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Jun 6, 2018 | 09:00 GMT

7 mins read

Jordan Scrambles to Keep Its Economic Reforms on Course

Jordanian police officers secure the office of the prime minister during a demonstration in the capital Amman late on June 4, 2018. Jordanian Prime Minister Hani Mulki resigned on June 4 after a wave of anti-austerity protests by citizens suffering from high unemployment and repeated price hikes.
(KHALIL MAZRAAWI/AFP/Getty Images)
Highlights
  • Public discontent in Jordan, this time over the kingdom's austerity and tax measures, has led to the resignation of its prime minister. But the next government still must cope with the same economic reform pressures.
  • The government's willingness to delay some of the economic demands it is making of its subjects displays a weakness that leaves space for protesters to organize, heralding more unrest.
  • Jordan's reliance on aid, loans and grants will allow Gulf Cooperation Council states, particularly the United Arab Emirates and Saudi Arabia, to nudge the country toward aligning more publicly with their anti-Iran foreign policies.

Days of labor strikes and protests by citizens from all walks of life against an income tax proposal have shaken up Jordan. The unusual display of public discontent in the normally placid kingdom drew promises from King Abdullah II and the rest of the government to reconsider plans for additional levies. The king himself even promised a temporary freeze on additional increases in fuel and electricity prices. Amid the hullabaloo, Prime Minister Hani Mulki stepped down and was replaced by the newly appointed Omar Razzaz.

The Big Picture

The Kingdom of Jordan, occupying a key strategic position in an unstable area of the Middle East, is burdened with a weak economy. The country has faced a persistent extremist threat and has periodically contended with instability but has managed to avoid greater insecurity. Its monarchy preserves this stability through its social contract with its subjects: It supplies them with basic social services and protection, and in exchange, it expects them to acquiesce to government demands. Now, with the country falling further into debt and the government pursuing aggressive economic reform, Jordanians are pushing to find the line between which of their demands the government will tolerate, and which it won't.

The ouster of Hani and his Cabinet will give the incoming government a bit of a reprieve as it pursues necessary but unpopular economic reforms required under the terms of an International Monetary Fund (IMF) loan and implemented under the advice of the World Bank. But the break will be short. Ultimately, driven by the realities of the fragile economy, Razzaz will face the same decisions as the preceding government and will be subject to the same discontent that plagued Mulki's tenure. Until Jordan's structurally unsound economy is repaired, either through a program of austerity and significant economic reforms or with another significant infusion of aid money, there will be no easy compromise between popular demands and economic reform. In the near term, Jordan can expect more promises of aid from the usual partners, but even so, the coming months will likely be marked by more unrest and protest.

An Economic Sinkhole

Given its weak economy and its key position in the midst of a conflict-prone region, Jordan has long been a primary destination for foreign aid, institutional loans and cash infusions from its regional allies. Other states with an interest in shoring up Jordan's stability have heavily invested in its economy. Over the past 60 years the United States has poured $20 billion into the country, which has also drawn large sums of aid from the Gulf Cooperation Council (GCC) states, especially after the 2011 Arab Spring.

 

Jordan’s unsustainable economy sucks up those cash infusions without generating enough wealth on its own.

But Jordan's unsustainable economy sucks up those cash infusions without generating enough wealth on its own. Beyond phosphates, it has few natural resources to rely upon. The country's vibrant tech sector is small, generating only about 12 percent of its gross domestic product, hardly enough revenue to sustain it, and employing a mere 1 percent of the population. Revenue from tourism, remittances, services and agriculture help keep Jordan afloat, but as the IMF and World Bank have long advised, the country must broaden its revenue base to obtain some semblance of independence. Meanwhile, its national debt stands at 95 percent of GDP and is still growing. Indeed, taming the debt is one of the chief goals of its recently published five-year economic plan, which set a target of reducing it by nearly 20 percent. To help achieve that goal, the plan relies on boosting revenue through tax implementation.

But that idea is not sitting well with Jordanians, who are more accustomed to receiving support from the government than to having it place financial demands on them. They have also grown angry at the expense that housing Syrian and Iraqi refugees has placed on the system. Jordan's high unemployment rate and the lack of social mobility have added to the strain that has become evident in increasing reports of divorce, suicide and drug use in recent years.

In 2017, Amman implemented a value-added tax, which would affect citizens based on their consumption rates. But this was a risky move, because the effects were not limited to the upper classes; they also applied to the poor and middle classes. And for the first time in decades, the government removed some subsidies on food (the price of bread, an absolute necessity for Jordanians across the class spectrum, doubled in January). The income tax was to be one of the next frontiers, especially notable considering that only 3 to 5 percent of Jordanians had ever faced the prospect of paying income taxes. The new income tax law that spurred the recent unrest was designed to increase government revenue by 250 million to 300 million dinars ($350 million to $420 million), but given its unprecedented nature, it quickly developed into a red line for Jordanians.

Scrambling for a Solution

To many Jordanians, the IMF and the World Bank demands feel impossible to satisfy. But in the government's eyes, the country must find a way to fulfill those conditions. This means that the next few years will be spent in a delicate dance of delaying some reforms without canceling them altogether. The Harvard-educated Razzaz, a former World Bank official, is well-equipped to devise solutions to shore up the economy. But no matter how creative his technocratic solutions, his term in office will be marked by unrest, because Jordanians are refusing even the idea of more taxes. Despite the advantages they give him, Razzaz's World Bank credentials will also make him the target of suspicions by protesters who do not trust the motives of institutions like the IMF and the World Bank.

Faced with this collision of demands, something had to give. For now, the government is proving that it is willing to bend, demonstrating that the social contract is flexible and in flux. By and large, Jordanians are not close to calling for a overthrow of the monarchy, but they will push as hard as they can against the prime minister and his government. The government's flexibility will further embolden the public as well as the trade unions and professional associations that have championed strikes. In between this push and pull, the social contract will bend in some places and break in others. In already restive areas such as the city of Ma'an and its surrounding region, protesters are already pushing harder than those in Amman. In Jordan's extremist underground, terrorist groups will seek to capitalize on the protests to recruit.

So if the government will be slowing down on some reforms, in the absence of revenue that taxes were to have provided, where will the money come from? Jordan has long used its capable security and intelligence services as a means of coaxing cooperation from such powers as the United States, the European Union, the United Kingdom and Russia. The United States, which especially values its security relationship and cooperation with Jordan, is likely to boost the amount it spends there. It has pledged $1.27 billion in aid to Jordan for 2019, a 25 percent increase from this year.

The GCC states channeled $5 billion in aid during 2012-17 to help it stave off crisis after the Arab Spring. But more recently, their aid has been doled out in a more bilateral fashion, tied to specific projects. Of course, aid and loans, especially from the GCC states, have always come with strings attached. While Jordan is loath to capitulate to outside demands, it realizes its weaknesses and understands that it must give something in return for the help from wealthier partners. For the United Arab Emirates and Saudi Arabia, that price includes a more public alignment with their campaigns to counter Iranian interests in the region. This means difficulty lies ahead for Jordan as it strives to focus on quelling domestic unrest while keeping up outside appearances.

 

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