Moderate Gains, Mounting Risks: Jordan’s Path to Stability Amid Regional Conflict

Jordan’s economy showed resilience in 2023 with moderate growth across sectors, but ongoing regional conflict poses risks to its 2024 outlook, particularly in trade and tourism. Inflation remains contained, yet high debt and labor market challenges require careful fiscal management amid external uncertainties.

The latest study produced by the World Bank’s Middle East and North Africa unit, reports that Jordan's economy demonstrated significant resilience in 2023, achieving moderate growth despite a highly challenging regional environment. Real GDP growth reached 2.7%, slightly improving from the previous year’s 2.6%. This broad growth covered critical sectors like manufacturing, services, and agriculture. Manufacturing achieved a record level, marking its highest growth since 2011, with services, particularly restaurants and hotels, also performing well and recording the second-highest growth since 2017. Agriculture registered a strong performance as well, supported by improved rainfall and increased exports, especially in fruits and vegetables. However, the ongoing conflict in the Middle East has affected the broader outlook, and growth in 2024 is expected to decelerate to 2.4%, before slightly rebounding in the following years. Meanwhile, Jordan's labor market faces challenges, with unemployment remaining persistently high. The unemployment rate fell slightly to 22.0% in 2023, down from 22.8% in 2022, but labor force participation has been declining for the past two years. Female labor force participation, one of the lowest globally, has remained around 14.0% since 2021, and only recently increased to 15.5% in early 2024. Youth unemployment remains particularly high, impacting economic inclusivity and underutilizing Jordan’s potential workforce.

Inflation Stays Contained Despite Global Pressures

Inflationary pressures have been moderate, aligning with global trends, as inflation fell from an average of 4.2% in 2022 to 2.1% in 2023, supported by a favorable base effect, lower international commodity prices, and tighter monetary policy. The Central Bank of Jordan has maintained its policy rate at 7.25% since July 2023, preserving a positive real interest rate to control inflation. This rate is expected to stay relatively stable in 2024, aided by continued monetary tightening and relatively stable global commodity prices. The inflationary outlook includes potential risks tied to the Middle Eastern conflict, which has already raised shipping costs due to Red Sea disruptions and could further pressure international oil prices. Jordan’s inflationary containment has been a positive factor in stabilizing purchasing power, but any escalation in external tensions could bring volatility, impacting overall price stability.

Fiscal Policy Aims for Gradual Debt Reduction

Fiscal policy efforts have focused on controlling expenditures, with Jordan’s fiscal deficit narrowing to 5.1% of GDP in 2023, from 5.6% in 2022. This progress was primarily due to the phasing out of fuel subsidies introduced after the Russian invasion of Ukraine, which helped offset rising interest payments and increased capital expenditure. However, both general government consolidated and unconsolidated debt remain elevated, reaching 89.2% and 113.8% of GDP, respectively. The increase in debt has been driven largely by foreign currency borrowing, reflecting Jordan’s reliance on international funding sources. Debt levels are expected to remain high in the near term, particularly due to challenges in sectors like electricity and water. Projections indicate that fiscal consolidation may continue but at a slower pace, supported by revenue-boosting measures and potential easing of monetary policy to spur domestic revenue growth. A modest fiscal surplus is anticipated by 2025, although the outlook remains sensitive to rising interest payments and external debt burdens.

Tourism Growth Boosts External Balances

Jordan’s external sector saw a notable improvement in 2023, with the current account deficit narrowing to 3.7% of GDP, down from 7.8% in the previous year. This was primarily driven by a reduction in the trade deficit, as imports declined more than exports, partly due to favorable international commodity prices. Furthermore, tourism receipts surged to a record 14.5% of GDP, fueled by a strong post-COVID recovery in travel, which helped boost the services balance. Foreign direct investment and portfolio inflows also increased, supported by a 1.25 billion dollar Eurobond issuance by the Ministry of Finance, leading to an increase in the Central Bank of Jordan’s foreign reserves to 17.3 billion dollars by the end of 2023, covering approximately seven months of imports. However, the economic consequences of the Middle Eastern conflict became evident in the first quarter of 2024, with the current account deficit widening again as tourism receipts declined and the trade deficit expanded. Tourist arrivals dropped sharply in late 2023, especially among single-day visitors from Europe, who were affected by the regional security situation. Despite recent recoveries in tourist arrivals, overall receipts remain vulnerable to fluctuations, particularly if regional tensions escalate.

Balancing Stability and Conflict-Related Risks

Looking forward, Jordan’s economic outlook in 2024 is intricately linked to developments in the Middle East conflict, which is anticipated to subside in the base scenario. Still, the impact on trade and tourism could be profound if the situation worsens. The temporary government measures introduced in January 2024, including customs exemptions on shipping costs, aim to alleviate the financial burden of higher trade costs due to Red Sea disruptions. Nevertheless, a significant decline in travel receipts due to sustained conflict could reverse recent gains in Jordan's external accounts. The alternative scenario presented by the World Bank underscores a potential rise in the current account deficit to 6.3% of GDP if travel receipts were to drop by 15% in peak tourist season, with a 30% drop pushing the deficit to 7.4%. Additionally, any prolonged disruptions could pose broader risks to sectors like transportation, manufacturing, and retail, which are closely linked to tourism. Uncertainties around the conflict add considerable downside risk to Jordan’s economy, potentially affecting inflation, fiscal stability, and overall growth.

Economic Resilience Will be Tested in 2024 and Beyond

The projected slowdown in economic growth, combined with ongoing structural challenges in the labor market and dependence on external financing, means that Jordan’s resilience will be continually tested as it navigates the complexities of the regional environment in 2024 and beyond. Jordan’s ability to manage these external shocks while ensuring macroeconomic stability will be crucial, especially as the country works to maintain fiscal discipline and encourage private sector growth.