Jordan: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
04 May 2004
eISBN:
9781451820317
Language:
English
Keywords:
ISCR; CR; GDP; deficit; debt ratio; GDP Jordan; Jordan; ATC export; baseline export prospects; airlift capacity; garment export sector; merchandise export; Export performance; Exports; Comparative advantage; Tourism; Middle East
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This Selected Issues paper and Statistical Appendix on Jordan underlies stabilization and structural transformation of the economy. Current fiscal policy appears to be broadly sustainable and should be sufficient to allow for the continued fall in the debt burden, absent large external macroeconomic shocks. Over the past decade, Jordan has made commendable progress in replacing an informal family-based social safety system with well-defined and well-targeted social protection institutions. The government will need to remain committed to periodic increases of fuel prices to close the gap between domestic and international petroleum product prices.

Abstract

This Selected Issues paper and Statistical Appendix on Jordan underlies stabilization and structural transformation of the economy. Current fiscal policy appears to be broadly sustainable and should be sufficient to allow for the continued fall in the debt burden, absent large external macroeconomic shocks. Over the past decade, Jordan has made commendable progress in replacing an informal family-based social safety system with well-defined and well-targeted social protection institutions. The government will need to remain committed to periodic increases of fuel prices to close the gap between domestic and international petroleum product prices.

VIII. Assessment of External Competitiveness and Export Prospects81

249. Jordan’s external competitiveness and export performance has improved significantly over the last few years, as progress achieved in structural reforms, trade liberalization, and preferential access to major foreign markets have contributed to an acceleration of export growth. A substantial part of the export growth has stemmed from a surge in garment exports as foreign investors have taken advantage of Jordan’s duty and quota-free access to the U.S. market. There is concern that the competitive edge afforded to Jordan by such exemptions may be lost due to the upcoming elimination of quotas under the WTO agreement on apparel, textiles and clothing (ATC).

250. This chapter aims to assess the sustainability of the ongoing export boom by considering not only macroeconomic developments but also the micro-foundations of export growth. By identifying the sources of comparative advantage for Jordan, such as factor endowments, institutions and policy, economic geography and agglomeration economies, and focusing on the main supply and demand factors affecting each major exporting sector, this chapter attempts to capture the underlying microeconomic dynamics of Jordanian exports.

251. The analysis suggests that Jordan is likely to sustain favorable external sector prospects over the medium term. Exports of goods and nonfactor services could be reasonably expected to grow on average by about 7.5 percent in U.S. dollar terms, provided some remaining supply constraints are addressed. This outlook envisages that Jordanian exports could adjust flexibly to terms of trade shocks, further their competitive position in regional markets, and reap more fully the opportunities opened by preferential trading arrangements, particularly with the United States and the European Union.

252. This chapter is organized as follows. Section A reviews the main indicators of Jordan’s external competitiveness, against the background of recent export developments. Section B analyzes the primary supply and demand sources of comparative advantage that are likely to shape the medium-term export prospects of key sectors of the Jordanian economy. Section C concludes by providing a baseline medium-term outlook for Jordan’s exports and providing some estimates of the sensitivity of its external sector prospects to the impact of the elimination of quotas under the WTO/ATC.

A. External Competitiveness

253. Overall, external competitiveness of the Jordanian economy is likely to have increased significantly since the late 1990s notwithstanding the dependence of the real effective exchange rate on movements of the U.S. dollar to which the Jordanian dinar (JD) has been de facto pegged. Previous analysis undertaken by Fund staff estimated that the JD was overvalued by some 10–15 percent in real effective terms, in the spring of 1999. The REER further appreciated up to early 2002, reflecting the increasing strength of the U.S. dollar relative to other major currencies, in particular the Euro. This trend was subsequently reversed and at end-2003, the REER stood at roughly its level in early 1999 (Figure VIII.1).

Figure VIII.1.
Figure VIII.1.

Jordan: Indicators of Competitiveness

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A008

Sources: CBJ, IMF; and INS database.

254. The equilibrium real effective exchange rate has been buttressed by efficiency gains resulting from greater openness to foreign competition, privatization, as well as improvements in public infrastructure and in the delivery of government services. Together with prudent macroeconomic policies, these broad structural changes have started to yield some gains in total factor productivity growth, according to recent research by Fund staff. 82

255. In successive rounds of liberalization, quantitative barriers to imports and tariffs were eliminated or reduced on a multilateral or regional basis, opening Jordan to world markets. Jordan acceded the WTO in 2000 with a commitment to gradually reduce tariff and nontariff barriers over the following 10 years. Jordan also ratified an FTA with the United States in 2001 and an association agreement with the European Union (EU) in 2002. Jordan is also a member of the Arab FTA since 1998 and has signed or concluded negotiations for FTAs with most countries of the MENA region, some European countries that are not yet members of the EU, and more recently, Singapore. In addition, the ambitious Aqaba Special Economic Zone is being developed as a low-tax, duty-free area conducive to new investments in manufacturing and tourism.

256. The above structural changes are likely to take time to fully impact the overall external performance of the Jordanian economy. They have however already started to bear fruit, as witnessed by the robust export performance that has contributed to a significant diversification of Jordan’s structure and direction of trade in the last few years.

257. Following a decade of subdued growth, Jordan’s export performance improved substantially during the last three years, contributing to a remarkable strengthening of the external current account. Over the period 2000–03, exports earnings increased by 8.5 percent a year in U.S. dollar terms, compared with an average annual rate of growth of only 4.5 percent during the 1990s. Remarkable gains were recorded in merchandise exports, which grew by 21.3 percent a year between 2000 and 2003, compared to 8 percent on average during the previous decade (Table VIII.1). Exports of nonfactor services, on the other hand, performed relatively poorly during the three years, partly due to a slowdown in tourism receipts related to regional and air travel security concerns.

Table VIII.1.

Jordan: Average Annual Growth of US$ Export Receipts

(In percent)

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Source: Jordan Department of Statistics.

258. The boom in merchandise exports of the last three years has been fueled by a surge in apparel exports to the United States. This surge has been driven by the success of the Qualified Industrial Zone (QIZ) scheme, whereby the United States offers special duty-free and quota-free market access to goods produced in designated industrial estates, under the requirement that a minimum of 35 percent of value added originating in Jordan, the West-Bank and Gaza, and Israel. This scheme proved particularly attractive to low-cost garment manufacturers, mainly from Asia, whose export potential to the United States were increasingly constrained by import quotas allowed under the WTO agreement on textile and clothing. From only two factories in 1999, the number of QIZ accredited companies reached 43 in 2003, resulting in a surge of QIZ exports from only $2.4 million in 1999 to some $586.6 million in 2003. The QIZ success was critical in lifting the growth of manufactured export receipts, from a yearly average of 10.4 percent during the 1990s to 65.9 percent over the period 2000–2003.

259. The acceleration of export growth witnessed during the last three years has not however been limited to garments assembled in QIZs. Merchandise exports excluding manufactures still grew by a respectable 10.4 percent a year during 2000–2003, up from an average of 7.5 percent during the 1990s. This solid record was achieved despite a stagnation of traditional exports of mineral products due to unfavorable price developments, as notable gains were recorded in agricultural products and pharmaceuticals exports, mainly to neighboring countries. Re-exports have also shown remarkable growth, fueled by trade with Iraq, although the latter were temporarily but severely disrupted during the first half of 2003 due to the war.

260. The above developments have contributed to a significant broadening of Jordan’s export base. Mineral-based traditional exports now account for less than one-fifth of domestic exports, compared to almost one-third just a few years ago. Similarly, the disappointing performance of tourism in recent years has contributed to a decline of the share of nonfactor services in total exports to about a third, from almost one-half at the end of the 1990s. Conversely, non-traditional merchandise exports have gained much prominence as a source of foreign exchange, with a share in total exports of goods and non factor services surging from around one-third of domestic exports at the end of the 1990s to more than 80 percent at end-2003. (Table VIII.2).

Table VIII. 2.

Jordan: Structure of Exports of Goods and Nonfactor Services

(In percent)

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Sources: Jordan’s Department of Statistics; and Central Bank of Jordan.

261. The changing structure of its merchandise exports has contributed to a diversification of Jordan’s main foreign markets. In particular, the share of exports destined to the United States has increased from only 4 percent in 2000 to more than 20 percent currently. Conversely, the importance of Asia has declined from 16 to 10 percent during the last three years, due to the relative poor performance of traditional exports of phosphate, potash, and fertilizers, mostly destined to India. Arab countries, however, continue to provide key markets for almost half of Jordan’s products, including fruits and vegetables and pharmaceuticals whose exports have performed relatively well in recent years. Indeed, except for textiles and mineral based products, most of Jordan’s exports are destined to other Arab countries (Tables VIII.3 and VIII.4).

Table VIII.3.

Jordan: Destination of Merchandise Exports, 1999–2003

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Source: Central Bank of Jordan.
Table VIII.4.

Jordan: Geographical Destination of Selected Merchandise Exports in 2002

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Source: UN’s Comtrade database.

Accounting for 66.3 percent of domestic export receipts in 2002.

262. In the tourism sector, the mid-1990s was a high-growth phase for European and U.S. visitors due to the start of the peace process. However, the intifada, the events of September 11, and the Iraq war have caused a major drop in Western tourist arrivals. Instead, in recent years, visitors from neighboring Arab countries have increasingly contributed to Jordan’s tourism industry (Table VIII.5).

Table VIII.5.

Jordan-Regional Origin of Tourists

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Source: Jordan’s Department of Statistics

B. Supply and Demand Sources of Comparative Advantage

263. To analyze export prospects for Jordan there is a need to understand its sources of comparative advantage. In this section we put comparative advantage in a supply-demand framework to better understand the forces which have and are likely to drive exports.

Supply issues

264. The traditional sources of comparative advantage are factor endowments, institutions and government policy, and agglomeration economies. We consider each of these sources in turn focusing on the export sectors for which they are most relevant.

Factor endowments

265. Jordan’s semi-arid climactic conditions are not favorable for large-scale farming. Annual rainfall is just 200–600 mm in the uplands and 20–70 mm in the desert, and less than 3 percent of Jordan’s surface area is arable. Indeed, agriculture comprises less than 4 percent of its GDP. However, Jordan has been a traditional exporter of fruits and vegetables to its neighbors due to farming in Jordan Valley. As a percent of exports, fruits and vegetables have been showing a declining trend, having fallen from 7.8 percent of exports in 1985 to just over 5 percent by 2003. Although Jordan is likely to continue to serve regional markets and find niche areas in European markets, given its natural constraints, agricultural produce is unlikely to be a large and fast-growing component of exports over the medium term.

266. Jordan’s chief mineral resources are its deposits of potash and phosphate. Traditionally, these have contributed significantly to its exports, although to a lesser extent in recent years, largely due to unfavorable price developments as global supply has increased. Jordan will need to improve efficiencies and remove supply constraints in the sectors to fully take advantage of its deposits. 83 Recent years have seen an increasingly high level of competition in the phosphate, potash, and fertilizer markets. Current projections indicate little, if any, price increases for these commodities over the medium term. Although current WEO projections point to a moderate upturn in the prices for these traditional exports, one cannot rule out that price developments may turn out even less favorable than currently envisaged. Thus, traditional mineral exports are unlikely to reverse their relative decline as a major source of foreign exchange for Jordan.

267. Jordan possesses a comparative advantage in terms of the level of skills of its workforce compared to those of its neighbors. This is primarily due to a strong emphasis on education and a liberal social and economic environment. Jordan’s literacy rate of over 90 percent is the highest in the region, and with 37 percent of its population educated to above the secondary level, Jordan has a large pool of engineering, business and medical graduates. Nascent sectors such as ICT and pharmaceuticals are well placed to exploit this comparative advantage. The IT industry has already racked up more than $40 million in exports primarily to the Middle East region in the niche areas of e-learning and e-governance. The government is taking the lead in creating an enabling environment by improving connectivity, increasing PC penetration rates, and encouraging private sector participation. To harness its IT skill comparative advantage, Jordan needs to continue to enhance its capabilities and resolve regulatory issues relating to the implementation of intellectual property rights (IPR), the streamlining of government procedures, and the development of e-commerce legislation.

268. Pharmaceuticals is a sunrise industry which stands to benefit from Jordan’s relatively well-educated workforce. Jordan has four clinical research organizations to aid in research and development (R&D) and drug trials. Its smooth accession to the WTO and the IPR agreements have strengthened multinationals’ confidence in Jordan’s commitment to investors. Local firms in the sector have made substantial investments to comply with international standards, and especially in getting EU and the U.S. Federal Drug Administration (FDA) approvals. Strategic alliances and licensing agreements with leading international companies is likely to buttress their competitive edge over regional competitors. The companies will need to continue to innovate, invest in R&D, and strike alliances and license agreements to remain competitive.

269. Major tourist attractions such as Petra, Jerash, and several others form another source of comparative advantage. They are, however, vulnerable to perceived security risks. Jordan’s tourism earnings have became less susceptible to these risks over the last few years, primarily by diversifying into regional visitors. However, there is considerable scope for improvement by addressing supply constraints in the supporting infrastructure for tourism. The primary constraints are Jordan’s limited airlift capacity,84 the lack of skilled manpower, especially in hotel management, a shortage of entertainment infrastructure,85 and the lack of a regional tourism network to facilitate the flow of tourists to other countries within the region. Addressing these supply constraints would enable the tourist industry to attain a higher growth path.

Institutions and policy

270. An influential body of opinion in the international trade literature views institutions as a major determinant of development as well as a proximate cause for exporting success. 86 Jordan’s economic and political institutions are fairly well developed compared to other countries in the region. Jordan compares very favorably on economic freedom. 87 Its level of financial development is considered to be the highest in the region. 88 On other institutional indicators such as rule of law, regulatory quality, overall trade restrictiveness, governance, and functioning of labor markets and private sector development, Jordan ranks among the highest in the region. 89 Jordan’s political institutions also have relatively strong foundations and have given it political stability for the last several decades.

271. On government policy, Jordan compares very favorably with its regional neighbors. It ranks 1st among 24 countries in the region in a recent study done by the Middle East and Central Asian Department of the IMF (see Figure VIII.2). 90 The figure displays Jordan’s scores on a scale of 0 to 100 (the larger the better) on several composite indicators of government policy relative to the average as well as the minimum and maximum for the MENA region. For instance, Jordan scores 75 on the index of macroeconomic environment which is above the MENA average of 65 but less than the maximum of 90. Jordan does score the highest in the region on social policies and domestic market policies, whereas it ranks very high on tax and expenditure, financial sector, and external sector policies. These indicators suggests that Jordan’s highly favorable institutions and government policy should continue to have a positive impact on its export performance.

Figure VIII.2.
Figure VIII.2.

Jordan: Performance on Institutions and Policy Relative to Region 1/

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A008

1/ Values range from 0 (worst performer) to 100 (best performer). Average, minimum, and maximum stand for simple MED average, MED minimum and MED maximum.

Agglomeration

272. The forces of agglomeration and economies of scale through a clustering of activity can potentially have a large impact on exporting activity. 91 Spillovers can be both physical, where the presence of one firm reduces transportation and other input costs for the other, and intellectual, where human capital may be increased due to the flow of labor between two firms. Essentially, a clustering of economic activities generate linkages. The demand for inputs from a final goods producer generates a ‘backward’ linkage as more supplier firms enter the industry leading to better quality and/or cheaper inputs. The availability of better inputs in turn leads to more firms entering the final goods industry and hence its development through a ‘forward linkage.’ These linkages feed on each other and can generate large externalities eventually causing industrial growth. 92

273. Jordan has a comparative advantage in the sense that it has already created a clustering of activity through the concentration of apparel exporters in the QIZs. The presence of foreign manufacturers has enabled spillovers to other producers reducing their input costs and improving their technology and human capital. The presence of garment producers in one location and the associated demand has enabled the concentration of support services such as labor markets, vocational training, health care, freight and customs, machinery supplies, housing, catering among others thereby reducing their costs and improving their quality. The availability of these inputs have encouraged other multinationals to locate in the QIZs. These linkage forces have the potential to intensify further over the medium-term.

274. In addition, multinationals act as export catalysts for domestic manufacturers through demonstration effects. 93 Given their knowledge of complying with export rules and regulations in foreign markets and dealing with potential clients, multinationals lower information costs associated with exporting for domestic manufacturers. The trade literature emphasizes the initial sunk costs of penetrating export markets through adequate marketing and distribution channels as a critical element of exporting. 94 The diffusion of this information from foreign exporters can conceivably benefit Jordanian manufacturers even after the elimination of the quotas under the WTO agreement. The spillovers through linkages and demonstration effects could potentially enable Jordanian exporters to expand their manufacturing base and export higher value-added products to new markets.

C. Demand Issues

Geographical and cultural links

275. Jordan enjoys geographical proximity to the sizeable markets of Iraq and Saudi Arabia. In the past, manufacturing exports have benefited from access to the Iraqi market, both due to historical and cultural links, as well as the latter’s difficult political relations with its other neighbors. In addition, Jordan’s cultural links to the region remain strong due to its diaspora and a common language. Indeed, as mentioned in Section A, most of Jordan’s exports apart from textiles and apparel and mineral products, are concentrated in the Middle-East region. Hence, developments in the region will have a key impact on Jordan’s export outlook.

276. Demand is likely to continue to be strong from the region barring shocks, as the region stabilizes, and growth picks up. Demand for fruits and vegetables and other agricultural produce is expected to remain significant in the region. For manufacturing exports excluding textiles, the medium-term demand outlook is less sanguine. Jordan’s primary market is Iraq, and although there may be short-term demand from Iraqi importers to fill in urgent needs, it seems likely that the lucrative captive Iraqi market for Jordanian manufacturing exports will contract due to the influx of other, more efficient exporters. The diversification of Iraqi imports may cause nontextile manufacturing exports to remain stagnant or even decline. In the services sector, the demand outlook is more bullish. As the region embraces IT, demand for e-learning and e-governance is likely to continue to be strong especially from markets such as the UAE and Bahrain. For pharmaceutical products, the Middle East is one of the fastest growing markets in the world and is forecast to have annual compound growth rates in excess of 10 percent per annum over the medium term.

Preferential trading arrangements

277. Jordan has benefited immensely by exploiting its good political relations to conclude free trade arrangements and other preferential trade agreements with its Middle-Eastern neighbors and the United States and EU. In particular, the QIZ scheme with quota and duty-free access to the U.S. market has been the major factor behind the spectacular growth of apparel exports. Further, by entering the WTO and protecting the IPR regime, Jordan has gained a foothold in the pharmaceuticals sector. In the medium-term, export growth will depend heavily on Jordan’s ability to take full advantage of its preferential access to the world’s two largest markets. The FTA with the United States and Association Agreement with the EU ratified in June 2002 to eliminate most trade barriers over the next 10 years could translate into significant export gains for Jordan.

Sources of export demand

278. To understand sources of export demand growth we can decompose growth into four likely components—(i) deepening current penetration of existing markets with the same products; (ii) deepening current penetration of existing markets with new products; (iii) penetrating new markets with the same products; (iv) penetrating new markets with new products. We discuss prospects in each of the major exporting sectors in this light.

279. Jordan can increase its penetration of existing markets in cultural tourism. The European market for cultural tourism is very large and is a potential source for more tourism receipts. There is also underlying demand for new export sectors such as IT and pharmaceuticals as well as higher-end apparel in the existing markets of the Middle East for the former and the United States for the latter. Currently, most of Jordan’s IT exports are to the region and in this market, Jordanian firms face competition from Indian and Israeli IT companies. However, there is a niche area for Jordan due to its skilled workforce, similar culture, people to people contacts and familiarity with Arabic to penetrate the Gulf market, where demand for IT continues to grow at a rapid clip. Jordan could use its knowledge of Arabic and cultural links to forge renewed growth in these segments. In pharmaceuticals, demand in the region continues to grow as discussed previously even as Jordanian companies continue to invest in R&D and innovation, and market new products. The large U.S. market for apparel is highly attractive for Jordan’s competitive garment export sector. By moving up the value chain, Jordan can avoid competition from low-cost suppliers such as China and India, as well as increase its export revenue base.

280. Jordan needs to tap into demand from new markets for its existing export sectors of fruits and vegetables, textiles, and tourism. Currently, most of fruit and vegetable exports go to the region, and only a tiny fraction to European markets. There is scope to find several niche markets in Europe especially during the winter season as well as with better packaging to compete with African and Israeli exporters. In tourism, the Arab and East European markets offer tremendous opportunities to increase revenues. Jordan can focus on higher-end tourism, of which the largest segment currently goes to Lebanon, as well as increasing the length of stay of tourists by marketing Jordan as a whole. High growth areas for the regional market are adventure and eco-tourism. Other markets include a growing Eastern European market including Russia for cultural and religious tourism such as the Baptism site. In garment exports, Jordan needs not only to move up the value-added chain, but also diversify away from the United States to other lucrative markets such as the EU.

281. The outlook for penetrating new markets with new products is less optimistic, largely due to a lack of experience and knowledge. It is conceivable however, that the sunrise pharmaceutical industry could increase its penetration of the EU market, and other specialized exports such as Dead Sea minerals and olive oil could find new markets and thereby boost overall export growth.

D. Outlook and Challenges

282. The surge in apparel exports to the United States to take advantage of the duty and quota free QIZ regime has been the dominant source of export growth during the last few years. The elimination of quotas at end-2004, under the WTO/ATC, will be a significant trade shock for Jordan which will likely induce a number of companies currently operating in Jordan to relocate to countries with lower unit labor costs and/or shorter lead and delivery times.

283. The elimination of the WTO/ATC quota regime represents, however, a threat as well as an opportunity. Jordan will maintain some advantages as a result of duty-free access to the U.S. market under both the QIZ scheme and the U.S.-Jordan FTA, as well as in the EU market under the Association Agreement. Seizing upon these advantages will require a shift from mass garment production to higher value-added textile items which generally enjoy greater tariff protection in these two major markets. Prospects for such a shift seem encouraging, given the sustained interest from a number of foreign textile manufacturers in relocating production in Jordan, shortly ahead of the elimination of WTO/ATC quotas. 95

284. In addition, the footloose apparel FDI and the clustering of production in the QIZs has benefited Jordan through the transfer of modern techniques, labor training, and the demonstration effects of exporting. Local workers have improved their skills and work ethics, managers have learnt more efficient production techniques, and owners have gathered knowledge about marketing and distribution channels to export markets. These intangible assets will remain even after the quota regime is dismantled, and can be leveraged by Jordanian exporters to seek new markets, move up the value chain, and diversify their export portfolios. The extent to which they take advantage of these assets will depend largely on entrepreneurial initiative and an ability to take risks.

285. Jordan’s institutions and government policy provide a conducive environment for export growth. The government should continue to reduce its role in the economy, including through further privatization, and encourage private sector development. A further liberalization of its trade regime, including on a unilateral basis and beyond its current commitment under the WTO, together with improvements in governance should encourage further growth. Also, Jordan has been able to create comparative advantage, especially in textiles and apparel, by preferential trade agreements due to its good relations with most countries. Preferential market access will continue to be a strong determinant of export growth for Jordan over the medium-term, in particular the duty-free access to the U.S. market and the Association Agreement with the EU. Jordan could potentially continue to translate its strong political goodwill into beneficial trade arrangements.

286. Jordan needs to address supply bottlenecks in order to reap the full benefits of its competitive advantages. The recent privatization of container handling at the port of Aqaba should contribute to removing a supply constraint facing all major merchandise exporting sectors. This should be complemented by the elimination of the existing monopoly of the truckers’ union on road transport from Aqaba to Amman and the rest of Jordan. Passenger transport and freight are also affected by the monopoly landing rights of Royal Jordanian. Tourism and “just-in-time” products such as perishable fruits and vegetables bound for Europe are the ones which are most affected by the paucity of flights to and from Jordan. Vocational training for the textiles and tourism sectors needs to be enhanced as both sectors face a shortage of manpower with the necessary skills. A regulatory structure needs to be put in place to address legal and intellectual property issues in the ICT sector as well in for regulating the operations of QIZs to enhance their functioning. To harness the potential from the information sectors, Jordan will need to improve connectivity and enhance the enabling environment.

287. Provided that supply constraints are tackled, Jordan should retain favorable medium-term export prospects. Specifically, under a baseline scenario, exports of goods and nonfactor services could be reasonably expected to increase on average by about 7.5 percent in U.S. dollar terms over the period 2004–2009. Merchandise exports receipts are projected to grow by 6.8 percent a year, mainly driven by the dynamism of non-mineral sectors. Exports of nonfactor services are projected to increase faster by some 2 percentage points on average, with a catch up of sectors other than tourism, as key foreign exchange providers. (Table VIII.6).

Table VIII.6

Jordan. Baseline Export Prospects, 2004–2009

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Source: Fund staff projections

Phosphates, potash and fertilizers

Including pharmaceuticals and ITC products

Including ICT services

288. Growth prospects for mineral-based exports would mainly stem from increased phosphate production as a result of the Eshidya mine and higher potash capacity envisaged from the removal of production bottlenecks at the refinery level, largely due to the additional expertise provided in this area by a leading Canadian firm that bought half of the government’s stake in Arab Potash Company, in 2003. The growth of foreign exchange earnings from traditional exports is likely, however, to be constrained by subdued price prospects due to increased competition from Asian suppliers. The outlook for agricultural exports would also be mostly volume driven on the back of continued demand from neighboring countries, with possible price gains expected only gradually as producers may be able to tap higher value-added, counter-seasonal niche markets in Europe.

289. Export of manufactures can be projected to grow by some 7.5 percent in U.S. dollar terms on average during 2004–2009, assuming that the adverse impact of the upcoming elimination of WTO/ATC quotas is limited to a relatively short transition of Jordan’s textile industry up the value-added chain. Under this baseline scenario, textile and apparel export growth would come to a halt in 2005, before gradually increasing to reach 8 percent per year by the end of the decade. Other manufactured exports could experience a smoother and somewhat faster growth path, albeit from a lower base.

290. Additional growth momentum should be mainly provided by the pharmaceutical industry, the ICT and the tourism sectors. Provided it continues to invest in R&D and other processes to comply with global standards, Jordan’s pharmaceutical industry should enjoy solid export prospects, particularly in Middle-Eastern markets, but also in some specific segments of more mature markets. Likewise, Jordan’s relatively young but dynamic IT sector appears poised for strong growth as it can tap a relatively large supply of skilled workers to meet the demand from niche markets in the region due to cultural and linguistic ties. Tourism prospects should also be strong, particularly if supply can be adequately diversified to better meet substantial demand from regional visitors and if new markets such as Eastern Europe can be further tapped.

291. The above outlook however is subject to some downside risk, particularly as the impact of the elimination of WTO/ATC quotas may prove more severe than envisaged under the baseline. The risk posed by this on Jordan’s external prospects can be illustrated by simulating the balance of payments and external debt impacts of three adverse scenarios for ATC exports. Scenario A assumes that ATC exports drop by 25 percent in 2005, and grow by only three-fourth of the rates envisaged under the baseline during 2006–2009 (Table VIII.6). The two other scenarios B and C are even more adverse, as they assume respectively that ATC exports drop by 50 percent and 75 percent in 2005, before growing by only one-half and one-third of the rates envisaged under the baseline during 2006–2009. Financing gaps are calculated and added to the external debt stock under each scenario. It is also assumed that 65 percent of export receipts shortfall are offset by lower imports, based on the 35 percent minimum value-added requirement under the U.S.-FTA.

292. Based on these illustrative scenarios, the elimination of the WTO/ATC quotas could increase the external current account deficit by between 0.8 and 2.2 percentage points of GDP a year during 2005–2009. This would significantly slow the reduction of Jordan’s external debt toward more sustainable levels, even if part of the shock to the balance of payments could be financed from a drawdown of Jordan’s currently quite comfortable level of international reserves. For instance, assuming that one-fourth of the financing gap in any year is financed through lower reserves, the external debt-to-GDP ratio would still end up between 3 and 8 percentage points higher than under the baseline (Table VIII.7).

Table VIII.7.

Jordan. External Vulnerability to the Elimination of the Quotas under the WTO/ATC

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Source: Fund staff projections.

Of goods and non-factor services

Taking account of the additional net interest burden, assuming an interest rate of 5 percent per year.

For the adverse scenarios, the ratios take account of the estimated GDP impact of lower growth of value-added by the textile industry.

Assuming that one fourth of the financing gap in any year is financed by a loss of international reserves, rather than by the accumulation of new external debt.

293. Another significant downside risk arises from the termination of Jordan’s access to heavily subsidized supplies of crude oil by Iraq since the beginning of the war in 2003. While temporary supplies of subsidized oil from other Arab countries have mitigated the impact of the loss of the Iraqi oil grant in 2003, these arrangements may not extend into the medium-term. The end of subsidized oil could therefore add about 3 percent of GDP annually to the import bill and imply a loss of competitiveness for Jordanian exports, as domestic petroleum product prices will need to be increased to pass on the higher cost to the private sector. Based on present projections regarding oil prices in the next few years, Fund staff estimates indicate that this could result in an appreciation of the REER in the range of 1–2 percent.

294. On the other hand, a possible further correction in the U.S. dollar against other major currencies could offset part of the terms of trade shocks mentioned above. Under the current peg, a further depreciation of the U.S. dollar would result in increased competitiveness of the Jordanian dinar against other major currencies to the extent that inflation in Jordan remains close to industrial country levels.

295. In conclusion, provided that both the government and the private sector rise to the challenges posed by adverse trade shocks, in particular the elimination of the WTO/ATC quotas at the end of 2004, export growth over the medium term may prove somewhat higher than envisaged under our baseline projections. Jordan’s external sector seems therefore poised to remain the key contributor to growth in this small open economy.

Statistical Appendix

Table 1.

Jordan: Selected Indicators, 1999–2003

Quota: SDR 170.5 million

Population: 5.3 million (2001)

Per capita income: US$1,806 (2003) (World Bank Atlas Methodology)

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Sources: Jordanian authorities; World Bank World Development Indicators 2002; and Fund staff estimates.

Including grants.

Excluding imports for re-exports.

Table 2.

Jordan: Sectoral Origin of Gross Domestic Product at Constant 1994 Prices, 1999–2003

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Sources: Department of Statistics; and Fund staff estimates.

Comprises finance, insurance, real estate and business services; community, social, and perso services; nonprofit services to households; domestic services of households; and an imputed bank

Table 3.

Jordan: Sectoral Origin of Gross Domestic Product at Current Prices, 1999–2003

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Sources: Department of Statistics; and Fund staff estimates.

Comprises finance, insurance, real estate and business services; community, social, and p services; non profit services to households; domestic services of households; and an imputed bank service charge.

Table 4.

Jordan: National Expenditure Accounts at Current Prices, 1998–2002

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Sources: Department of Statistics; and Fund staff estimates.
Table 5.

Jordan: Monthly Consumer Price Index, 1999–2003

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Source: Department of Statistics.
Table 6.

Jordan: Agricultural Production, 1998–2002

(In thousands of metric tons)

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Sources: Ministry of Agriculture; and Department of Statistics.
Table 7.

Jordan: Industrial Production, 1999–2003

(1994 average index = 100)

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Source: Department of Statistics.
Table 8.

Jordan: Selected Sectoral Industrial Production Indices, 1999–2003

(1994 average index = 100)

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Source: Central Bank of Jordan.
Table 9.

Jordan: Construction Activity, 1997–2003

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Source: Central Bank of Jordan.
Table 10.

Jordan: New Business Registrations and Capital Investment, 1997–2003

(Capital in millions of Jordanian dinars)

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Source: Central Bank of Jordan.