Jordanian Prime Minister Dr. Omar Al Razzaz, during his visit to the Ministry of Planning and international Cooperation in the first week of July, claimed that the financial support “represented in the direct loans and financial aid my country is receiving” is an indicator of the growing faith of the international community in the economy. The country, therefore, should capitalize and make best use of this opportunity to position itself as a “flourishing financial hub” that is attractive to global investors, he asserted.
Al Razzaz’s rationales to make such a claim could be many, including spreading positivity among Jordanians and scaling-up the country’s image in the eyes of potential international investors. This was much needed as, for a while now, the country’s attractiveness from an economic point of view has not been very compelling. This can be blamed on its GDP growth vs. unemployment vs. inflation rates in addition to its credit rating.
A country takes debt and injects it into the economy to initiate a “multiplier effect” on its GDP. The resultant rise in GDP offsets the increase in debt, and consequently the debt-to-GDP ratio falls. Only then will the ratio become a positive indicator. However, that is not the case in Jordan.
An ideal GDP growth rate is pegged around 2% to 3%. Additionally, the rate of inflation and unemployment should be in balance for an economy to be considered healthy. For this to happen, the rate of unemployment should be somewhere between 4.7% and 5.8%, with a target inflation rate of no more than 2%. Jordan’s average growth rate from 2017 till the first half of 2020 has been 1.9%, accompanied with an average unemployment rate of 18.8% and a 4.46% average inflation rate.
And in addition to these indicators, Fitch, “before the Covid19 crisis and under this same administration,” lowered Jordan’s credit rating to BB- with a stable outlook. This is the bottom tier of Fitch’s investment-grade credit ratings. The entities with these ratings are widely considered to be “speculative grade” as they are more vulnerable to changing economic conditions than the groups above them. Nevertheless, these entities largely demonstrate the ability to meet their debt payment obligations. In May 2020, Fitch reported that Jordan’s rating declined to BB- with a negative outlook, yet another drop.
While assessing the core economic potency of a country, it is considered prudent to take into account its debt-to-GDP ratio. That is because the more the GDP of a country (like Jordan) is reliant on financial support, the less productive it will be and the weaker its economy. This will eventually reflect in its credit rating, which for all practical purposes might be the prime criteria for the global community to make an investment choice.
Among the biggest obstacles standing in the way of Jordan’s economic development and growth is its debt to GDP ratio. It increased to 99.8% in the first quarter of 2020, compared to 96.7% in the same a period year ago. This increase was attributed to high government expenditure, in addition to a decrease in domestic revenue flows that mainly resulted from the low purchasing power of individuals, especially after the government rolled out a tax structure that significantly pushed prices of a large basket of goods.
Be that as it may, Jordan’s debt-to-GDP percentage is off-putting for the financial bigwigs scouting for opportunities to park their money. Efforts are needed to aggressively reduce it and create a positive investment climate in the country. Jordan might be a small country with limited resources, but its also has good economic value thanks to its crucial geographical location, prolonged political stability, and peaceful and flexible living environment that combines the lifestyles of the liberal West and the conservative Arabia.
On the financial front, Jordan offers a balanced business environment pivoting on offering quick and transparent procedures to kick-start businesses. The government, with its generous incentives in economic zones, is helping businesses get started and expand. Jordan was ranked 75th out of 190 countries by the World Bank in 2020 Doing Business Report, up by 29 ranks from a year earlier. High levels of access to loans and venture/seed capital makes it a coveted project germination hub.
Above all, Jordan’s key strength lies in its highly qualified, flexible, and cost-competitive workforce. With this valuable human capital, it has become one of the region’s most vibrant environments for research and development and innovation. According to UNCTAD’s 2020 World Investment Report, foreign direct investment (FDI) flows into Jordan totalled to $916 million in 2019. The total stock of FDI was estimated at $36 billion in 2019. Jordan certainly has what it takes to rise much stronger than this.
Reversing its core economic indicators by bringing them from negative to positive territory and showcasing its tangible attributes to the international community will help Jordan in its attempt to position itself as a promising investment center in the Middle East. That is the task ahead for now.
This article was first published on Forbes.com on August 13, 2020.