By Peter Guest
The Levant in 2014 has a new bogeyman: the Islamic State emerged from the chaos of the Syrian civil war and has swept across Iraq, making huge territorial gains. Abu Bakr al-Baghdadi, the group’s figurehead, claimed that its goal was to establish a Caliphate across the whole of the Levant and that Jordan was next in line.
In reality, the direct military threat to the kingdom seems remote.
“If you look at the way in which the Islamic State and its predecessor organisations have operated, they’ve learned over the years to manage the financial side of their operations very effectively,” says Tom Keatinge, a finance and security analyst at the Royal United Services Institute think tank in London. “It’s no surprise in a way to see how they’ve moved from financial node to financial node, consolidating their ‘war chest’ before making a further move.”
“The question from that perspective is, does Jordan represent an attractive opportunity? I would argue not because clearly it’s not a resource-rich country and it’s got a much more tightly controlled and professional military.”
The US has already backed Jordan’s defences through its counter-terrorism fund and has troops stationed in the country, Keatinge points out. Crossing Jordan’s borders would be a huge escalation.
However, the conflict in Iraq, coupled with the civil war in Syria, is having an enormous impact on the region’s other economies.
There are now 608,000 Syrian refugees in Jordan and 1.14m in Lebanon, the latter comprising almost one-third of the pre-refugee population. Jordan’s refugees are mainly, but not entirely, in official camps; Lebanon’s have joined the civilian population in cities and makeshift villages, adding pressure to the country’s infrastructure and services.
A resumption of the conflict in Iraq has added another enormous disruption to both economies. Some 20% of Jordan’s exports go to Iraq, while the country is an important trans-shipment route for Lebanon’s trade with the Gulf. Tourism has fallen away, reducing revenues. With both countries navigating their way out of domestic political crises that have paralysed their legislatures, their capacity to cope with shocks and the refugee burden has been limited, and the long term consequences of the turmoil next door could be severe as it exacerbates existing structural economic problems.
As Shanta Devarajan, chief economist for the Middle East and North Africa region at the World Bank in Washington DC, says: “Part of the economic impact of refugees, both in Jordan and in Lebanon, is a function of the fact that there were lots of distortions in the economy beforehand.”
Jordan’s economy has kept expanding throughout the turmoil around it, registering 3.3% GDP growth in 2013. The International Monetary Fund had forecast a faster rate of 3.5% for 2014 but the impact of renewed fighting in Iraq has yet to be fully counted. The United Nations estimates that the Syrian crisis has cost Jordan at least $5bn, of which the country has recouped less than $1bn in international assistance. Jordan’s government debt rose 15% in 2013, from $23.7bn to around $27.2bn.
PRESSURE VALVE
In 2011, as the Arab Spring toppled autocratic governments in Egypt, Libya and Tunisia, Jordanians took to the streets demanding political reform. Aware of the necessity of giving the population a pressure valve and worried about the rising potency of an Islamist political bloc that had gained in confidence, the government announced, then held, elections in January 2013. Since then, protests have subsided and opposition groups have largely begun to advocate for a place in the formal political process, rather than demanding the removal of the government through mass action.
Although Jordan’s political transition was limited and peaceful, the new government under Abdullah Ensour faces a challenge that is common to other countries coming out of the Arab Spring. Social subsidies, in particular to electricity, are a drain on the national budget but are a crucial element of maintaining the standard of living in a country that has a GDP per capita of under $5,000. The country relies heavily on foreign aid from Saudi Arabia and the US, both of which see the country as an important political buffer between the region’s unstable states.
The IMF, which has also been providing assistance to Jordan through a $2bn standby arrangement, is insisting that the country address these subsidies, alongside wider economic reforms aimed at mobilising more resources through tax. However, such reforms are politically sensitive. When the government raised fuel prices in November 2013 there were protests across the country lasting several days.
Unemployment is also high and rising, hitting 30% in some areas of the country. Traditionally the government has employed large numbers of young men from tribal areas in the armed forces and used government spending to limit the social impact of unemployment with high wages and large recruitment programmes. A tighter national budget would limit the country’s ability to do this but an idle youth population would be seen as a breeding ground for unrest and radicalism.
It is a challenge that few in the region have been able to manage but, as Devarajan says, the Jordanians have acknowledged that the need for reform has been increased by the current crisis. Disruptions to gas supplies from Egypt have increased wholesale prices, giving further impetus to the liberalisation of the energy infrastructure.
“The Jordanians have realised that they need to make some reforms in order to make sure that the international assistance, as well as the domestic resources, are better utilised. They have serious problems with public expenditure management,” he says. “Leaving aside the humanitarian assistance, the money that they get from external financiers, including the Gulf, is often stuck and is not spent on the public investment projects that they need. There’s always this problem of moving money through the system that they’re trying to unblock now.”
A new tax law is making its way through the legislature, which should increase receipts and reduce tax avoidance, while other initiatives to reduce the costs of social programmes, such as a smart card system for bread subsidies, are being rolled out.
“They’re making progress on public expenditure management, the business climate, on transparency, on governance, all of which are a really long term agenda or have been on the books for a really long time,” Devarajan says. “This is as good a time as any to do it because they actually need to be much more efficient with their public spending, for instance, when they’re faced with this crisis.”
This approach, given the potential social pressures, is remarkable according to James Fallon, an analyst at Control Risks in Dubai. The 2013 elections gave the government a degree of legitimacy while the fate of the Muslim Brotherhood in Egypt has acted as a warning to opposition figures.
“It doesn’t mean that there aren’t long term pressures that could mount on the government, but it seems for the time being that the social unrest that we saw in 2011 and 2012 has not really translated into sustained mobilisation against the government,” Fallon says.
“I think long term there are a lot of pressures and I think that we will be watching these pressures over the course of years rather than months. The situation in Iraq and Syria is something that we will be dealing with for years. The fragility and the exposure of the Jordanian economy and, to a lesser extent, politics to that is important.”
ACUTE PROBLEMS
Over the border in Lebanon, however, the political problems are far more acute. The political crisis in Beirut has been more sustained and more acute, a symptom of a system in which many social, religious and economic groups have to come to a consensus before any decisions are made. After President Michel Suleiman stepped down in May, parliament failed in a dozen attempts to elect a successor, leaving a political vacuum in which progress on the economy has stalled. The current cabinet running the country took more than a year to form.
“The problem in Lebanon is that this willingness to co-operate has to be renegotiated every couple of months,” Fallon says. “It’s really fragile. You don’t have a clearly defined actor in the government — the government is an expression of its ability to get its constituent parts to agree on an approach. We’ve seen that throughout Lebanon’s post-war history repeatedly come to a head so there’s no structural reason to believe that it won’t again.”
This political stalemate is complicated by the involvement of Lebanese fighters from Hezbollah, the Shia political party and militia, in the Syrian civil war. Lebanon’s political parties have vastly differing views on the conflict and the country shares some of the religious fault lines that are now rupturing across the region.
The World Bank estimates that the impact of the fighting in Syria has been a 2.9 percentage point decline in Lebanon’s GDP growth.
The incoherence in political institutions and the heavy involvement of militia groups and Iran in the country’s governance mean that Lebanon has not had the same level of international financial support as its Jordanian neighbour, even now when the country has such a huge refugee burden.
“Lebanon didn’t get much international assistance before the crisis and actually isn’t getting very much even now. Lebanon is very much a private sector-driven economy,” Devarajan says. “It’s turning out to be a big drain on public services in Lebanon. Electricity, water, schools are very overcrowded, hospitals and so on. That’s pretty much being borne by the Lebanese people.”