Jordan’s economy weathers the storm of Syrian refugees

Jordan’s economy weathers the storm of Syrian refugees

Handling the influx of Syrian refugees into Jordan requires a significant commitment of resources. Will the demands of this situation ultimately prove detrimental? Or will they in fact stimulate the Jordanian economy?

The Za’atari refugee camp on the northern border of Jordan encapsulates the problems and opportunities the Jordanian economy is facing. Formerly a small rural village, the population has mushroomed to about 120,000 over the last year. Syrian refugees have set up businesses, and services have started to improve, with 4,000 liters of water trucked in daily, a new electric grid, new schools and hospitals, and plans to lay down water pipes in the near future.

But all of this new infrastructure is not cheap. It costs around $500,000 a day to run Za’atari, and locals are starting to grumble. Trucking in the water is damaging the roads. The electricity network and health services are having trouble keeping up with increased demand. Prices are increasing while wages are dropping.

Many in the Jordanian government worry that the huge costs are keeping growth constrained, costing Jordanians jobs and creating a long-term drain on government finances.

The drain on government finances is the most troubling. Jordan recently reassessed the situation and estimates that the total cost of hosting the refugees in 2013 and 2014 will exceed $5 billion. Finance Minister Umayya Toukan attributed the rising costs to the need for infrastructure development to alleviate overcrowding and provide sufficient health and educational services. This comes on top of an already distressed fiscal situation. In 2011, a drop in foreign aid coincided with soaring government expenditure, causing an acute financial crisis. The government was forced to turn to the IMF, securing a $2 billion loan in return for a promise to reform its subsidy system.

But there is also a positive case to be made for the developments in Za’atari. Syrian refugees are injecting new money into the economy, creating enterprise and taking menial jobs Jordanians do not want. Jordanian economist Yusuf Mansur highlights the fact that refugees are increasing demand for goods and service. Without them, he asserts, the already low growth rate might be even worse. As of September, the unemployment rate had actually dropped from 12.9% at the beginning of 2013 to 12.2%.

In addition, macroeconomic indicators appear strong. The Central Bank of Jordan recently decided to reduce interest rates by 0.25% – a sign of confidence in the local currency, as the central bank is no longer raising interest rates to avoid capital flight. They also announced reductions of at least a quarter percentage point in both the rediscount rate and the repurchase agreement rate. The yield on bonds due in 2015 has decreased by about one percentage point this year, and the IMF predicts growth to be a steady 3 to 3.5% in 2013. Thanks to injections of Gulf money and greater confidence in the local currency, foreign reserves have doubled this year, to $11 billion.

The net effect of all this will take some time to emerge. A lot depends on how the government handles the situation. There are two major opportunities here.

First of all, infrastructure development can be extremely beneficial in the long run. New electricity grids, better roads and improved water distribution systems are necessary investments if growth is to be sustained, with or without a refugee population.

Secondly, subsidy reform is necessary, and if a tight fiscal situation forces the government to control costs by following through with IMF prescriptions, this will save the government greater problems in the future.

There are also, however, several developments that could throw a spanner in the works.

If the IMF is too strict in forcing the implementation of reforms, this could create unnecessary external constraints on the ability of the government to adjust to developments. This does not seem to be the case thus far. In mid-October the IMF agreed to cut one percentage point from Jordan’s deficit target for the coming year. But it will have to continue to revisit the targets to ensure they are not being unduly restrictive.

Reducing subsidies also poses the risk of igniting unrest. Jordan was already in a fragile situation following the Arab Spring, having experienced protests calling for government reform. As is the case in many other Arab governments, subsidies and the expansive welfare system are used to maintain support and prevent unrest. With the added tensions caused by the refugee situation, reducing them could prove inflammatory. However, this too seems unlikely, if only because Jordanians need only look across the border to see the worst-case scenario they face if they push protests too far.

Another potential fly in the ointment is the prospect of foreign aid drying up. Jordan is not even close to having the capacity to deal with hosting the refugees by itself. Without external aid, it would either risk an imminent default or have to kick the refugees out. This seems unlikely at the moment. The Syrian conflict is still front-page news, and governments are still deeply worried about the situation getting worse The UK recently allocated an extra £11 million to the refugee response, yet this remains a concern in the medium term.

Finally, the Jordanian government should keep a keen eye out for signs of a “war bubble.” With rising prices for food, utilities, consumer goods and housing due to both increased demand and reductions in subsidies, inflation could springboard. This, combined with huge investments in infrastructure and housing construction (some of which is happening already) could create a bubble in the economy. More ready access to foreign exchange – because of both aid payments and the influx of international aid workers, journalists and diplomats – contributes further to this risk. Currently, inflation seems to be holding steady, and an overabundance of labor is keeping wages down. However, if the situation stabilizes, there is a distinct possibility of a bubble emerging.

So far, Jordan seems to be weathering the storm well. The economy is displaying promising figures, foreign aid money is still coming in, and Jordanian grumbling is confined to just grumbling. An improvement in the Jordanian economy could in fact prove to be a silver lining of the Syrian conflict.

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