Selected Issues

Abstract

Selected Issues

The Macroeconomic Impact of the Syrian Refugee Crisis and Regional Conflicts on Jordan1,2

  • Six years since the beginning of the Syrian Civil War, the Jordanian economy continues to be negatively affected by the Syrian Refugee Crisis (SRC) and regional conflicts. Several estimates point to a negative but decreasing impact on output over time. The SRC and conflicts in Syria and Iraq have weighed on investor sentiment, tourism, and exports but the influx of Syrians is likely to have increased aggregate demand. Labor market conditions deteriorated after the massive influx of refugees and non-tradable prices accelerated. The balance of payment suffered pressures on the non-oil current account, owing to lower exports of goods and services and higher imports. The SRC has increased the direct fiscal costs persistently by above one percent of GDP, which could double after counting for quality and capital deterioration.

A. Output

1. The Syrian Refugee Crisis (SRC) and regional conflicts have been weighing down growth. Since the outbreak of the crisis in mid-2012, staff estimates that losses of real GDP growth were on average approximately one per cent per year because of its negative impact on exports and investment (see figure).3 The estimated cumulative impact on GDP is about 18 percent of annual GDP. The disruption of trade routes with its main trade partners reduced exports significantly—a World Bank study indicates that most of the impact of the Syrian war on Jordanian welfare is due to trade disruption.4 The instability in the region reduced the arrival of tourists and overall confidence, which may have impinged on consumption of durable goods and investment. Staff has revised progressively downwards its projections for growth as total factor productivity decreased since 2012 (see figure below).5

A01ufig1

Quarterly real GDP losses due to the Syrian Refugee Crisis and regional conflicts 1/

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Source: Staff calculations using data from the authorities and UNHCR.1/ The losses are estimated from the time series regression of the quarterly growth of seasonally adjusted real GDP on the lag of the output gap measured as the deviation of the log of seasonally adjusted real GDP from its Hodrick-Prescott trend and on the growth of registered Syrian refugees as reported by the United Nations High Commissioner for Refugees (UNHCR).
A01ufig2

Projected and Actual Annual Real GDP growth (rhs) and Total Factor Productivity (TFP, lhs)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Source: WEO October projections and Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), “The Next Generation of the Penn World Table” in American Economic Review, 105(10).

2. This negative impact is decreasing as the influx of Syrian refugees slowed and the stock pushed up aggregate demand.6 The influx of more than 10 percent of Jordan’s original population may have certainly increased consumption, particularly, over time as the incomers settled and the likelihood of returning to their home country diminishes. Moreover, anecdotal evidence suggests that many businesses left Syria and transferred their capital to Jordan.7 New capital and workers could contribute to the already substantial informal sector output and compensate the deceleration of measured output progressively as their income and productivity grow.8

B. Labor Markets

3. The SRC has negatively impacted formal and informal labor market outcomes in Jordan.9 Since the beginning of the SRC, the unemployment rate grew by approximately 3.1 percent despite the fact that labor force participation decreased by about 2.0 percent, reflecting a decrease of the employment rate of around 2.9 percent over the same period (see figure below). The negative shock on the overall level of economic activity could certainly have contributed to this labor market performance. The increasing labor supply of Syrians in the informal sector may be causing the persistent reduction of the share of self-employed in the economically active population, a proxy for informal employment (see figure below).10

A01ufig3

Quarterly Labor Market statistics

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Source: Department of Statistics of Jordan and staff calculations. All rates are four-month moving averages.

4. Unemployment grew the most in governorates that host most of the refugees. About 90 percent of the registered Syrian refugees that live outside camps are in Amman, Mafraq, Irbid, and Zarqa. These governorates, and the small northern governorate of Jerash, present the highest growth of unemployment since the beginning of the SRC (see figures below). The average unemployment rate of governorates with the largest influx of refugees increased by about 3.3 percent since the beginning of the SRC, while in the rest of the governorates, it decreased by 1.4 percent. Labor force participation decreased slightly in the governorates with large influx of refugees, while it decreased above national levels in the rest of the governorates (see figures below).

A01ufig4

Unemployment and refugees by governorate

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Source: Department of Statistics of Jordan and UNHCR.
A01ufig5

Average Change in selected Labor Market statistics across Governorates since the SRC 1/

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Source: Department of Statistics of Jordan and UNHCR.1/ For each rate, we take the difference of the four quarters moving average value of 2016Q4 minus the value in 2012Q4. Governorates with large refugee presence include Amman, Mafraq, Irbid, Zarqa, Aljoun and Jerash.

These patterns indicate that Syrian refugees have competed with Jordanians in labor markets. Policies such as the relaxation of the rules of origin of the EU for Jordanian exporters that employ Syrian and Jordanian workers are conducive to coordinating efforts to engage refugees in productive and formalized economic activities.11

5. The SRC may have increased the difference between formal and informal wages. The figure below depicts a simple model of the labor market in Jordan before and after the SRC. Before the SRC, the unemployment (U0) was due to the excess supply of labor in the formal sector at formal wages (WF+𝛼). The informal labor market is assumed to be in equilibrium but, after the SRC, the labor supply increases (SI1), owing to the influx of Syrian refugees depressing informal wages (WI1). This is consistent with findings of an ILO report, which shows that the labor force participation of Syrian refugees is approximately 30 percent, slightly below the Jordanian, and most of the refugees participate in the informal economy.12 Moreover, since some Syrian workers are receiving working permits, this would be expected to increase the formal labor supply (SF1).13 And formal labor demand may have decreased (DF1), owing to the negative impact of the SRC and regional conflicts on economic activity and to the negative incentives. As a result, the wedge between formal and informal wages (WF+𝛼− WI1> WF+𝛼− WI0) may have increased. Thus, unemployment (U1) in the formal sector would be expected to increase, as observed in the actual data, or there could be some reduction in formal wages, offsetting some of the impact on unemployment. A reduction of payroll taxes could stimulate the demand for formal jobs, by reducing the equilibrium wage in the formal sector (WF+𝛼), as wage costs would be lower (for employers and employees), and reduce incentives to demand labor in the informal sector (WF+𝛼− WI1).14

A01ufig6

A Model for the Labor Market in Jordan

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

References: D is the labor demand; S is the labor supply; U is the unemployment; W are the wages; α are other costs of formal employment such as payroll taxes; the sub index F denotes formal sector, I denotes informal sector, 0 denotes before the SRC, and 1 denotes after the SRC.

C. Inflation

6. The SRC pushed up non-tradable goods prices at a decreasing rate recently but did not impact substantially the price of tradable goods. Rental prices grew 2.3 percent faster after the SRC than over the average of the last decade, reflecting an inelastic supply of housing relative to the rise in demand stemming from the influx of refugees.15 The initial acceleration over the first year of the crisis seems to be slowing down afterwards (see figure below). However, food prices have maintained their historical positive correlation with international food prices.16 Given that rental prices are only about 16 percent of the overall CPI, the impact of the SRC on the general price level in Jordan does not appear substantial.17

A01ufig7

Price Indices

(2012=100, 3MMA)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Source: Staff calculations with data from the Department of Statistics of Jordan and IMF commodity prices.

D. Balance of Payments

7. The SRC and the conflicts in Syria and Iraq have led to a significant increase in Jordan’s trade deficit. The conflicts disrupted exports that depended on Syria as a major export route to other important destinations such as Lebanon, Europe, Turkey and Central Asia. The closing of remaining border crossings with Syria and Iraq in 2015 represented another blow to Jordanian exports (see figure). Exports to Iraq—once Jordan’s major export market, accounting for almost a fifth of domestic exports or about $1.2 billion a year—have declined by more than 50 percent since the closing of the Iraqi-Jordanian border. Jordan has tried to mitigate these losses by resorting to alternative but more expensive routes such as Aqaba Port and by air, as well as searching new markets, including in the region and in Africa.18 In fact, domestic exports to the GCC have remained robust in the past five years and helped mitigate the loss of the Iraq and Syrian markets. Meanwhile, the large influx of refugees has led to a significant increase in food imports (see figure), and the growth of total non-energy imports outpaced real GDP growth during 2012–15. As a result, non-oil trade deficit increased significantly in the past years, from about 14 percentage points of GDP in early 2011 to about 19 percent of GDP in the second half of 2016 (see figure). The deterioration in the overall trade deficit has been mitigated by the decline of oil prices since the second half of 2014.

A01ufig8

Exports by destination

(4-quarter moving average, in percent of GDP)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Sources: Jordanian authorities; and IMF staff calculations.
A01ufig9

Non-energy imports, volumes

(4-quarter moving average, 2010Q1=100)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Sources: Jordanian authorities; and IMF staff calculations.
A01ufig10

Trade deficit

(4-quarter moving average, in percent of GDP)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Sources: Jordanian authorities; and IMF staff calculations.

8. The conflicts also adversely affected tourism. Despite Jordan’s stability, the conflicts are having negative spillovers into Jordan’s tourism sector, as illustrated by the persistent fall in tourism arrivals and travel receipts (see figure), which have been partially mitigated by the sustained performance of arrivals of Jordanian expatriates.19 It is important to note, however, that travel receipts were already slowing down before the SRC, including because of the uncertain regional environment already prevailing back then.20

A01ufig11

Travel receipts

(in percent of GDP)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Sources: Jordanian authorities; and IMF staff calculations.

9. The mobilization of public and private transfers has helped to mitigate current account pressures. Jordan has been receiving considerable support from the international community to better cope with the refugee crisis. Transfers to the budget and private transfers (i.e., transfers from private citizens, donor support received by NGOs in Jordan and transfers through UN agencies) have also contributed to contain the overall current account deficit. However, as international transfers have started to slow down lately, they would contribute less to contain the current account deficit going forward (see figure).21

A01ufig12

International transfers

(4-quarter moving average, in percent of GDP)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Sources: Jordanian authorities; and IMF staff calculations.

10. Nevertheless, the non-oil current account deficit has widened since end-2013. The widening in non-oil trade deficit, falling travel receipts, and declining international support have all contributed to a sharp rise in non-oil current account deficit in recent years. The non-oil current account balance shifted from an average surplus of about 6 percent of GDP in 2010–14 to a record-high deficit of 3 percent of GDP in the past two years (see figure). As mentioned before, lower oil prices have provided some respite and helped contain the deterioration of the overall deficit. Yet, the current account balance remains highly vulnerable to sharp increases in oil prices.

A01ufig13

Current account deficit

(4-quarter moving average, in percent of GDP)

Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A001

Sources: Jordanian authorities; and IMF staff calculations.

11. Unidentified capital inflows, including possibly from Syria, may have helped to finance the balance of payments. Anecdotal evidence suggests that businesses have left Syria and transferred their capital and equipment to neighboring countries.22 Available data do not allow for a quantitative assessment, but the large positive errors and omissions since early 2013 (annual average of about 3 percent of GDP) may be linked to unmeasured FDI, including from Syria, which could have helped finance the large deterioration of the non-oil current account deficit observed in recent years.23 It could have also helped mitigate the fall of measured FDI, which averaged only about 4.5 percent of GDP since early 2013, or about half the historical average.

12. The SRC and regional conflicts have worsened Jordan’s current account, while private inflows may have provided some respite to the balance of payments. This assessment is in line with the findings of a few studies that have tried to quantify the impact of the Syrian crisis on Jordan’s balance of payments. For instance, the UNDP (2015) estimated that the influx of refugees increased food imports in cumulative terms by almost $0.9 billion (2.5 percent of GDP) in 2012–15, while the cumulative loss of tourism revenues during the same period amounted to $1.8 billion (5 percent of GDP). In the same vein, Al Wazani (2014) estimates that the average annual increase in trade deficit stemming from the Syrian crisis during 2012–14 could have reached 6 percent of GDP. However, this large increase would have been partially mitigated by additional foreign aid and investments received in the same period.24

E. Fiscal Costs

13. The SRC has increased actual government spending by at least one percent of GDP since 2013. Based on a 2014 study by USAID, staff updated estimates of the fiscal impact of the Syria crisis on the central government and utilities.25 Based on the USAID’s dataset, which includes detailed bottom-up estimates of new public expenditures excluding donor financed expenditures, staff extended their estimates towards 2015. The table below shows that the estimated actual additional spending in budget outturns as a result of subsidies and new activities resulting from the influx of Syrian refugees exceeded 1 percent of GDP a year from 2013 to 2015. The security sector had the largest expenditures related to the SRC.26 This analysis does not include the impact on government revenue associated with the reduction of GDP stemming from to the SRC and regional conflicts.

Estimated Fiscal Impact of the Syrian Refugee Crisis

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Source: Staff calculations building on previous work by USAID and updated data from UNHCR and Government of Jordan.

14. However, when factoring in the impact of refugees that are not officially registered already in Jordan, as well as the impact of refugees on the quality of public services, fiscal costs tend to be significantly higher. In the table above, staff also re-estimated the indirect fiscal costs of the SRC to re-establish the quality of public services to pre-crisis levels. These calculations imply additional fiscal costs of approximately one percent of GDP. The largest contributors are health and education services owing to the deterioration of the quality of the services, and water services because the additional demand imposes the need for additional capital expenditures to secure water provision in one of the most water-scarce countries in the world. As done in the USAID study, staff used the average number of registered refugees over the year in accordance with UNHCR; if the Syrians who remained in Jordan before the crisis were included, the extrapolation of the overall average annual (direct and indirect) fiscal costs would be about 3.5 percent of GDP.27

References

  • Abdih, Y., 2011, “MENA Oil Importers: Addressing Informality and Promoting Inclusion,” in Regional Economic Outlook, Middle East and Central Asia (Washington: International Monetary Fund).

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  • Abdih, Y., 2014, “The Syria Crisis as Felt in Jordan,” IMF Country Report No. 14/153 (Washington: International Monetary Fund).

  • Antón, A., 2014, “The effect of payroll taxes on employment and wages under high labor informality,” in IZA Journal of Labor & Development 3:20.

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  • Errighi, L. and J. Griesse, 2016, “The Syrian Refugee Crisis: Labour Market Implications in Jordan and Lebanon,” European Commission Discussion Paper 029.

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  • Gobat, J. and K. Kostial, 2016, “Syria’s Conflict Economy,” IMF Working Paper 16/123 (Washington: International Monetary Fund).

  • Ianchovichina, E., and M. Ivanic, 2014, “Economic Effects of the Syrian War and the Spread of the Islamic State on the Levant,” Policy Research Working Paper 7135.

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  • Khalid W. al Wazani, 2014, “The Socio-Economic Implications of Syrian Refugees on Jordan.”

  • Kugler, A. and M. Kugler, 2009, “Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia,” in Economic Development and Cultural Change, Vol. 57, No. 2.

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  • Nasser, R. and S. Symansky, 2014, “The Fiscal Impact of the Syrian Refugee Crisis on Jordan,” United States Agency for International Development (USAID).

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  • Stave, S. and S. Hillesund, 2015, “Impact of Syrian Refugees on the Jordanian Labor Market,” International Labor Organization (ILO).

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  • United Nations Development Programme, 2015, “The Indirect Impacts of the Syrian Crisis on Jordan’s Economy: A Quantitative and Qualitative Approach.”

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1

Prepared by Maximiliano Appendino (MCD), Pablo Morra, and Nelson Sobrinho (both SPR).

2

Since the Syrian Refugee Crisis (SRC) overlaps with other shocks such as the aggravation of the conflicts in Iraq in 2015 and the Syrian Civil War itself, this paper aims at disentangling the different channels through which the SRC and the regional conflicts have impacted on the Jordanian economy.

3

This is in line with previous estimates from the IMF. See, for example, Abdih (2014). The government of Jordan and the UNDP (2015) estimate that the total indirect costs of SRC were about 8 percent of GDP, including some components discussed in this work as the trade balance, tourism receipts, rental prices, informal sector and public services.

5

UNDP (2015) highlights that the increasing competition for scarce public goods, such as health and water, and other macroeconomic impacts, such as capital flight after the SRC, could reduce productivity in Jordan.

6

The main methodology in Figure 1 does not explicitly incorporate the impact of the most recent shocks on output, such as the closure of the Iraqi border or the slowdown in the GCC. Based on alternative estimates, the deceleration of growth during recent years is lower than during the beginning of the crisis but still substantial. This result indicates that the SRC and the regional conflicts continue to reduce growth despite the substantial deceleration of the influx of refugees which points to the impact of more recent shocks.

7

See, for instance, Gobat and Kostial (2016).

8

Staff’s previous research puts the size of the informal sector in Jordan at about 26 percent of measured GDP (Abdih, 2011). UNDP (2015) estimates the indirect cost of SRC through the informal sector to be 0.2 percent of GDP.

9

UNDP (2015) depicts a similar impact of the SRC on labor markets.

10

Given the lack of data on informal labor markets and the fact that self-employment workers are more likely to participate in these markets, the reduction of self-employment as a share of total employment may reflect the fact that some self-employed workers have become unemployed or left the labor force because of the competing pressures in this sector stemming from the influx of Syrian refugees.

11

See, for example, Errighi and Griesse (2016).

12

See, for instance, Stave and Hillesund (2015).

13

Approximately 32,000 working permits for Syrian refugees were issued by November 2016.

14

Payroll taxes (or social security contributions) amount to 21 percent of private sector wages in 2016, with about two-thirds paid by the employer and one-third by the employee. Kugler and Kugler (2009) estimated that a 10 percent increase in payroll taxes reduce wages by 1.4 to 2.3 percent and employment by 4 to 5 percent, and suggested a negative impact on formal employment, using a panel of fifteen years of plant level data in Colombia. Antón (2014) suggested that the reduction in payroll taxes in Colombia in 2012 may have increased total employment by 0.3 to 0.5 percent, formal employment by 3.4 to 3.7 percent, and formal wages by 4.9 percent. Colombia has a sizable informal sector and a minimum wage that appears to be binding for a significant portion of the workforce as in the case of Jordan. See for more details the Selected Issue Paper on “Payroll Taxes and Employment: Considerations and International Experience.”

15

UNDP (2015) reports that rent prices increased by 17 percent as a result of soaring demand for housing by refugees since 2012. The Central Bank of Jordan estimates a slightly higher impact of SRC on rental prices: 2.8 percent faster growth after the SRC than over the average of the last decade.

16

The increase in volume of food imports at international discussed in the next section support this result.

17

However, rental prices are about 35.6 percent of the core inflation indicating a higher impact of this shock on the long-term trend of the general price level in Jordan.

18

Ianchovichina and Ivanic (2014) estimated sizeable transport costs for Jordan as a result of the Syrian conflict. These are probably having adverse implications for competitiveness.

19

Though Jordanians living abroad tend to spend less in per capita terms than foreigners when visiting Jordan, their longer length of stay help make travel revenues more stable.

20

For instance, a study by the UNDP (2015) cites that other conflicts in the region also had an impact on travel receipts.

21

Further mobilization of donor support in the context of the London Conference and the Fund’s financing and catalytic role under the EFF would help deal with these pressures while ensuring adequate reserve levels.

22

See, for instance, Gobat and Kostial (2016).

23

While large errors and omissions may be related to unmeasured FDI, Syrian-related investments may not be large enough to explain the sizeable errors and omissions.

25

See Nasser and Symansky (2014). This paper’s methodology was designed in collaboration with Fund and World Bank staff.

26

Our estimates are broadly in line with USAID’s estimates. However, for 2014, they are somewhat smaller than USAID’s because food and oil prices ended up being lower than expected in early in 2014, reducing the estimated cost of energy and food subsidies.

27

Following USAID’s report by Nasser and Symansky (2014), we only included the registered refugees reported by UNHCR in our baseline estimation. The marginal impact on public expenditures may be driven by the net influx and not necessarily by the Syrians already residing in Jordan before the SRC.

Jordan: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.