Policy Research Reports

Investigating the Effects of COVID-19 on the Jordanian Economy: A Macro-Micro Analysis

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No.

PRR 44

Publisher

ERF

Date

October, 2022

Abstract
Author(s)

The Jordanian case, being an upper middle-income, relatively diversified and politically stable country, is of particular interest for several reasons. This report examines the macroeconomic and microeconomic effects of COVID-19 on Jordan. First, Jordan has, for a number of decades, acted as the “shock absorber” for the surrounding area, an island of stability and refuge in a region beset by conflict. According to the UNHCR (2019), one in every four people in Jordan is a refugee. Jordan had barely begun to recover from the global financial crisis when the Syrian conflict and regional instability further hampered its economy (Assaad and Salemi, 2019). The COVID-19 pandemic is a further shock to an already struggling economy; prior to the pandemic, Jordan already had the third lowest rate of employment in the world with 31% in 2020. Unemployment rate is particularly high among youth with 37.28% and women with 24% (Assaad, Krafft and Keo, 2019; World Development Indicators, 2022). Moreover, Jordan, being a rent economy, is highly dependent on foreign direct investment and remittances. With the decline in oil prices in labor-importing countries and the pandemic, these channels are likely to exert a negative effect at the macroeconomic level (lower economic growth, more unemployment, less trade) and the microeconomic one (poor, youth, women, informal workers, refugees and vulnerable populations).

The objective of this report is threefold. First, it provides an overview of the COVID-19 impact on Jordan and the associated government’s response. The latter was necessary but not sufficient, especially when it comes to the support provided to households and firms. Second, using both macroeconomic and microeconomic datasets, we examine the effect of the COVID-19 on the economy. Indeed, we show how the structural characteristics of the Jordanian economy amplified the impact of the pandemic. Finally, we provide some policy recommendations to curb the negative effects of this shock at different levels (especially monetary, fiscal, social, and trade policies).

Several conclusions can be withdrawn from our findings. At the macroeconomic level, in order to curb the negative effects of the health shock, the government implemented some fiscal measures that led to a decrease in government revenues and an increase in spending. This led to a deterioration of the fiscal deficit that increased from 6% during the first quarter of 2020 to 10% in the second quarter and a higher primary deficit from 1% to 5.5%. At the monetary policy level, the Central Bank adopted an expansionary monetary policy. To do so, more than 550 million dinars were injected to the national economy by reducing the compulsory reserve from 7% to 5%. Moreover, the Central Bank of Jordan adopted a number of measures to boost the financial sector including: restructuring the loans of individuals and companies, reducing the guarantee commissions of the industrial and services finance program from 1.5% to 0.75% for all loans, reducing the start-up loans guarantee commission from 1% to 0.75%, and increasing the insurance coverage percentage of the local sales guarantee program from 80% to 90%. Mid-sized firms took advantage of this initiative since 38% applied for or received a business loan. This figure is lower for larger ones (22%). The lowest figure is the one of micro.

This result is a surprising given that, generally, the smaller the firms, the more they need financial resources. Yet, mid-sized firms, exporters and those operating either in the manufacturing sector or the services contracted a loan from or asked to reschedule it in order to cope with the crisis. At the trade level, the total number of harmful and liberalizing measures imposed by Jordan has changed drastically with the health crisis since the total number of harmful measures has increased from 1 to 7 between 2018 and 2020 (such as the ban on exports of food products or the ban on re-exportation or selling of medical masks).

At the microeconomic level, small, and micro firms are the most affected by the economic slowdown. Employed individuals in these firms, especially those with no contracts, were more likely to be fired or experience decline in their payment. Second, income decline, increase in food price, limited availability of food and limited mobility threaten food security of households. This food crisis may be considered as an access problem, both physically and economically, especially for low income and vulnerable groups as refugees and those living in urban areas. Third, women are the main ones to bear the cost of the increasing care work during the lockdown period and the e-schooling. Fourth, working remotely, in a context of precaution measures and social distancing, is not easily applied as some jobs cannot be done off work sites, employees are not allowed to work from home and because of lack of technology. Finally, the main coping strategies applied to face the painful economic impacts include borrowing money from family or friends in the country, taking money out of savings, borrowing from banks, employer, or private lender and selling assets.