Israel’s war on Gaza and its impact on Jordan’s economy — report

50% drop in Jordan hotel reservations amidst ongoing war

(File photo: Jordan News)
AMMAN — The World Bank (WB) has issued a warning that the ongoing Israeli war on Gaza could potentially impact the Jordanian economy, particularly in the tourism sector, leading to a decrease in tourism revenues and external accounts.اضافة اعلان

A threat to the tourism sector
According to an economic report, the war poses a significant threat to tourism activity and its revenues. This concern arises, especially at the beginning of one of the peak seasons, following the robust recovery of the tourism sector from the COVID-19 pandemic.

The report notes rapid growth in the restaurant and hotel sector, with the number of tourists reaching its highest level since 2019, as reported by Al-Mamlaka TV.

The tourism recovery in Jordan for the current year has been extensive across travel categories and countries of origin. Notably, one-day tourists have shown a significant increase of 76 percent, with this category representing around 17 percent of total arrivals in 2023. The report suggests that these tourists, who often visit Jordan as part of tours including lands occupied by Israel, maybe the most directly affected by the ongoing war.

50 to 75 percent decrease in hotel occupancy since Oct. 7
Preliminary reports from tourism agencies indicate a substantial decline in hotel occupancy rates and reservations, ranging from 50 to 75 percent during the two months following the onset of aggression, particularly in renowned tourist sites.

Aviation concerns
Simultaneously, the aviation sector, still recovering from COVID-19 losses, may face higher operational costs. Flights are taking longer routes to avoid war zones, and additional costs may arise in case of higher fuel prices, potentially affecting consumer prices.

Tourism Minister Makram Al-Qaisi reported a 50 percent decline in hotel reservations in Jordan since the beginning of the war on Gaza on October 7. He revealed a decrease in demand for tourist sites and reservations in tourist restaurants by 40 to 70 percent, according to data received from popular tourist sites like Petra and tourism associations.

A cancellation of 23 charter flights since Oct. 7
Qaisi further highlighted the cancellation of 23 charter flights and 26 ship flights to Aqaba from the start of the war until the end of the year. These cancellations are causing losses to hotel establishments and impacting tourist group reservations, including conference and party tourism programs, restaurant reservations, and daily-use facilities.

WB indicated that the decline in tourism may have broader impacts on economic activity, given the close links of the restaurant and hotel sector with other significant sectors of the Jordanian economy, including wholesale and retail trade, transportation, and construction.

The WB expects a decline in domestic consumption due to behavioral changes, representing a substantial portion of the gross domestic product. In the worst-case scenario of regional escalation, disruptions in trade flows could affect value chains, and production costs, and impact domestic and foreign investment.

Strikes do not serve to support the people in Gaza — Khasawneh
Prime Minister Bisher Al-Khasawneh emphasized during a government session that calls to paralyze economic activity, including strikes, do not serve to support the people in Gaza and may lead to harm to people's livelihoods and the economic situation. He stressed that such actions are expressions aimed at political pressure and cautioned against self-harm and weakening the Jordanian internal front.

The WB also warned of potential challenges in the gas sector, including the possibility of importing natural gas at a higher cost if developments escalate. Gas imports, subject to long-term agreements, come from Egypt and the Leviathan gas field from the Israeli side. The report highlighted the potential impact on the National Electricity Company, which may need to import liquefied natural gas at a higher cost.

The worst-case scenario
The report further addressed external accounts, noting the potential repercussions on the current account balance, particularly in 2023, due to a decline in travel revenues. In a pessimistic scenario, a decline of up to 30 to 50 percent in travel revenues during the fourth quarter of the year could lead to a deterioration in the current account deficit, with a gradual expected return by 2025.

The report also considered the impact on the capital account, anticipating a decline in net inflows with a decrease in foreign direct investment. The second channel of impact involves potential rises in oil prices, which could significantly impact the energy market. While oil markets saw some fluctuations at the beginning of the aggression, the report highlighted the risks for energy markets, especially if the war escalates.

For Jordan, as a net energy importer, an increase in oil prices to $100 to $110 per barrel could result in an elevated current account deficit in 2024, compared to baseline estimates. The report suggested that remittances from Jordanians working abroad in oil-exporting Gulf Cooperation Council countries and increased budget support from those countries could partially compensate for the impact of higher oil prices.

Regarding merchandise trade, the report indicated that Jordanian exports to the West Bank, Gaza Strip, and Israel represent 2.5 percent and 1.1 percent of total exports in 2022, respectively. Exports to the United States of America represent 20.9 percent of total exports. However, the report highlighted potential disruptions in exports to the US, particularly those through Qualified Industrial Zone (QIZ) agreements, due to difficulties in sourcing inputs from war zones.

The repercussions of the ongoing war on public finances are characterized by complexity, with potential impacts on the real value of government expenditures due to high inflation. Rising oil prices could lead to increased spending on fuel subsidy programs, affecting public transportation and cooking gas. Higher spending on fuel subsidies may divert funds from government capital spending.

Estimates suggest that a 10 percent increase in oil prices could result in a 0.2 percent increase in the fiscal deficit. If oil prices reach $100 to $110 per barrel, this could mean a 0.4 percentage point increase in the deficit as a percentage of GDP. The report indicated that borrowing needs may increase to compensate for the shortfall, putting pressure on debt service requirements given the high cost of financing.

Regarding sovereign risks and the cost of financing, the report noted a temporary increase in interest rate spreads measured by the emerging market bond index during the period from October 1 to 30. Jordan recorded an average of 437.8 basis points, compared to 311.8 basis points in September. Despite the temporary increase, Jordan's sovereign risks remain lower than its neighbors, according to the report.
Fitch Ratings affirmed Jordan's rating at BB- with a stable outlook despite the ongoing war, citing Jordan's record of maintaining economic and political stability in the face of major external shocks.

On the Palestinian side
On the Palestinian side, Gaza has lost no less than 66 percent of job opportunities since the outbreak of the Israeli aggression, equivalent to 192,000 jobs, according to estimates published by the International Labor Organization and the Palestinian Central Bureau of Statistics on Wednesday.
The economic conditions in the West Bank have also been affected, with revised estimates indicating the loss of approximately 32 percent of job opportunities since the beginning of the war, equivalent to 276,000 jobs.

Estimates from the chief economist at the Israeli Ministry of Finance, Shmuel Abramson, suggest that each month of war may lead to a loss in gross domestic product amounting to between 8 and 9 billion shekels ($2.1 and 2.4 billion), as well as future losses to the economy and labor market.

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