96822 jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Preface The Jordan Economic Monitor provides an update For information about the World Bank and its on key economic developments and policies over activities in Jordan, including e-copies of this the past six months. It also presents findings from publication, please visit www.worldbank.org.jo. recent World Bank work on Jordan. It places them in a longer-term and global context, and assesses To be included on an email distribution list for the implications of these developments and other this Jordan Economic Monitor series and related changes in policy for the outlook for the country. publications, please contact Nada Abou Rizk Its coverage ranges from the macro-economy to (nabourizk@worldbank.org). For questions and financial markets to indicators of human welfare comments on the content of this publication, please and development. It is intended for a wide audience, contact Léa Hakim (lhakim1@worldbank.org) or Eric including policy makers, business leaders, financial Le Borgne (eleborgne@worldbank.org). Questions market participants, and the community of analysts from the media can be addressed to Mona Ziade and professionals engaged in Jordan. (mziade@worldbank.org). The Jordan Economic Monitor is a product of the World Bank’s Global Practice for Macroeconomics & Fiscal Management, (GMFDR) team. It was prepared by Léa Hakim (Economist) and Samer Matta (Economic Analyst), under the general guidance of Eric Le Borgne (Lead Economist) and Auguste Tano Kouame (Global Practice Manager). The Special Focus was prepared by Amir Fouad (Consultant), Peter Mousley (Program Leader), Sahar Nasr (Program Leader) and Laila Abdelkader (Financial Sector Specialist). May Ibrahim (Senior Executive Assistant) provided Arabic translation and Zeina El Khalil (Communications Officer) print-produced the report. The findings, interpretations, and conclusions expressed in this Monitor are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. Data is as of 1 April 2015. Preface | 1 The World Bank Table of Contents Preface......................................................................................................................................................... 2 Executive Summary................................................................................................................................ 4 ‫الملخ�ص التنفيذي‬............................................................................................................................................... 5 Recent Economic and Policy Developments............................................................................ 6 Output and Demand........................................................................................................................................ 6 Labor and Employment.................................................................................................................................... 7 Fiscal Policy...................................................................................................................................................... 8 External Position.............................................................................................................................................. 8 Monetary Policy and Finance......................................................................................................................... 10 PROSPECTS................................................................................................................................................. 15 Special Focus: Access to Finance in Jordan........................................................................... 17 I. Context..................................................................................................................................................... 17 II. Access to finance for MSMEs............................................................................................................... 20 III. Downward trend in access to finance for Jordanian firms........................................................... 22 IV. Ongoing structural reforms and next steps..................................................................................... 28 Data Appendix......................................................................................................................................... 30 Selected Special Focus from Recent Jordan Economic Monitors............................. 31 Selected recent World Bank publications on Jordan..................................................... 33 List of Figures Figure 1. Growth trajectory significantly affected by external shocks yet steadily recovering..................... 6 Figure 2. Jordan outperformed the MENA region in terms of growth rates................................................. 6 Figure 3. In the first three quarters of 2014 net exports drove the growth rate from the production side, …........................................................................................................ 7 Figure 4. … while, construction and mining and quarrying led growth from the expenditure side............. 7 Figure 5. Despite dropping in 2014............................................................................................................ 9 Figure 6. … Unemployment remains a chronic problem............................................................................ 9 Figure 7. Fiscal Balances, both with and without grants, improve.............................................................. 9 Figure 8. Debt-to-GDP ratio has been rising since 2008............................................................................. 9 Figure 9. Trade deficit widened in 2014 due to an increase in energy imports......................................... 10 Figure 10. Current account deficit narrowed despite drop in transfers....................................................... 10 Figure 11. Headline and core inflation are fading....................................................................................... 11 Figure 12. With tobacco and clothing pushing down core inflation........................................................... 11 Figure 13. Lower policy rates did not translate into a parallel drop in commercial bank lending rates....... 12 Figure 14. Investor sentiment still negative................................................................................................ 12 Figure 15 Contemporaneous output gap closing….................................................................................... 14 Figure 16. … yet, cumulative output gap persists....................................................................................... 14 Figure 17. Policy-rate trend in line with cumulative output gap.................................................................. 14 Figure 18. Largest Obstacle to Operations, Jordan (2013), by firm size ….................................................. 18 Figure 19. … by region............................................................................................................................... 18 Figure 20. Access to finance for Jordanian firms by region......................................................................... 23 Figure 21. Access to finance for Jordanian firms by sector.......................................................................... 23 jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Figure 22. Access to finance for Jordanian firms by age.............................................................................. 24 Figure 23. Access to finance for Jordanian firms by size............................................................................. 24 Figure 24. Access to finance for Jordanian firms by gender inclusiveness................................................... 25 Figure 25. For lines of credit requiring collateral, the type of collateral required was:................................ 27 List of Tables Table 1. Financial Soundness Indicators (in percentage unless otherwise indicated)............................... 12 Table 2. Firms Access to Finance in Jordan.............................................................................................. 22 Table 3. Jordan: Selected Economic Indicators, 2012-17......................................................................... 30 List of Boxes Box 1. Output Gap Analysis.................................................................................................................. 14 The World Bank Executive Summary i. Jordan’s economy continues to slowly but iv. On the external sector side, the current steadily recover from the Arab Spring spillovers. account narrowed thanks to robust public and These spillovers include Egypt’s gas disruptions, private receipts. The current account is likely to the neighboring Syrian and Iraqi conflicts and have narrowed from 10.3 to 7.1 percent of GDP associated security incidents. Notwithstanding between 2013 and 2014 due to higher travel and these shocks, real GDP growth rate is estimated government receipts. The trade in goods deficit to have reached 3.1 percent in 2014, up 30 basis slightly widened by 1.3 percent largely due to a points over 2013. From the supply side, growth 6.4 percent rise in energy imports to offset the was led by construction, wholesale and retail trade, disruption in (cheap) gas supplies from Egypt. The and finance and insurance, with a pick-up in the impact of security incidents in Iraq, Jordan’s largest mining and quarrying sector. On the demand side, export partner, was negative but proved to be more growth was predominantly fueled by higher public muted than originally expected as trading continued, investments, mostly due to earmarked GCC grants, albeit under higher costs. and a narrower trade deficit. v. With spare capacity in the economy, ii. The steady economic recovery has inflation decelerating rapidly, and comfortable improved unemployment rates although this reserve indicators, the Central Bank of Jordan masks underlying structural weaknesses. While (CBJ) continued its expansionary stance. Headline unemployment dropped from 12.6 to 11.9 percent inflation dropped to its lowest level since December from 2013 to 2014, this was not driven by increased 2009 while core inflation started decelerating, as employment but by an equivalent and concerning expected, in mid-2014 as temporary supply factors drop in the labor force participation rate. This was waned off. The CBJ’s latest action, on February 3, possibly driven by discouraged workers given 2015, included bold interest rates cuts such as a 100 perceived competition from refugees and limited bps reduction in the overnight deposit window rate. hiring prospects in the public sector given ongoing consolidation efforts. vi. The economy is expected to steadily continue to gather pace as reforms continue while iii. The expanding economy and continued security and oil prices present key downside efforts at fiscal consolidation have resulted in a risks. Real GDP growth is forecast at 3.5 percent lower fiscal deficit. The overall fiscal and primary in 2015 due to stronger private consumption and deficits of the central government (excluding grants investment, in part driven by lower oil prices and and NEPCO losses) narrowed by 1.0 and 1.5 investment projects notably in energy. The debt- percentage points (pp) of GDP respectively during to-GDP ratio is expected to be reduced given the 2014 compared to 2013. This was driven by a growth pick-up and continued fiscal consolidation. (mostly) cyclical improvement in revenue collection Downside risks include exacerbation of the Syrian and contained growth in spending. Gross public debt and Iraqi crises and a higher oil price. increased by 2.9 pp of GDP from end-2013 to 89.6 percent of GDP by end-2014. The recently approved 2015 budget (consistent with the IMF SBA) augurs well for continued fiscal consolidation. 4 | Executive Summary ‫‪jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES‬‬ ‫الملخ�ص التنفيذي‬ ‫العام والخا�ص‪ .‬ومن المقدر �أن يكون الح�ساب الجاري قد‬ ‫ي�ستمر االقت�صاد الأردني بالتعافي من تداعيات‬ ‫‪ .i‬‬ ‫انخف�ض من ‪ 10.3‬بالمئة �إلى ‪ 7.1‬بالمئة من الناتج المحلي‬ ‫ء ولكن على خطى ثابتة‪.‬‬ ‫و بطي ٍ‬‫الربيع العربي على نح ٍ‬ ‫الإجمالي بين عامي ‪ 2013‬و‪ 2014‬ب�سبب ارتفاع الإيرادات‬ ‫ت�شمل هذه التداعيات اال�ضطراب الحا�صل في �إمدادات الغاز‬ ‫الحكومية وتلك المتعلقة بال�سفر‪ .‬وات�سع العجز في تجارة ال�سلع‬ ‫الم�صري‪ ،‬وال�صراع في �سوريا والعراق وما ينتج عنهما من‬ ‫ب�شكل �ضئيل �أي بن�سبة ‪ 1.3‬بالمئة وذلك �إلى حد كبير ب�سبب‬ ‫تطورات �أمنية‪ .‬وعلى الرغم من هذه ال�صدمات‪ ،‬من المقدر �أن‬ ‫االرتفاع في ن�سبة ا�ستيراد مواد الطاقة التي بلغت ‪ 6.4‬بالمئة‪،‬‬ ‫ي�سجل معدل نمو الناتج المحلي الإجمالي الحقيقي ن�سبة ‪ 3.1‬في‬ ‫للتعوي�ض عن انقطاع �إمدادات الغاز الم�صري الأقل كلفة‪ .‬كما‬ ‫ة بالعام‬ ‫المئة في عام ‪� ،2014‬أي بزيادة ‪ 30‬نقطة �أ�سا�س مقارن ً‬ ‫�أن التطورات الأمنية في العراق‪ ،‬البلد الذي يعتبر �شريك الأردن‬ ‫‪ .2013‬ومن جانب العر�ض‪ ،‬فقد نتج هذا النمو عن الحركة في‬ ‫الأول في مجال الت�صدير‪� ،‬أدت �إلى نتائج �سلبية‪ ،‬لكن بقيت تلك‬ ‫كل من قطاع البناء‪ ،‬وتجارة الجملة وتجارة التجزئة‪ ،‬والتمويل‬ ‫التداعيات محدودة على عك�س ما كان متوقع ًا‪ ،‬بحيث ا�ستمرت‬ ‫دم في قطاعي المعادن والمقالع‪� .‬أ ّ‬ ‫ما‬ ‫والت�أمين‪ ،‬مع بع�ض التق ّ‬ ‫العمليات التجارية و�إن كانت بكلفة �أعلى‪.‬‬ ‫دت الزيادة في اال�ستثمارات العامة‪ ،‬الممول‬ ‫من جانب الطلب‪� ،‬أ ّ‬ ‫معظمها من قبل دول مجل�س التعاون الخليجي �ضمن برنامج‬ ‫في ظل الطاقة االنتاجية الفائ�ضة في االقت�صاد‪،‬‬ ‫‪ .v‬‬ ‫المنح المخ�ص�صة‪� ،‬إلى خف�ض العجز التجاري‪.‬‬ ‫والتباط�ؤ في الت�ضخم‪ ،‬والم�ؤ�شرات المريحة من جانب‬ ‫احتياطي العمالت الأجنبية‪ ،‬وا�صل الم�صرف المركزي‬ ‫كما �أدّى االنتعا�ش االقت�صادي �إلى خف�ض في معدالت‬ ‫‪ .ii‬‬ ‫الأردني �سيا�سته التو�سعية‪ .‬وانخف�ض الت�ضخم �إلى �أدنى م�ستوى‬ ‫عا لل�ضعف الهيكلي فقد انخف�ض‬ ‫البطالة‪ ،‬لكن يبقى ذلك قنا ً‬ ‫له منذ دي�سمبر‪/‬كانون االول ‪ ،2009‬بينما بد�أ يتباط�أ معدل‬ ‫معدل البطالة من ‪ 12.6‬بالمئة �إلى ‪ 11.9‬بالمئة بين عامي‬ ‫الت�ضخم الأ�سا�سي‪ ،‬كما كان متوقع ًا‪ ،‬في منت�صف عام ‪ 2014‬مع‬ ‫‪ 2013‬و‪ ،2014‬ولكن هذا االنخفا�ض ال يعك�س زيادة في فر�ص‬ ‫تراجع العوامل الم�ؤقتة للعر�ض‪ .‬وما قام به الم�صرف المركزي‬ ‫العمل لأن �سببه هو الإنخفا�ض الحا�صل في ن�سبة م�شاركة القوى‬ ‫م�ؤخر ًا‪ ،‬تحديد ًا في ‪� 3‬شباط‪/‬فبراير ‪ ،2015‬يعتبر خطوة جريئة‬ ‫العاملة في �سوق العمل‪ .‬وقد يعود ذلك �إلى الإرباك الحا�صل‬ ‫في ما يتعلق بتخفي�ض �أ�سعار الفائدة‪ ،‬كخف�ض �سعر فائدة نافذة‬ ‫ب�سبب المناف�سة التي يواجهها المواطن الأردني في �سوق العمل‬ ‫االيداع ليلة واحدة بن�سبة ‪ 100‬نقطة �أ�سا�س‪.‬‬ ‫من قبل الالجئين‪� ،‬إ�ضافة �إلى �سيا�سة الحد من التوظيف في‬ ‫القطاع العام بهدف �ضبط �أو�ضاع المالية العامة‪.‬‬ ‫من المتوقع �أن ت�ستمر وتيرة الن�شاط االقت�صادي‬ ‫‪ .vi‬‬ ‫بالت�صاعد‪ ،‬وذلك بالتزامن مع تنفيذ ال�سيا�سات الإ�صالحية‪،‬‬ ‫ما التو�سع في االقت�صاد وموا�صلة الجهود في �ضبط‬ ‫‪� .iii‬أ َ‬ ‫لكن التطورات الأمنية و�أ�سعار النفط ت�شكل المخاطر الأهم‬ ‫�أو�ضاع المالية العامة فقد �أدّى �إلى خف�ض العجز المالي‪.‬‬ ‫في وجه النمو االقت�صادي‪ .‬ومن المتوقع �أن يبلغ نمو الناتج‬ ‫حيث �ضاق العجز الكلي والعجز الأولي االجمالي للمالية العامة‬ ‫المحلي الإجمالي الحقيقي ن�سبة ‪ 3.5‬بالمئة في العام ‪2015‬‬ ‫والحكومة المركزية (با�ستثناء المنح وخ�سائر �شركة الكهرباء‬ ‫ب�سبب قوة اال�ستهالك الخا�ص وزيادة اال�ستثمار‪ ،‬ويعود ذلك‬ ‫الوطنية) بن�سبة ‪ 1.0‬و ‪ 1.5‬نقطة مئوية على التوالي من الناتج‬ ‫جزئي ًا �إلى انخفا�ض �أ�سعار النفط وتزايد الم�شاريع اال�ستثمارية‬ ‫ة مع العام ‪.2013‬‬ ‫المحلي الإجمالي خالل العام ‪ 2014‬مقارن ً‬ ‫في مجال الطاقة‪ .‬كما من المتوقع �أن تنخف�ض ن�سبة الدين العام‬ ‫ويعود ذلك في الأغلب �إلى الت�شدد الدوري في تح�صيل الإيرادات‬ ‫�إلى الناتج المحلي الإجمالي‪ ،‬نظر ًا الرتفاع النمو وا�ستمرار‬ ‫و�ضبط النمو في الإنفاق‪ .‬كما ارتفع الدين العام الإجمالي بن�سبة‬ ‫�ضبط �أو�ضاع المالية العامة‪� .‬أما بالن�سبة للمخاطر الأ�سا�سية‪،‬‬ ‫‪ 2.9‬نقطة مئوية في نهاية عام ‪� 2013‬إلى ‪ 89.6‬في المئة من‬ ‫فهي تكمن في �إمكانية تفاقم الأزمات ال�سورية والعراقية �إ�ضاف ً‬ ‫ة‬ ‫الناتج المحلي الإجمالي ال�سنوي بحلول نهاية ‪ .2014‬ون�ستب�شر‬ ‫�إلى ارتفاع �أ�سعار النفط‪.‬‬ ‫خير ًا بميزانية ‪2015‬التي تمت الموافقة عليها م�ؤخر ًا لجانب‬ ‫�ضبط �أو�ضاع المالية العامة (تطابق ًا مع تو�صيات �صندوق النقد‬ ‫الدولي)‪.‬‬ ‫أما بالن�سبة للقطاع الخارجي‪ ،‬فقد �إنخف�ض‬‫�ّ‬ ‫‪ .iv‬‬ ‫الح�ساب الجاري بف�ضل الإيرادات المتينة في القطاعين‬ ‫الملخ�ص التنفيذي‬ ‫‪| 5‬‬ The World Bank Recent Economic and Policy Developments trade deficit (in real terms). The public investment Output and Demand drive was mostly due to higher capital expenditures predominantly financed by earmarked GCC grants. 1. Despite regional spillovers, Jordan’s An 8.7 percent narrower trade deficit in Q3 2014 economy has continued to slowly yet steadily (yoy) was driven by a 9.3 percent increase in pick-up. These spillovers include the Egypt gas domestic exports. These, in turn, reflected the disruptions, the neighboring Syrian conflict resulting, post-strike recovery in the potash and phosphate inter alia, in more than 620,000 refugees and, more industries which saw domestic exports grow by 81.2 recently, the Islamic State (IS) push into neighboring percent and 48.7 percent yoy, respectively. Private Iraq in June 2014 and other security incidents. demand’s contribution (private consumption and Notwithstanding these shocks Jordan’s real GDP private investment) is expected to have declined growth rate is estimated to have reached 3.1 percent over the first three quarters of 2014 (Figure 3). This in 2014, up 30 basis points over 2013, reflecting mainly stemmed from a 10.3 percent reduction higher growth for the fourth consecutive year (through Q3 2014 yoy) in foreign direct investment (Figure 1). While far from the 6.6 percent average to Jordan, and weaker real estate demand (captured growth witnessed during the 2000-2008 expansion, in a 7.4 percent decrease in construction permits Jordan’s 2014 growth performance continues to fare in 2014). Subdued private demand was reflected in better than the 1.2 percent average rate achieved in tepid credit growth from commercial banks (at 2.3 the Middle East and North Africa region (Figure 2). percent in 2014). 2. On the demand side, growth was 3. On the production side, all sectors of the predominantly fueled by a narrower trade deficit economy contributed positively to growth, most and higher public investments. Compared to the notably mining and quarrying in the third quarter first three quarters of 2013, the similar period of of 2014 (Figure 4). The sectors that most contributed 2014 saw a 23.8 percent improvement in public to growth included construction, wholesale and investment and a 12.8 percent reduction in the retail trade, and finance and insurance services each GDP Growth 2000-2014 GDP Growth in MENA Percent Percent 10 Period Averages: 10 9 2010-2014: 2.8% 8 8 7 6 6 4 5 Period Averages: 4 2000-2009: 6.5% 2 3 0 2 -2 1 0 -4 2000 2001 2002 2003 2005 2006 2008 2009 2010 2011 2012 2013 20142 2015p 2004 2007 EGYPT JORDAN LEBANON MENA FIGURE 1. Growth trajectory significantly affected by FIGURE 2. Jordan outperformed the MENA region in external shocks yet steadily recovering terms of growth rates Source: Department of Statistics and World Bank staff calculations Source: World Bank Global Economic Prospects, January 2015 6 | Recent Economic and Policy Developments jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Private Demand Net Exports Supply Side Contribution to Real GDP Government Spending Public Investment Growth (y.o.y) Percent Real GDP (rhs) Percent Percent Net Taxes On Product Services 20 3.5 4 Industry Agriculture 17.5 3.3 3.5 GDP 15 3.0 12.5 2.8 3 10 2.5 2.5 7.5 2.3 2 5 2.0 1.5 2.5 1.8 0 1.5 1 -2.5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 1.3 0.5 -5 1.0 0 -7.5 2011 2012 2013 2014 0.8 -10 0.5 -0.5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -12.5 0.3 -1 2010 2011 2012 2013 2014 -15 0.0 -1.5 FIGURE 3. In the first three quarters of 2014 net exports FIGURE 4. … while, construction and mining and drove the growth rate from the production side, … quarrying led growth from the expenditure side Source: Department of Statistics, Ministry of Finance and World Source: Department of Statistics and World Bank Bank calculations staff calculations contributing 0.4 pp, 0.4 pp and 0.3 pp to real GDP the unemployment rate dropped from 12.6 to 11.9 growth respectively, despite the deceleration in the percent from 2013 to 2014, this improvement was number of Syrian refugees particularly as pertaining not driven by increased employment but by an to retail trade. In addition to construction within equivalent and concerning drop in the labor force industrial sectors, manufacturing contributed 0.3 participation rate from 37.1 percent in 2013 to 36.4 percent to real GDP growth, followed by a 0.2 pp percent in 2014, the lowest average since 2007 contribution by mining and quarrying. This reflects a (Figure 6). This was possibly driven by discouraged recovery in the potash industry after 2013 witnessed workers given perceived competition from refugees. halts in production and is especially visible in Q3 It could also be driven by job-seekers aiming for a 2014 where mining and quarrying contributed 0.4 public sector job who dropped out of the labor force pp to real GDP growth. Agriculture, after negatively given the fiscal consolidation program which has contributing to GDP growth in 2013 due to the limited the public sector’s traditional role as major disruption of agricultural export routes to Lebanon, employer in the economy. Women and youth are Turkey and Europe, contributed positively (by 0.1 particularly affected by unemployment with 20.7 percent on average) to GDP growth in the first percent of women unemployed in 2014 compared to three quarters of 2014. Restaurants and hotels saw 22.2 percent in 2013 yet also accompanied by a 0.6 a small but positive average contribution of 0.1 pp pp reduction in women’s labor force participation to GDP growth thanks to an 8.4 percent increase rate to 12.6 percent in 2014 (the lowest in the region). spending per tourist during the first three quarters of Unemployment among youth remains elevated at 2014 compared to the same period in 2013 (tourist 36.1 percent for the 15-19 years old category and arrivals remained broadly unchanged, growing by a 29.3 percent for those between 20-24, 2.0 pp higher modest 0.5 percent during that period). and 1.1 pp lower than in 2013, respectively (Figure 5). On a regional basis, the governorates of Maan and Tafiela registered the highest unemployment rates in 2014 at 15.4 percent each while the lowest were registered in Zarqa at 10.2 percent and the capital Amman at 10.3 percent. Labor and Employment 4. The steady economic recovery has improved unemployment rates although this masks underlying structural weaknesses. While Recent Economic and Policy Developments | 7 The World Bank achieve cost recovery for NEPCO in 2017)2. On the Fiscal Policy expenditure side, key measures centered on cuts in government expenditures targeting purchases 5. The central government fiscal deficit of goods and services, capital spending, militatry improved in 2014 despite larger financing of utility expenditures, and a cash transfer program initiated companies (Figure 7). The fiscal deficit, including in November 2012 to compensate middle and lower grants, improved from 11.4 percent of GDP in 2013 income households for the elimination of subisidies to an estimated 9.2 percent of GDP in 2014. Grants on petroleum products (except on LPG cylinders for continued to help contain the central government private consumption).3 deficit and rose from 2.7 percent of GDP in 2013 to 4.9 percent of GDP in 2014, mainly sourced from 7. The debt-to-GDP ratio continues its upward the US and GCC. The latter is mostly earmarked to trend on account of persistent fiscal deficits and capital expenditures. Excluding grants, the central subdued growth (Figure 8). Gross public debt is government fiscal deficit was flat at 14.1 percent of estimated to have reached US$32.0 billion (89.6 GDP in 2013 and 2014. This non-grant related status percent of GDP) in 2014 from US$29.1 billion (86.7 quo was mostly driven by a cyclical improvement in percent of GDP) at end-2013. The debt-to-GDP ratio revenue collection counterbalanced by contained but has been trending up for the sixth consecutive year. growing spending (see next paragraph). The tighter Gross debt is predominantly denominated in local deficit (including grants) comes despite higher currency with 64.5 percent in Jordanian Dinar. In transfers to the National Electric Power Company the first nine months of 2014, the government had (NEPCO) and the Water Authority of Jordan (WAJ), increased its issuances of Treasury bills and bonds by estimated at 7.0 percent of GDP in 2014 compared 22.4 percent compared to the corresponding period to 5.9 percent of GDP in 2013. The larger transfers of 2013, totalling the equivalent of US$6.3 billion. stemmed from the government’s need to resort to On the external financing side, Jordan issued a US$ more expensive energy sources following further 1.0 billion US-guaranteed Eurobond with a five-year disruption of (cheap) gas supplies from Egypt. As maturity with a fixed coupon of 1.95 percent in June of early 2015, the utility companies have reverted 2014. to financing their deficits through borrowing from commercial banks under a government guarantee, as was the case before 2013. 6. In line with the IMF SBA program, fiscal consolidation continues and is reflected in the External Position 2015 budget. The Government of Jordan has pursued efforts to enhance, in a pro-poor manner, revenue 8. The trade in goods balance widened in 2014 mobilization while also improving the efficiency due to higher energy imports mostly linked to the and progressivity of its spending. Recent measures 2   Previously the Government had announced that the on the revenue side include the cancellation of a electricity tariff would be increased by 15 percent in January number of tax exemptions, a new income tax law 2015. However, given the lower oil prices and their positive (adopted in December 2014) which is expected to impact on NEPCO’s losses, the Government decided on a lower increase. raise 0.4 percent of GDP,1 increases in January 2015 3 of 7.5 percent on avearage of the electricity tariff   Households earning less than JD 10,000 annually were since eligible for an annual cash transfer of JD 70 per houseld (as part of the Government’s medium-term plan to member for a maximum of six members, provided the price of oil is below $100 per barrel. The third tranche of cash transfers aimed at compensating households for the removal of fuel 1   Under the new law, the personal income tax rate for the first subsidies, was not be disbursed in December 2014, as earlier 10,000 JDs taxable stands at 7 percent, the next taxable 10,000 proposed, given that international oil prices were below $100 JDs are at 14 percent, and a 20 percent rate applies on additional a barrel for more than two months. In 2014, the government amounts. The general corporate income tax rate was raised to improved its targeting criteria by proxy means testing looking at 20 percent from 14 percent. asset indicators as opposed to only wage income. 8 | Recent Economic and Policy Developments jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Percent Unemployment rate by education level Percent Jordan Labor Market Dynamics (sa) Percent 16 42 15 Total Low Skilled High Skilled 15 14 40 14 14 13 38 13 12 11 13 36 10 12 9 34 12 8 11 7 32 6 11 5 30 10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 4 3 2 2008 2009 2010 2011 2012 2013 2014 1 0 Employment Rate (ER) Labor Force Participation Rate 2010 2011 2012 2013 2014 Unemployment Rate (UR, rhs) FIGURE 5. Despite dropping in 2014.... FIGURE 6. … Unemployment remains a chronic problem. Source: Ministry of Tourism and World Bank staff calculations Source: Department of Statistics Percent Percent 45 Fiscal Aggregates as a Ratio of GDP 16 Jordan Debt-to-GDP Ratio (1998-2014) 40 (%) Percent 14 120 35 12 30 100 10 25 80 8 20 6 60 15 4 40 10 5 2 20 0 0 0 2005 2006 2008 2009 2010 2011 2012 2013 2014e 2004 2007 1998 1999 2000 2001 2002 2003 2005 2006 2008 2009 2010 2011 2012 2013 2014e 2004 2007 Domestic Revenues Total Expenditures Budget Deficit (excl. grants, rhs) Budget deficit (incl. grants, rhs) External Internal Total FIGURE 7. Fiscal Balances, both with and without grants, FIGURE 8. … Debt-to-GDP ratio has been rising since improve 2008 Source: Ministry of Finance and World Bank staff calculations Source: Ministry of Finance and World Bank staff calculations disruptions of natural gas from Egypt (Figure 9). 12.3 percent increase in vegetables and fruits, and a Since April 2014, Jordan has witnessed a shortfall of 12.1 percent increase in clothes. The USA overtook gas imported from Egypt due to multiple explosions Iraq as Jordan’s largest export destination in 2014 that cut off the gas pipeline. To compensate for the given the 7.6 percent lower exports (6.2 percent gas shortage, Jordan has resorted to importing more excluding re-exports) to Iraq resulting from Islamic expensive diesel and fuel oil. While a 44 percent State (IS) militants seizing the Iraq border crossing reduction in the international oil price from June to with Jordan in June 2014. The decline in exports December 2014 partially mitigated this higher cost, to Iraq proved to be more mitigated than originally energy imports were nonetheless 6.4 percent higher expected as trading continued, albeit under higher overall, with non-energy imports increasing by 1.9 costs. Larger exports to Syria and the GCC by percent yoy, resulting in a 3.1 percent increase in 48.3 percent and 15.1 percent, respectively, (2.5 total imports. Exports improved by 6.0 percent in percent of GDP combined) more than outweighed 2014 yoy led by a 7.5 percent rise in domestic imports the reduced exports to Iraq (0.3 percent of GDP). outweighing a 2.8 percent decline in re-exports. The Hence, the trade in good balance widened by 1.3 rise in domestic exports was driven by a 28.8 percent percent yoy in 2014, to US$14.4 billion. increase in mineral or chemical fertilizers, a 24.7 percent increase in exports of crude phosphates, a Recent Economic and Policy Developments | 9 The World Bank US$ mln Trade in Goods Balance US$ mln Current account balance during 25 Imports Exports 8 the first three quarters Trade Deficit Energy Imports 4,000 Exports of Phopshates 7 20 2,000 6 0 15 5 2008 2009 2010 2011 2012 2013 2014 US$ mln 4 -2,000 10 3 -4,000 2 -6,000 5 1 Other transfers -8,000 Public Transfers Trade Balance 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 -10,000 Primary Income Balance Current Account Balance FIGURE 9. Trade deficit widened in 2014 due to an FIGURE 10. Current account deficit narrowed despite increase in energy imports. drop in transfers. Source: Department of Statistics, World Bank staff calculations Source: Central Bank of Jordan, World Bank staff calculations 9. The current account deficit narrowed by grants from the GCC (almost half the value in 2013)4 end-September 2014 despite wider secondary and a further disbursement of about US$371 million income and trade balances and thanks to robust from the IMF as part of the SBA. By end-2014, while public and private receipts (Figure 10). The decreasing for the fourth consecutive month, gross current account is estimated to have narrowed international reserves at the CBJ reached US$14.1 from 10.3 to 7.1 percent of GDP between 2013 and billion (7.4 months of imported goods), well above 2014. The current account deficit shrank to US$2.0 end-2013’s US$12 billion (6.5 months of imported billion in the first nine months (9M) of 2014, 14.8 goods) and in excess of the IMF’s reserve adequacy percent less than the US$2.3 billion registered floor. for the same period of 2013. This improvement was led by a 56.2 percent higher services account including due to larger net travel flows of US$218 million during 9M 2014 compared to the same 2013 period. In contrast, the secondary income balance deteriorated to US$5.2 billion (14.4 percent of GDP) Monetary Policy and in 9M 2014 compared to US$5.4 billion (16 percent of GDP) in 9M 2013 as a result of a 43 percent fall in Finance public transfers, only slightly offset by a 2.2 percent increase in remittances. 11. As expected, the temporary supply shocks that had pushed up headline and core inflation 10. The balance of payments nonetheless are fading (Figure 11). Based on the newly rebased improved resulting in higher foreign reserves at (to 2010) consumer price index (CPI), headline the Central Bank of Jordan. By end-September inflation dropped to 1.7 percent in December 2014 2014, the balance of payments registered US$758.5 on a 12-month yoy basis and 2.9 percent on a million, 88 percent higher compared to the period average basis, mostly reflecting the plunge corresponding 2013 period. It was supported by a of international oil prices. As expected (and detailed 155 percent larger portfolio investment account in Q2 in our previous Jordan Economic Monitors), core 2014 on account of the US$1 billion US-guaranteed inflation, which excludes food and energy products, Eurobond issued in June 2014. Additionally and 4 during 2014, Jordan received US$716 million in   Grants received in the balance of payments account differ from those received in the fiscal accounts. GCC funds first arrive at a CBJ account and are thus accounted for in the balance of payments. These funds only enter the fiscal accounts once the funds have been spent in the budget as the GCC funds can only be used to refund spending on capital expenditure. 10 | Recent Economic and Policy Developments jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES 7 8 Inflation Rate Drivers of Core Inflation 7 (%) 6 6 5 5 4 Percent (%) 4 3 Percent (%) 3 2 2 1 1 0 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Jul-14 Jan-15 May-14 Sep-14 Nov-14 0 -1 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Jul-14 Jan-15 May-14 Sep-14 Nov-14 -1 -2 Other Personal Effect Personal Care -2 Education Home Maintenance Rents -3 Headline Inflation Core Inflation Clothing and Footwear Tobacco and Cigarettes Core FIGURE 12. With tobacco and clothing pushing down FIGURE 11. Headline and core inflation are fading core inflation Source: Department of Statistics, World Bank staff calculations Source: Department of Statistics, World Bank staff calculations also started to decelerate—to 5.1 percent yoy in about 20 percent of Jordan’s imports originate from December 2014 against 5.4 percent on a period the European Union. Core inflation continued to average basis. The main drivers of core inflation abate to 4.0 percent on a yoy basis in February 2015 in 2014 were rents, tobacco and cigarettes, and and 4.5 percent on a cumulative basis. clothing and footwear, increasing by 5.8 percent, 14.8 percent, and 8.9 percent, respectively (Figure 12. The Central Bank of Jordan continues its 12). These decreases reflect the fading impact of expansionary stance amidst decelerating inflation, one-off supply shocks, most notably the increase a persistent cumulative output gap, and robust in customs duties on clothes from 5 to 20 percent reserves accumulation. While the output gap in September 2013, taxes on cigarettes in February appears to be closing since QII 2014, the cumulative 2014 raising cigarette prices by 100 fils per pack, part output gap appears to have entered negative of a government decision to raise taxes on tobacco territory since early 2013 indicating spare capacity and alcohol.5 The contribution of rents to core in the economy (Refer to Box 1). While policy rate inflation subsided during the year from 2.4 percent cuts are welcome in this context, the effectiveness of yoy until May 2014 to 1.9 percent yoy in December the monetary policy transmission mechanism has, 2014 which reflects lower demand for housing so far, been muted given the delay and limited pass possibly due to a slower influx of Syrian refugees through of policy rates to lending rates. For example, that started in May 2013. This slower increase in the 75 bps drop in the Central Bank’s overnight housing demand is reflected by a 7.4 (yoy) drop in deposit window rate has so far only translated in a the number of constructions permits in 2014. Given 14 bps average drop in commercial bank’s lending a further subsiding of these measures and recent rates (Figure 13); as a result commercial bank low international oil prices, headline inflation turned lending to the private sector rose by a modest 2.3 negative in February 2015 (at -1.7 percent yoy and percent (yoy). To stimulate the economy further, the -0.8 percent on a per average basis for 2015). This CBJ has persisted with loose monetary policy cutting decrease was driven by the prices of transportation rates most recently on February 3, 2015 decreasing and ‘fuel and lighting’ (accounting for 18.8 percent the overnight deposit window facility rate by 100 and 13.1 percent reductions, respectively) and could bps to 1.75 percent and reducing the rediscount rate also include the effect of the depreciating Euro as and overnight repurchase agreement rates by 25 bps each to 4.00 percent and 3.75 percent respectively. 5   While the special tax rates on mobile phones and mobile The cost of borrowing decreased with intrabank, phone subscriptions were each doubled to 16 percent and 24 percent respectively in July 2013, the communications Treasury bill and Treasury bond rates declining by component of the CPI was not significantly affected as 84, 83, and 100 bps respectively, between end-2013 competition and technological advances in the sector likely and end-2014. This compares with a 12 bps rise in allowed firms to keep retail prices unchanged. Recent Economic and Policy Developments | 11 The World Bank Relation between policy rate and lending rates Point Amman Stock Exchange Weighted Index Percent Percent 5,000 4.0 9.4 3.8 9.3 4,800 3.6 9.2 4,600 3.4 9.1 3.2 9.0 4,400 3.0 8.9 4,200 2.8 8.8 2.6 8.7 4,000 2.4 8.6 3,800 2.2 8.5 2.0 8.4 3,600 2-1-2013 07-02-2013 12-03-2013 14-04-2013 16-05-2013 18-06-2013 21-07-2013 25-08-2013 26-09-2013 04-11-2013 08-12-2013 5-8-2014 7-9-2014 13-10-2014 13-11-2014 16-12-2014 25-1-2015 26-2-2015 15-1-2014 17-2-2014 20-3-2014 22-4-2014 27-5-2014 29-6-2014 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 May-14 Sep-14 Nov-14 Jul-14 Jan-14 Mar-14 Policy Lending Rate (%) Average Lending Rates (%. Rhs) FIGURE 13. Lower policy rates did not translate into a FIGURE 14. Investor sentiment still negative parallel drop in commercial bank lending rates Source: Central Bank of Jordan, World Bank staff calculations Source: Amman Stock Exchange TABLE 1. Financial Soundness Indicators (in percentage unless otherwise indicated) End-June 2008 2009 2010 2011 2012 2013 2014* Nonperforming Loans/Total Loans 4.2 6.7 8.2 8.5 7.7 7.0 7.0 Provisions (in percent of classified loans) 63.4 52 52.4 52.3 69.4 77 76.4 Risk-weighed Capital Adequacy Ratio 18.4 19.6 20.3 19.3 19 18.4 17.4 Leverage Ratio 12.9 13 13.1 13.1 13.3 12.9 12.5 ROE 11.5 8.8 8.8 8.3 8.6 9.9 5.8 ROA 1.4 1.1 1.1 1.1 1.1 1.2 0.7 Net Profits Before Taxes (in JD million) 564.3 460.4 523.4 516.6 587.8 719.5 422.4 Liquidity Ratio 141.2 159.1 161.4 152.9 143.5 149.1 150.2 Growth Rate of Total Assets 11.4 7.4 9.6 7.9 4.3 9.1 3.0 Growth Rate of Customer Deposits 13.2 12.1 10.9 8.3 2.4 10.5 6.5 Growth Rate of Credit Facilities 17.2 2.1 8.6 9.8 12.5 6.3 3.9 * Not annualized. Source: Central Bank of Jordan. US Treasury Bills and an average 17 bps rise in US incursion of Islamic State militants into Iraq. On a Treasury Bonds for the same period.6 cumulative basis, the ASEI lost 2.3 percent of its value by end-year 2014 compared to end-2013 13. The equity market is declining on a net weighed down by a 16.2 percent and 3.5 percent basis reflecting negative sentiment of regional reductions in the respective values of industry and spillovers. After a 5.4 percent improvement in the services components which overshadowed 10.2 Amman Stock Exchange Index (ASEI) during the first percent and 4.2 percent improvements in insurance five months of 2014 compared to end-2013, the and banking components respectively. This decline June to August summer months saw a 5 percent continued into 2015 on account of further security decline reflecting investor sentiment following the incidents namely the killing by the Islamic State of a Jordanian pilot in early-February. The ESIA ended 6   Rates discussed refer to 12 month Jordan and US Treasury February 2015 1.4 percent lower than end-2014 bills and the average rates of 2, 3 and 5 year Treasury bonds for levels (Figure 14). Jordan and the US. 12 | Recent Economic and Policy Developments jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES 14. The banking sector in Jordan is largely resistant.7 By June 2014, banks’ nonperforming loans (NPL) ratio remained at 7.0 percent, unchanged from end-2013 and down from a 2011 peak of 8.5 percent but still far from the pre-crisis level of 4.1 percent in 2007 (Table 1). Banks’ Return on Equity (ROE) and Return on Assets (ROA) both improved in 2013 (latest annual data) to 9.9 percent and 1.2 percent, respectively, the highest rates since 2008. At 17.4 percent end-June 2014, the capital adequacy ratio is robust, as is the leverage ratio which (12.5 percent at end-June 2014 which is well above the 3 percent stipulated by Basel III). The net foreign asset position of commercial banks registered minus US$2.8 million at end-2014, down from minus US$2.2 million a year earlier reflecting a higher stock of foreign reserves at the central banks as well as a continuation in the de-dollarization which, at 17.5 percent end-2014 (compared to 19.6 percent at end-2013), is back to pre-tension levels. Banks’ exposure to sovereign debt8 has been increasing, however, accounting for 40.7 percent of total assets in end-2014, up from 38.8 percent in end-2013. 7   The CBJ is closely monitoring developments in Arab Bank’s appeal to a US lawsuit. 8   Banks’ sovereign debt exposure is computed as the ratio of commercial banks’ aggregate investment in claims on public sector and deposits at CBJ relative to total assets. Recent Economic and Policy Developments | 13 The World Bank BOX 1. Output Gap Analysis An analysis of Jordan’s contemporaneous output gap reveals a closing gap over time, while a cumulative gap persists. Sensitivity analysis using three Hodrick-Prescott filters reveal a closing output and even slightly positive output gap by end-Q3 2014 (Figure 15). However, while the contemporaneous output gap appears1/ to be closing since mid-2014, after several years of below-potential economic growth, a sizeable negative cumulative output gap, which started in early 2013, remains (Figure 16). 100 JD mln 200 80 100 60 40 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 20 JD mln -100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 0 -200 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 -20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 -300 -40 Output Gap HP_1600 -400 -60 Output Gap HP_1000 Output Gap Output Gap HP_500 -500 Cumulative Output Gap (0=2001Q3-2002Q1) -80 FIGURE 15. Contemporaneous output gap closing… FIGURE 16. … yet, cumulative output gap persists Source: Department of Statistics, World Bank staff calculations Source: Department of Statistics, World Bank staff calculations Coupled with other indicators, especially labor market ones, this tends to indicate that the Jordanian economy still has spare capacity that could be mobilized should growth continue to gather pace. For example, the labor force participation rate (LFPR) is currently significantly lower than it was prior to the sharp economic slowdown of 2011 (the latest LFPR is at 36.4 percent in end-2014, against 40.1 percent in end-2009). As indicated earlier, part of this drop in the LFPR could be due to demotivated people that have given up on competing with Syrian refugees at the low end of the skills spectrum. The drop in the LFPR is all the more concerning given that Jordan’s population has a youth bulge which should have led to an increase in the participation rate. The policy implications are that the CBJ still has time before needing to tighten monetary policy. While the closing contemporaneous output gap would indicate an economy operating at full capacity, reducing justification for continued expansionary policy, the relatively large output gap reflects spare capacity in the economy. As growth starts to pick-up, it is expected that some spare resources would come back into production, including discouraged labor that dropped out of the labor force. Policy-wise, this would indicate that the CBJ does not need to tighten monetary policy at this stage, particularly given decelerating inflation and the time lag between its action on reducing key policy rates and their pass-through to commercial banks (Figure 17). JD mln Percent 200 8 100 7 6 0 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 5 -100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 4 -200 3 -300 2 -400 1 Policy Rate -500 Output Gap HP filter 1600, t (JD mln) 0 Cumulative Output Gap (0=2001Q3-2002Q1) (JD mln) FIGURE 17. Policy-rate trend in line with cumulative output gap Source: Department of Statistics, World Bank staff calculations 1/ Output gap estimates are notoriously difficult to estimate precisely. Using a different methodology the IMF (2015) still estimate that Jordan has a negative contemporaneous output gap in 2014 and 2015. The policy implications of this result are similar to the ones included in this box. 14 | Recent Economic and Policy Developments jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES PROSPECTS 15. The economy is expected to steadily prices. Exports are expected to decline by a smaller continue its rate acceleration as reforms and 0.3 pp to 44.2 percent of GDP in 2015 due to the adjustment to the regional spillovers pay off. Real leveling off of potash and phosphates that drove GDP growth is forecast to accelerate to 3.5 percent exports in 2014. Additionally, current transfers are in 2015 and 3.9 percent in 2016. The probability expected to fall by 1.8 pp of GDP between 2014 and distribution around these point estimates is titled 2015. Overall the current account is expected to upwards. These forecast also assume a status quo narrow to 5.7 percent of GDP in 2015. with respect to regional security challenges from Syria and other geopolitical risk, the level of gas 17. The largest challenges to Jordan stem inflows from Egypt, continued fiscal consolidation, from geopolitical security risks. Any exacerbation a low oil price,9 and a continuation of investments of security risks related to the Syria or Iraq crises particularly in energy supply diversification, and or IS threat could severely undermine growth on account of new investment and PPP laws. prospects and development efforts.10 International Netting out a 0.3 point estimated contribution to oil price movements represent a two-pronged risk. 3.1 percent real GDP in 2014 from the recovering Should low prices persist in the medium term, this mining and quarrying sector which we forecast would cause cumulative fiscal pressures on many of will level off, the underlying additional 0.7 point the oil exporting countries that Jordan relies on for contribution to growth in 2015 is expected to be grants particularly related to capital expenditures, primarily driven by the continued benefits from and would lower remittances from its diaspora the positive supply shock represented by the large in oil-producing countries. Should the price of oil drop in international oil prices. This would improve significantly rebound, this would result in a negative production costs, public finances (elimination of supply shock and pressure the twin deficits (though an oil-related cash compensation transfer more the impact on both will become more muted over time than offsetting lower oil-related revenue), and given the well advanced gas supply diversification net disposable income of consumers, thereby that Jordan has embarked on, as detailed below). A boosting private consumption. Continued fiscal third notable risk particularly for the fiscal balance consolidation and a steady pick-up in economic relates to whether expected grants, already expected growth are estimated to revert the past six years’ to shrink to almost have to 2.6 percent of GDP in increase in the debt-to-GDP ratio in 2015. 2015, do not materialize. Finally, should the Fed tighten rates, it would be expected that such higher 16. The current account is expected to narrow rates would eventually pass through in the Jordanian further owing to a tighter trade balance and public economy given the Jordanian Dinar’s peg to the US transfers. The trade deficit is forecast to narrow to dollar, curbing lending activity and increase the cost 19 percent of GDP in 2015 from an estimated 19.8 of borrowing. percent in 2014. This would mainly be led by total imports which are expected to contract by 5.9 pp of 10 GDP to 64 percent of GDP on account of lower oil   In a 2014 study that predates the Islamic State surge into Iraq, the IMF estimated that the Syrian crisis had an overall negative impact on economic activity, with losses to output 9   As per World Bank commodities price forecast for crude oil, growth at around 1 pp in 2013 and increased rental prices by 5 average, spot at US$53.2/barrel in 2015 and US$56.9/barrel in pp by year-end. International Monetary Fund, (2014) “Jordan: 2016. Selected issues”, Country Report No. 14/153, Washington DC. Prospects | 15 The World Bank 18. Jordan continues to make progress for private-sector innovation and improving the in diversifying its sources of energy, crucial industrial policy framework would support job- for energy security and for improving its twin creation.11 deficits. The development of a Floating Storage and Regasification Unit at Aqaba, with a send-out capacity of 500 million cubic feet of liquefied natural gas for imports, is expected to be operational in the summer of 2015. The first shipment is scheduled in August as part of an agreement between the NEPCO and Shell to sell and purchase a minimum of 150 million cubic feet of liquefied natural gas estimated to cover 15 percent of Jordan’s energy needs. The government continues towards achieving its 10 percent renewable energy target by 2020 with 400 MW of contracts for wind and PV power projects already awarded (of which 130 MW capacity is under construction) and more expected to be contracted by end-2015/2016. With respect to natural gas, Jordan has suspended talks to import natural gas from Nobel pending an antitrust case. A US$18 billion pipeline was planned to export crude oil from Basra in Iraq to Aqaba but the security situation is likely to hinder the project. Additionally, Jordan is keen to improve the balance of its power generation mix by utilizing its abandoned domestic deposits of oil shale. In 2014, the government signed a long term agreement for purchasing electricity from a 500 MW privately develop shale oil power plant expected for operation in 2019. 19. The implementation of reforms would bode well for unlocking constraints to stronger, sustainable, and inclusive growth. Such reforms cut across a number of pillars. On the institutional level, political reform is welcome to encourage greater external and internal (within government) accountability, consistency and continuity of policies, and frequent monitoring and evaluation. In parallel, and on the fiscal policy level, fiscal adjustments are required to reduce the budget deficit and ensure fiscal sustainability. Structural reforms include the promotion of exports (both products and markets), improving the business environment through public administration reforms including at the municipality level, 11 improving access to finance and boosting investor   For more details, see World Bank (2012). Hashemite Kingdom of Jordan: 2012 Development Policy Review, confidence. Finally, enabling an environment Washington DC. 16 | Prospects jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Special Focus: Access to Finance in Jordan Access to finance is underdeveloped in Jordan creditors, utility companies, or financial institutions; where firms rate their inability to receive credit as the inability of banks and financial institutions to the second overall obstacle to their operations. This access borrowers’ credit information online; and the status quo is of particular concern for micro-, small-, fact that borrowers cannot inspect their data in the and medium-sized enterprises (MSMEs), which largest credit registry. Jordan also compares poorly make up over 90 percent of the Jordanian economy against MENA and OECD countries on public registry and are major contributors to its competitiveness coverage and private credit bureau coverage.13 and employment potential. The situation has only worsened since 2006, with basic Access to Finance 21. Getting credit is especially a concern for indicators deteriorating for firms across the country, small, young firms outside Amman. Widespread of varying size and age, and in different sectors. The political and economic instability in the MENA Jordanian authorities, including the Central Bank region, combined with an unfavorable policy of Jordan, have introduced several measures to environment in most countries, has severely limited improve access to finance but instrumental structural the ability of firms to access sufficient credit and reforms are still needed to instigate transformational other forms of financing. The problem is particularly improvements across the board. acute in Jordan, where firms rank the issue of access to finance as the second largest obstacle to their operations after the investment climate. Small firms were five times likelier than larger firms to record access to finance as their largest obstacle (Figure 18). Similarly, more than twice as many firms in I. Context Aqaba, Zarqa, and Balqa saw access to finance as their largest obstacle compared to firms in Amman 20. Jordan ranks 185th out of 189 economies (Figure 19). in the “Getting Credit” indicator of the World Bank’s 2015 Doing Business report, due to 22. In MENA, job creation is currently its poor credit information system and its dominated by young, fast-growing firms. There inadequate collateral and bankruptcy laws. This is a large and growing amount of literature finding ranking caps off a downward trend that saw Jordan that younger and smaller firms more generally have fall by an average of 18 spots a year between 2011 higher employment growth rates than older and and 2014.12 The Jordanian economy has a score of larger firms.14 These studies, for example, point to zero (weakest possible) on both the depth of credit the organic nature of growth in younger and smaller information index and the strength of legal rights firms versus the acquisition-driven growth that index, far lower than those of the average of Middle characterizes larger firms. The World Bank’s 2014 East and North Africa (MENA) and Organization for Economic Co-operation and Development (OECD) 13   World Bank (2014). Doing Business 2015: Going Beyond countries. This is attributed to, inter alia, the non- Efficiency. Economy Profile 2015: Jordan. World Bank Group, availability of credit information from retailers, trade Washington, DC. 14   World Bank Group (2014). Jobs or Privileges: Unleashing 12   The overall Doing Business ranking for Jordan in 2015 is the Employment Potential of the Middle East and North Africa, 117 out of 189 economies. Report No. 88879-MNA, Washington DC. Special Focus: Access to Finance in Jordan | 17 The World Bank Largest Obstacle to Operations, Jordan Largest Obstacle to Operations, Jordan Investment Investment Climate Climate Access to Finance Access to Finance Aqaba large(100 and over) Political Instability Political Instability Balqa medium(20-99) Inadequately Zarqa Inadequately small(<20) Educated Educated Irbid Corruption Amman Corruption 0 25 50 75 0 25 50 75 FIGURE 18. Largest Obstacle to Operations, Jordan FIGURE 19. … by region (2013), by firm size … Source: Enterprise Surveys. Figures are survey-weighted. Top five Source: Enterprise Surveys. Figures are survey-weighted. Top five national-level obstacles shown. Investment climate indicator pools national-level obstacles shown. Investment climate indicator pools eight relevant indicators. eight relevant indicators. Jobs or Privileges report focused on the MENA region and employment potential (World Bank 201315). and highlights findings consistent with the prevailing There are around 150,000 registered enterprises in literature, paying special attention to the high share of Jordan, of which MSMEs account for more than 94 job creation in the region that is attributable to both percent. The majority of jobs are generated through micro-startups (firms with between 1-4 employees) MSMEs, employing around 71 percent of private and to fast-growing firms. For example, so-called sector employees, where SMEs employ 32.7 percent “gazelles”, or firms that double their employment and microenterprises 38.7 percent. This sector is over a four year period, accounted for roughly 64 also a leading source of exports and incomes in percent of total net job creation in Jordan from 2006 Jordan. Furthermore, the high correlation between to 2011. firm size and age suggests that MSMEs in Jordan— the vast majority of them young—represent the best 23. The prominent role young firms play in possible engine for job creation in the country based MENA job creation is highly relevant to MSMEs on regional trends. in Jordan, because half of all young firms (i.e., under the age of 10) in Jordan are small, and 25. Without access to finance, the capacity of another 41 percent are medium sized. Micro, these firms to grow their business and to create small, and medium sized enterprises (MSMEs) jobs is constrained. The more developed a financial today are positioned as the backbone and vanguard system is, the more likely firms are able to obtain of the modern enterprise sector in Jordan. The 2011 capital from the banking sector, capital markets, or General Economic Establishments census revealed private equity, and obtaining capital is a perquisite for that MSMEs represent 95 percent of Jordanian businesses to grow. Accessing credit in the form of enterprises, 66 percent of which have less than 19 credit lines or loans in order to make new investments employees; employ 70 percent of the total labor or acquire working capital is crucial; young firms are force employed by the private sector; produce expected to be more financially constrained than outputs that contribute 40 percent towards national their more established counterparts (e.g., because GDP, and account for 45 percent of total exports. Around 40 percent of the operating enterprises are located outside Amman. 15   For more details, see World Bank (2013) Project Appraisal Document on a Proposed Loan in the Amount of US$70 Million to the Hashemite Kingdom of Jordan for a Micro, Small, and 24. MSMEs are major contributors to the Medium Enterprise Development for Inclusive Growth Project, Jordanian economy and to its competitiveness, Finance and Private Sector Development Department, Middle East and North Africa Region, Report No: 72284-JO, Washington, DC.) 18 | Special Focus: Access to Finance in Jordan jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES of a lack of credit history).16 Unfortunately, high employer of choice for entry level positions given transaction costs, information asymmetries, weak its high overall compensation level compared to regulatory frameworks, and poor credit information the private sector. However, given the ongoing systems magnify the difficulties that young firms fiscal consolidation efforts, hiring has become more already find themselves in which can result in having limited. In the private sector, which historically considerable difficulty in accessing finance. accounted for the remaining 58 percent of jobs created in the Kingdom, less than half the jobs 26. This impedes job creation in Jordan were filled by Jordanian workers, while over half and, consequently, the twin goals of eradicating going to foreign workers (World Bank 201217). The poverty and generating sustainable and inclusive strong preference for working in the public sector growth. The lack of access to finance is among the has generated long waiting lists for applicants and a many factors constraining the Jordanian economy. relatively high reservation wage among Jordanians These result in a structurally weak labor market, both of which have resulted in a structurally high including high unemployment, particularly among unemployment rate (World Bank, 201218). Recently, youth and women. Compared to an average competition at the low end of the private sector labor unemployment rate of 12.5 percent from 2008 to market has intensified with the Syrian conflict and 2014, unemployment for those aged 15-19 averaged the large influx of refugees.19 Combined with fewer 34.1 percent compared to 26.9 percent for those public sector openings due to the fiscal consolidation 20-24 and 20.4 percent for women, over the same efforts started in mid-2012, this competition has period. Furthermore, regional disparities persist in likely demotivated Jordanians that were looking for a the economy, with both the non-conducive business job. As a result, the percent labor force participation environment and inadequate access to finance rate, which was already low by international and preventing the private sector from creating sufficient regional standards, has weakened, registering 36.4 jobs in the Governorates away from Amman, percent in 2014 compared to 39.5 percent in 2008. which are dominated by the public sector. Aqaba, Kick-starting private sector job creation is therefore Balqa, and Zarqa, the top three Governorates citing urgent and critical given the development challenges access to finance as a top constraint (Figure 19), the Kingdom is currently facing. demonstrate average unemployment rates of 14.0 percent, 13.9 percent, and 12.1 percent respectively compared to an average of 10.8 percent for Amman across the 2008-2014 time period. 27. The effect of Jordan’s dire access to finance situation on job creation is of particular concern because job creation is Jordan’s key development challenge. Jordan’s labor market suffers from severe structural deficiencies. As a result of these, the number of jobs created is insufficient to accommodate the country’s burgeoning youth population. The quality of the jobs created is also an issue, leading to discontent for those who do get jobs, especially among youth. Historically, 42 percent of jobs created in the Kingdom have 17   World Bank Hashemite Kingdom of Jordan: 2012 been in the public sector, which is perceived as an Development Policy Review. 18 16   Ibid.   World Bank (2013). Small and Medium Enterprises in 19 Jordan: Challenges for Growth, Employment, Exports and   See World Bank (2014) “Resilience Amid Turmoil,” Jordan Innovation. Finance and Private Sector Development, Middle Economic Monitor, Spring issue and specifically the Special East and North Africa Region. World Bank Group, Washington, Focus on “Syrian Refugees and Labor Market Outcomes in DC. Jordan”. Special Focus: Access to Finance in Jordan | 19 The World Bank given their limited assets. As a result, many firms II. Access to finance often resort to the informal sector, family, friends and other sources for access to finance. for MSMEs20 31. On the demand side, the MSMEs’ level of 28. In Jordan, the access to finance issue skills and capacity is an impediment to accessing presents a substantially larger problem for finance—enterprises often lack transparency, MSMEs than for larger firms. Although smaller and do not have audited financial statements. firms in Jordan grow at faster rates than their MSMEs are perceived as being less stable, and large counterparts, as well as create more new job lacking in competent management, and hence are opportunities, they frequently cite inadequate access considered more risky. They often do not have to finance as one of the main constraints confronting sufficient collateral, and when they do, they are their development. Only 11 percent of small firms not registered, making foreclosure difficult if not in 2013 had a loan, for example, compared to 24 impossible. MSMEs often refrain from applying for percent of medium sized firms and 33 percent of bank loans due to a religious aversion to interest- large firms (see Figure 23). based borrowing. Small firms have indicated that hurdles in business licensing and regulatory policies 29. Banks are the principal source of external are factors that hinder their growth. Municipal finance for SMEs, but the latter only receive 10 inspections are common challenges. percent of bank lending, compared to 25 percent in emerging markets. The financial system in Jordan 32. MSMEs growth is constrained by various is dominated by a large banking sector. There are 25 factors. On the supply side, MSME lending is commercial banks, the three largest of which control hampered by an inadequate legal and institutional 47 percent of assets, loans, and deposits (bank framework for secured transactions and insolvency, financing in Jordan mainly funds working capital, lack of credit reporting and information, and rather than longer term finance). Furthermore, non- weak regulatory and supervision of financial bank financial institutions (NBFIs) play a limited services offered by NBFIs. A guarantee or risk- role in financial intermediations compared to other sharing mechanism can help compensate for the developing economies. It is worth noting that micro financial infrastructure deficiencies in the interim, finance institutions (MFIs) in Jordan reach 283,000 as Jordan improves its credit information, secured out of a potential 300,000 clients estimated by transactions and insolvency. The Jordan Loan the Global Findex, thus the micro-enterprise loan Guarantee Corporation (JLGC) contribution to market is quite close to market saturation. As a SME lending is low--totaling 3,575 guarantees in result, financial intermediation to SMEs appears to 2014—and requires improved product offerings and be the “missing middle”. modernized systems to enhance its effectiveness. 30. At the Governorates level, MSMEs face 33. MSMEs access to financial services has bigger challenges. In terms of physical outreach, also been constrained by limited provision of Governorates such as Irbid and Zarqa both have active Shariah-compliant financial products. SMEs often SME populations, but are relatively underserved by refrain from applying for bank loans due to their bank branches compared to Amman. The licensing religious discomfort with interest-based borrowing. procedures and requirements by municipalities can There has been a growing demand for Shariah- also be quite burdensome and expensive for SMEs compliant financial products in Jordan (54 percent of SMEs have strong preference for Islamic finance 20   This section draws from World Bank (2015) Project Paper products in the country).21 This class of services on a Proposed Additional Loan in the Amount of US$ 50 Million to the Hashemite Kingdom of Jordan for the Micro, Small, and is only offered by four banks within the banking Medium Enterprise Development for Inclusive Growth Project, 21 Finance and Markets Global Practice, Middle East and North   Please see “Islamic banking opportunities across Small and Africa Region, Report No: PAD1364, Washington, DC. Medium Enterprises in MENA”, IFC Report; May 2014. 20 | Special Focus: Access to Finance in Jordan jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES system. Jordan’s Islamic banking assets account with the existence of these Government initiatives, for around 15 percent of the overall banking sector as well as a wide range of private sector-driven assets, the sector is well capitalized and liquidity VC companies and angel networks, there is still a is ample with deposits growing by seven  percent lack of financing for start-ups. Jordanian start-ups during 2013. However, Islamic Banks account for are challenged to receive follow-up funding after only 11 percent of total banks’ financing to SMEs incubation and loans for startups (venture debt), with 95 percent provided in the form of the markup which are not provided widely through banks in financing instrument (Murabahah). SMEs’ Shariah- Jordan. The main challenges faced by Jordanian compliant financing is constrained by banks’ over start-ups are the lack of follow-up funding between collateralizing SMEs and reluctance to bear credit US$  200,000 and US$  500,000 and the need for risks. The introduction of Islamic financial products additional business development services exceeding that reduce underlying risks either through asset the supply currently offered.22 backed instruments (e.g. Ijarah; Shariah compliant operating lease) or provision of third party guarantee through JLGC (Kafalah) is expected to accelerate the industry’s growth, and streamline SMEs access to Shariah-compliant financing. 34. In addition to facing regulatory hurdles on the supply side, MSMEs can attribute their lack of access to finance to a myriad of other factors. Although 18 banks have dedicated SME departments increasing their capability to lend to SMEs, several rely primarily on collateral-based lending rather than cash flow-based, leaving creditworthy SMEs unfinanced; most loans require collateral amounting to about 23 percent more than the loan value (small firms report having provided higher collateral than large firms); and, the enforcement of basic contractual rights is cumbersome, time consuming and costly, representing a significant disincentive when lending to SMEs. Furthermore, the internal ratings systems used by Jordanian banks for SME lending are often based on outdated techniques that do not effectively manage risk or lower costs. 35. Start-ups lack access to finance and to debt financing. The Government of Jordan is very active in catalyzing a growing entrepreneurial ecosystem, startups and the venture capital (VC) industry in Jordan. Entrepreneurship development initiatives backed by the Jordanian Government include, the Jordan Enterprise Development Corporation (JEDCO), King Abdullah II Fund for Development, Queen Rania Center for Entrepreneurship and iPARK as well as partially Government-funded incubator Oasis500. Jordan is considered as one of the main 22   infoDev. 2012, “Early Stage Innovation Financing (ESIF) start-ups hubs in the MENA region. However, even Facility.” Concept Note, World Bank, Washington, DC. Special Focus: Access to Finance in Jordan | 21 The World Bank of varying size and age, and in different sectors. III. Downward Gender inclusion in firm leadership appears to be one exception. Firms that have at least some female trend in access ownership have exhibited improvements in access to finance over the years on the above indicators. to finance for Furthermore, gender inclusive firms have seen the value of collateral they are required to provide Jordanian firms go down: in 2006, 65 percent of such firms owed collateral exceeding 100 percent of the loan value, 36. World Bank enterprise survey data reveal while in 2013, only 57 percent did so (Figure 24). not only that access to finance in Jordan is limited, but also that the situation has worsened since 38. Access to finance has deteriorated in 2006. The percentage of firms without a checking both Amman and in the Governorates. Generally account, for example, rose from 6.2 percent in 2006 speaking, firms in Amman stand to benefit in terms to 16.6 percent in 2013, while the percentage of of access to finance due to the much larger presence firms enjoying the benefits of an overdraft facility of the private sector in the Amman metropolitan halved from 40.4 percent to 20.1 percent over the area compared to the other, public sector dominated same period (Table 2). In general terms, there is a governorates. As discussed above, the financing significant lack of diversity in sources of financing pinch disproportionately affects small firms, and in Jordan, with internal funds and retained earnings Amman happens to house most of the country’s constituting the primary source. Only about six largest firms. Nevertheless, the capital has not been percent of firms in 2013 cited private banks as immune to the worsening trend in access to finance financing more than 50 percent of working capital. that has plagued Jordan as a whole. Amman has seen The overall number of firms citing non-bank financial its percentage of firms with access to a line of credit institutions as a source of working capital at all is and an overdraft facility fall by half between 2006 negligible: only three firms did so in 2006 and six and 2013, in line with the downward trend in other firms in 2013. regions. Similarly, the number of firms without a checking account has doubled over the same period 37. The worsening trend in access to finance (Figure 20). Geographically speaking, Irbid is the in Jordan cuts across all firm characteristics, from most disadvantaged region surveyed in Jordan. Only region and firm size to firm age and sector. In nearly six percent of firms there have an overdraft facility all instances, the basic indicators of access to finance and only two percent have a line of credit. To make such as ownership of a checking account, access to a matters worse, of the firms in Irbid that did manage line of credit, and access to an overdraft facility have to secure a loan in 2013, 99 percent were required deteriorated for Jordanian firms across the country, to provide more than one type of collateral, and TABLE 2. Firms Access to Finance in Jordan 2006 2009 2013 Does not own a checking account 6.2% 4.4% 16.6% Has an overdraft facility 40.4% 32.0% 20.1% Value of collateral exceeds 100 percent of loan value 80.5% 76.7% 92.7% More than one type of collateral required 85.7% 74.0% 95.0% Source: World Bank Enterprise Surveys. 22 | Special Focus: Access to Finance in Jordan jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Does not own a checking account Has an overdraft facility 20% 80% 18% 70% 2006 2009 2013 2006 16% 60% 14% 50% 2009 12% 10% 40% 2013 8% 30% 6% 20% 4% 2% 10% 0% 0% Amman Al-Zarqa Irbid Amman Al-Zarqa Irbid Has a line of credit or loan from a financial institution Value of collateral exceeds 100 percent of loan value 45% 120% 40% 2006 2009 2013 100% 35% 30% 80% 25% 2006 60% 20% 2009 15% 40% 2013 10% 20% 5% 0% 0% Amman Al-Zarqa Irbid Amman Al-Zarqa Irbid FIGURE 20. Access to finance for Jordanian firms by region Source: World Bank Enterprise Surveys (2006, 2009, and 2013). Does not own a checking account Has an overdraft facility 18% 16% 2006 2009 2013 50% 45% 14% 40% 2006 2009 2013 12% 35% 10% 30% 8% 25% 6% 20% 15% 4% 10% 2% 5% 0% 0% Manufacturing Services Manufacturing Services Has a line of credit or loan from a financial institution Value of collateral exceeds 100 percent of loan value 35% 90% 2006 2009 2013 80% 30% 70% 25% 60% 2006 2009 2013 20% 50% 15% 40% 30% 10% 20% 5% 10% 0% 0% Manufacturing Services Manufacturing Services FIGURE 21. Access to finance for Jordanian firms by sector Source: World Bank Enterprise Surveys (2006, 2009, and 2013). Special Focus: Access to Finance in Jordan | 23 The World Bank Does not own a checking account Has an overdraft facility 25% 2006 2009 2013 60% 2006 2009 2013 20% 50% 15% 40% 30% 10% 20% 5% 10% 0% 0% 0-10 years 10-24 years 25+ years 0-10 years 10-24 years 25+ years Has a line of credit or loan from a financial institution Value of collateral exceeds 100 percent of loan value 100% 90% 2006 2009 2013 45% 2006 2009 2013 40% 80% 35% 70% 30% 60% 25% 50% 20% 40% 15% 30% 10% 20% 5% 10% 0% 0% 0-10 years 10-24 years 25+ years 0-10 years 10-24 years 25+ years FIGURE 22. Access to finance for Jordanian firms by age Source: World Bank Enterprise Surveys (2006, 2009, and 2013). Does not own a checking account Has an overdraft facility 16% 70% 2006 2009 2013 14% 2006 2009 2013 60% 12% 50% 10% 40% 8% 6% 30% 4% 20% 2% 10% 0% 0% Small (6-19) Medium (20-99) Large (100+) Small (6-19) Medium (20-99) Large (100+) Has a line of credit or loan from a financial institution Value of collateral exceeds 100 percent of loan value 45% 120% 2006 2009 2013 40% 2006 2009 2013 100% 35% 30% 80% 25% 60% 20% 15% 40% 10% 20% 5% 0% 0% Small (6-19) Medium (20-99) Large (100+) Small (6-19) Medium (20-99) Large (100+) FIGURE 23. Access to finance for Jordanian firms by size Source: World Bank Enterprise Surveys (2006, 2009, and 2013). 24 | Special Focus: Access to Finance in Jordan jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Does not own a checking account Has an overdraft facility 25% 60% 50% 2006 20% 40% 2009 15% 30% 2013 10% 2006 2009 2013 20% 5% 10% 0% 0% Women No Women Women No Women Has a line of credit or loan from a financial institution Value of collateral exceeds 100 percent of loan value 70% 90% 2006 2009 2013 60% 80% 2006 70% 50% 2009 60% 40% 50% 30% 2013 40% 30% 20% 20% 10% 10% 0% 0% Women No Women Women No Women FIGURE 24. Access to finance for Jordanian firms by gender inclusiveness Source: World Bank Enterprise Surveys (2006, 2009, and 2013). in each case the collateral required exceeded 100 just one in three in 2013, with similarly evident— percent of the loan value. if not as stark—dips in other indicators (Figure 22). Unsurprisingly, young firms are the most susceptible 39. The negative trend in access to finance to inaccessibility of finances. One in five young firms has impacted both manufacturing firms and did not have a checking account in 2013. This is services firms across the board. The number of particularly problematic given the singular role that firms with no access to a checking account leaped young firms play in job creation, as highlighted by in 2013 by 11 percentage points for manufacturing the Jobs or Privileges report cited above. firms and 6 percentage points for services firms. In other metrics, services firms fare worse. Less than 41. As noted earlier, access to finance issues 20 percent of services firms, for example, have disproportionately affect smaller firms and is also access to an overdraft facility or line of credit from a becoming worse over time. Small firms have by financial institution (Figure 21). far the least access to finance: nearly 15 percent of them did not own a checking account in 2013, and 40. The decline in access to finance for only 12 percent had an overdraft facility (down from Jordanian firms is occurring regardless of age, 21 percent in 2009). Furthermore, 97 percent of but is more pronounced for younger firms. small firms face collateral amounts that exceed 100 Predictably, older enterprises seem to be on firmer percent of their loans, compared to only 83 percent ground, with a higher percentage owning various of large firms facing the same set of circumstances financial instruments. Nevertheless, the trend over (Figure 23). As noted previously, only 11 percent of time is worsening: the percentage of firms over small firms in 2013 had a loan at all. Thus, while the 25 years old that enjoy the benefit of an overdraft trend for all access to finance indicators has been facility has fallen from over 51 percent in 2006 to downward regardless of firm size, small firms are Special Focus: Access to Finance in Jordan | 25 The World Bank clearly more affected. This trend is ominous given the important role that small firms in play in the Jordanian economy. 42. The downward trend in access to finance in Jordan does not hold for firms with at least some female ownership. Such firms “outperform” their exclusively male-dominated counterparts across several Access to Finance metrics. By 2013, each and every firm surveyed in Jordan that had some female ownership possessed a checking account, while nearly one in five firms owned exclusively by men had no checking account. Similarly, while the percentage of gender inclusive firms having an overdraft facility and/or a line of credit increased to 57 percent and 64 percent, respectively, in 2013, the number of male-owned firms with access to such financial instruments languished in the 15 percent range after declines from previous years (Figure 24). 43. In addition to having limited access to checking accounts, lines of credit, and other financing instruments, Jordanian firms that do manage to secure loans face increasingly stringent collateral requirements. While the number of firms subject to only one form of collateral was low in Jordan in 2006—only 14 percent of firms in 2006 enjoyed that luxury—by 2013 it had become even rarer, with 95 percent of firms required to provide more than one form of collateral. Generally speaking, land and buildings are the most commonly required form of collateral, but as more and more types of collateral are being required for each loan, the use of machinery and equipment, accounts receivable and inventories has increased. The use of accounts receivable and inventories, in particular, has surged. In 2006, fewer than 20 percent of firms used accounts as collateral, compared to 33 percent by 2013—the most affected firms have been those located in Amman and Irbid, as well as older firms (over 25 years), over 50 percent of which cited accounts as one of the types of collateral required of them to obtain their loans (Figure 25). 26 | Special Focus: Access to Finance in Jordan jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Land and Buildings 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2006 2009 2013 Machinery and Equipment 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2006 2009 2013 Accounts 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2006 2009 2013 FIGURE 25. For Lines of credit requiring collateral, the type of collateral required was: Source: World Bank Enterprise Surveys (2006, 2009, and 2013). Special Focus: Access to Finance in Jordan | 27 The World Bank funds for SMEs in collaboration with the Ministry IV. Ongoing of Planning and International Cooperation (MOPIC) and other international and regional Structural Reforms institutions. These efforts have amounted to around US$ 370 million including competitive interest rates and Next Steps and appropriate maturities as illustrated below: 44. Despite the worsening trends in access • An agreement was signed with the World Bank to finance, several reforms have recently been for US$ 70 million, 100 percent of which was introduced and are expected to improve the received by the CBJ and allocated to banks with situation, once fully implemented. The Jordanian which the latter had signed loan agreements. As government has made significant strides in of March 31, 2015, banks fully disbursed the improving the enabling environment for the MSME allocated amounts to MSMEs directly or through sector including, inter alia: the finalizing of a partial MFIs. Given the commendable progress of the guarantee scheme aimed at improving access to project, a follow up project for US$ 50 million finance for medium enterprises;23 improving the additional financing is underway. business environment for SMEs through regulatory reforms and elimination of red tape; approving • An agreement for US$ 50 million has been basic mobile phone payments; working on adopting signed with the Arab Fund for Economic and a comprehensive secured transactions law; and Social Development (AFESD). The CBJ received preparing a National Startups and MSME Strategy.24 50 percent of the loan, which has been allocated The JLGC has also refocused its attention on SME to banks that have signed loan agreements with lending, developed a new Islamic product, and the CBJ. An additional initial agreement for signed new agreement with three banks to extend US$ 100 million has also been signed with the guarantees with their SME lending. AFESD. 45. The Central Bank of Jordan (CBJ) has • The CBJ has facilitated the process of taken the decision to expand its regulatory banks’ benefiting from a European Bank for umbrella to include microfinance institutions Reconstruction and Development (EBRD) loan (MFIs) and has begun the process of setting up of about US$ 100-120 million to finance SMEs. a regulatory framework to supervise MFIs. The microfinance bylaw was approved by the cabinet • A grant agreement was signed on February 9, on 14 December 2014 and published in the Official 2014 with the World Bank for US$ 3 million Gazette on 1 February 2015. A division within the to enhance governance and strengthen the CBJ’s Banking Supervision Department has been regulatory and institutional framework for created to regulate and supervise MFIs. Furthermore, MSMEs. The project aims at strengthening credit the CBJ will conduct a market study to determine guarantees schemes, enhancing the consumer the feasibility of bringing all unregulated (i.e. non- protection mechanism, and developing the banking) financial institutions under its regulatory regulatory and institutional framework for micro scope. finance institutions and NBFIs. By end of 2014, the CBJ granted the initial licensing to a private 46. To facilitate access to finance the CBJ has credit bureau, which is expected to begin sought to mobilize efforts to provide the necessary operations in 2015 23   Led by the Ministry of Planning and International 47. In addition, the CBJ launched the Mid- Cooperation in collaboration with the US Overseas Private Term Facility Program in 2011 to stimulate the Investment Corporation (OPIC). industrial, agricultural, tourism and alternative 24   Led by the Jordan Enterprise Development Corporation energy sectors. Under this initiative, the CBJ (JEDCO). 28 | Special Focus: Access to Finance in Jordan jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES extends credit to local banks at a preferential interest of the secured lending law would effectively provide rate which in turn allows the banks to lend to their the legal basis for the establishment of the collateral customers—made up primarily of SMEs in the registry. Therefore, achieving this reform would targeted economic sectors—at concessional interest effectively increase access to credit, reduce the cost rates for up to five years (ten years for the alternative of credit, increase market competition and promote energy sector). The program has a total ceiling of 5 credit diversification. In addition, the formation of a percent of each bank’s direct standing facilities in credit bureau that collects and provides consumer Jordanian Dinars (i.e., JD950 million). credit information for firms and individuals would streamline and facilitate lending to potential 48. The CBJ has also undertaken a number borrowers by helping banks and financial institutions of other key measures to improve SMEs access assess the creditworthiness of borrowers.26 to finance. These have included strengthening the financial institutional infrastructure (e.g., lowering 50. Enhancing the role of NBFIs by addressing the threshold for reporting to public credit registry); their legal and tax framework could help create modernizing the reporting and monitoring system a level playing field. Many NBFIS, such as leasing for banks; licensing new bank branches in previously companies, provide products that cater well to underserved Governorates; and facilitating the entry MSMEs. In fact, there are already more than15 leasing of Islamic banks to cater to the growing demand for companies in Jordan with a leasing volume of around Shar’iah compliant products.25 All these measures USD 70 million and an estimated penetration rate have contributed to MSMEs growth and expansion of almost 5.5 percent. Thus, with proper regulation in Jordan, and resulted in the emergence of a more and supervision, this area has promising potential positive enabling environment, which should help for growth. these enterprises in contributing to job creation, and overall economic growth. 51. Finally, modern insolvency and bankruptcy laws in line with best practices are crucial. Effective 49. Notwithstanding these efforts, insolvency systems enhance predictability and thus instrumental structural reforms are still needed lender confidence in loan recovery upon default. for transformational change to improve access to This encourages more lending, as the lending risk is finance across the board. The approval of a secured reduced leading to a reduction in the cost of money. lending law by the Jordanian Parliament would Moreover, effective insolvency and bankruptcy laws facilitate the use of movable property as an alternative encourage financial institutions to provide credit form of collateral, reducing the largely real estate since they are given priority rights to recoup funds collateral requirement. Small and young firms often in the case of bankruptcy. It would also stimulate have limited real estate collateral but most do have employment-generating start-ups to set up shop movable property that they could use as collateral. knowing that a timely and less-costly exit strategy The version of the secured lending law which was is possible. Such reforms would ease what is a core approved by the Council of Ministers and submitted constraint to doing business in Jordan and stimulate to Parliament provides for the establishment of a the economy towards achieving enhanced job- collateral registry of movable assets. The enactment creation and ultimately, the twin goals. 25   In addition, the CBJ is working on an Out-of-Court Workout (OCW) of multi-creditor loans through informal restructuring of specific debts on a voluntary basis. The OCW debt restructuring process—typically done by unilateral contractual agreement—is non-mandatory and non-binding on non-participants. It follows simple and transparent implementation principles that improve access to finance by providing creditors with a flexible and effective means to address the financial distress of struggling (though not yet insolvent) businesses. This also leads to 26 enhanced predictability and lender confidence in loan recovery   A credit information law has been enacted and a provisional upon default. license for the credit bureau has been issued. Special Focus: Access to Finance in Jordan | 29 The World Bank Data Appendix TABLE 3. Jordan: Selected Economic Indicators, 2012-17   2012 2013 2014 2015 2016 2017   Act. Act. Est. Proj. Real sector (annual percentage change, unless otherwise specified) Real GDP 2.7 2.8 3.1 3.5 3.9 4.0 Real GDP per Capita 0.4 0.6 0.9 2.3 1.6 1.7               Agriculture (share of GDP) 3.3 3.1 2.9 2.9 3.0 3.0 Industry (share of GDP) 25.1 25.0 25.5 25.6 25.8 25.9 Services (share of GDP) 55.8 56.0 60.1 59.7 59.5 59.3 Net taxes on products (share of GDP) 15.8 15.9 11.5 11.7 11.8 11.8               Money and prices (annual percentage change, unless otherwise specified) CPI Inflation (p.a) 4.7 5.6 2.8 1.0 2.0 2.2 Money (M2) 3.4 9.7 6.9 7.8 8.4 7.0               Investment & saving (percent of GDP, unless otherwise specified)  Total Investment 26.9 28.1 28.8 27.5 28.3 28.4 Gross National Savings 11.7 17.8 21.7 21.9 23.1 24.7               Government finance (percent of GDP, unless otherwise specified) Total revenues and grants 23.0 24.1 28.7 25.9 26.7 26.8 Domestic Revenue (excluding grants and privatization) 21.5 21.5 23.9 23.2 23.2 23.3 o/w. tax revenue 15.3 15.3 16.0 16.1 16.5 16.6 Foreign Grants 1.5 2.7 4.9 2.6 3.5 3.5 Total expenditure and net lending 32.0 35.6 37.9 28.9 29.5 29.7 Current* 28.9 31.3 33.4 24.7 24.9 24.9 o/w wages and salaries 5.0 5.0 4.9 4.8 4.7 4.6 o/w interest payment 2.7 3.1 3.7 3.6 3.7 3.6 o/w Transfer to utilities (NEPCO and WAJ) 0.3 5.9 7.0 0.0 0.0 0.0 Capital & NL 3.1 4.3 4.5 4.2 4.6 4.8 Overall balance (deficit (-), excl. grants)** -10.5 -14.1 -14.1 -5.4 -5.1 -4.7 Overall balance (deficit (-), incl. grants) -9.0 -11.4 -9.2 -2.8 -1.6 -1.2 Primary Balance (deficit (-), excl. grants) -7.8 -11.0 -10.4 -1.8 -1.4 -1.1 Primary Balance (deficit (-), incl. grants) -6.4 -8.3 -5.5 0.8 2.1 2.4               External sector (percent of GDP, unless otherwise specified)  Current Account -15.2 -10.3 -7.1 -5.7 -5.2 -3.6 Net Exports -28.0 -29.4 -25.4 -19.8 -19.0 -18.0 Export FOB 46.2 42.5 44.5 44.2 45.4 45.6 Import FOB 74.3 71.9 69.9 64.0 64.5 63.6 Net Income and transfers 12.8 19.2 18.3 14.1 13.8 14.4               Net Private Investments (FDI and Portfolio) 6.3 10.5 9.3 9.0 9.9 10.2 Gross Reserves (Months of Imports GNFS) 3.5 5.9 6.8 7.8 7.7 8.2               Total Debt (in million US$, unless otherwise specified)  Total Debt Stock 24,864 29,192 31,983 34,782 35,741 37,037 Debt to GDP Ratio (%)*** 80.2 86.7 89.6 88.8 85.7 83.5               Memorandum Items:             Nominal GDP (Billion JD) 22.0 23.9 25.3 27.7 29.5 31.4 GDP (in million US$) 31,015 33,679 35,695 39,159 41,716 44,371 Source: Government Data and World Bank Staff Calculation. * Includes adjustment to other receivables for 2012 (0.4% of GDP) and transfers to NEPCO and WAJ. As of 2015, NEPCO and WAJ will revert to government-guaranteed borrowing from commercial banks. ** Includes additional measures needed for 2015 (0.2 % of GDP), 2016 (1.2 % of GDP) and 2017 (1.7 % of GDP) *** Government and guaranteed gross debt. Includes NEPCO estimated borrowings for 2015-2017. 30 | Data Appendix jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Selected Special Focus from Recent Jordan Economic Monitors time is bound to have a major impact on the host Spring 2014 JEM: country’s labor market. While in principle both positive and negative impacts could arise from such “Resilience amid a shock, ultimately the net impact on the Jordanian labor market remains an empirical question. Official Turmoil” data are utilized to examine the impact on three labor market indicators – labor force participation, Updating Poverty Estimates at Frequent Intervals: the employment rate and the unemployment rate Preliminary Results from Jordan: (Special Focus - while accounting for economic activity through 1) Jordan, not unlike many countries, relies on using construction permits as a control variable, at infrequent household expenditure and income the level of governorates. The Vector Autoregression surveys (HEIS) to estimate poverty in the country. (VAR) methodology has been adopted on panel In Jordan, the last HEIS survey dates from 2010 so data that involves a cross-section of governorates that the last official poverty estimates is also from in Jordan, during the time period Q4 2007 to Q3 that year. When policy decisions are made in 2014, 2013. We find evidence suggesting that the Syrian they are therefore based on rather dated estimates refugees are causing a reduction in the national labor of poverty. Not only has Jordan suffered from a force participation rate of Jordanians. Preliminary series of negative shocks, the Government has also analysis reveals this could be the result of refugees introduced major mitigation programs (e.g., the willing to work for relatively low wages, causing a petroleum cash compensation transfer). Have these large increase in discouraged Jordanian workers (as programs been successful in protecting the poor? Is these have a reservation wage that they perceive Jordan still progressing in its fight against poverty? cannot be satisfied under the current environment To help answer these questions, World Bank staff and therefore prefer to drop out of the labor force developed an alternative method for estimating altogether; since these discouraged workers are no poverty by imputing household consumption data longer searching for jobs, they are not counted in the into the Employment-Unemployment Survey, which rank of the unemployed). Given Jordan’s previously is conducted every quarter. This approach offers low labor force participation rate prior to the Syrian alternate annual poverty estimates for Jordan. Based conflict, the recent drop in the participation rate is a on this new approach, estimates for 2011 and source of concern. 2012 point to a small decrease in the poverty rate compared to 2010. Previous Bank research revealed, however, that a third of the population lived below the poverty line in at least one quarter of the year. Hence, while progress continues in tackling chronic poverty, transient poverty affects a large swath of the population, which points to a large share of vulnerable Jordanians. Syrian Refugees and Labor Market Outcomes in Jordan: (Special Focus 2) A large influx of refugees into a country occurring over a relatively short Selected Special Focus from Recent Jordan Economic Monitors | 31 The World Bank poverty estimated did experience transient poverty, Fall 2013 JEM: including some lower-middle and middle income households. Further analysis is needed to understand “Moderate the complex chronic and transient dimensions of poverty in Jordan as policy interventions will differ in Economic Activity effectiveness to reduce poverty versus vulnerability. with Significant Downside Risk” Spring 2013 JEM: Impact of Syrian Crisis on Jordan’s Health Sector and Subsidies: (Special Focus 1) The large influx “Maintaining of Syrian refugees into Jordan, currently at over 8 percent of the Jordanian population, is having a Stability and significant and palpable socio-economic impact. Jordan’s open door policy and the authority’s Fostering Shared generous decision to allow the refugees access to basic services rendered to nationals have generated Prosperity Amid large direct fiscal costs. This Special Focus provides quantified estimates of the cost of some of the most Regional Turmoil” significant services provided to the refugees—drugs and vaccines administered and bread and LPG fuel Options for Fiscal Adjustment and Consolidation subsidy programs—for the period 2012-2014. We in Jordan: (Special Focus) The steady and structural find that drugs and vaccines are projected to cost decline in revenues that started in 2007 shrank fiscal the Jordanian budget USD 71.5 million during that space and increased the vulnerability of Jordan’s time period. The bread and LPG subsidy programs public finances to exogenous shocks. The sharp rise are among the principal subsidies extended by in spending that started in 2011—in part related the authorities to enable all Jordanian households to the disruption of Egyptian gas supply, and to access to basic necessities. As these are universal/ meet popular demands for additional spending and untargeted subsidies, they have also been accessible subsidies—resulted in a significant and unsustainable to the Syrian refugees and possibly to Syrians back in worsening of public finances. Options to address Syria. Using econometric analysis, we estimate the this situation include both revenue and expenditure cost to the bread subsidy program due to increased measures. The former comprise broadening the tax demand by the refugees during the period 2012- base and ensuring equal enforcement of existing 2014 to be USD55 million. As for the LPG subsidy, tax laws. The latter consist of improved efficiency we find that the additional cost comes out to be USD in current and capital spending, adjustments to the 24.9 million during that same period. electricity tariffs to reflect the permanent increase in input prices, a better targeting of consumer The Incidence and Importance of Transient subsidies, and water sector reforms. If well balanced Poverty in Jordan: (Special Focus 2) According and calibrated, revenue and spending measures to annual official estimates, 14.4 percent of the can be progressive, which would enhance their population in Jordan lived in poverty during 2010. acceptance. A within-year profile of poverty, however, indicates that a third of the population in Jordan lived below the poverty line in at least one quarter of the year. In other words 18.6 percent of the population which is classified as non-poor based on annual 32 | Selected Special Focus from Recent Jordan Economic Monitors jordan ECONOMIC monitor | PERSISTING FORWARD DESPITE CHALLENGES Selected recent World Bank publications on Jordan (For an exhaustive-e list, please go to: http://www.worldbank.org/en/country/jordan/research ) Title Publication Document Type Date Plunging Oil Prices Bring Gains and Losses to the Middle East and North Africa 2015/01/29 Press Release Region Jordan Economic Monitor, Fall 2014: Steady and Moderate Growth Continues 2014/12/10 Report Jobs or Privileges: Unleashing the Employment Potential 2014/11/01 Jordan Issue Brief Of the Middle East and North Africa Doing Business 2015: going beyond efficiency – Jordan 2014/10/01 Working Paper Jordan Economic Monitor: Steady and moderate growth continues 2014/04/01 Report Jordan Economic Monitor: Resilience amid turmoil 2014/04/01 Report Jordan country opinion survey report (July 2013 - June 2014) 2014/03/14 Working Paper Jordan Economic Monitor: Moderate Economic Activity With Significant Downside 2013/10/31 Report Risk Soft skills or hard cash? : the impact of training and wage subsidy programs on 2013/08/14 Brief female youth employment in Jordan Mitigate the Impact of Syrian Displacement on Jordan 2013/07/18 Loan Agreement Jordan Economic Monitor: Maintaining Stability and Fostering Shared Prosperity 2013/06/25 Report Amid Regional Turmoil Developing micro, small and medium enterprises in Jordan : the route to shared 2013/03/01 Brief prosperity (English) Do wage subsidies help young women get jobs? 2012/01/12 Brief Doing business 2013 : Jordan – smarter regulations for small and medium-size 2012/23/10 Working Paper enterprises : comparing business regulations for domestic firms in 185 economies Soft skills or hard cash? What works for female employment in Jordan? 2012/19/10 Working Paper The Patterns and determinants of household welfare growth in Jordan : 2002-2010 2012/01/10 Policy Research Working Paper PPIAF assistance in Jordan 2012/01/10 Brief Health equity and financial protection datasheet: Jordan 2012/01/08 Brief Privatization: lessons from Jordan 2012/01/07 Brief Soft skills or hard cash ? the impact of training and wage subsidy programs on 2012/01/07 Policy Research Working Paper female youth employment in Jordan The Jordan education initiative: a multi-stakeholder partnership model to support 2012/01/06 Policy Research Working Paper education reform Who needs legal aid services? Addressing demand in Jordan 2012/01/03 Brief Jordan - Carbon Capture and Storage (CCS): capacity building technical assistance 2012/01/03 Energy Study Are Jordan and Tunisia’s exports becoming more technologically sophisticated? 2012/01/02 Working Paper Analysis using highly disaggregated export databases Jordan student aid reform : opportunities for a new generation 2012/01/02 Brief Are Jordan and Tunisia’s exports becoming more technologically sophisticated? And 2012/01/02 Brief why it matters Jordan - First Programmatic Development Policy Loan Project: country partnership 2012/24/01 Summary of Discussion strategy - summary of discussion Selected Recent World Bank Publications on Jordan | 33 NoTES NoTES NoTES