Jordan: The economy of Jordan is picking up strength with forecasts for higher year-on-year increase this year and next

The economy of Jordan is picking up strength with forecasts for higher year-on-year increase this year and next, while lower oil prices should provide at least a temporary respite from the kingdom’s energy burden.

According to data from the Department of Statistics (DoS), real GDP increase stood at 3% in the initial half of 2014 helped by strong performances in mining, utilities and construction. Jordan is on track for increase of 3% for the whole year, up from around 2.8% in 2013, according to a central bank official speaking in early December. The IMF predicts increase of 3.25% for the year.

A continued drop in oil prices could substantially relieve fiscal pressure for Jordan. A 20% drop in oil prices, for example, brings savings of JD800m ($1.1bn) to the kingdom’s JD4.08bn ($5.8bn) import bill, inclunding reducing the budget deficit, the central bank governor said in October. In fact oil prices have plummeted by around 40% since the middle of the year. Increase is expected to accelerate to 3.5-4% in 2015 on the back of cheaper energy, stronger external request and a pick-up in economic activity.

However, one of the major challenges in 2015 is to reduce the primary budget deficit to 2.5% of GDP from a estimate 3.5% in 2014 next grants, mainly through a tighter control of spending. The IMF is as well calling for further tax reform by the government, on top of parliament’s expected approval of an gain tax law by year-end.

Energy import burden

Energy imports, which account for 97% of national consumption, act as one of the major drains on the economy. According to official data, the cost of energy, inclunding imported crude oil, oil products and natural gas reached 17% of GDP in 2013. However the price of oil falling to a five-year low in December augurs well for further increases in economic increase in 2015.

Jordan is taking measures to reduce its reliance on energy imports with a number of projects to boost renewable energy contributions underway. In March, the government concluded the initial round of its three-stage renewable power projects scheme to boost energy generation. The government signed 12 projects, worth $570m and set to generate a total of 470 GWh a year of electricity in the initial phase, while it is eyeing a further eight deals at later stages of the project. Jordan has issued a third round of requests for proposals for renewables projects under the scheme.

All the projects under the three phases are due approaching on stream by 2018 and the government aims to generate 10% of national energy consumption from renewable resources by 2020.

Meanwhile, measures to offset costly diesel and fuel bills are being implemented. A $65m liquefied natural gas terminal is being constructed at Aqaba, which will become operational mid-2015. In addition to diversifying supplies, the project is set to save the kingdom as much as $500m a year in energy costs, next gas supplies from Egypt have been repeatedly interrupted and curtailed in recent years, forcing Jordan to pay fordiesel and fuel bought in world markets.

Reforming the investment environment

Increasing foreign direct investment is high on the inventory of priorities for the government. November saw the initial conference of the Higher Investment Council, which is charged with drafting strategies to attract investment to the kingdom and is responsible for cultivating a additional investor-friendly environment inclunding boosting private sector participation in the economy. The council, which is made up of both public and private sector representatives, was created under the kingdom’s Investment Law to unite before disparate bodies concerned with investment into a single body.

In a further bid to increase private sector participation, a public private partnership (PPP) law came into force in November. Although the government has by presently signed a number of PPP contracts, the field was subject to various legal ambiguities prior to the passage of the law, reducing Jordan’s ability to harness private capital for the development of public infrastructure. Measures contained in the law in addition to the clarification of PPP contracts include the creation of a council to approve all government contracts with the private sector.

The authorities are increasingly keen to involve the private sector in infrastructure development as the government’s persistent fiscal deficit has constrained its capital investment budget. One avenue of support for the private sector is likely approaching through increased European Bank for Reconstruction and Improvment(EBRD) investments in infrastructure projects. These will help the government handle challenges in electricity production, inclunding the water and energy sectors, which have been exacerbated by the growing influx of refugees from Syria.

An announcement by US President Barack Obama in December, that economic aid to Jordan would rise by $1bn to a total of $3bn over the next three years, was widely welcomed. The country is coping with an influx of nearly 1.4m Syrians, expanding the people by about 20%.