Transcript Global and regional growth

The Economy of Jordan:
Problems and Solutions
Presented by
Dr. Ohan Balian
May 03, 2010
Amman
Outline
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Global and regional growth
Economic indicators
The “Twin-Deficits”
Stabilization policies
Banking supervision
Industrial policy
Conclusion
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1.
Global and regional growth
Global growth
 Global GDP fell by 2.2% in 2009 (World Bank: Global
Economic Prospects 2010)
 Never such a fall since the Great Depression in
1929-1933
 Caused by the bursting of the real estate and
stock market bubbles
 These bubbles were caused by low interest
rates/leveraging
 A ‘liquidity trap’ situation
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1.
Global and regional growth
(contd…)
Regional growth
 Regional growth rates, especially in GCC, at 3.2% in 2009 (United
Arab Economic Report 2009)
 Relatively low compared to 6.3% in 2007 and 5.9 % in 2008
 Price of oil fell from $96 in 2008 to $60 in 2009 which caused GCC
GDP to fall by 30% - from $1.2 trillion in 2008 to $835 billion in
2009
 Inflation also fell sharply from an average of 11% in 2008 to 2% in
2009
 GCC and Arab countries are expected to grow by 5.2 % in 2010
(World Bank: Global Economic Prospects 2010)
 Jordan has very strong links with the GCC countries in terms of
remittances, trade, grants, and FDI
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2. Economic indicators
Source: IMF Consultations Article IV 2009
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GDP (nominal)
CPI inflation
Investment
Consumption
Savings
S/I balance
Gov revenue
Gov exp
Budget Deficit
Exports of goods
Imports of goods
Trade balance
Current account
$22 billion
4%
27.8% of GDP
23.3% of GDP
17.0% of GDP
-10.8% of GDP
32.4% of GDP
37.7% of GDP
-5.3% of GDP
$6.8 billion
$13.7 billion
-$6.9 billion
-$10.8 billion
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3. The “Twin - Deficits”
 Internal (budget) and external (trade) deficits
 In 2009, budget deficit was 5.3% of GDP and trade
deficit was 6.9% of GDP
 The implications of the twin-deficits is that it will
eventually lead to higher interest rates and therefore
reduce the rate of growth
 The budget deficit is expected to increase to over 7%
of GDP in 2010 caused by expansionary fiscal policies
 The trade deficit is expected to improve slightly but will
be below its long-term trend because of weak growth
prospects regionally
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4. Stabilization policies
Monetary and Fiscal policies
 Short-run policies to generate economic growth
 The fixed exchange rate with the $US closely
links the US interest rate (low) with the interest
rate in Jordan
 The increasing deficit in the budget limits the
scope for expansionary fiscal policies
 Both of these phenomena – the link with the
US interest rate and the limited scope of fiscal
policy – reduce the “degrees of freedom” of the
Jordanian Authorities to conduct stabilization
policies
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4. Stabilization policies
(contd…)
Monetary and Fiscal policies
 Nevertheless, the authorities have succeeded in
reducing fiscal spending considerably with further
easing of liquidity
 Very limited room for counter-cyclical fiscal policy - i.e.
not able to use expansionary fiscal policies by
increasing gov expenditures
 Most of the fiscal policies will be conducted on the
spending side – e.g. freeze of public sector wages and
reductions in fuel and food subsidies
 Monetary policy (expansionary) is more feasible
because of low inflation (about 4% compared to over
10% in 2008)
 Lower policy rates and reductions in reserve
requirements to encourage lending and increase the
money supply, in turn increasing aggregate demand 8
5. Banking supervision
 Banking system not affected much by the financial
crisis
 Primarily because of active supervision by the Central
Bank of Jordan which has insulated the Jordanian
banking system from exposures to troubled
international banks, structured financial products, and
from wholesale financial markets
 This has allowed for a high build-up of international
reserves (about $10.2 billion)
 Bank deposits have also increased substantially with
comfortable liquidity positions and low NPLs
 And coming from Dubai, Jordanian banks have very
little exposure to Dubai debt!
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6. Industrial policy
 Role of government has been increasing due to the
global slowdown. This intervention is known as
Industrial Policy
 But industrial policy should be conducted in the ‘right’
way using targeted gov support programs
 ‘Embedded Autonomy’ – i.e. close relationship with the
private sector without the gov losing its autonomy
 Various ‘Principles’ need to be taken into account when
designing effective industrial policies
 This was the method used by the ‘Asian Tigers’ in the
1970’s and some GCC countries – clustering, free
zones, support to SMEs, etc.
 There have been suggestions that the recent crisis in
Dubai was partly caused by inappropriate industrial 10
policies.
7. Conclusions
 Given Jordan's strong links with the GCC (in terms of
remittances, trade, grants, and FDI), the prospects in
the short to medium terms look good as economic
recovery in GCC countries takes strength.
 Very limited room for fiscal policy as the deficits
(internal and external) are high which will put upward
pressure on interest rates and thus hold back growth.
 But global recovery (although weak) is expected to
reduce the trade deficit, and fiscal consolidation on the
spending side should at least prevent the budget deficit
from increasing further.
 Industrial policies should be more targeted taking into
account best practice design principles in designing the
institutional framework of such policies.
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