AMMAN (Reuters) - The cost of accommodating hundreds of thousands of Syrian refugees in Jordan is hampering the economy’s ability to grow substantially beyond a three to 3.5 percent IMF annual growth target for the next two years, the central bank governor said.
The drain on the country’s meager economic resources and higher state expenditure resulting from the presence of over 600,000 refugees fleeing violence to neighboring Jordan, had put brakes on an debt burdened economy already facing severe fiscal strains, Ziad Fariz said on Tuesday.
“Syrian refugees are bound to affect growth by I would say at least 2 percent. We would have had 5 percent. Despite this, I think the economy will continue to grow by about 3 percent more or less, 3 to 3.5 percent,” Fariz added.
This was in line with the International Monetary Fund (IMF) forecast, supported mainly by Gulf money for new infrastructure projects and greater confidence in the local economy.
“The impact of the Syrian refugees is huge on the economy directly and indirectly with its current impact and longer term and immediate on resources, on expenditure and the environment,” Fariz said in interview for the Reuters Middle East Investment Summit.
Jordan is one of Syria’s four immediate neighbors, along with Lebanon, Turkey and Iraq, inundated with refugees. Of more than two million refugees, almost one third are in Jordan. They are now almost ten percent of the country’s population.
Combined with a drop in foreign aid and soaring welfare payments and higher energy import bill, the kingdom went through an acute financial crisis last year that forced it to take a $2 billion IMF loan.
Jordan’s economic problems deepened after 2011 as a sharp reduction in supplies of the cheap Egyptian gas it used to generate most of its electricity forced it to pay an extra $2.5 billion a year for diesel and fuel bought in the global markets
Fariz who met senior IMF officials on the sidelines of a World Bank and IMF meetings in Washington earlier this month said extra foreign aid was crucial to help Jordan push through tough economic reforms and mitigate the negative impact of the accelerated influx of refugees from Syria.
The IMF relaxed this month some fiscal targets on its budget belt tightening plans and on how quickly Jordan would have to raise electricity tariffs under its three-year loan program, in recognition of the impact of the Syrian crisis and the need to safeguard social stability.
The budget deficit stood at around 9 percent of GDP but the biggest problem was a financing gap due to the hefty losses at the state owned electricity firm NEPCO, Fariz said.
Fariz said a $1.25 billion U.S. backed seven-year Eurobond which was agreed last August that would be floated next month in global markets, would help ease the government’s financing gap, which had forced it to expand borrowing from local banks.
“It depends on the rating of America, not our rating and its going to be higher than the rating of the U.S. government,” Fariz said.
Fariz said by adopting the right policies to rein in budget spending and giving more room for the private sector, the economy’s resilience this year was “very obvious” with signs of a recovery in a sharp drop since 2011 in capital inflows from investments, tourism and remittances.
Boosted by Gulf money and greater confidence in the local currency, foreign reserves had doubled this year alone, where they stood now at a current $11 billion.
“The level of reserves is acceptable it increased by 100 percent compared to last year and demand for the dinar is rising. Last year people were exchanging dinars for dollars this year it’s the opposite and hopefully this will bring more investments to the country,” Fariz said.
Dollarization had also fallen to 20 percent from 27 percent.
Cushioned by the build-up in reserves, the central bank has since August eased monetary policy for the first time in more than two years, cutting benchmark rates by 50 basis points n a move that reflected a more stable environment after raising rates to guard against capital flight.
“I hope the market will respond positively after our move to ease interest rates further,” he added
By injecting more liquidity into the banking system through a series of monetary instruments from buying bonds to purchase swaps, the central bank had helped spur sluggish private sector growth and maintain growth in the last two years despite the external shocks, Fariz said.
Inflationary pressures seemed to be falling with annual inflation possibly dropping to around 5 percent by the end of the year from a current 6 percent if “a declining monthly trend” continues.
Fariz echoed an IMF assessment that although the country continued to face high uncertainties from the protracted impact of the devastation in Syria on its economy, putting pressures on external and fiscal accounts, healthy macroeconomic fundamentals gave it considerable room to weather the regional turmoil.
“Let’s say the Jordanian economy will continue to show one of its strongest characteristics...the ability to meet challenges and resilience to external shocks,” Fariz added.
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Reporting by Suleiman Al-Khalidi; editing by Ron Askew