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Jordan economy holds a steady course

7 June 2023

MEED's July 2023 report on Jordan also includes:

> OIL & GAS: Jordan's oil and gas sector battles sluggish phase
> POWER & WATER: Jordan sustains utility infrastructure progress
> CONSTRUCTION: Hospital boost for Jordan construction

 

With attention absorbed by the royal wedding of Jordan's Crown Prince Hussein bin Abdullah and Saudi architect Rajwa al-Saif in early June, the release of unemployment figures for the first quarter of 2023 showing joblessness at almost 22 per cent suggested it might have been a good day to bury bad news.

Stubbornly high unemployment is only one challenge facing the Hashemite Kingdom. Rising costs have also roused demonstrations. Last December, professional drivers took to the streets to protest against fuel price rises, a side effect of the imposition of IMF-backed fuel subsidy reforms that resulted in a doubling of prices.

And yet, broader inflationary pressures have been mitigated by significant strategic wheat reserves and long-term gas supply arrangements. The country’s dollar peg has also limited foreign exchange volatility.

Inflation still poses a significant risk, say analysts. “Jordan has been largely shielded from the high inflationary pressures affecting the world. However, the country inevitably faced higher prices as both food and fuel supplies have been affected by Russia’s war on Ukraine,” says Farah el-Rafei, Jordan economist at consultancy Oxford Economics.

“If inflation spikes again, this could put significant pressure on the government, given stagnant wages and high unemployment.”

Institutional acclaim

The government’s economic management has won plaudits from the IMF and ratings agencies. The IMF’s most recent assessment issued in May found that despite a challenging global and regional environment, Jordan has managed to maintain macroeconomic stability and access to international capital markets through prudent monetary and fiscal policies.

The fund lauded the kingdom’s post-pandemic recovery, projecting real GDP growth rise to 2.7 per cent in 2023, and inflation for the year to moderate to 3.8 per cent.

This has afforded space to tackle the country’s indebtedness, with ambitions to reduce public debt to 80 per cent of GDP by 2028, from around 90 per cent now. This will be achieved by continued efforts to broaden the tax base, and by improving the efficiency of public spending.  

“The country has made solid progress in implementing the structural reforms suggested by the IMF,” notes El-Rafei.

“Activity has increased via higher tourism and export revenues carried over from 2022, and this momentum is likely to be maintained in 2023.”

If inflation spikes again, this could put significant pressure on the government, given stagnant wages and high unemployment
Farah el-Rafei, Oxford Economics

Persisting difficulties

Despite Jordan’s cushioning against inflation, particularly with food stocks, there is an expectation that rises in prices in the region will inevitably catch up on growth efforts this year. 

Another risk stems from the dollar peg, where higher interest rates raise the cost of borrowing.

“While the US Federal Reserve announced a potential end to the rate hikes, leaving the rates as high as they are for an extended period might suffocate investment in Jordan,” says El-Rafei.

Jordan’s external deficit remains high, reflecting the country’s high import burden. The current account deficit widened to 7 per cent of GDP in the first half of 2022. This external deficit is expected to persist in the short term as global inflation stabilises and regional exports and investments pick up. 

Though the IMF recommends continuing the prudent policies that have preserved macroeconomic stability, the government may find it increasingly difficult to increase tax revenues and change the composition of tax revenues. 

According to Nesreen Barakat, CEO of the Jordan Strategy Forum, total tax revenues are still hovering around 15 to 17 per cent of GDP, and most of these revenues (about 70 per cent) emanate from the country’s sales tax.  

“Broadening the tax base is proving difficult,” she says. “In addition, I wonder how the government can improve the efficiency of public spending when a few spending items, such as wages, pensions and interest payments on public debt, account for a large proportion of total public spending.”

Restrategising growth

Another challenge for Jordan is that merely sustaining the post-pandemic recovery may not be enough. 

In Barakat’s view, given the unemployment challenge, much stronger real GDP growth rates are needed. “Here, I am not confident that the Jordanian economy can achieve higher growth rates in the next few years,” she says.

“If we succeed in implementing the Economic Modernisation Vision’s initiative and public sector reform, we might have a good chance in the long term. Within this context, one cannot underestimate the importance of enhancing and increasing local investments as well as foreign direct investment.”

The Economic Modernisation Vision calls for the private sector to take the lead, accounting for 73 per cent of the total $58.8bn in investment. 

The three-phase vision aims to increase average real income per capita by 3 per cent annually, create 1 million jobs and more than double the nation’s GDP over 10 years. 

For the vision to be realised, a large pipeline of public-private partnership (PPP) schemes is needed, covering water desalination, school construction, clean energy, green hydrogen, transport improvement and road construction, among others. 

Barakat says the government should not just focus on 'large' PPP projects. “The private sector cannot get involved in large and long-term PPP projects,” she says.

“The absence of an active bond market in its primary and secondary aspects makes it impossible for them (entrepreneurs as well as banks) to get involved. I see the private sector getting involved in 'small' PPP projects. This is where the government should be instrumental in determining these projects and seeking private sector partnerships.”

Green opportunities

Another new avenue of thinking is a greater interest in climate spending.

Last year saw the launch of the government’s Green Economy Financing Facility (GEFF), supported by the European Bank for Reconstruction & Development, the Green Climate Fund and the EU, to help Jordan transition to a green economy.

Some $22m of funding via three GEFF deals has been disbursed to boost private sector investment in renewable energy and efficient utilisation of water and energy resources. The International Finance Corporation has also announced a $50m investment issued by the Jordan Kuwait Bank. 

“This is particularly significant as Jordan is considered among the most vulnerable to drought due to climate change, which remains a high risk due to capacity shortages,” says El-Rafei. 

Such long-term strategising will be key to developing Jordan’s economic potential. But in the meantime, there are near-term hurdles to navigate amid a challenging international context that is forcing higher borrowing costs. The danger remains that this could choke investment opportunities that are essential to Jordan’s recovery.  

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James Gavin

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    Al-Kamil power plant, a 280MW, gas-fired power plant in the Sharqiya region of Oman, was recently decommissioned following nearly 20 years of operations as the country’s second independent power plant.

    The plant reached commercial operation in 2002, at which time it started to supply electricity to Nama Power & Water Procurement Company under a 15-year power purchase agreement that was later extended to the end of 2021. No further extension was granted so, in 2022, the decommissioning process was initiated.

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    Starting decommissioning 

    The decommissioning of a power plant is a complex process and can take as much time to complete as it takes to build a plant. It involves environmental considerations, health and safety protocols, detailed surveys, de-energisation, dismantling, demolition, waste management and the segregation and storage of secondary valuables. 

    Careful planning and management are essential to ensure that decommissioning is accomplished safely, cost-effectively and in accordance with all government environmental standards.

    Consulting on the decommissioning of Al-Kamil were Dubai’s Golden Sands Marketing Consulting (GSMC), appointed in 2021, alongside Abu Dhabi’s Sustainable Water & Power Company (SWPC) and Dubai’s Tractebel Engineering Company (TEC).

    One of the first steps that GSMC undertook was to prepare a master plan covering the entire decommissioning process (see right).

    A site investigation was undertaken by GSMC and SWPC early in the process to determine the condition of the power assets and the overall site. 

    The Al-Kamil power plant was found to have been well maintained, with no major health, safety, security and environment (HSSE) issues.

    SWPC prepared the dismantling guidelines covering all plant equipment, and these were reviewed by TEC. The guidelines covered three main phases: the shut down and isolation of all assets; the de-
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    GSMC designed a sales strategy for the plant equipment, taking into consideration the secondary market for power-related equipment, as well as the scrap market in Oman. A competitive procurement process was also followed in an effort to maximise sales revenues from plant equipment.

    A separate tender was issued to appoint a demolition contractor to remove the remaining civil works, and once this work was complete, a local environmental engineering company undertook a final environmental report to demonstrate that the site was properly cleared and ready for handover to the original owner, the Housing & Urban Planning Ministry.

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    The decommissioning project went well in terms of HSSE considerations, with no fatalities, no lost-time injuries and no first aid injuries over the more than 243,000 total workhours at the site. 

    There were no material environmental spills or incidents to report, and all above- and below-ground structures were demolished and safely removed from the site in accordance with local requirements. 

    The final environmental report, completed just before handover, showed that the site was effectively in the same condition as it was when originally taken over at the start of construction.

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    Many lessons were learnt during the process that can benefit future power plant decommissioning efforts in the region.

    > Notify key stakeholders early: Key stakeholders are those that have a vested interest in the project, either through ownership of certain assets on site, such as grid connection assets, or via regulation, such as the environmental authority. Many of these stakeholders take time to respond, so notifying key stakeholders early in the process can ensure that unnecessary delays are avoided.

    > Prioritise HSSE: For any future decommissioning project, HSSE must be a top priority, and this should be the focus throughout the entire decommissioning process – at all levels of work and management. 

    The site manager at Al-Kamil installed a 24/7 closed-circuit television camera, which proved to be extremely effective in terms of monitoring progress and identifying potential HSSE issues before they became an incident. This simple and cost-effective practice should be replicated for all future decommissioning projects.

    > Appoint the environmental consultant early in the process: It is advisable to appoint an environmental consultant early in the process. The consultant is needed to coordinate activities with the local environmental authority and obtain a no-objection letter or certificate, complete an environmental management report and an update of the environmental impact assessment, which includes an environmental baseline.

    Ideally, these reports and environmental authority approvals should be completed well before any work is under way at the site. This information is also useful to potential bidders for the sale of equipment, or to contractors involved in the dismantling and demolition process.

    > Submit an environmental management plan for approval: It is unlikely that any environmental authority will provide a no-objection letter or certificate without reviewing the environmental plan. It is therefore necessary to complete the plan early, prior to informing the environmental authority. This can minimise potential delays in starting the decommissioning process. 

    As a general practice, an environmental consultant should be brought on board early in the process, ideally once the overall master plan is approved by the company.

    > Establish a proactive steering committee: This was done at Al-Kamil and proved to be effective when it came to overseeing project progress and dealing with issues as they arose. Certain members of the steering committee visited the site regularly and undertook spot HSSE inspections.

    At Al-Kamil, the overall decommissioning was relatively straightforward as the plant was in a remote area. However, decommissioning a power plant in a busier location, or when part of the power plant remains in operation, is more challenging. Under these circumstances, a steering committee is vital. 

    > Set realistic delivery and completion timelines: Decommissioning a power plant is a complex process. The initial timeline to complete the process for Al-Kamil was one year, which was the best estimate at the time as there were no benchmarks or references in Oman. However, the actual completion time turned out to be three years – longer than the approximately 2.5 years it took to build the plant, from the start of construction in early 2001 to full commercial operation in July 2003.

    Realistic delivery dates should be set for contractors, suppliers and others involved in the decommissioning process. This is likely to result in better pricing, as bidders tend to factor in higher contingencies with shorter or fast-track delivery dates. More realistic delivery dates also help management to allocate staff resources and manage the decommissioning budget. 

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    “We’re very excited about being part of the Adnoc ecosystem. Gordon Technologies, through Turnwell, has just completed its first batch of wells and is currently working on the Turnwell project,” the Enersol CEO says, adding: “Gordon is the MWD provider on that project.”

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