This Selected Issues Paper focuses on economic condition, energy subsidies, and oil prices in Jordan. Energy price subsidies pose a serious fiscal risk in the present context of increasing and volatile international prices. The macroeconomic situation in Jordan is closely tied to that of other countries in the Middle East. From a policy perspective, macroeconomic and structural policies in Jordan should be conducted in such a way that the vulnerability of the country to sudden stops or reversals of external income flows is reduced.
II. Oil Prices and the Jordanian Economy1
Spillovers from the GCC to Jordan in the form of foreign direct investment (FDI), remittances, and general government transfers drive the real GDP of the country in the long run, and at the same time mitigate the negative impact of commodity price shocks on its growth dynamics.
1. The macroeconomic situation in Jordan is closely tied to that of other countries in the Middle East. Remittances from Jordanians working in other states, especially in the Gulf Cooperation Council (GCC) countries, are an important source of national income, equivalent to 15–20 percent of GDP. The Persian Gulf region is also the primary destination for Jordanian exports and in turn supplies most of its energy requirements. Additionally, the country receives substantial grants and foreign direct investments from other countries in the region, most notably from the GCC.
2. As a result of these linkages, demand-driven oil price booms have two opposing effects on Jordan’s GDP: one of them direct and negative and the other indirect and positive. The direct negative effect occurs through the increase in import costs (Figure 1), while the indirect positive effect arises as a result of larger inflows of external income—the sum of foreign direct investment, remittances, and grants—from the region (Figures 2 and 3), higher phosphate export receipts (since different commodity prices are highly correlated), and higher regional demand for Jordanian exports due to favorable macroeconomic conditions in oil-exporting economies aided by oil hikes (Figure 4). It is estimated that a 10 percent demand-driven increase in the price of oil raises the GDP of Jordan by about 2.5 percent after 10 quarters.2 This finding shows that the indirect positive effects of oil price booms more than compensate for their direct negative impact as long as the external income inflows from the oil-exporting economies are maintained.
3. The persistence of external income flows to Jordan from the GCC countries and other oil exporters partly depends on the ability of the latter group to keep producing oil in the long run, as well as on the stability of oil revenue-to-GDP ratios in these economies over a prolonged period. For major oil exporting countries, many of which commenced oil extraction and exports at the beginning of the 20th Century, the reserve-to-extraction ratio indicates that they are capable of producing for many more decades even in the absence of new oil field discoveries or major advances in oil exploration and extraction technologies. As a result, external income flows to Jordan are not likely to disappear in the foreseeable future, and so their effects on long-run output and economic growth will continue to be substantial.
4. From a policy perspective, macroeconomic and structural policies in Jordan should be conducted in such a way that the vulnerability of the country to sudden stops or reversals of external income flows is reduced. Change in the composition of external income flows towards foreign direct investment and a diversified export base, and away from general government transfers (as witnessed in recent history, see Figure 3), could help to generate income in the future. This chapter focuses on Jordan, but the analysis can of course also be extended to any oil-importing country in the region with strong ties to the GCC.
Mohaddes, K. and M. Raissi, 2011, “Oil Prices, External Income, and Growth: Lessons from Jordan,” IMF Working Paper 11/291 (Washington: International Monetary Fund).
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Prepared by Mehdi Raissi.
For additional details, see Mohaddes and Raissi (2011).