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6 September 2011
The Invitation
The Gulf Cooperation Councils (GCC) announcement during the Heads of State summit held last May in Riyadh to formally welcome the idea of Jordan as a member of the council represents a break from the past. While this announcement came as a surprise to almost everyone, the GCC's outreach could have significant economic and political consequences for both Jordan and the GCC. This paper will attempt to analyze the economic implications of joining such a wealthy regional block for a resource-scarce country like Jordan. We will start with a brief introduction to the GCC in addition to its accomplishments in terms of economic integration. This will be followed by a closer look at the possible implications for Jordan under different frameworks of integration.
3. Common Market Common markets are a progression from customs unions where not only goods are allowed to move freely but factors of production too. Free movement of labor and capital across borders is facilitated, ensuring that national treatment of factors of production apply across borders. 4. Monetary Union A monetary union is the culmination of the economic integration process. Once goods and factors of production can move freely, members of a union seek to unify their national currencies. Consequently, members forfeit their national currency and a common currency is used across political borders as legal tender. This stage requires national governments to relinquish their sovereignty over monetary policy to a super-national central bank.
Jul-10
Oct-10
Jan-11
Source: CBJ
Source: DOS
Apr-11
2008
2009
2010
21.7%
22.3%
20%
Exports
Imports
Lower custom duties from tariff cuts On a different note, the customs union assumes common external tariffs for members on their trade with other countries outside the union at a low rate of 5%, which will require Jordan to significantly decrease its existing tariffs relative to other members in the GCC and will lead to increased competition and less protection to local producers, considering that GCC manufacturers enjoy more government subsidies, cheaper energy and lower taxes. It is also worth noting that the kingdoms custom duties and fees on international trade averaged 6.5% of total government revenues during the period 2008-2010. Consequently, the repercussions of the customs union will jeopardize one of Jordans main sources of revenue.
JD Million
315.6 300
10%
10.0%
5%
200 2006
Source: CBJ, MOF
2007
2008
2009
2010
Factors of production wont be affected The membership agreement within the customs union framework is not expected to have an impact on the factors of production, such as labor and capital, as these are not included in such an agreement. Therefore, foreign direct investments, remittances and unemployment will not be affected under this scenario.
As a result ... Under the customs union scenario, the agreement will not prove to be successful for Jordans economy in the medium to long term as, aside from the limited benefits mentioned earlier; Jordan will have to undergo costly structural changes to conform to GCC economies in terms of tax systems, fiscal policies, and custom tariffs.
Remittances to Jordan
14.7%
Unemployment in Jordan
15.3% 14.0%
2,500 2,000 JD Million 1,500 1,000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
14.5%
14.7%
14.8%
13.1%
12.7%
12.9%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Remittances
Source: CBJ
Growth
Source: DOS
2010
Q1
10%
12.5%
13.1%
As of the first half of 2011, remittances have decreased by 3.1% to stand at JD1.2 billion compared to the same period last year and have decreased by 9.6% during June alone when compared to the same month last year, this in turn has added further pressure on Jordans foreign currency reserve which declined 12.6% or JD1.09 billion to stand at JD7.5 billion at end of the first half of 2011 compared to the balance at the end of 2010. Moreover, the membership will provide easier access to the GCC for skilled Jordanian workers and eventually help contain Jordans rising unemployment which reached 13% by the end of Q1 2011, up from 12% in the previous year and ultimately increase workers remittances. Tourism might flourish According to the latest figures released by the Ministry of Tourism, the number of visitors from the six GCC states grew by 11.6% in 2010 to reach 1.65 million or 20% of total visitors while tourism receipts from GCC nationals amounted to around JD450 million or 18.5% of total receipts during the same year. Although we do not expect to see a notable increase in inbound leisure tourists from the GCC as all GCC nationals already enter Jordan without any Visas, the same is not true for medical and educational tourism which could see a boost if Jordan was able to position itself as a more costeffective destination for these two subsectors.
20%
19%
18% 2006
Others
2006
2007
2008
2009
2010
2007
2008
GCC as % of Total
Others
GCC as % of Total
More FDI Foreign direct investment in Jordan, especially from the six GCC nations, witnessed substantial growth in the last decade reaching a record level of USD3.5 billion or 23% of GDP in 2006 before gradually dropping to USD 1.7 billion or 6% of GDP by the end of 2010. The GCC accounted for 29% and 15.5% of total FDI in Jordan during 2009 and 2010 respectively while Saudi Arabia alone accounted for 10% and 13.5% of FDI in the kingdom during the same period.
FDI in Jordan
4,000 3,000 USD Million 2,000 1,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 25% 20% 15% 10% 5% 0% 35% 30% 25% 20% 15% 10% 5% 0%
16% 11%
2008
2009
2010
Unrestricted flow of capital from the GCC would facilitate more FDI in coming years which will boost economic growth and help solve some of the countrys structural problems such as rising
unemployment. This could also positively impact the real estate sector and the Jordanian Stock Market, which have recently experienced falling prices and subdued activity. It is also worth mentioning that Jordan could experience some capital outflows towards the GCC searching for more competitive business environments with cheaper energy and lower tax rates.
It will also ease the Kingdoms debt burden Following several years of expanding budget deficit and declining GDP growth, Jordans public debt has been rising steadily in both relative and absolute terms. Net public debt increased by 5.8% during the first 4 months of 2011 to reach JD12.1 billion, or 57.7% of GDP. As mentioned earlier, higher economic growth and lower deficit in coming years will reduce the countrys reliance on debt markets and alleviate its debt burden.
2006
2007
2008
2009
2010
Apr-11
2006
2007
2008
2009
2010
Apr-11
Domestic Debt
Source: CBJ
Foreign Debt
Economic growth should strengthen After growing at an average rate of 7.2% between 2006 and 2009, real GDP growth dropped to 2.3% in 2010 as a result of the global financial crisis. Moreover, and following the political unrest in the region, which affected most sectors in the kingdom, the IMF has recently lowered its 2011 growth forecast for Jordan to 3.3%, down from its October 2010 estimate of 4.2%.
12% 10%
5.8% 5.3% 4.2%
7.2%
3,000
5.5%
8% 6% 4% 2% 0%
2,500 2,000
2.3% 2.4% 2.3%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Q1 10
Q1 11
Growth (%)
In fact, Jordans nominal GDP, which was estimated at JD18.76 billion, or USD 26.50 billion, in 2010, is the second smallest in the region while the kingdoms GDP per capita amounted to USD 4,328 in 2010 and ranked 10th in the Arab world, ahead of Tunisia, Morocco, Syria, Egypt, Iraq, and Yemen.
Should plans for the GCC expansion come through, more FDI and remittances coupled with lower inflation and oil prices would boost real GDP growth in Jordan as the economy benefits from a much lower base compared to many other wealthier countries in the MENA region.
MENA-Nominal GDP
450 USD Billion 375 300 225 150 75 0 KSA UAE Egypt Algeria Kuwait Qatar Morocco Iraq Libya Syria Oman Tunisia Lebanon Yemen Jordan Bahrain USD 75,000 60,000 45,000 30,000 15,000 -
Source: IMF
Source: IMF
As a result The common market framework looks like a more promising scenario, although one that requires time and effort to resolve difficulties pertaining to the free flow of capital and unrestricted movement of citizens between member states. The implications under such framework are far more significant than the customs union and will place Jordan in a favorable position in the future.
Next Steps
Jordan will open formal accession talks with the GCC on the 11th of September 2011, in a move that is expected to deepen economic relationships between the kingdom and the six-nation coalition. It is still difficult to say how long the accession negotiations would take, but Jordanian officials hope to reach an agreement as soon as possible. As this is just the beginning of a lengthy process, we will revisit this topic with a more detailed and comprehensive analysis in the near term after further negotiations take place between both sides and more information is released.
Qatar UAE Kuwait Bahrain Oman KSA Libya Lebanon Algeria Jordan Tunisia Morocco Syria Egypt Iraq Yemen 7
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