Jordan’s Economy During Covid-19

Jon Alterman: Mohamad al-Ississ currently serves as the minister of finance for the Kingdom of Jordan, where he previously was the minister of planning and international cooperation and an economic advisor to His Majesty King Abdullah. He has extensive experience in development, having worked in the public and private sectors as well as academia. We first met 25 years ago when he was a freshman at Harvard and his energy and intelligence clearly distinguished him in a class of more than 250 students that I was helping teach. Mohamad, welcome to Babel.

Mohamad al-Ississ: Thank you, Jon. What a delight to be talking to you after all these years, and thank you for having me today on this podcast.

Jon Alterman: Give us a picture of before Covid-19 hit Jordan. You were minister of finance, you were doing a lot of things. What's the picture of the economy you were looking at? What did you think your 2020 was going to look like?

Mohamad al-Ississ: In order to understand how you would see the Covid challenge, it's important to understand that Jordan at that time has just emerged from one of the most challenging economic crises of any country in the world. We've endured over a decade of exogenous shocks worth 44% of our GDP. Our GDP per capita declined roughly 14%. We welcomed waves and waves of refugees as the war intensified in Syria. Our trade routes were closed as Syria and Iraq went through their own internal challenges. And overnight we lost 97% of our energy supply as Egypt faced its Arab Spring. The security in Egypt basically led to a breakdown of the energy supply in the form of natural gas that we received from them.

During this time, we decided that we need to regain competitiveness. So as the year started, we put in place what I'd like to call a recovery budget. We decided to increase our capital expenditure for the first time in many years. And we got a number of inefficiencies and our focus was growth and fighting and curbing tax evasion. So we're looking at this year to be a very different year, an inflection point in our growth trajectory, and sadly Covid hit and the story changed.

Jon Alterman: Now as part of that, I remember us talking about this London initiative, a large commitment by Jordan, a large bin by the international community to help the Jordanian economy recovery. And you had a five-year growth and reform matrix. What happened to that matrix?

Mohamad al-Ississ: Indeed, Jon. We've put together a matrix of structural reforms, and we decided that the best way to deal with the economic situation in Jordan is to embark on an intense structural reform plan that involves pretty much every aspect of the economy. We had two choices as Covid hit—as all other countries in the world faced—we could firefight, or we could put in place—while we address the health ramifications of Covid-19—the basis for our future trajectory. We did not use Covid-19 as an excuse to actually delay it, but we pushed a number of these reforms. As we were fighting Covid on the health front, we were also pushing an intense reform agenda economically.

Jon Alterman: Which is hard because you're looking at greater unemployment, you're looking at reduced government revenues. The IMF revised its estimates for Jordan, its growth estimates went from 2.3% GDP growth to a 3.4% contraction. A large part of the Jordanian labor market is in the informal sector. Economically, what have the last three months looked like for Jordan? How does it feel to ordinary Jordanians as the country is going through, in many ways, the two transitions of on one hand, your reform efforts and on the other hand a reduction in economic activity due to Covid?

Mohamad al-Ississ: The most concerning parts of that diversity in projection is if we keep in mind that in spite of all the circumstances I just mentioned to you about the challenges of the past decade, our economy continued to grow at 2%, in spite of all these massive challenges. We are now focused on ensuring whatever we do, we shorten the time for recovery. And that's why our response was swift and decisive. We've actually, we're one of the first countries in the world to implement an immediate and comprehensive lockdown where we made testing free and available for all.

Mohamad al-Ississ: We lowered our sales tax on key protective equipment, such as hand sanitizers, gloves, masks. We delivered food and other necessary items to those in need. We've expanded our safety nets to reach daily wage labor who were most vulnerable from these closures. The economic price of it, needless to say, is massive. But we firmly believe that was the best ethical and economic response to this health challenge.

Jon Alterman: So what kind of economic assistance can you get from the IMF, for example, and what is the IMF asking in return?

Mohamad al-Ississ: Frankly, our relationship with the IMF could not have been any better. This month, for example, Jordan received a rapid financing instrument of approximately $396 million, which is 85% of our quota as part of the Covid response. In addition, back in March, the IMF approved our extended funds facility program to 1.3 billion.

Having said that, what I found most important in this relationship is it's not merely monetary or a checklist. We've been engaged in a number of technical assistance programs that focused on improving our debt management, attraction of investment, a tax and customs administration reform. And I think it's important that the essence of it is Jordan owning its structure reform agenda, and not waiting for the IFI to come and try to push implementation in this direction. Rather, we're doing this because we want to create jobs for our citizens. We want to improve the workplace for our women, and there is no shortcut to that. The only path forward is through hard, deep, structural reform.

Jon Alterman: Other than the IMF, what are the principal, external sources of funding for reform programs in Jordan? And what are the internal sources of funding they're looking for?

Mohamad al-Ississ: We're fortunate in Jordan to have a robust and strong banking sector. We also have a well-endowed social security investment fund, and we can tap into both of these resources. Having said that, because we know that the biggest challenge the private sector faces in this Covid-19 situation is access to liquidity. We decided not to, as a government, crowd out the private sector on the lending front. For that reason, we focused our efforts on looking for external financing needs. It's really heartening. The United States, UK, France, Germany, the rest of the EU, and the GCC who, during Covid-19, were facing intense challenges on the home front. Yet, they were also helping Jordan meet its financing needs, which allowed us really to leave the domestic financing to the private sector.

Jon Alterman: It's a crowded list of countries that are trying to get help getting through this. How does this play out in the future? How do you think it will play out between countries that are doing the right thing, attracting versus countries that are perceived to be vital, and then getting the sort of urgent assistance to keep them from toppling?

Mohamad al-Ississ: Jon, I participate in the G20 meetings for ministers of finance and governors of central banks. Frankly, a lot of the effort has focused on reaching out with support and financial assistance to the poorest countries, and that's important. But it's important to remember that just as Covid-19 spreads across borders, without discrimination, so is the economic and financial aftermath of this disease. This is a situation where we have to avoid the worst economic ramifications together as humanity, because I think the challenge of not doing so will leave nobody immune from it.

Jon Alterman: You've talked about the importance of the private sector in driving reform, making a more attractive investment climate for people, and at the beginning of our conversation. In the Covid world, what can you do to attract private sector investment over the next three years? What kind of returns do you think investors are going to expect in the near term? What kinds of things do you think in this Covid-inflected world are going to worry investors?

Mohamad al-Ississ: Investment looks for balancing, high return with a managed risk. Let's take them each on its own. On high return, Jordan has one of the best educated labor forces worldwide. Our female labor participation in the labor force has, I believe, roughly 68 to 70% of them have tertiary university degrees. In fact, we have a very vibrant startup culture in Jordan. The World Economic Forum, every year picks the top 100 startups in the Arab world as contributors for the fourth industrial revolution. And this export of services has enabled Jordan to withstand the previous shocks that I mentioned, which included physical closures of borders.

Hence, when you look at managing risk, you can consider the past decade that Jordan went through as a dress rehearsal for the Covid-19 situation. As an investor, I think this sends a lot of assurances about a country's ability to withstand a stress test, such as Covid provides. And I believe we have a convincing case of balancing reward and risk in Jordan while accessing over a billion people in export markets through leveraging our free trade agreements with the U.S., with Europe, and with the rest of the Arab world.

Jon Alterman: So you think people will still be looking for opportunities in emerging and frontier markets, regardless of a sort of consolidation and maybe a breakdown in some globalization, as a consequence of all this, that people will still be seeking?

Mohamad al-Ississ: Frankly, Jon, this is a key question. If you think about the world pre Covid-19, we were headed on a de-globalization trajectory, trade wars were intensifying, the UK left the Euro zone. I think the lessons learned from Covid is that challenge has to be faced through a collaborative approach. And I'm not saying this in a romanticized, theoretical fashion. If you're a business, one lesson from Covid-19 is you cannot concentrate your supply chain focusing only on one source, China or otherwise, because while you can access it at a lower cost, your exposure to risk is intensified. And therefore, if I'm a private sector leader, I would be looking at diversifying my supply chain. I believe the Covid-19 challenge is the largest economic challenge since the great depression. It is a massive simultaneous demand and supply shock, but ultimately I believe in our ability in getting out of this collectively. And there is a lot of money that's looking for safe places to be placed and balancing risk with reward. And I'm hoping that as this money considers its next destination, Jordan would be on the list.

Jon Alterman: So as a final question, you're looking at cutting wasteful expenses, you're trying to reduce tax, you're spending a lot. You're trying to both save money and fix your regulatory environment. What do you think Jordan needs to invest in right now, other than the regulatory piece, other than the governance piece? As you look forward to this new world, what are the investments you believe Jordan needs to make to flourish in that world?

Mohamad al-Ississ: I think that's an important question because it keeps our focus on the long-term rather than the immediate firefighting that everybody has to engage in, given the situation. Jon, you and I lived in Egypt at different times. I lived there during the revolution and I remember one of my friends at the time told me, may you live in interesting times, turns out to be a curse.

And interesting times is what we've been living here in Jordan and the rest of the world in the past time. We're no strangers to it as a region. We're no strangers to it as a country. And in fact, our prompt and swift response to this crisis, I think is a manifestation of our previous experiences there sadly, for better or for worst. During this time, we've decided to invest in different opportunities. As everybody was concerned about the transmission of germs, especially when using cash, we saw this as an opportunity to push e-payments, which is a great path for us to both improve our revenue collection in having a better understanding of what's going on in the economy, but also in formalizing informal areas of the economy.

Mohamad al-Ississ: In March alone, the number of e-payment transactions that took place are more than the past three years collective. I believe we need to continue in investing, in leapfrogging, towards more e-payment, more startup activity and to empower it. We need to digitize. We've built a number of platforms, which were by the way, built pro bono by our entrepreneurs, by our startup companies, for scheduling delivery of food to increase the social distancing and to issue digital permit at the time of the quarantine. Continuing to invest in digitizing the economy is important. Continuing to fight informality, as I think we had the golden opportunity because of the ramifications on daily wage labor.

And we insisted as we were issuing permits to go back to work, that any company or firm that goes back to work had to formalize, and we dropped the cost of doing that to encourage more and more of them to formalize and to register. And ultimately, we have been engaged on an intense tax evasion fight, which as you can imagine, is not an easy thing to do. Not only technically, but politically. But we decided as our response to the crisis was swift and as we gained political capital because of that, we will use this political capital to put Jordan on a safe fiscal path going forward. I think between digitization, education and really fighting evasion and bringing everybody under the rule of law in this country, we can build the basis for a Jordan that can continue to be resilient to shocks, but can finally start bringing down the unemployment challenge, providing hope for its use. And really delivering on the moderation and stability promise that Jordan symbolizes.

Jon Alterman: I mean, it's an ambitious agenda and I wish you all kinds of luck, both in the near term and then also building on the successes you've had in the last few months as you take Jordan onward. Thank you very much.

Mohamad al-Ississ: Thank you, Jon. And I hope we can meet face to face soon, hopefully.

Jon Alterman: I look forward to it. Thank you.