the first quarter of 2004. The track record of sound macroeconomic management, trade liberalization, and reforms on multiple fronts have transformed Jordan into a dynamic economy led by the private sector."
The government is committed to cutting public debt and pursuing structural and legal reform. In addition, Jordan is politically stable. After more than five years in office, King Abdullah is popular, even if political liberalization has not been pursued with quite the same vigour as economic reform.
Crucial to the latter has been the privatization programme, which Satel considers one of the best organized in the region. "When you look around at what has been privatized in Jordan," he says. "It is far superior to what has occurred elsewhere in the Middle East."
Jalil Tarif, CEO of the Amman Stock Exchange (ASE), notes that the privatization of Jordan Telecom was particularly successful. It was partly privatized in 2000, with 40% of the company's shares sold to a France Telecom/Arab Bank consortium under the former's management. Some 26.5 million shares were then sold publicly in Jordan Telecom's 2002 IPO.
Tarif says: "Government ownership of both listed and non-listed companies has dropped from around 17% at the end of the 1990s to less than 6% today." Privatization receipts totalled more than JD1.3 billion ($1.8 billion) in 2003, and the programme is set to continue. The government is said to be looking to sell a majority stake in the state-owned Central Electricity Generating Company and Aqaba Railway Corporation, and fully privatize two electricity firms.
Inflation has been kept under control via the Jordanian dinar's peg to the US dollar, which is set at a rate of $1.41. Despite US calls for the introduction of a flexible exchange rate regime – to help US importers of Jordanian goods – the IMF has warned that such a move would be premature. The authorities have the sort of level of reserves necessary to defend the peg, and the policy rationale behind it is to maintain macroeconomic stability and confidence in the currency. David Cooling, sovereign ratings analyst at Standard & Poor's, argues that "under the fixed exchange rate regime, the central bank has achieved better price stability than its peers on a BB rating".
Jordan is also benefiting from substantial investment in education and healthcare, and boasts a large, highly educated workforce. Per capita income and the general standard of living are improving at an annual rate of about 2.2%, and the government has set in action an Social and Economic Transformation Plan (SETP). This focuses on investing in human resources, increasing privatization and investment in major infrastructure projects, and creating an accountable and transparent legislative and monitoring environment. According to Azzam Shweihat, chairman of the American Chamber of Commerce in Jordan: "A key attraction to foreign investors is the excellent pool of educated manpower, capable of receiving high-level technical training and engaging in modern high-tech and soft industries."
Benefiting from US trade agreement
A key aim of the SETP is to cut unemployment via vocational training schemes and the creation of jobs in labour-intensive industries such as tourism and IT. Unemployment officially stands at 14% and mostly affects young men. A population growth rate of around 2.8% does not help the situation.
Jordan has benefited enormously from its accession to the World Trade Organization and the signing of a free trade agreement with the US, both of which took place in 2000. Exports to the US, Jordan's most important trading partner, are now worth about $600 million annually. The country has also signed an association agreement with the European Union, which brings preferential access to the European market, and has gained privileged access to a number of regional economies via the Arab Free Trade Agreement.
Shweihat believes that: "The Jordan-US Free Trade Agreement has been the centrepiece of Jordan-US investment and trade relations since its signing in October 2000. It provides many incentives to US and Jordanian investors, especially in tariff elimination on trading in goods, liberalized trading in services on both sides, opportunities in electronic commerce and digitized products, and unmatched flexibility in rules of origin applications." He adds that the FTA "has been a point of attraction for US and Jordanian investors and businesses in terms of building business linkages, creating joint ventures, and establishing a US regional presence in the Jordanian market".