AMMAN — Jordanian decision makers should focus on fiscal reforms in the next couple of years and not on growth, according to an economist.

Sayem Ali, economist/global markets and research at Standard Chartered, described Jordan’s public debt as a key risk, noting that it has reached almost 80 per cent of the Kingdom’s gross domestic product.

He stressed during a recent gathering, attended by the governor of the Central Bank of Jordan among  bankers, businessmen and intellectuals, that the budget and trade deficits should be tackled to avoid an increase in public debt leaving to the authorities the choice that is most appropriate in terms of higher revenue or lower spending.

The economist said that by tackling the high indebtedness and deficits, the government will be sending positive signals to markets, investors and creditors about its determination to control the country’s finances and adhere to fiscal discipline.

“Public debt build up is unsustainable and reforms are critical,” Sayem emphasised, noting that austerity measures are showing results but that more reforms are needed.

According to Sayem, the medium-term outlook is stable with the economy recovering from external shocks.

“$2 billion from the International Monetary Fund provides foreign exchange reserve cushion and reforms will reduce vulnerability to shocks,” he said, adding that political risks have subsided and describing the new electoral laws as a significant push towards empowering Parliament.

Sayem also described the $5 billion pledge from the Gulf Cooperation Council (GCC)  countries as very positive for growth outlook.

He indicated that foreign exchange reserves have risen to $8 billion (4.5 months of import cover) and that the dollarisation risks have eased on proactive monetary policy response.

“The Jordanian dinar peg has strengthened on pro-active monetary stance and foreign investor sentiment has turned positive,” the economist said, noting that improved market sentiments were reflected in the Emerging Markets Bond Index (EMBI) Global.

Emphasising that  reforms are positive for growth, the economist expected Jordan’s growth in 2013 and 2014 to range between 3-3.5 per cent and inflation to go up this year to around 6 per cent before dropping in the following years.

He listed energy costs as the most pressing issue at present and viewed the government plan to hike electricity charges as a positive step in the reform drive because the public will be forced to reduce consumption and, subsequently, the country’s energy bill will be lower.

“People should not view higher electricity charges as inflationary but rather as an incentive to rationalise power usage,” he said.

However, he admitted that certain risks should be taken into consideration mentioning in this regard Pakistan where higher electricity charges led to thefts from power lines  and consumers refusing to pay bills.

While upbeat about Jordan and its pro-active approach and willingness to deal with challenges, Sayem reaffirmed that fiscal reforms are key to macroeconomic stability.  

On the regional level he described as “Middle East — a region in flux,” the economist indicated that oil exporters are expanding fiscal policy backed by strong oil receipts and rising reserves whereas non-oil producing countries, such as Jordan, Lebanon and Egypt face fiscal constraints and the heavy burden of inefficient subsidies amid rising social pressures.

“Inflationary pressures will pick up on record government spending, especially that housing components begin to rebound,” he said. “In non-oil states, imported inflation,  especially from energy and food prices, might bite.” 

Sayem added that regional financial cooperation is on the rise as “we see more financial support between surplus and non-surplus economies”.

“The region is more dependent on oil prices than before and inflation is building up on record government spending,” he continued, noting that foreign exchange reserves are building up in GCC states.

The economist pointed out that the Middle East and North Africa (MENA) region has enough firepower to sustain spending and that Asia, not the G3 (US, Europe and Japan) is now the largest trade partner for the MENA region.

On the international level, Sayem mentioned rising unemployment and social pressures in the European Union as a key risk to global economy besides the risk of currency wars remaining high and adding to the volatility in foreign exchange, rates, and commodity markets. 

“Pro-growth policies of central banks are just about offsetting the lack of stimulus from the governments in G3,” he said pointing to stronger US recovery in 2013 in terms of unemployment and house prices on the Federal Reserve’s third quantitative easing (Q3).

He added: “The euro area remains in deep recession, but the European Central Bank’s unlimited bond purchase programme has reduced risks of debt default.

The economist concluded by saying that China’s economy is slowly rebalancing and recovering. “We expect Chinese growth to reach 8.3 per cent this year on strong credit growth.”