Jordan has endured a demanding few years in light of the challenging political and security environment in the Middle East. However, a series of policies introduced by the Central Bank of Jordan and the country's government are already making headway in tackling these challenges.
Most economies are still finding it difficult to overcome the negative consequences of the global financial crisis. It has changed the global economic environment; economic growth is still going through a downward spiral, while the foundations of monetary policy and financial stability are constantly challenged. Massive stimulus programmes were adopted to mitigate the downturn, but that could not prevent some economies from slipping into a deep recession. Policy rates rapidly hit the zero lower bound and large swings in capital inflows complicated macroeconomic management. As a result, new monetary policy tools were introduced to remedy the economic problems.
In Jordan, as was the case elsewhere around the world, the global financial crisis and regional turmoil had a significant impact on economic growth and macroeconomic stability.
During the past few years, a number of global and regional factors adversely impacted economic activity in Jordan. These include weakening global demand in the aftermath of the global financial crisis, regional turmoil since the breakout of the Arab Spring and the rise of extreme militant groups, which have fuelled conflict in the Middle East. These regional factors affected Jordan by significantly increasing the cost of energy due to repeated interruptions to Egypt's gas flows, the increasing burden of accommodating large numbers of Syrian refugees and the disruptions of the land freight and transit routes. These challenges posed serious threats to the economy and questioned its capacity to preserve a steady pace of economic growth in this volatile region.
These challenges have resulted in a deterioration of the fiscal and external positions of the economy and heightened the pressure on the Central Bank of Jordan’s (CBJ's) reserves buffers.
Cost of conflict
These events have led to the importing of costly energy substitutes to counter the decline in gas flows from Egypt, with the inevitable result of inflating government subsidies on electricity and petroleum products. Moreover, the inadequate international support to Jordan in hosting Syrian refugees contributed to increasing the fiscal burden, resulting in an increase in the budget deficit from 6.8% of gross domestic product (GDP) in 2011 to 8.3% of GDP in 2012, and increasing public debt from 65% of GDP in 2011 to 75.5% of GDP in 2012. In addition, the current account deficit widened from 10.2% of GDP in 2011 to 15.2% of GDP in 2012 before shrinking in 2013 and 2014.
Foreign direct investment (FDI) flows declined due to growing regional uncertainty, which had created additional pressures on official foreign exchange reserves. These decreased significantly to $6.6bn at the end of 2012 before rebounding. As a result, economic growth slowed to reach an average of 2.6% between 2010 and 2013, compared with an average of 6.5% over the previous decade. The first quarter of 2014 witnessed a reversal of trends with economic growth up 3.2%, while unemployment rates remained above average for the Middle East and north Africa (MENA) region.
To address these challenges, the government instigated a national reform programme to correct the internal and external imbalances by adopting fiscal consolidation measures and other structural reforms. This programme was supported by a $2bn stand-by arrangement from the International Monetary Fund to remedy the fiscal and external imbalances while strengthening growth prospects, thus promoting macroeconomic stability.
As part of the programme, the government took measures to correct these imbalances and sustain the fiscal position. The most prominent measure was the elimination of fuel subsidies, replacing them with targeted cash transfers to vulnerable parts of the population, making Jordan the first among the MENA countries to take such effective measures. As a result, the fiscal deficit declined to 5.5% of GDP in 2013 compared with 8.3% in 2012. Moreover, the current account deficit declined from 15.2% in 2012, to 10% in 2013, and it is projected to decline further this year.
Monetary policy
On the other hand, the CBJ introduced a monetary policy framework that is based on a set of new instruments, including weekly and monthly repurchase agreements through auctions to manage liquidity and to guide interest rates in the interbank market. CBJ also incorporated outright open-market operations that enable it to buy and sell government securities in the secondary market with the aim of managing liquidity in line with market conditions at its discretion. In addition, the CBJ allowed banks, at their discretion, to conduct currency swap contracts with the CBJ to provide the needed liquidity in local currency to banks.
The new monetary framework helped the Jordanian economy withstand several nominal shocks and has since sustained the objectives of price and financial stability. After a severe decline in official foreign reserves and an increase in the dollarisation ratio in 2012, which reached 24.8%, reserves have been rebuilt to a comfortable level and dollarisation is quite low today. The foreign reserves buffer reached $14.4bn at the end of July 2014 compared with $6.6bn at the end of 2012. Moreover, inflation rates are stable and at a reasonable level, reaching 3.2% during the first seven months of 2014. Looking forward, we are trying to turn challenges into opportunities.
Reform programme
The adoption of a four-year national reform programme came as a necessity to the economy to counter the challenges that we faced, but we felt the need for a long-term national plan to bolster growth. Thus, the government, under the directives of his majesty [King Abdullah II], is working now on a 10-year plan (Vision 2025) to have a clearer vision about the structural reforms that we need to implement to overcome a number of growing challenges and improve the living conditions of Jordan’s citizens. The key issues that this plan will address are human resource development, social development, economic development, de-centralisation and development under the governorate level.
It aims to deepen structural measures to enhance competitiveness and improve the business environment, redirecting trade towards today’s growth engines, attracting foreign direct investment, exploiting the potential for intra-regional trade, and promoting Jordan as a safe haven for business in the region.
We are working on a comprehensive strategy to achieve these objectives. We view Vision 2025 as a unique opportunity to consolidate proposed policies and best practice within an overarching macroeconomic framework. The Vision 2025 strategy, to be completed by the end of the year, aims to build synergies between line ministries, donors and civil society. To avoid duplication, it is built on recent sectoral studies, including in energy and water, and coordinated with the World Bank’s ongoing work on systematic country diagnostics to identify constraints to inclusive growth and poverty reduction. As implementation is key, there will be semi-annual updates on interim milestones in priority reforms.
Ziad Fariz is the governor of the Central Bank of Jordan.
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