Jordan looks to grow its way out of economic hardship

New set of measures in budget aimed at boosting private sector activity and jobs

Jordanian youth rest on stairs in downtown Amman, Jordan, Saturday, March 26, 2016. (AP Photo/Muhammed Muheisen)
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For three years, Jordan, one of the Middle East’s smallest economies, has pursued an austerity programme as the resource-scarce kingdom faces the twin challenges of dealing with a high debt burden and hosting more than one million refugees.

Now, the country, which has historically relied of foreign aid and grants to finance its budget, has rolled out a stimulus package that pivots to a new ‘growth-focused’ policy that seeks to revive the economy.

“The most difficult reforms are behind us and the promising future lies ahead,” King Abdullah II said in his opening speech to parliament last month, heralding in the government’s new approach.

In response to growth dipping below 2 per cent this year and unemployment reaching 19.2 per cent in the second quarter of 2019, according to the World Bank, the government has introduced over the last month a multiphase package designed to stimulate industry, investment, real estate, job creation and exports.

As part of the measures, the Jordanian government has issued a guarantee that tax incentives and regulations agreed with external investors will be locked for a 10-year period and not be subject to change — a welcome relief those who say investment policy has changed abruptly with the carousel of seven governments over the past nine years.

To bolster industry, which accounts for 20 per cent of Jordan’s GDP, the government lowered electricity tariffs for the sector by 0.01 Jordanian dinars (Dh0.05) per kilowatt-hour, from 0.085 dinars per kW/h to 0.075 dinars, out of recognition that energy costs now account for 40 per cent of production costs.

The government also lowered income tax on small and medium enterprises to 17 per cent, from 20 per cent.

In a bid to wean the country off its reliance on an estimated 900,000 guest workers, the cabinet also introduced an incentive worth 240 dinars for every foreign worker replaced with a Jordanian.

The growth-focused package also turned to real estate, a sector which has witnessed a 20 per cent downturn in 2019, by waiving property registration and transfer fees for first-time homebuyers and reducing such fees on all transactions by 50 per cent until the end of the year.

To help consumers, the government gave public sector employees their first salary raise in a decade, increasing payments to government employees and civil and military retirees by an average of 20 dinars per month.

The stimulus package has been costly. The incentives are expected to add an estimated 300 million dinars to Jordan's budget deficit, pushing it to 1.2 billion billion dinars for 2020 at a time when Amman is attempting to cut public debt. It is also negotiating the renewal of a three-year credit line from the Washington-based lender worth $713 million (Dh2.6bn).

Yet the government is billing the stimulus as an investment to “grow the Jordanian economy".

There are already early signs of success; after 10 months of downward returns, the real estate sector witnessed a 90 per cent year-on-year increase in transactions in November 2019.

Analysts have particularly praised the government’s assurances to local and international investors, some of whom were heading to more attractive environments in nearby Turkey and Egypt.

“This gives investors confidence that the government won’t change the policy suddenly when the government itself changes in two years,” says Zayyan Zawaneh, economic analyst and former adviser to the governor of the Central Bank of Jordan.

The IMF has agreed with the Jordanian government that the “priorities for the coming years are to maintain economic stability, boost growth, create jobs and strengthen social protection,” as it continues talks for a new three-year funding deal, citing the kingdom’s “important progress in maintaining economic and financial stability”.

Yet economists and business leaders question whether the stimulus package represents the deep shift in economic policy needed to stimulate growth and bolster government revenue in the medium to long-term.

“After seven years of IMF policy, we did not secure economic growth as expected — growth remains at 2 per cent and it is time for the government to realise it is time for a new approach,” says Jawad Anani, former royal court chief who served as deputy prime minister for economic affairs from 2016-17.

“The total preoccupation with the budget deficit made the government budget-focused to the point where it became growth-blind,” he said.

Amman Chamber of Industry points out that many of the reductions are a return to the status quo two years ago, but may not necessarily be enough to revive certain sectors.

“This is one positive step in the right direction — no government has ever introduced a stimulus package before — but we need more than a status quo, we need to address fuel costs, energy, and accessing markets,” says Musa Saket, vice chairman of the Amman Chamber of Industry and an economic analyst.

The largest obstacle in Jordanian economic policy, analysts and business leaders agree, is its continued reliance on sales tax for the bulk of its revenue.

Currently 65 per cent of all government tax receipts, and half of its total revenue, comes from sales tax.

In comparison, despite recent increases, income tax accounts for 20 per cent of tax revenue and 16 per cent of overall government revenue.

Analysts say the reliance on sales tax has left the government vulnerable to local market volatility.

“The problem is, when the market declines or purchasing power declines, government revenues decline,” says Mr Zawwaneh, the economist. “This is what is happening right now.”

The average Jordanian citizen pays 26 per cent of his or her income in taxes according to government statistics released last year, but wages have remained largely stagnant over most of the past decade, while various developments such as rising energy prices and the influx of over one million Syrian refugees has seen prices rise across all sectors.

“We are glad to get a raise, yes, but it is not commensurate with the cost of living,” said Murad Munir, a government clerk in Amman, who saw his salary increase by 20 dinars, to 420 dinars a month.

“If the government lowers sales tax or reviews the tax system so those at the top pay more, that will be a true relief for us.”

The Amman Chamber of Industry and the Jordan Chamber of Commerce say that by being required to pay sales tax to the government up front each year before a single commercial transaction is made, capital and liquidity are tied up, preventing small and medium enterprises from expanding.

The Jordan Chamber of Commerce has also urged the government to amend a system which requires importers and traders to pay not only customs fees based on the value and classification of goods, but also a separate fixed 5 per cent customs fee and an additional 6 per cent “customs declaration fee” on each shipment.

The commercial sector says it has carried a disproportionate burden of austerity measures; The Jordan Chamber of Commerce says that SMEs in the non-industrial and non-financial sectors now pay 3 billion dinars each year in sales tax directly to the government, 780 million dinars in income tax and 265 million dinars in customs tax.

Mohammed Awad once sold Turkish-made men’s and women’s clothing under a now-defunct free trade agreement between Amman and Ankara and now imports overstock and irregular apparel sold in bulk from the US, UK and Europe. He says he is struggling to sell imports at cost prices.

“The government has provided a few incentives to foreign investors and large industries — but the shopkeeper like me are waiting for our turn,” says Mr. Awad

Razzaz has pledged that the government will “crack down on tax evasion”, and will work on tightening loopholes for income tax dodging as well as reviewing the entire tax system in the months ahead.

“We Jordanians have been used to economic dark days,” Mr. Awad says as he gestures to his unlit Amman storefront. “We are waiting and hoping to see the sun.”