October 28, 2014 / 3:52 PM / 5 years ago

Jordan sees four percent growth in 2015 on buoyant exports - central bank

AMMAN (Reuters) - Jordan’s economy may grow by 4 percent next year as buoyant exports and increased public and private spending help mitigate the fallout from crises in neighbouring Syria and Iraq, the central bank governor said.

Ziad Fariz said the economy was on track to meet a 3.3-3.4 percent growth target in 2014 that was close to an IMF agreed 3.5 percent, with the $36 billion economy proving more resilient in the face of an influx of Syrian refugees and a dampened regional investment climate.

A continued drop in oil prices could also substantially ease fiscal pressures in a country which imports 97 percent of its fuel needs, bringing substantial savings to its 4 billion dinars ($5.6 bln) annual bill that comprised 28 percent of total imports, Fariz said.

“If oil drops 20 percent from 4 billion we are talking about 800 million dinars (in savings),” he told the Reuters Middle East Investment Summit.

“It will reduce the budget deficit and growth is helped by recovery in several sectors as we try to stimulate private sector as a means for growth,” he added.

Fariz, who last week met IMF officials in Washington after the completion of the fifth and sixth reviews of the country’s economic performance under a three-year standby deal that secured the kindgom $2 billion, said the kingdom was commended for “doing all right given the circumstances”.

The cash-strapped kingdom was forced to sign the IMF deal in 2012 to get much-needed finances to set it on the right track and stave off a major economic crisis.

The rebound in the economy since then has been credited by economists and government officials to the adherence to IMF reforms that included politically risky elimination of fuel subsidies and higher electricity prices.

SAFE HAVEN

Businessmen and investors say foreign aid that has amounted to several billions of dollars by major Western donors to offset the impact of the Syrian crisis has also cushioned the economy.

Jordanian officials say the cost of hosting Syrian refugees are adding to the strain on the economy, with Foreign Minister Nasser Judeh warning at a conference in Berlin on Tuesday that Syria’s neighbours were approaching “host country fatigue”.

But economists say the influx of skilled Syrian labor, the setting up of factories by its businessmen and a housing boom along the border with Syria sparked by refugees has been a boon for Jordan’s economy despite the fiscal costs to the budget.

Recently Jordan has also benefited from the arrival of wealthy Iraqis who have fled violence in Iraq in recent months.

The kingdom has served as a safe haven during every major regional upheaval in the last few decades, attracting capital inflows from Syria, the Palestinian territories and Iraq.

Foreign reserves have risen almost 18 percent since the start of the year to a record $14.4 billion and are now at a comfortable 7-1/2 months’ reserves, a sign of domestic and foreign investor confidence in the country’s macro economic policies, Fariz said.

A main challenge remained fiscal consolidation to help reduce the country’s primary budget deficit to 2.5 percent of GDP in 2015 from a forecast 3.5 percent in 2014 after grants which traditionally cover the financing gap, he said.

The 2014 budget deficit would go up by three percentage points to 6.5 percent if over $1.4 billion of losses by the state electricity company were included, Fariz said.

“Next year we will continue the effort to reduce the budget deficit by rationalizing expenditure. Reducing the deficit has taken the form of enhancing revenues and controlling expenditure,” he said.

Along with a plan to freeze expenditure in the 2015 budget at current levels around 6.8 billion dinars, a new tax law next year seen by the IMF as a key pillar of fiscal reforms that reduces tax incentives could generate up to 1 percent of GDP.

Spending on key infrastructure drawn from a 5 billion project financing fund given by Gulf states to bolster the kingdom’s political stability has also eased pressure on successive budgets that focused on public salary hikes and handouts to maintain social peace. The government has so far spent almost half of the fund.

Fariz said the improved economic situation is expected to narrow the balance of payments deficit to 7 percent in 2014 compared with 9 percent last year and 12 percent in 2012.

This has been underpinned by a rise in exports, stable remittances and higher tourism receipts that were being helped by the significant drop in oil prices in the last few months.

Inflation was expected to decline to around 2.5 percent next year from an average 3 percent in 2014 due to the lower oil and commodity prices, Fariz said.

The oil price fall will help reduce losses of the state electricity company that have averaged $1.4 billion annually as a result of importing expensive heavy fuel after the disruption of cheap gas supplies from Egypt and have been a main reason for straining public finances, he said.

Under the IMF deal, the government has raised electricity prices by 16 percent every year to help reduce subsidies and allow the state firm to break even by end of 2017.

Follow Reuters Summits on Twitter @Reuters_Summits

Editing by Emelia Sithole-Matarise

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