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Upgrading Jordan's economic growth outlook

We are upgrading Jordan's economic growth outlook for 2004. Economic activities across sectors picked up momentum in the first quarter, with real GDP growth hitting a record 6.9 percent (10.7 percent in current prices), compared to 2.8 percent (4.1 percent in current prices) in the first quarter of 2003.

It is clear that Jordan's economy has recovered from the disruptions caused by the war on Iraq and is projected to post a real growth rate for the year as a whole of more than 5 percent.

Given such economic growth and with a population growth rate close to 2.8 percent, per capita income and the general standard of living of Jordanians must be improving at around 2.2 percent in real terms, the highest rate since the early 1990s.

The return of confidence to the domestic scene, expansionary fiscal and monetary policy, the continuing surge in exports, the availability of excess liquidity in the banking system, the rise in consumer lending, higher remittances from Jordanians working abroad and international financial aid is contributing to its strong economic performance this year.

All economic sectors performed well in the first quarter. The best performer was the manufacturing sector, which grew by 17.1 percent compared to 0.9 percent in the first quarter last year. Exports to the US, especially from the Qualified Industrial Zones, surged by 41 percent in the first quarter to reach $229 million, up $90 million over the first quarter figure for 2003. Exports to the US are forecast to reach $750 million this year, more than 22 percent of the country's total exports. The volume of Jordanian exports to Iraq did not only recover in the first quarter but exceeded the level that prevailed in the first quarter of 2002, before the war on Iraq. The Iraqi market will account for around 18 percent of total Jordanian exports.

Others sectors doing well include construction, tourism, telecommunications, banking and finance, retail and wholesale trade, utilities, government and other services. The construction sector, which recorded strong growth last year, continued to rise this year as well. The growth in this sector is attributed to the large number of infrastructure projects currently being implemented and the rising number of housing and apartment buildings under construction. The area approved for residential and commercial construction rose by around 42 percent in the first quarter to reach 2.178 million square meters. The surge in construction activities was supported by strong demand from Jordanians and Arabs, especially Iraqis, after the laws were changed to allow non-Jordanians easier access to the kingdom's real estate sector. The construction sector has strong forward and backward linkages with other sectors of the economy (building material, furniture, consumer durables, etc) and is therefore having a positive impact on growth elsewhere in the economy.

A strong recovery was recorded in the tourism and transport sectors with visitors, mostly from the Gulf and surrounding Arab countries, dominating. Major hotels in Amman reported average occupancy rates of more than 70 percent in the first five months of the year. It was a record first quarter for Royal Jordanian Airlines in terms of cargo and number of passengers. The instability in Iraq encouraged companies operating there to relocate staff to Jordan. The kingdom became the gateway to and from Iraq and re-exports to that country surged. Telecoms and information technology also did quite well, as did services like banking, medical care, education and private universities.

The rise in real estate prices, up in certain areas of Amman by around 25 percent in the past six months, and the higher stock prices, with the market index up 6.9 percent since the beginning of the year, boosted the "wealth effect" of consumers and should reflect positively on their consumption and investment expenditures. Rapid expansion in consumer loans and higher remittances, expected to reach $2.5 billion this year, are also supporting the growth in domestic consumption.

Saudi Arabia has extended for another year an oil grant of 50,000 barrels per day (bpd) to Jordan, which expired in the first week of April. This will have a positive impact on the economy. Talks are under way between Jordan and both Kuwait and the UAE to convince them to renew their oil grants, which total 25,000 bpd each. The Jordanian government has raised the price of fuel in a bid to control the budget deficit and the higher cost of oil. Sales tax was also increased by 3 percent to 16 percent as of April 1, 2004. This helped boost government revenues but contributed to the higher inflation rate. The average cost of living index in the first four months of 2004 was 3.6 percent higher than in the same period for 2003, and inflation this year is likely to exceed that of last year. Those working in the public sector, mostly living on fixed salaries, are feeling the impact of higher taxes and rising prices.

Jordan will continue to peg the Jordanian Dinar (JD) to the dollar at the fixed rate of $1.41, given that foreign reserves at the central bank are at an all time high of close to $4.8 billion and the country's competitiveness remains adequate, as evidenced by its recent robust export performance. The fixed exchange rate regime has served Jordan well and encouraged capital repatriation. The current peg to the dollar is a natural anchor, given that much of Jordan's external current account inflows are denominated in dollars or in currencies linked to the dollar.

Notwithstanding the improving trends, Jordan remains highly indebted and foreign grants will continue to be required for several more years to keep the government's budget deficit within safe financing limits. Jordan's domestic and external public debt dropped by 4.6 percent to JD6.77 billion ($9.5 billion) at the end of April this year, from JD7.096 billion ($9.99 billion) at the end of last year. However, both amounts represented 89.7 percent of the Kingdom's estimated GDP. The outstanding external debt at the end of April stood at JD5.19 billion ($7.3 billion) or 68.8 percent of GDP for 2004 while outstanding domestic debt stood at JD1.58 billion ($2.2 billion), 20.9 percent of GDP.

Jordan's prospects look promising in light of the serious economic and legal reforms introduced in the past few years and the bold and enlightened leadership of King Abdullah. Jordanian companies stand to benefit from reconstruction and rehabilitation opportunities in Iraq in the months and years ahead. Capital Intelligence recently upgraded Jordan's long term outlook from BBB- to BB citing a decline in government indebtedness, a rise in foreign reserves, improved economic growth prospects and a commitment to economic reform.

Jordan enjoys internal security and stability, has a free market oriented economy, an attractive investment climate, an advanced judiciary system, world class infrastructure and communications, qualified and competitive human resources, a developed banking sector, and one of the most advanced and well regulated capital markets in the Middle East. This is why Jordan is now highly regarded by both domestic and foreign investors.

Beirut,06 28 2004
The Daily Star
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