Jordan’s Economic Challenges and Solutions
Jordan’s Economic Challenges and Solutions
Jordan’s economy is one of the most resilient and stable in the region. However, it has long faced a series of structural challenges that have limited its growth and development. However, with the right mix of policy reforms, innovation, and collaboration between public and private sectors, Jordan has the potential to overcome these hurdles. This article examines the key economic challenges facing Jordan, their root causes, potential solutions, and the stakeholders involved in driving progress.
Key Economic Challenges
High Unemployment
As discussed in the article titled Overview of Jordan’s Economic Landscape, the country’s unemployment rate is high and stands at 21.4% as of Q1 2024. There are several causes for this:
Mismatch of desired skills.
Preference for public sector jobs.
High informal employment.
Dependence on foreign labor.
The labor market in Jordan suffers from a structural mismatch between the skills of job seekers and the requirements of available jobs. Many educated individuals are unable to find suitable employment that matches their qualifications, leading to high levels of voluntary unemployment among skilled workers.
In addition, there is a strong preference among the workforce for public sector jobs due to better compensation, job stability, and perceived accountability. This preference leads to a situation where the demand for public sector positions exceeds supply, creating a surplus of applicants and contributing to high unemployment rates among those seeking private sector jobs.
Over half of the workforce is engaged in informal employment, which is typically done to avoid taxes and pension contributions. This high level of informality exacerbates unemployment issues, as many workers are excluded from benefits and legal protections afforded to formal employees.
The preference for public sector employment has resulted in foreign workers filling gaps in sectors such as manufacturing and agriculture. This reliance on migrant labor further complicates the employment landscape for local workers.
Water Scarcity
Jordan is one of the most water-scarce countries globally due to its arid climate and over-reliance on groundwater. Some causes include:
High influx of refugees increasing demand.
Poor water management.
Outdated water infrastructure.
According to Jordan’s Ministry of Water and Irrigation, climate change and overuse of water resources caused reductions in groundwater reserves. In 1946, Jordan had 3,600 m3/capita/year of renewable freshwater resources. In 2021, it fell to 61 m3, and by 2040 it is expected to fall to 35 m3. This shortage hinders economic growth by hurting agricultural production, constraining industry, and increasing resource costs for businesses.
Public Debt
As of the second quarter of 2024, Jordan’s debt-to-GDP stood at just under 90%. Reasons for this involve:
Slow economic growth.
Regional crises and instability.
High subsidies on commodities like fuel.
One of the primary strains on the Kingdom’s public finances is the high level of spending on public servants and the military’s wages and pensions, which make up around 50% of all government spending.
Stagnant Wages and High Costs
The minimum monthly wage in Jordan is JD 260 ($367) for domestic workers and JD 230 ($324) for foreign workers. It has been as such since it increased in December 2020.
According to the Financial Inclusion Study conducted in 2022, the bank account savings rate of adults fell from 9.3% in 2017 to 4.3% in 2022. Additionally, almost 66% of those saving indicated at least one reason being for emergencies, indicating that citizens are struggling to afford discretionary spending.
Costs of living are rising beyond the level of wage growth, so many citizens have resorted to borrowing. Over 47% of adults borrowed in the 12 months before the survey, which is significantly high. Diving deeper, 39.3% borrowed informally, indicating that traditional routes, such as banks, are unfavored.
Policy Recommendations
Support the Private Sector
The government’s focus on providing significant public sector jobs is heading towards an unsustainable path and causing a gap in the private sector. The government should instead focus on subsidizing private companies, especially in the growing IT and tourism sectors, which make up a large portion of the economy.
For example, companies can receive a tax break of JD 1,000 per year for every full-time employee hired who earns at least JD 500 monthly and remains employed for at least one year. Additionally, companies in high-growth sectors like technology can receive grants for every job they create.
This incentivizes the expansion of operations and well-paying jobs for citizens. Such initiatives should also consider focusing on youth since their unemployment rate is almost 50%.
Invest in Water Technologies
The government, specifically the Ministry of Water and Irrigation, should encourage the use of desalination plants and water recycling systems for agriculture and urban areas.
The most notable example is the European Investment Bank’s Aqaba-Amman desalination project, which aims to provide a 24/7 supply of freshwater to Amman before the end of 2028. This project, along with similar initiatives, will help reduce water scarcity, thereby improving economic outlooks for citizens through a more secure life.
Reform Taxes
The tax system in Jordan can put significant pressure on citizens, especially those earning low incomes. One notable case is electric vehicles, which recently saw an unexpected increase in tax rates. Currently, such cars are taxed at up to 55%, depending on price. This squeezes the consumer, hindering the hopes of vehicle ownership.
Energy analyst Jawad Jalal Abbassi believes the government should incentivize, not discourage, the purchase of electric vehicles, especially with the EU banning the sale of conventional petrol and diesel cars from 2035.
According to Jawad, it is in the country’s best interest to prioritize small, non-polluting cars. His solution involves a laddered tax system, in which the first JD 10,000 ($14,000) is exempt. After that, taxes apply based on the category and price bracket of the model; the more luxurious it is, the more it is taxed.
This would increase smaller, more compact cars on the road, reducing congestion and emissions. In effect, this reduces citizens’ spending on fuel and increases the purchasing power of the middle class, thereby stimulating consumption and investment.
