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ARAB BANK PLC
THE HASHMITE KINGDOM OF JORDAN
SUMMARY ON
SURROUNDING ENVIRONMENT
June 2002
POLITICAL SCENE
Global Scene:
 Political instability manifested by regional
turmoil following US military actions in
Afghanistan, chaos in Palestine & possibility
of military strike against Iraq.
 The predominance of a state of unclear vision
& fickle expectations.
 Regional instability & risks are mitigated by
friendly relations with Arab neighbors and
support from the USA.
 Jordan-US FT Agreement signifies a message
of support & appreciation for Jordan.
Global Scene (Cont’d):
 Having a clear & moderate stand on the crisis
(Sept.11th), Jordan has no political bills to
pay.
 The warmth of Jordan-US relations started to
wane due to differences over regional issues
(Iraq & Israeli-Palestinian conflict).
 Jordan relations with Israel have remained
cool.
Domestic Scene:
 Tense atmosphere & public dissatisfaction
with regional events.
 Internal stability is reinforced by the King’s
popularity and the improving relations with
Arab states.
 The king, acting as a CEO, is keenly pushing
towards political & economic reform.
 Despite regional political turbulence, Jordan
will pursue its economic agenda.
 Parliamentary elections planned late 2002.
ECONOMIC
ENVIRONMENT
Economic Highlights:
 Jordan has been pursuing IMF recommended
comprehensive economic re-adjustment
policies since early 1990s.
 Policies have been significantly successful in
stabilizing the economy and maintaining
monetary stability.
 However, structural reforms, earnestly undertaken since late 1990s to cover all aspects of
the economy, are still emphasized to set the
stage for sustainable future growth.
Economic Performance:
 During the 1990s, the economy faced several
difficulties due to trade deregulation, liberalization & political instability.
 Hence, economic growth had been modest
over the period 1996/2000 (3% on average).
 This growth had been below population
growth rate causing a deterioration in per
capita income.
 However, the continuous reform policies laid
the bases for future growth.
Economic Performance (Cont’d):
 In year 2000, economic growth stood at 4%
despite difficult conditions.
 All other indicators were satisfactory:
Ω Low inflation (0.7%).
Ω Stable JD exchange rate.
Ω Comfortable level of net foreign reserves
(US$ 2.7 billion covering 8 months of
imports).
Ω Improvement in external debt / GDP ratio
(95% in 1996 to 80% in 2000).
Economic Performance (Cont’d):
 Strong performance in 2001 despite
unfavorable regional & int’l conditions:
Ω 4.2% real GDP growth (4.5% nominal).
¤ Growth sectors (mining, telecommunications, money, banking & insurance,
construction & industry).
¤ Slow growth (petroleum products,
electricity & potash).
¤ Retreat sectors (tourism, air transport,
shipping, investment).
Economic Performance (Cont’d):
 Year 2001 performance (Cont’d):
Ω Inflation 1.8% (0.7% in 2000) due to price
increases.
Ω JD stability has been maintained.
Ω Unemployment 14.9%.
Ω Net foreign currency reserves of US$ 2.6
billion (7-month export coverage).
Ω External debt of US$ 6.7 billion (75.8% of
GDP vs. 80% in 2000).
Ω Industrial production rose by 5.4%.
Economic Performance (Cont’d):
 Year 2001 performance (Cont’d):
Ω Narrowing down of trade deficit:
¤ Exports (JD 1.62 billion) rose by 21%.
¤ Imports (JD 3.41 billion) rose by 5%.
¤ Deficit decreased by 6.2% (28.5% of
GDP vs. 31.7% in 2000).
Ω Current account after grants at the same
level (JD 40 million) representing 0.6% of
GDP vs. 0.7% in 2000.
Fiscal Performance:
 Fiscal deficit is still high (6.9% of GDP before
grants & 3.0% after grants) due to:
Ω Drop in non-tax revenues (-21%):
¤ Fall in custom tariffs on many goods.
¤ Drop in tourism activities & proceeds.
¤ Drop in mining proceeds (JPMC).
¤ Tax relief extended to tourism sector.
Ω Rigidities on expenditure side (pension
funds, rural development, subsidies).
Ω Capital expenditure at 84% of budgeted.
Fiscal Performance
:
(Cont’d)
 External debt is still high ($ 6.7 bln) & entails
heavy burden ($ 720 mm. in debt service).
 Paris Club’s debts on Jordan are expected to
be rescheduled with the help of the IMF.
 Securitization of internal debt and more
dependence on public debt instruments to
cover budget deficit.
 New Public Debt Law allowing for domestic
borrowing up to 40% of GDP.
Monetary Policy:
 Successful in containing inflation & maintain-
ing monetary stability.
 7 cuts on domestic interest rates vs. 11 cuts
on the US Dollar interest rate.
 2% drop in 3-month CDs following the decline
in US Treasury Bills.
 Reserve ratio slipped to 8%.
 Recent loosening shows restored confidence
in the economy, and is justified by the level of
net foreign reserves (US$ 2.6 billion).
Monetary Policy (Cont’d):
 M.S. increased by 5.8% (10.2% in 2000) due to
the absence of UN compensations effect.
 Credit to the private sector recovered
strongly (increasing at 11%) in response to
low interest rates (JD 402.4 million).
Economy During 2002:
 Outlook for the economy since Sept., 2001
has been dampened by int’l and regional
developments (USA military reaction to
Sept.11th events, turmoil in Palestine,
possibility of a military strike on Iraq).
 Sectors most affected: (tourism, airline
activities, shipping, capital investment
inflow).
 S&Ps has revised Jordan’s outlook from
“Positive” to “Stable”.
Economy During 2002 (Cont’d):
 Real GDP growth anticipated around 4.0%.
 Motors of growth:
Ω Investment projects (Disi water
conveyance, Jordan-Egypt gas pipeline,
Jordan-Iraq oil pipeline).
Ω Foreign investment recovery.
Ω New socioeconomic development plan.
 Inflation is expected within 3.5%.
 Fiscal deficit anticipated at 6.5% of GDP (7%
in year 2001).
Economy During 2002 (Cont’d):
 Economic policies:
Ω Sustain economic growth in the face of
difficult regional situation.
Ω Maintain price stability.
Ω Increase foreign exchange reserves by a
moderate amount.
Ω Achieve a further reduction in net public
debt.
Economic Re-adjustment:
 Long process of reform since 1989.
 Review shows strong macro rather than
microeconomic indicators, reflecting success
of stabilization policies & need to further
address structural reform policies.
 Since 2000, the King has been successfully
pushing forward structural re-adjustment
policies (privatization, world integration,
trade liberalization, financial deregulation).
Econ. Re-adjustment (Cont’d):
 Performance exceeding targets in many areas:
2000
US$ Million
Program Actual
Real GDP (%)
2.5%
4.0%
Inflation (%)
2.8%
0.7%
Liquidity (%)
8.7%
10.2%
FOREX reserve change
485
772
Fiscal deficit / GDP
2.5%
4.7%
Current account / GDP
-1.7%
0.7%
Exports growth
5.2%
3.7%
Imports growth
4.2%
12.9%
2001
Program Actual
3.5%
4.2%
2.4%
1.8%
8.4%
5.8%
-320
-184
2.9%
3.2%
-1.8%
0.6%
5.9%
20.7%
5.3%
10.3%
Econ. Re-adjustment (Cont’d):
 The current economic re-adjustment (1999/02)
expired in late April 2002.
 The process of re-adjustment to be extended
to an additional period of 3 years in the after
math of the government subsidy cuts on some
basic commodities (bread, kerosene, fuel oil,
diesel, fodder, barely).
Banking Environment:
 Long process of reform (since early 1990s).
 More open & competitive environment.
 Demand for credit financing started to pick
up after a long period of retraction.
 Margins are getting slimmer due to fierce
market competition.
 Surplus liquidity without satisfactory &
profitable channels of investment.
 Income from public debt instruments & CDs
contributes a larger share of banks’ profits.
Banking Environment (Cont’d):
 Banks’ financial results for 2001 showed a
healthy performance.
 Early 2002, three small banks experienced
difficulties due to a fraud case involving
falsified contracts used as collateral against
loans.
 Loans still outstanding around US$ 100 mm.
 The crisis has been dealt with maximum care
and is about to be contained.
Financial Market (ASE):
 Despite regional & int’l instability, year 2001
proved to be one of ASE’s best.
 Trading volume doubled reaching JD 669
million, the highest level since 1994.
 Stock Price Index increased by 30%.
 The banking sector was the driver of growth
(30%), followed by industry (22%), insurance
(11%) & services (10%).
 Market capitalization surged by 28% to reach
US$ 6.35 billion.
Financial Market / ASE (Cont’d):
 Hopes of a better future performance with the
increase in export potentials, evidenced by:
Ω Jordan-US Free Trade Agreement.
Ω Partnership agreement with the E.U.
Ω Spread of Qualifying Industrial Zones.
Ω Launching of Aqaba Special Economic
Zone.
Ω Continued privatization.
Economic Prospects:
 S&Ps maintained Jordan’s rating at BB-, with
a stable outlook rather than positive.
 The adverse regional politics will continue to
impair tourism & investments.
 Yet, with the reform process expedited & the
expected benefits of the new growth engines
(ASEZ, privatization, Jordan-US FTA & QIZ),
economic prospects seem more favorable.
Economic Prospects (Cont’d):
 However, maintaining regional political
stability remains crucial for Jordan to reap
the benefits of its reform agenda & domestic
strategy to boost economic growth.
LEGAL & REGULATORY
ENVIRONMENT
General Reforms:
 Comprehensive reform & overhaul of the
legal climate to adapt to more market
deregulation, openness & globalization.
 Tariff cuts on many industrial inputs.
 Custom ceiling reduced to 30%.
 General Sales Tax replaced by VAT.
 Property Rights & Competition Law.
 Investment Promotion Law equating foreign
with Jordanian investors.
 New Public Debt Law.
Banking Reforms:
 Obligatory Reserve Ratio down to 8%.
 Banks to publish their Prime Lending Rate.
 Deregulating lending rates & commissions.
 New Banking Law (enhance indirect control).
 Deposit Insurance Law.
 Un-cleared checks (new unit).
 National Payment System to be launched.
 New loan provisioning & credit concentration
instructions.
 Efforts to broaden E-banking services.
Global Integration:
 Partnership agreement with the E.U.
 Joined the WTO.
 Free Trade Area with the USA (Jordan is the
fourth country to sign such an agreement).
 QIZ status for selected industrial estates.
 Tariff ceiling reduced to 30% (25% by 2005).
 Bilateral treaties with Arab & foreign
countries.
 Joined Arab Free Trade Area (Jan., 1998).
Privatization Program:
 Commenced in 1996 and started to
aggressively roll in August 1998.
 Government shares in 44 companies have
been fully or partially privatized.
 Sale of 49% of government stake in Jordan
Cement Factories Co. to the French Lavarge.
All other government shares sold to S.S.C.
 40% of government shares in JTC sold to
France Telecom & Arab Bank & 8% to S.S.C.
 Management of Amman water & waste water
networks awarded to the French LEMA.
Privatization Program (Cont’d):
 Ma’in Spa leased to the French ACCOR.
 Bus routes in Amman partially handed over
to three private companies.
 Selling of R.J.’s (national carrier) non-core
businesses (Duty Free Shop, Flight Training
Center, Catering Center, Alia Hotel & Engine
Maintenance).
 National Electric Power Co., sliced into a
generating co. (CEGCO) & a distribution co.
(EDCO) as a prerequisite for privatization.
Privatization Program (Cont’d):
 The Dutch Nepostel was awarded a 4-year
contract to prepare postal services for privatization (RFP to be completed before 2003).
 JPMC slated for privatization in 2002.
 Government to sell 26% of its shares in APC
(RFP to be completed by 9/2002).
 R.J.’s Air Academy to be restructured &
slated for privatization.
 Selected electricity & water projects to be
privatized on B.O.T. or B.O.O. bases.
Privatization Program (Cont’d):
 A consortium has been selected to build &
operate the first independent power plant.
 New Privatization Law to regulate the use of
privatization proceeds.
Other Reforms:
 Further reforms are underway to address the
following issues:
Ω Reduction & equality of treatment in tax
burden (new Income Tax Law).
Ω Law on mortgage of moveable property.
Ω Speeding up legal procedures.
Ω Review of Evidence Law.
Ω Financial Leasing Law.
Ω Postal Services Law.