csn jordan

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Last update: February 2008

Swiss economic development

cooperation with Jordan

1. Economic context: an overview The Hashemite Kingdom of Jordan is a small country with a highly urbanized population

of 5.9 million inhabitants, expected to grow to 7 million by 2015. With a relatively openeconomy, located in one of the politically most unstable regions of the world, Jordan hasexperienced above-average development ever since the financial crisis of 1989.

The economy is dominated by the services sector which accounts for close to 70% of Gross Domestic Product (GDP). Manufacturing (mainly textiles) and construction make around20% of GDP whereas both agriculture and mining – due to the pervasive water scarcity andlack of oil – are under 5% of GDP each. Tourism accounted for up to 10% of GDP in the yearsafter the OSLO accord of 1993, but suffered a lot since the beginning of the 2003-4 war inIraq and again during the latest Israeli-Lebanese conflict in July/August 2006.

Between 2000 - 2004, average growth amounted to 5% as compared to less than 3.5%over the 1996 – 2000 period. Despite the recession in the aftermath of the Iraq war, growthrates were back to more than 7% in 2004 and 2005, with inflation remaining at moderate3.5% and 4.5% in the respective years. By the end of 2005, Government debt was down to

83% of GDP as compared to more than 200% in the early 1990s, due to effective fiscalconsolidation along with a series of Paris Club debt restructuring agreements.

As a result of the strong commitment of the former king Hussein I and his wife, positivetrends have also been felt by human development indicators: since 1970, life expectancywent up from less than 60 to more than 70 years, adult literacy increased from 60% to 90%,and infant mortality was halved. Today, social indicators are better than the average in theMiddle East and North Africa (MENA) region, and education and health expendituresoutperform other regional countries, even some richer ones.

The main driving forces behind the remarkable development in Jordan are sound

development policies, capital inflows and unilateral transfers in the form of workers’remittances and public grants, together amounting to an estimated 25% of GDP. Wide-ranging economic reforms have been undertaken since 1989, including: domestic taxation(broadening of the tax base, introduction of a Value Added Tax), tariff reductions, free tradeagreements1 , the financial sector, public utilities (privatisation, adjustment of administered

1 With the EU (1999), the US (2001) and EFTA (2002) .

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prices), the regulatory environment, the energy and environment sector, etc. Furthermore, theso-called “Qualifying Industrial Zones” giving exporters duty- and quota-free access to the USmarket have a positive impact on textiles and clothes exports. Eventually, a stable exchangerate policy with the Jordanian Dinar fixed to the US dollar at a constant rate, has helpedreduce inflation and stabilize the economy.

In recent years, Jordan has benefited from an influx of immigrants and money from Iraq(estimated at above 5% of GDP) as well as from higher Foreign Direct Investments(estimated at 10% of GDP). As a consequence, real estate prices and private consumptionincreased considerably. It remains to be seen whether or not this development is sustainable.

The positive economic development has been attenuated by two external shocks, one of them being the absence of free oil supply from Iraq and the consequent doubling of oil pricessince 2004, the other one being a significant reduction of foreign grants in the same period.

As a consequence, Government expenditure for oil subsidies increased dramatically, leading tothe decision to reduce oil subsidies successively by 2007 and to fully liberalize the domestic oilmarket by 2008. The budget deficit before grants remained on a relatively high level ataround 10% of GDP, while the current account deficit amounted to almost 18% as a result of the above mentioned oil shock. Furthermore, the per capita income (Gross National Income(GNI)) of USD 2’140 in 2004 has not yet rebounded to the 1980ies boom level.

Despite the positive development of Jordan’s economy, unemployment and povertyremain as the two most important economic problems to be solved. Both depend significantlyon political developments in the region and their respective impacts on the economy. Strongincreases in poverty and unemployment have been observed in the aftermath of the Gulf wars as well as in the context of the 2006 Israeli-Lebanese conflict. Unemployment has beendown to around 15% of the total labour force since 2002, whereas a poverty assessmentprepared by the Jordanian Government and the World Bank shows that the national poverty

line has dropped from 21% to 14% of the population since 1997. However, there remainmany pockets of deep poverty and a high number of working-poor throughout the country.

In late 2005, a National Agenda was completed aiming at the doubling of income percapita over the coming ten years. Broad strategies, policies and objectives to modernize thecountry’s economic, institutional and political infrastructure are outlined in order to provideguideline actions to the Government. Education, the business environment and the reductionof poverty are at the core of this long-term development vision.

Despite the noticeable achievements of the recent years, Jordan’s development prospectsand its fight against poverty are inhibited by a series of significant challenges, including:

Regional political situation: the country is affected by its geo-political situation, in-betweenIraq and Palestine’s West Banks. Each crisis has sent waves of refugees to Jordan, whosepopulation is now mostly of Palestinian origin. Likewise, the Iraq wars as well as the 2006Israeli-Lebanese conflict have resulted in masses of workers returning from the Gulf,declining remittances and tourism revenues.

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Scarcity of natural resources: with no oil and 92% of desert land, Jordan is one of the 5most water-stressed countries in the world. Water scarcity, water quality and distance topopulated areas make resource management and financial requirements huge challengesfor Jordan, in view of an already unsustainable water consumption and with respect tothe expected needs of the growing population, the industry and tourism.

Population growth, poverty and unemployment : Population growth is among the highestin the world, currently at about 2.6% per year. Remarkable progress has been made onthe poverty issue, and unemployment is estimated to persist on today’s level.

A yet unfinished reform agenda : Budget deficits are estimated to remain high, while theprivate sector is still underdeveloped and domestic private investment remains weak atan estimated 7% of GDP. The implementation of the above mentioned 2005 National

Agenda and its corresponding impacts in the years to come remain to be seen.

In spite of a long tradition of political parties as well as free and fair elections in June2003, power is very concentrated. Next elections are scheduled for September 2007.

All these challenges present risks for Jordan’s economic development. The ongoinginstability in Iraq and the Israeli-Lebanese conflict have brought very concrete threats such as adisruption of trade with Iraq, the interruption of imports of Iraqi oil and decreasing tourismrevenues. On the other hand, both Iraq’s and Lebanon’s reconstruction could benefit Jordanthrough increased transit trade and other exports of goods and services.

In the struggle to fight poverty and increase employment, it will be important toimplement policies aiming at broadening sources of growth through additional domestic andforeign private sector investment and export diversification.

In terms of bilateral economic relations , Jordan is a modest partner for Switzerland. Tradehas witnessed a regular, one-way increase since the 1990s, with Swiss exports worth CHF150 million in 2005 while imports decreased from CHF 8.5 million in 2004 to 4.7 million in2005. Parallel to the conclusion of the Euro-Mediterranean partnership (bilateral Associationagreements with the EU), EFTA signed a free-trade agreement with Jordan in 2001, in forcesince September 1, 2002. This agreement is an important achievement, ensuring a new basisfor expanding trade as well as a non-discriminatory treatment of EFTA States’ enterprises intheir economic and trade relations. A bilateral agreement on the promotion and protection of investments between Switzerland and Jordan is in force since December 11, 2001.

2. Past experiences and lessons learned

The economic cooperation of SECO with Jordan dates back to 1985 and has mainly beenanchored around infrastructure financing and macroeconomic aid, linked to a recognition of both Jordan’s needs and efforts towards poverty reduction. Some elements of SECO'sassistance also derived from the political situation (Gulf War).

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The financing of basic infrastructures accounts for the biggest part of the bilateralcooperation, with two Mixed Financing Agreements (MF I and II) in a total amount of CHF 83million. Furthermore, Jordan received substantial financial aid in the context of the Swiss debt reduction facility (CHF 35 million worth of bilateral debt plus a contribution of CHF 5 milliontowards the multilateral debt service ).

The following lessons have been learnt from almost 20 years of SECO cooperation withJordan:

Project performance has generally been very satisfactory.

Mixed Financing should be reformed : (i) the instrument’s attractiveness is relative, asaround 50% of the respective project have to be financed using commercial credits. Thisis a disadvantage as compared to generous alternatives from other donors and explains aslow pace of use of the line; (ii) the instrument’s use was very demand-driven: more pro-activeness and selectivity in project selection is required, implying, e.g. a sectorconcentration; (iii) only projects which are commercially non-viable should be considered

for funding; (iv) sustainability of projects requires a combination of technical assistance,institution building and policy dialogue.

Potential to increase coherence in the cooperation program: Past interventions weremotivated by a mix of specific development concerns and political requirements. Thissituation led to the implementation of valuable individual projects but also to a deficientcoherence in the overall intervention rationale and program.

Coordination with other donors results in greater aid effectiveness (definition of tasks,concentration of capacities) and efficiency (targeting of contributions). Coordinationefforts initiated by the UN in the environment sector (incl. healthcare waste) are to beencouraged through active participation by SECO/the Embassy.

Jordan has benefited from substantial debt relief from Switzerland. The bilateral debtreduction has provided high visibility and effectiveness .

The implementation of the SECO program requires adequate local liaison, monitoring and supervision . In this regard, the Swiss Embassy in Amman has played an important roleover the past years.

The visibility of the SECO cooperation over the past years in Jordan has been ratherlimited when considering the nature and scope of the assistance. More efforts arerequired to improve the situation.

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Improvement of basic infrastructures

Despite the high priority given by the Jordanian Government to effective delivery of keyessential public services such as education, health and water – as reflected by large budgetaryallocations and above-average human development indicators – many constraints andinefficiencies are still remaining. Moreover, the level of public infrastructure must increase inorder to meet the demands of a fast-growing population and to impact positively on the levelof private (domestic and foreign) investments.

In this context, Jordan is in need of further access to foreign grants and soft loans in orderto overcome its public funding constraints; the Swiss Mixed Financing instrument offers avaluable option for the Jordanian Government in sub-sectors which are not massively fundedthrough foreign grants (such as the water sector).

Strategic Orientation:

SECO continues with the implementation of the second MF line signed with Jordan on

04.10.2002 (in an amount of CHF 30 million, up to 50% grant). This MF line being usedfor the financing of commercially non-viable projects focussing on two priority sectors:health and environment.;

An amount of up to CHF 3 million (grant) has been made available for technical

assistance and capacity building related to the implementation and sustainability of MFprojects;

SECO undertakes to liaise and coordinate closely with the like-minded bilateral and

multilateral donors involved in the two priority sectors, in order to participate andcontribute to the sector policy dialogue with the Government.

SME development and internationalisation

Jordan’s private sector is still underdeveloped, with limited competitiveness. Instead of afew successful recent privatisations (in telecommunications, cement, potash etc), privateinvestment is sluggish, with a large remaining public sector and foreign investors intimidatedby the regional situation. Sustainable economic development requires a better recognition anduse of the potential of small and medium-size enterprises (SMEs) contributing to job creation,technical innovation, export diversification and industrial decentralization, as well as the relatedimpact on poverty reduction.

Jordan is undertaking significant efforts to face the huge needs and requirements to

develop its SME sector. SECO will continue to privilege an approach aiming at very selectiveand targeted “niches” in which SECO avails of a comparative advantage and can contribute toinnovation and demonstration.

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Strategic Orientation:

Active contribution of the SECO-funded Swiss Import Promotion Program (SIPPO) to assistJordanian exporting SMEs to better access markets in Switzerland and OECD countries ,with a special focus on bio products (olive oil, dates, cosmetics) as well as fashion and

clothes; Operation of a business-to-business (“B2B”) internet e-commerce platform between

Jordan and Switzerland to stimulate business contacts and match-making opportunitiesbetween companies in both countries;

Continued involvement of the SECO-funded Swiss Organization for FacilitatingInvestments (SOFI) to inform potentially interested enterprises on the evolution of thebusiness environment and investment opportunities in Jordan, to assist potential investors

in making business contacts and matchmaking , and to offer limited initial seed-funding (Start-up Fund).

Promotion of eco-efficient production techniques and sustainable modes of production

through the establishment of a close cooperation with the Royal Scientific Society (RSS) foradvising SMEs on how to optimise their production processes while adoptingenvironmentally sound technologies (focus on a maximum of three sectors includingchemicals and food such as olive oil).

Indicative financial disbursements

For the implementation of its program during the period 2006-2010, SECO plans –subject to continued commitment to reforms and satisfactory performance by theGovernment and the Jordanian partners – the mobilization of an envelope of about CHF 18million. Efforts will be undertaken to smoothen annual disbursements, but the nature of themain operations (Mixed Financing) will most probably lead to continued erratic annual flows.

4. Program management

In Berne, the directly involved SECO-cooperation (WE) divisions are: i) Infrastructurefinancing (WEIN, Mr. David Kramer, [email protected]), ii) Trade and cleantechnology cooperation (WEHU, Mr. Stefan Denzler, [email protected]) and iii)Investment promotion (WEIF, Mrs. Antonia Schaeli, [email protected]). Mr. DavidKramer (kmd/WEIN) is the WE country coordinator ( [email protected] ).

The Swiss Embassy in Amman is SECO’s main Swiss partner in Jordan. It contributes veryefficiently to the local coordination and management of the program. Its main tasks are toassume coordination and representation/liaison with authorities and to ensure logisticalassistance and trouble-shooting when necessary. Exchanges will take place in order to clarifythe respective tasks and responsibilities for each new project.

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Annex 1 Swiss development aid flows (million CHF)

Between 2002-2007, the Government of the Swiss Confederation has disbursed aboutCHF 27 million in bilateral aid to Jordan:

Swiss Development Cooperation Flows (million CHF)

2002 2003 2004 2005 2006 2007

SDC* Bilateral development 0.5 0.4 1.8 1.8 0.3 1.17

Contributions to NGOs 0 0 0.2 0.2 0 0Humanitarian Aid 0.7 2.1 1.3 2.1 2.8 6.23

Total SDC 1.2 2.5 3.3 4.1 3.1 7.4

SECOGrants 2 0.45 0.5 0.55 0.7 0.5

Mixed Financing Loan 1.8 0.7 0 0.5 0.15 0.23Total SECO 3.8 1.15 0.5 1.05 0.85 0.73

OthersPolitical Affairs Division IV** 0 0 0.2 0.1 0 0

Total others 0 0 0.2 0.1 0 0

Total (excl. loan) 3.2 2.95 4.0 4.75 3.95 8.13

* Swiss Agency for Development and Cooperation, Division of the Swiss Department of Foreign Affairs** Division of the Swiss Department of Foreign Affairs

Comments and remarks

The above-mentioned figures do refer exclusively to the bilateral annual net flows andexclude aid to Palestinian refugees (through United Nations Relief and Works Agency forPalestine Refugees (UNRWA), etc), some of whom live in Jordan.

The above table does not take into account the benefits derived by Jordan from global orregional SECO programs such as SOFI, SIPPO, Start-up fund, etc.

The erratic flow of SECO disbursement is due to the (large) number and (small) size of MFprojects, which covered the quasi-totality of SECO funding to Jordan since the late 1990ies.

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Annex 2

On-going projects and programs

Basic infrastructures

• Mixed Financing lines I and II A first Mixed Financing line (MF I) of CHF 53 million (40% grant vs. 60% loan) has been in forcesince 1986. Projects currently in implementation focus on the supply of essential medicalequipment to Jordanian hospitals and of emergency vehicles for Jordan’s international airports.Commitments made under these projects have exhausted the balance under this line.

A second Mixed Financing line (MF II) amounting to CHF 30 million entered into force on

04.10.2002. It is open for commercially non-viable projects in health and environment sectors. Thegrant element remains at 40%, except for health projects (50%). The following projects are underimplementation:

Strengthening Hospital Hygiene, Laboratory Diagnostics and Eye Care in public hospitals Amount: CHF 11 million

Healthcare Waste Management in Northern Jordan Amount: CHF 5.2 million

Emergency Vehicles and Ambulances for Jordan’s Airports Amount: CHF 2.9 million

Sectors: Mixed Financing line I: health, cadastre, milling, port infrastructure, electricityMixed Financing line II: health, environment

Amount: total of CHF 83 millionDuration: I: 1985 – 2005

II: 2002 – 2005 (extended to April 2009)Partner: Ministry of Planning (http://www.mop.gov.jo/)

SME development

• OECD-MENA Initiative on Investment for Development

This Initiative is a regional effort, initiated and led by MENA countries with the support of the

OECD secretariat. It is a results-based policy dialogue involving policy officials from MENAcountries and their OECD counterparts, focusing on policy formulation and implementation. Theprogram seeks to mobilize investment - foreign, regional and domestic - as a driving force forgrowth, stability and prosperity throughout the MENA region. The main objective is to upgradeinvestment policy standards, track progress in implementing new policies, and support policymakers at regional and national level, all with the aim of attracting more investment to the region.The last ministerial meeting was hosted by Jordan.

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Sectors: Investment promotion Amount: EURO 70’000.-Duration: 2005-2007Partner: OECD (http://www.oecd.org)

• Business-to-Business (B2B) Platform Jordan-Switzerland

A Business-to-Business (B2B) platform was launched during the visit to Berne of King Abdullah of Jordan in October 2002. This platform is aimed at enabling IT firms – especially SMEs – in Jordanand Switzerland to make direct and immediate trade and investments contacts. Financed at startand for two years by SECO, the platform was developed by SIPPO in coordination with the Swissand Jordanian IT national associations, simsa (Swiss interactive media und software association)und INTAJ (Information Technology Association – Jordan).

Sectors: information technologies (IT)Location: internet: www.trado.org

Amount: CHF 855’000.-Partner: in CH: SIPPO (http://www.sippo.ch/) ; simsa (http://www.swissmedia.ch)

in JO: INTAJ (www.intaj.net)

• Swiss Organisation for Facilitating Investments (SOFI)

Jordan is among the 22 countries selected to benefit from SECO’s investment promotion mandateexecuted by the Swiss Organisation for Facilitating Investments (SOFI). Apart from informationdissemination on investment conditions and opportunities (e.g. trough internet, conferences,missions), SOFI provides advices in identifying potential partners. In addition and on a commercialbasis, it supports enterprises in preparing and implementing their investment projects..

Sectors: investment promotionLocation: Zurich

Amount: CHF 4.5 million per year for the mandate but non country specificDuration: End 2007Partner: in CH: SOFI (http://www.sofi.ch/)

in JO: Jordan Investment Board – JIB (http://www.jordaninvestment.com/)

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• SECO Start-up Fund

To encourage and facilitate the preparation and initial phases of new investment projects, SECOprovides Swiss entrepreneurs with up to 50% of the financing needs in the form of loans. Thiscredit line is being administered by SOFI.

Sectors: investment promotionLocation: Zurich Amount: CHF 18 million for the revolving fund (all eligible countries)Duration: 1997 - 2009Partner: SOFI (http://www.sofi.ch/)

Trade promotion

• Jordan Cleaner Production Center (CPC)

Since 2004, SECO supports the establishment of a Cleaner Production Center within the RoyalScientific Society (RSS) in Jordan. The center aims at increasing the competitivity of enterpriseswhile reducing their environmental pollution by applying cost-effective measures andtechnologies. The project enhances the capacity of RSS in the area of Cleaner Production, provideshigh quality services to enterprises in the metal, chemical and food industry sectors, and fostersthe creation and expansion of a Cleaner Production market in Jordan. The center is involved inknowledge exchange within the SECO-UNIDO network of Cleaner Production Centers all over theworld, and particularly with other Arab speaking countries.

Sectors: metal, chemical, food industryLocation: Amman

Amount: CHF 2.1 million

Duration: 2004 - 2009Partners in CH: FHNW/SBA (http://www.fhnw.ch)in JO: Royal Scientific Society (http://www.rss.gov.jo)

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• Swiss Import Promotion Programme (SIPPO)

Since 1999, SIPPO promotes imports to Switzerland of products from developing and transitioncountries, including Jordan. It selects and supports local SMEs (eg. product adaptation,participation to fairs, matchmaking) to access the Swiss market. In Jordan, the program follows a"branch-approach", with focus on Bio products (olive oil, dates, cosmetics) as well as fashion and

clothes. SIPPO has a representative in Amman.

Sectors: bio-products, fashion and closingLocation: Zurich

Amount: CHF 6 million per year for the mandate but non country specific, aboutCHF 490’000 are directly aimed at activities in Jordan

Duration: since 1999Partners in CH: SIPPO (http://www.sippo.ch/)

in JO: Jordan Export Development & Commercial Centers Corporation - JEDCO(http://www.jedco.gov.jo/)

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Annex 3

Main current development partners

Type

DomainsPublic Private Multilateral

Infrastructurefinancing

Ministry of Planning (MOP)

Ministry of Health(MOH)

World Bank

SME Developmentand

Internationalisation

JEDCOJIBRSS

INTAJEnterprises

World Bank

This Table refers only to local (national or international) partners. Swiss executing agencies ordevelopment partners are not included.

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www.seco-cooperation.ch

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