It is good that we have differing views on the impact of the crisis on Jordan and use that for analysis and understanding the present state of the economy and where it is heading 

A gloomy view, on the other hand, can be based on the sharply declining growth path, the weak exports, the decline in FDI and remittance inflow, and more seriously, on the threat to macroeconomic stability and growth prospects, arising from the deterioration of the fiscal position.

It is good that we have differing views on the impact of the crisis on Jordan and use that for analysis and understanding the present state of the economy and where it is heading. What needs to be avoided, however, is overstating the downside to the extent where it undermines confidence and discourages investment and consumption decisions, or only seeing the positive aspects of the economy and get lulled into complacency.

Now the global recovery is well under way and the international prospects are positive. Jordan's outlook is set to improve in tandem. Indeed, there are signs of an upturn in some economic indicators, including bank credit and exports growth, and official forecasts are for higher growth this year. That said, the economy may still face important challenges and the rebound in activity and confidence may bring with it a new set of risks that policy makers should be prepared to deal with in a timely manner, to ensure a smooth recovery.

First, recalling that unemployment usually lags behind growth slowdown, the worst may be yet to come for the labor market. The unemployment situation can also be exacerbated in the short run by the freeze in government hiring this year and, potentially, by any amendment to the Social Security Law to keep workers longer in the labor force.

The social and political implications aside, a rise in the jobless rate is particularly problematic for growth, both in the short and longer terms. Job losses undermine domestic consumption and aggregate demand, and when job recovery does occur, it is usually a slow and lengthy process.

 An increase in imports, and hence a widening of the trade deficit, which is to be expected with a pick up in activity and increased demands, will also add downwards pressures on foreign reserves 

Second, fiscal consolidation is achievable mainly through expenditure cuts, but it could come at a cost to growth, especially if the burden of fiscal adjustment falls on capital expenditures. The impact on growth will be stronger if there is a strong complementarity between private and public spending, which will hinder the needed revival in private investment to counter the effects of the fiscal tightening.

Third, the abundant liquidity in the banking sector was accumulated partly as a result of the banks' reluctance to lend in the midst of shaky business conditions. So once confidence is restored, banks' lending may bounce sharply, posing risk to monetary stability. Inflationary pressures would also mount if credit acceleration is to coincide with the expected rise in international commodity prices.

Fourth, the monetary policy will have to deal with other adjustments in the monetary variables, notably the foreign reserves of the Central Bank. Currency substitution in favor of the dinar and "carry trade" operations (borrowing in dollar and investing in dinar-denominated assets), triggered by the sharp decline in interest rates on the dollar, have been partly responsible for the increase in the Central Bank's foreign reserves. This will stop and may reverse course at some point, perhaps within months, once a tightening cycle of monetary policy (raising interest rates) begins in the U.S.

An increase in imports, and hence a widening of the trade deficit, which is to be expected with a pick up in activity and increased demands, will also add downwards pressures on foreign reserves. Adjustment in the reserves and external positions to more normal levels should not be a concern as long as it is orderly; the challenge is to ensure it is going be so.

Addressing these risks and challenges will require first and foremost a careful management of macroeconomic policies and improving their mix, with a clear priority to bringing the fiscal deficit and public debt to more sustainable levels and ensuring continued monetary stability.

The appropriate mix of monetary and fiscal policies may entail a further monetary easing, which should be carefully considered in view of the domestic and external developments.

Efforts to increase access to financing, especially for small- and medium- size enterprises, should also be intensified. The impact on growth of the fiscal tightening can also be mitigated by enhancing the "quality" of government expenditures, both in terms of their direct contribution to growth and of employment of Jordanians and their role in enhancing the country's productive capacity. But reconciling stability and growth cannot be achieved with short-term demand management alone, and would certainly require bold supply-side structural reforms.

The new tax law was a step in the right direction, but other legislative and institutional reforms should be expedited to improve the business and investment climate, with a view to supporting private sector-led growth.
At this stage, focus should be placed on the way forward, and the crisis appreciated in the context of the weaknesses and strengths it has revealed in the structure of the economy and the opportunity it provides to push the reform agenda forward.



*Published in Jordan's THE JORDAN TIMES on Feb. 16, 2010. Ghazi Shbaikat is a former minister of labor. He contributed this article to The Jordan Times.