Addressing inequalities in Jordan 26/03/2023

Countries like Jordan, which adhere to and follow the reform paradigms of the Bretton Woods Institutions  namely the International Monetary Fund (IMF), the World Bank, and the World Trade Organization — hardly ever focus on assuaging inequalities, including gender inequality, which combine to create costly deficits in their economies. The government should avoid being labeled as a creator of inequalities by simply ignoring them in the course of its avowed compliance to IMF policies.

The Jordanian economy suffered over the last 25 years from a rise in the numbers of both the extremely poor and the extremely rich. To be fair, this has also been a global phenomenon. However, in Jordan this was coupled with escalating challenges caused in part by the lack of emphasis on productivity and public innovation. Consequently, the economy currently suffers from high levels of national debt (similar to early 1990s levels), the highest unemployment rate in the past 30-some years and a 50 percent unemployment rate among youth, and fast-rising interest rates, where the Central Bank of Jordan and private banks increased interest rates eight times in the past 12 months.

Furthermore, even though the COVID-19 pandemic alerted policy makers to the plight of women and underscored the necessity to address the disparities they suffer from, it seems that, after a mere two years, the distress call has ebbed and withered, and even vanished due to neglect, yet again. In spite of an intellectually active and vibrant civil society that has appeared to gain strength and make some progress towards diminishing the gender gap, that progress has remained slow relative to the rest of the world.

Strategic shortcomings As a side note, feminist economics is not the only field where Jordan has failed to win the race. While economists around the world have been focusing on new streams of economic thinking, such as behavioral economics, integrating innovation into economic policy and the public policy debate, and modern monetary theory, Jordanian economic policy remains traditional or orthodox in almost every sense of the word.

Worse still, the economic debate in this part of the world remains focused on government budget deficits, and the rising national debt — not on how and where the money should be spent, or how to bring about equalities where there are inequalities. What is more, if inflation threatens advanced economies that pumped trillions of dollars into their economies in a bid for sustainability as a quick response to COVID-19, Jordan timidly follows the age-old response of “raise the interest rate”, even though pandemic measures in Jordan did not come close to those of such economies.

Types of inequalities On a positive note, gender inequality in education has been reversed. Jordanian women are now better-educated than men. However, wage inequality in the private sector has widened as the gap has increased from 15 percent to 17 percent. Moreover, Jordanian women still suffer from one of the lowest labor participation rates in the world.

Among the other inequalities that Jordan experiences are spatial income inequalities in urban and rural spheres as well as at the governorate level. Inequality among governorates, caused by disproportionate access to infrastructure, education, and health services, contributes even more to the Kingdom’s total inequality than urban-rural inequality. This spatial inequality contributes significantly to income inequality and economic growth imbalances, especially since Jordan lacks an adequate public transportation system, which results in a daunting lack of geographic mobility among the poor.

Another inequality is in the realm of education, tied to the wealth and education levels of parents. Children of the poor go to public schools where government spending has been stagnant, insufficient, and inefficient for more than a decade. On the other hand, the children of well-to-do parents attend private schools, some of which are on-par in terms of quality of education and fees with the top private schools of the world. Needless to say, this leads not only to income inequality but also to intergenerational immobility among the poor, and a no-exit-through-learning status quo. One must caution that such a state of affairs in education creates a dangerous schism in society that grows from one generation to the next.

What can the government do? Part of the solution to Jordanian inequalities is a set of progressive economic policies. At the education level, such policies include investing in education and ensuring equal access to services, internet, and social security; launching awareness campaigns on the benefits of education to reduce the drop-out rate; and further subsidizing school supplies, conditional on parents’ income and wealth. The government can also impose stricter measures to combat child labor, offer better-targeted full scholarships to less advantaged children, and implement a flexible program allowing university students in need to work on campus to cover some of their expenses.

In terms of progressive fiscal policies, a starting point would be a progressive income tax, avoidance of the IMF prescriptions and paradigms, income redistribution aimed at reducing wealth inequalities, and a comprehensive package of public services. The government should also take measures to combat involuntary unemployment, enhance access to social security, provide adequate and timely minimum wage laws, ensure that the country has an effective, first-rate antitrust/competition law, and emphasize spending on innovation, digital technologies, and artificial intelligence without undermining job security for the current and future labor force. Finally, to encourage local economic development and decrease spatial inequalities, there is an urgent need for a proper public transportation system.

Published in Jordan News: 

https://www.jordannews.jo/Section-36/Opinion/Addressing-inequalities-in-Jordan-27756

 

How the global economy will impact Jordan in 2023 Mar 06,2023

Global monetary tightening has been spearheaded by the Federal Reserve (Fed) — the central bank of the US — and the European Central Bank (ECB). Both have been aggressively fighting inflation caused by the Russia-Ukraine war, heightened post-COVID demand, and the disruption in supply chains, which peaked in the US at 9 percent in June 2022, followed with some lag by the euro zone at 10.7 percent in October 2022.

While the US and the EU have been facing high economic growth rates after the onset of COVID; Jordan has not. Here is a breakdown of the possible impact of the global monetary policy on the Jordanian economy in 2023.

Interest rates

At the start of 2023, the Fed had raised its federal funds rate by 425 basis points, and the ECB had raised its key interest rates by 250 basis points. Jordan, with the peg of its dinar to the US dollar, has followed the Fed policy almost perfectly. Moreover, with additional rate increases by the Fed and the ECB, the Jordan Central Bank is expected to increase the interest rate to its peak by June 2023.

While inflation has apparently subsided in the US and EU and is expected to drop further in 2023, interest rates have risen and Western economies do not seem to be heading toward a recession. Meanwhile, Jordan, which was facing an extremely long (13-year) depression as measured by the real per capita income, saw slight gains in terms of growth rates in 2022. This marginal growth was possibly driven by the increase in the value of potash and phosphate exports and a rise in tourism receipts and remittances.

Hence, Jordan may seem to buck the global trend so far, which should not be surprising since the Kingdom benefits when the world goes into a recession as the prices of imports, which are almost three times its exports, fall and thus provide a reprieve to aggregate production and consumption. Yes, one would expect exports to also decline, but two factors come into play here: Jordanian exports are mainly garments and raw materials such as potash and phosphate; and the trade balance has been markedly negative since the inception of the country.

Cost of debt

Jordan’s economic growth rate in 2023 will likely fail to meet expectations. It will decrease as both demand and supply decrease with the rise of interest rates. Demand decreases as the final prices of large ticket items (those that take up a significant portion of an individual’s average income) become more expensive due to the increase in the cost of debt. Already, the number of returned checks has risen, credit card debt is on the rise, and savings have decreased as Jordanians have dipped into their nest-eggs to spend.

Imports and production

Some imports will become more expensive as the prices of certain commodities such as wheat may rise due to shrinking supply. Jordan lucked out in 2022 as wheat purchases had been made before the start of the Russian-Ukraine war. However, if the war goes on, the cost of wheat imports will rise.

On the other hand, suppliers, including current and would-be producers such as investors, will find production more expensive, and will thus curtail their output. Given that Jordan’s inflation is imported — 87 percent of all caloric intake and 93 percent of energy is imported — the upshot is a continued inflation rate with greater stagnation.

Weakened growth from costly consumption and production, and greater leakage due to balance of trade expansion, which siphons added value from the GDP, could lead to lower growth in 2023 than previously predicted. Let us hope that this will not be the case.

Published in Jordan News on Mar 06,2023

https://www.jordannews.jo/Section-36/Opinion/How-the-global-economy-will-impact-Jordan-in-2023-27369

On banking and economic growth Feb 27,2023

The banking sector in Jordan witnessed fantastic growth figures in 2022 relative to 2021. Last year, the year-on-year profits of the banking sector grew by 38 percent. However, social media has been rife with criticism and concerns over this profitability and claims that it is harmful to the economy. While it is clearly beneficial to an economy to have a healthy banking sector, a pertinent question arises: does the growth of the financial sector lead to growth in the economy? The answer, although intuitively obvious, is not immediately clear.

The banking sector in Jordan is prominent both in size and impact. In 2022, the market value of the banking sector (JD8 billion) was 90 percent of the market value of the financial sector, 106 percent of the industrial sector, 290 percent of the services sector, and 41 percent of the total market value of all sectors.

In other words, it is the largest sector in the market.

The majority ownership of the two largest banks in Jordan goes to non-Jordanians. The Arab Bank is 52.3 percent owned by non-Jordanians, and the Housing Bank, the second largest Jordanian bank, is 81 percent owned by non-Jordanians. Overall, the banking sector is 55 percent owned by other Arabs and foreigners, which could possibly mean that over half of the JD900 million will be paid to foreign investors' accounts in other countries in their respective currencies. 

Foreign indirect investment, such as investments in stocks, is also usually fickle with herd–like departures at the whiff of trouble — one example is what occurred in the Asian economies in 1997 as investors dumped their stocks and took flight.  

In terms of policy, the regulator of the banking sector is the Central Bank of Jordan (CBJ). Articles 40–44 of the Central Bank Law provide it with the powers and tools to ensure that the growth in banking complies with the stipulations of Article 4 of the Law, which state that the monetary policy (including, of course, the banking sector) should contribute to economic growth. 

Now to answer the question posed at the beginning of this article. There is evidence from the literature (for example, see a BIS Working Paper by Stephen G. Cecchetti and Enisse Kharroubi, "Why does financial sector growth crowd out real economic growth?") that the growth of a country's financial system harms productivity growth. In other words, higher growth in the financial sector reduces real growth in the economy.

One possible explanation is that the financial sector competes with the rest of the economy for resources as its wealth increases. Indeed, in Jordan, the banking sector can attract the best talents because of the high compensation and benefits packages it offers its employees. Another reason is that credit booms, which usually go into financing real estate activities (safe, easy to assess, and stable) harm the engines for growth, such as knowledge and R&D intensive products. In Jordan, the data indicates a bias among private banks to lending to large companies, retail purchases, and real estate investments.

It has been reported in the media that 2023 was heralded with interest rates on loans exceeding 12.5 percent as the CBJ raised the discount rate (the lending rate to banks) seven times last year, almost in perfect such with the US Federal Reserve rates. Banks in Jordan have either increased the interest rates to their clients or increased the number of payments while keeping the rate the same. But, the fact that most banks do not borrow from the CBJ begs the question of why they would increase the interest rates. Moreover, in a market where there is competition, one would expect that banks would rival each other in lowering the rates instead of increasing them.

It is time that both monetary and fiscal policies are subjected to the ultimate and most important test: do they, individually and jointly, lead to economic growth?

Let us not wait too long for an answer.

Published in Jordan News on Feb 27,2023

https://www.jordannews.jo/Section-36/Opinion/On-banking-and-economic-growth-27240

Psst, let us talk inflation Feb 20,2023

Have you ever asked yourself what the cheapest governorate to live in is? If not, have you asked what is the most expensive? Since I was recently reviewing the Consumer Price Index (CPI) for January 2023 (which is hardly considered scientific or even semi-rigorous research), let me tell you.

The most expensive governorate in Jordan is Aqaba. Yes, Aqaba, with its Special Economic Zone and all the tax holidays and exemptions (which are being peeled away year after year). The cheapest governorate to live in is Mafraq, which may be understandable because, at 29.2 percent, it has the highest unemployment rate in the country. It is also a border governorate where the so-called sailors traverse the borders with zero customs and tax items.

If you are looking for an expensive meal, Maan offers the lowest prices. In contrast, Amman offers the highest — which is understandable in the case of Amman but not immediately apparent as far as Maan. If you wish to eat cereals, cereal products, meat, and poultry, your destination should be Maan for the cheapest prices. However, for fish and sea products, Aqaba beats all. But be careful; restaurants and hotels in Aqaba are second only to Maan —there goes your saving.

For non-alcoholic beverages, Amman is the most inexpensive governorate, and the most expensive is Karak. Please do not ask why! But for alcoholic beverages, Madaba and Zarqa (not Aqaba, which is second highest to Amman) offer the lowest prices — yes, I am as surprised as you!

If you are a smoker, stay in Aqaba as it offers the lowest prices, and move away from Madaba, where prices of tobacco products are highest in the Kingdom. If you are not a smoker and decide to reward yourself with a piece of clothing, buy it in Mafraq (lowest prices) and buy the shoes on your way there from Ajloun.

The cost of housing is, of course, highest in Amman (understandable since it has the capital, after all), followed closely by Aqaba, where one can see the sea. If you want to rent, go to Mafraq; but please understand that you would have to do household maintenance in Aqaba. Meanwhile, while doing the maintenance in Aqaba, remember to economize on fuel, lighting, and transportation; it has the highest prices in Jordan.

Do not use the phone in Mafraq! If not urgent, simply wait until you go to Maan, where the cost is the lowest. As to schooling the kids, Aqaba is the most expensive, and if you are one to shop, take them to Zarqa and save about 22 percent.

There you go! If you wish to spend less in Jordan, move about and pick the least costly from each governorate.

Published in Jordan News on feb 20, 2023

https://www.jordannews.jo/Section-36/Opinion/Psst-let-us-talk-inflation-27111

A walk down misery lane: A history of stock prices and policymakers. Feb 13,2023

A common observation and complaint in Jordan is that policymakers are hardly ever held accountable for their performance while in office. One way to evaluate policy leaders’ successes and failures is to examine the impact of their policies or terms in office on the value of stocks in the Amman stock market — more than half of which is comprised of the savings of Jordanians. A quick review of what happened to market capitalization of the domestic companies listed in the Amman Stock Market from 2007 to 2020 is illuminating.

One reason that market capitalization is a reasonable indicator of performance is that the stock price encompasses several variables in addition to the performance of the firm, such as relative optimism, positive or negative expectations, the level of trust in the institutions of the country, harmonization between fiscal and monetary policies, and the impact of external shocks on the supply and demand sides of the economy.

The losses in numbers

In 2007, the market capitalization stood at around JD29 billion. After many government executives decided that Jordan should become a victim and partake in the global credit crisis (and hence began to use this as an excuse for their many policy failures), the market capitalization value dropped to JD19.3 billion in 2011. Note that this was before the onset of the Arab Spring, during which Jordan was among the least-affected countries in the Arab world. The loss to stock-market investors at the time was close to JD10 billion, or 34 percent of the value of their investments.

However, the losses did not stop there. From 2012 until 2016, the drop in capitalization totaled JD1.7 billion. Then, from 2016 to 2018, the loss in capitalization slowed down to JD1.3 billion, only to rise again in 2019 by JD1.2 billion, and in 2020 by JD2 billion.

Questioning the cause

What should irk everyone is that the total loss of savings of people who invested in the capital of companies in the stock market reached JD16 billion, which is 56 percent of their initial investment. But did anyone raise a red flag here or there? No, many of the so called “experts”, which is a common designation in Jordan, blamed it on speculation, not knowing or basically ignoring that speculation is a huge factor in any stock market, especially among non-institutional buyers.

So, were executives held accountable? Not at all! Was such a decline in capital due to monetary or fiscal policies? I believe both, but I am not aware of any research into this. Were the reasons behind the losses domestic or external? Most external factors actually led to gains, as in the case of the influx of rich émigrés and industrialists who increased supply and demand in the country. If domestic reasons were to blame, then, which ministerial cabinet caused the most damage, and was it rewarded or punished? The numbers spell out the answer, there is no need to highlight the obvious. All were rewarded, and none were chastised.

Beyond blame throwing, mudslinging, and name calling, what is the solution? Recall that the present state of denigrated market capitalization and perished savings is but a result of many flows. Is it about time that policy makers pay attention to the plight of the millions who lost billions? I think it is. 

Published in Jordan News on Feb 13, 2023

https://www.jordannews.jo/Section-36/Opinion/A-walk-down-misery-lane-A-history-of-stock-prices-and-policymakers-26976

Why the rush to build a new Amman? Feb 05,2023

The current ministerial cabinet announced a few weeks back that a new city next to Amman is in the planning stage. One argument for the new project is that Amman is highly congested and therefore, the need has arisen to move to another site. The decision, in my view, is not only rash, but also unstudied.

Since traffic congestion is the excuse, let us look at the transport sector in Jordan. A detailed and comprehensive 2022 study by the World Bank should have been an eye-opener for the government. (Alas, it seems that it was not.) According to the study, the public transport system in Jordan is “uncoordinated, inefficient, and has poor coverage”. With most buses and taxis individually owned, Jordan has approximately 1,400 buses, 4,000 minibuses, 4,000 shared taxis, and 16,000 taxis.

The number of cars grows by approximately 6 percent per year, a growth rate that is higher than that of the population. Only one-third of public transport users are women and less than 50 percent of women use public transport. Additionally, 52 percent of women are dissatisfied with the public transport system. Furthermore, 47 percent of Jordanian women have turned down employment opportunities because of the absence of viable public transport options, which contributes to the fact that Jordan has one of the lowest rates of women’s participation in the labor force in the world, at 12 percent.

The unemployment of youth, currently at 49 percent, has also been exacerbated by the public transport system. Youth spend 23 percent of their income on transportation, which is an extremely high number relative to most countries. Households pay 17 percent of their income for public transport. These percentages have increased since the government increased the cost of fuel, which led to raising the fares.

Instead of providing an efficient public transport sector that enables greater efficiencies everywhere, the government has been underscoring transport infrastructure (roads and highways) without paying proper regard to pedestrians. Consequently, pedestrians are pushed out of the streets and cities in favor of vehicles.

The other option: fixing the transportation crisisThe loss to the economy is estimated at $3,000 million annually ­— not counting the economic loss of keeping women away from work. So, why has the government failed to improved the public transport system? One cannot claim the ignorance of decision-makers as an excuse; the World Bank study is not the first to mention this issue.

One possible explanation is that the government is at impasse or suffering from a moral hazard. From the current status quo of importing cars and not having a proper public transport sector, it profits over JD1 billion per year in customs, sales tax, special taxes, registrations, road taxes, fines, renewals, etc. If people were to buy cars at a lower rate, the government would forfeit a sizable portion of this income.   Worse still, after coming up with the Public Private Partnership (PPP) Law, the government desires to place tolls on roads as a PPP project instead of, say, offering a railway system.

One might also observe that a few years back, a study of the capital by the Greater Amman Municipality showed that it was not congested at all. In fact, close to half of its lands are empty. So why build another city? Maybe because someone wanted to emulate models in neighboring countries; or because the model had already been suggested by a previous cabinet and some studies are already available. One cannot simply sit and speculate a reason. Instead, we must get serious and solve our very real and present transport conundrum. 

Published in Jordan News on Feb 05,2023

https://www.jordannews.jo/Section-36/Opinion/Why-the-rush-to-build-a-new-Amman-26840

Jordan’s aid streams are drying up. Where do we go now? 28 Jan 2023

Since its inception, Jordan has been an aid beneficiary country. Yet aid ebbs and flows - it is never steady or secure enough to enable forward planning or strategic thinking. What is more, for several decades now, the government has relegated funding for capital expenditures (spending on projects that enhance productivity and invest in the future of the country) to foreign aid. Some aid sources seem to be drying up, leaving us to question: Where do we go now?

According to the World Bank Database, Jordan received $48 billion in foreign aid (grants and soft loans) during the period 1960-2020. The US alone gave Jordan $20 million since 1951, and recently increased the aid package from $1.275 billion to $1.45 billion for the next seven years. The UK, Germany, and Japan are also among Jordan’s main aid benefactors, and Saudi Arabia gave Jordan $1.175 billion since 1978, 50 percent of which went to support the budget.

Accumulating debts

The vast majority (over 90 percent) of foreign aid has been directed towards government budget support.  Moreover, during the 2010–2014 period, 70 percent of aid was in the form of grants, while the remainder comprised soft loans.

Currently, only half of aid is in the form of grants, which means that debt servicing is growing year after year. Hence, the economy (as measured by GDP) needs to grow at a faster rate than the interest on the debt.

Last year, debt servicing in Jordan totaled $2.22 billion, or 20 percent of domestic revenues (government domestic collections in taxes and fees from the local economy). However, some of the debt servicing goes out of the country - it is leaked out of the economy, thus weakening economic growth.

Moreover, if one were to add spending in the budget on debt servicing, civil service salaries, military and security apparatus allocations, and pensions, it would result in a sum greater than domestic revenues, which means that the government has to borrow to meet some (not even all) of its current expenditures.

Sinking productivity

This also means that it has to come up with these sums every month or year to meet its obligations, and it has no fiscal maneuverability. As a result, scant resources in the budget are ever dedicated to new projects, ones that enhance productivity, and when such projects are mentioned, they are subject to financing from aid.

Consequently, productivity in Jordan has been falling for decades. The highest per-capitaincome in real terms (with inflation taken out) in the history of Jordan was $5,055, in 1982. It was $3,837 in 2021.

In other words, the productivity in Jordan has been declining over the past 40 years; and the average income of a Jordanian has declined by $1,218. It is no wonder that 70 percent of respondents to a recent survey stated they do not trust the government and folks are generally unhappy.

Again, where do we go now?  The short answer is that we need the type of government spending that enhances the productivity of Jordanians to increase their output and income, and thus that of the government. If interested in a long response, see one of my past articles on the topic as I have answered this question many times.

Published in Jordan News on 28 Jan 2023

https://www.jordannews.jo/Section-36/Opinion/Jordan-s-aid-streams-are-drying-up-Where-do-we-go-now-26663