Jordan’s Internal Instability and the Ongoing Battle for Reform

Growing demands for genuine and lasting economic reform and an end to corruption are two major characteristics of recent anti-austerity measures in Jordan. Lily David and Kate Benn explore what this means for Jordan and regional stability.

At the end of May, 33 Jordanian unions and professional associations declared a nationwide strike in response to a new law drafted by the government, which will introduce a rise in energy prices and income and sales tax. The proposed law, aimed at tackling the country’s debt problem, resulted in seven days of mass demonstrations in cities across Jordan, including Amman, Irbid, Ma’an and Jerash.

As a small country with limited natural resources, Jordan relies heavily on external financing for economic stability. In 2016, Jordan secured a USD 723 million three-year credit line from the IMF, which aims to cut public debt to 77 percent of GDP from a predicted 96 percent by 2021. In response to the deficit and to alleviate the rising costs of the fallout from the Syrian conflict, the Jordanian government (backed by the IMF), has introduced a raft of unpopular reforms. In January 2018, for example, the government faced a backlash over the removal of bread subsidies, the first significant rise in the price of the staple good since 1996. Small-scale protests continued in February when the government fuel pricing committee also raised the price of gasoline and diesel.

In a move to ease this month’s public discontent, Jordan’s monarch King Abdullah II restored fuel subsidies two days after the demonstrations began, and froze any proposed changes to pre-existing tax laws. He also replaced Prime Minister Hani Al Mulki with his education minister, Omar Al Razzaz (Razzaz), a former economist at the World Bank. Razzaz has opposed the free-market reforms pursued by Jordan for nearly three decades and is anticipated to take a more gradual approach to policy change. These measures have placated the public for now and bought the regime more time to tackle their demands.

A familiar script

However, these tactics are not a new response to popular protest; in 1989, for example, IMF-instigated austerity led to mass demonstrations and drove the then-King Hussein to dissolve his government. Similarly, in response to public pressure in 2011, King Abdullah II sacked his government when regional instability and rising oil prices stunted tourism, foreign investment and overall growth.

Unstable neighbours

Regionally, Jordan borders nations experiencing some of the world’s most complex and violent conflicts, with Syria to the north, Iraq to the east and Israel and Occupied Palestinian Territories to the west. Jordan’s population of over 600,000 Syrian refugees has placed additional pressure on the kingdom’s economy and infrastructure. While measures have been taken to formalise the Syrian workforce, the labour market has become increasingly saturated as businesses employ refugees at low wages, pushing salaries down and limiting job opportunities. Additionally, the influx of refugees into Jordan’s towns and cities has increased rent prices to record levels. In the northern city of Irbid, where the majority of urban refugees settled at the beginning of the crisis, the average rent rose by up to 25 percent between 2012 and 2013, creating a housing shortage and leaving many Jordanians unable to afford accommodation.

Source: The Economist

The Syrian Civil War also forced the closure of Jordan-Syria trade routes, and Jordanian export revenues sustained losses of over USD 130 million in the first three years of the conflict. These losses affected low-income blue-collar workers most significantly, as the agriculture and phosphate-mining industries experienced the biggest falls in revenue. Resultant factory closures and industrial downsizing further exacerbated the unemployment crisis. For Jordan to retain the long-term stability that is valued by investors and the international community amid a volatile region, the government will need to create an inclusive economy that takes advantage of its growing workforce. Jordan’s 2018-2022 Economic Growth Plan, which includes a flexible labour market to absorb more workers, indicates that the government recognises the scale of the challenge. However, high levels of corruption and a lack of political will and infrastructure have historically prevented the country from implementing its grand ambitions.

Timely gifts

The international community has a major role to play in the development of the Jordanian economy. Israel, for example, shares its longest border with Jordan, and a high proportion of Jordan’s population are of Palestinian origin. Jordan’s relationship with Israel is mutually beneficial; Jordan relies heavily on Israel for its national security, and Jordan has acted as a buffer zone between Israel and the self-styled Islamic State, and been a key partner in the Israeli-Palestinian peace process. More recently, Jordan has constituted an important component in the Saudi-led coalition against Iran. Notably, Jordan has taken a harder line on Iran, having recalled its ambassador from Tehran in the last fortnight. This coincides with Saudi Arabia, Kuwait and the UAE’s pledge to offer USD 2.5 billion in aid to address the crisis.

King Abdullah II has also maintained strong ties to the US; Jordan is one of only five nations in the MENA region to have a free trade agreement with the US, which has pledged an extra USD 6.4 billion in aid to Jordan in 2018. Foreign aid has enabled Jordan to increase spending in the face of domestic crises, leading to a disproportionate number of public sector jobs and unsustainably high subsidies. Government corruption has persisted, however, inhibiting lasting change and increasing public frustration at persistent economic decline.

Parallels and opportunities

Unrest in Jordan mirrors a wider trend rattling the MENA region; in December 2017, Iran witnessed its biggest anti-government demonstrations in almost a decade. In January this year, thousands of people took part in protests across Tunisia and protests in Algeria culminated in a nationwide strike in public schools and hospitals. Activists across the region have used increasingly creative methods to avoid the security services, including banging pots and pans on rooftops and boycotting companies complicit in rising inflation in Morocco. Fuelled in large part by austerity measures and resentment over endemic corruption and high levels of unemployment, there is no sign of protests across the region slowing down.

A striking feature of these protests is the role that young people have played in mobilising popular frustration. Jordan’s protests were led by Al Hirak Al Shaabi (‘the Youth Movement’), an independent organisation promoting the interests of Jordan’s youth, who have been increasingly marginalised by the kingdom’s persistent fiscal crisis. Youth unemployment has risen to between 37 and 47 percent, with young women the worst affected and university graduates subject to a stagnant job market and lack of opportunities. In addition to increased job opportunities, protestors have also called for royal intervention against public sector corruption, which in December 2017 was named the ‘top priority’ for Jordan by its Senate President Faisal Fayez. The popular movement against the tax bill saw the Youth Movement demand measures to recover looted funds taken by corrupt officials, and an overall reduction in government salaries. However, the young protestors in Jordan are also keen to ensure that these protests are not hijacked by external groups, as happened in the Arab uprisings when the Muslim Brotherhood profited from the initial protests of largely secular participants.

“The burgeoning youth population will not wait for jobs forever.”

A balancing act

Jordan’s old tactics are too expensive to sustain. The country cannot depend on foreign aid to fund subsidies, low taxation and a bloated bureaucracy. If taxes increase in line with the IMF mandate, Razzaz must strike a delicate balance between reducing domestic dissent and implementing the necessary fiscal reforms. These include greater transparency and accountability over public spending and addressing tax distortions to reduce inequality. A new Prime Minister, suspended tax increases and extra Gulf aid may well placate the protestors for now, but the burgeoning youth population will not wait for jobs forever. While severe instability or disruption in the short term is unlikely, investors and operators should keep a close eye on the kingdom’s reforms in the medium and long term.

libyan militias: Dual Service ProViders

Lara Getz examines the impact of Libya’s militias in perpetuating instability for businesses and governments operating here.

On 7 June, the United Nations Security Council (UNSC) imposed sanctions on six individuals – four Libyans and two Eritreans – accused of leading human trafficking networks in Libya. Although this is the first time the UNSC has sanctioned individuals for their involvement in human trafficking, the move comes amid a series of punitive economic, judicial, and military actions taken by Libya and a range of other countries this year to target the illicit activities of militias in Libya. For example, the US Office of Foreign Assets Control (OFAC) imposed sanctions on entities allegedly involved in oil smuggling, Libyan authorities issued 205 arrest warrants for individuals suspected of smuggling migrants to Europe, and the Libyan Air Force carried out air strikes against alleged fuel smuggler sites along the Libyan-Tunisian border. However, despite this multi-pronged approach to combat militia smuggling activities in Libya, these efforts are unlikely to have any substantive impact on either the illicit activities of Libyan militias or their influence in the country. Whilst multilateral and national government actions may restrict the ability of certain individuals to engage in or prosper from illicit activities, they do not serve as a sufficient disincentive. Instead, the continued reliance on militias in Libya to provide local security services, despite their participation in criminal activity, gives militias little incentive to change their behaviour.

Smuggling in Libya

Competing centres of power and a lack of strong institutions have contributed to a thriving smuggling industry in Libya, in which militia members are active participants. Fuel smuggling and human trafficking are particularly prevalent in the country. According to the Libyan National Oil Company (NOC), between 30 and 40 percent of the fuel either refined in Libya or imported into the country is stolen or smuggled. Militias have reportedly received payments to guard the trucks of fuel smugglers. Meanwhile, Libya has become an integral point on the route used by sub-Saharan migrants to reach Europe, which human traffickers have exploited. Here, militias have played key roles in the trafficking process, including controlling departure areas for migrants, migrant camps, safe houses, and boats.

Dual security and crime providers

The efforts by the UN, OFAC, and Libyan authorities have been narrow in their approach, targeting a relatively small number of individuals involved in smuggling activities in Libya. As such, they fail to address the underlying issue of how militias have gained such a prominent and powerful role within the country – namely, the integration of militias into formal security institutions. These punitive actions do not address the fact that, despite their regular participation in illicit activities such as fuel smuggling and human trafficking, militias have largely been tasked with providing policing and security services across the country.

This issue was evident in the UN’s decision to include Abd al Rahman al Milad, commander of an EU-funded Zawiya coastguard unit, among the human traffickers sanctioned earlier this month. The UN has alleged that, despite his role in the coastguard, al Milad collaborates with migrant smugglers. However, this issue extends far beyond al Milad and the Zawiya coastguard, as a UN panel of experts reported that most Libyan militias involved in human trafficking activities are also nominally affiliated to official state security institutions. For example, while the Anas al Dabbashi militia was providing security for the Millitah oil and gas terminal in the coastal city of Sabratha, it was also reportedly acting as a major facilitator of migrant smuggling. The commander of the Anas al Dabbashi militia, Ahmed al Dabbashi, was another target of the UN’s recently announced sanctions.

Despite their dominant presence, militia groups have proven themselves to be unreliable security partners since they often ultimately remain loyal to their own commanders and to financial incentives. This became evident in Tripoli in January 2017 when the National Salvation Government (NSG), led by Khalifa Ghwell, took control of several ministries from the UN-recognised Presidency Council. Two militias aligned with the Presidency Council reportedly refused to oppose Ghwell’s return to Tripoli in response to a financial award.

Despite the targeting of prominent smugglers in Libya with sanctions, arrest warrants, and air strikes, neither Libyan authorities nor the international community have made concerted efforts to oppose the militia-dominated system in Libya. On the contrary, militias are being increasingly absorbed into state security institutions. The ability of militias to continue operating in the country with authority, autonomy, and impunity has important implications for both the stability of Libya and commercial ventures within the country.

“The ability of militias to continue operating in the country with authority, autonomy, and impunity has important implications for both the stability of Libya and commercial ventures within the country.”

A costly and unreliable environment

Given the powerful dual role militias currently have within Libya as providers of security services and autonomous actors engaged in illicit activities, they have little incentive to support any path towards unified, stable, or accountable state institutions. However, the more legitimacy militias receive from Libyan authorities and the more profits they gain from illicit activities, the harder it will become in the future to counteract the influence of militias throughout the country. This continued influence of militias in Libya and their engagement in illicit activities have three important consequences for commercial operators in Libya.

First, given the strength of militias in Libya and the grey area they inhabit regarding their legitimacy as security providers, reliance on them for security and policing functions leaves little recourse if the militias stop providing these services. For instance, the al Fil oil field in south-west Libya shut down in February 2018 and remained closed for at least two months after guards withdrew from the oil field to protest unpaid wages. The walkout was reportedly instigated by members of the Petroleum Facilities Guard (PFG), an armed group originally established to protect Libya’s oil assets but which now comprises various local units following their own laws and incentives. According to the NOC chairman, the guards were attached to the Ministry of Defence, and thus it was the responsibility of the ministry to respond to their demands. However, there is not substantial evidence of prior negotiations between either the Ministry of Defence or the NOC and local militia groups concerning the control and management of oil facilities. This raises uncertainty about how long such discussions would likely last as well as how a private company would be able to play a role in such negotiations and how it would ensure the outcome meets both its commercial and compliance requirements while taking into account potential reputational concerns stemming from negotiating with militias.

Second, the ability of militias to act autonomously and with impunity can negatively affect the continuity of business operations, particularly those involving oil fields, pipelines, terminals, and ports. For instance, the Ryayna Patrol Brigade, a militia from the north-west city of Zintan, was able to halt oil production at al Fil, al Sharara, and al Hamada oil fields in south-west Libya for several days in 2017 when it shut down pipelines to the refinery and port in Zawiya. The militia claimed it wanted to compel the NOC to invest more in the Zintan area, but other reports alleged the militia leader was trying to force authorities to release a cousin arrested on smuggling charges. An even more likely issue moving forward is the potential for clashes between rival militias as they fight over territory and for control of oil infrastructure. Such clashes could significantly derail business operations. For instance, on 14 June, fighting started when the PFG militia attacked the Ras Lanuf and al Sidra oil terminals in order to try to wrest back control of the terminals from the self-styled Libyan National Army, which had seized the terminals from the PFG in September 2016. The head of the Libyan NOC announced that the fighting had destroyed two crude oil tanks at Ras Lanuf, reducing storage capacity, and as of 20 June, had cut Libyan oil output in half. The closure of oil facilities, the damaging of equipment, reduced storage capacity, and uncertainty over the resumption of business activities contribute to a costly and uncertain environment for international companies operating here.

Third, the illicit activities of militias have the potential to reduce profits and to cost companies resources. In addition to the revenue lost from interrupted business operations, the diversion of oil or fuel from legitimate sources to illegal storage sites for the purposes of smuggling can hurt a company’s profit if the diversion occurs prior to a company transferring ownership of and responsibility for the commodity to another party. Furthermore, the diversion of goods to militias or smuggling networks, particularly those linked with sanctioned individuals, can also have negative reputational consequences, as well as potential financial and legal penalties if the company has failed to put adequate risk measures in place. The continued trafficking of migrants across the Mediterranean will also likely strain the resources of commercial vessels, as they may need to help rescue stranded or sinking boats and carry the resources for providing emergency first aid to rescued individuals. This occurred in January 2017 when a British-flagged commercial ship that was checking a pipeline off the Libyan coast responded several times to help migrants stranded on overcrowded boats. The crew of the ship helped distribute life jackets, food, and water in addition to waiting with the boat until additional help could arrive.

Moving forward

The increasing strength of militias in Libya will be a significant impediment for any efforts to establish a unified government or to create strong and accountable institutions, both of which are required to improve the investment and operational environment in Libya. However, in the absence of these elements, commercial operators in the country will need to have clear contingency plans in place for any disrupted business activities or attempts to divert resources. The UNSC’s new sanctions place a further imperative on carrying out due diligence in order to assess potentially fickle local partners, and to ensure that funds will not be diverted towards illicit activities.

Opening up the UAE to foreign ownership: What next for free zones?

With the UAE set to permit full ownership of companies for foreign investors, Matt Bailey looks at the implications for the nation’s free zones.

Last month, UAE’s Prime Minister Sheikh Mohamed bin Rashid Al Maktoum confirmed that a new investment law, which is to allow foreigners to own up to 100 percent of companies in the UAE, will come into force by the end of 2018. The highly anticipated law comes alongside other reforms that aim to make the UAE’s investment environment more open to foreign finance and further reduce the economy’s reliance on oil; the UAE Ministry of Economy is aiming to increase the non-oil sectors’ share of GNP from 70 to 80 percent by 2021. Other measures include a new 10-year residency visa which will be offered to foreign nationals working in scientific and medical industries – previously visas were valid for just two or three years. Additionally, new bankruptcy laws introduced in 2016 now allowing struggling companies to restructure their debts.

The UAE federal government has warmed to the idea of relaxing foreign ownership restrictions since it sold up to 20 percent of State-owned telecoms operator Etisalat to foreign investors in 2015. Etisalat’s share price subsequently rose by over a third in just six months.

The UAE is also keen to remain the Gulf’s main investment hub as its neighbours in the Gulf step up efforts to woo foreign capital as part of a region-wide strategy to diversify away from oil. Saudi Arabia, Bahrain and Kuwait have all loosened corporate governance laws in recent years in an attempt to attract international capital.

The new investment law calls into question the role of free zones in the UAE. Free zones, typically either based around major transport infrastructure or focused on a specific industry, are free from national regulations and until now have represented the key entry point for foreign investment into the UAE. There are currently 45 zones in the UAE, with ten more under construction. The free zones account for approximately two-thirds of the UAE’s non-oil output.

There is a debate over how much the new investment law will disrupt free zones. If 100 percent foreign ownership is implemented fully in the UAE’s mainland, free zones will have to rely on other advantages. They will continue to rely on financial sweeteners such as waiving corporation and income taxes or allow for the full repatriation of profits. But this alone may not deter investors wanting to set up in the mainland and develop their businesses there; lucrative government tenders are generally out of reach for free zone companies, except in Abu Dhabi.

The more established free zones boast superior physical and legal infrastructure and have reached critical mass. The UAE’s oldest free zone, the Jebel Ali Port and Free Zone speedily connects its occupants to the largest port in the Arab region and the Al Maktoum International airport, whose current USD 36 billion development is to make it the largest airport in the world. It is home to 7,000 businesses and 150,000 workers.

Likewise, the Dubai International Financial Centre, home to 17 of the world’s 25 largest banks, has brought its financial regulations in line with international norms. These are enforced by independent DIFC courts, nominally insulated from the political tendencies of the national government.

Less established free zones may be more vulnerable. In particular sectors such as healthcare, retail and education, in which companies need local branches to access their consumer base in the mainland, would be most likely to move away from free zones. Which sectors will be exposed to the new investment law has yet to be disclosed. The government has hinted that the tourism, real estate, manufacturing, education and financial sectors will be included.

Free zone authorities should also look at the size of the businesses they wish to retain. Free zones’ cheap access to energy and simplified administrative procedures may be most appealing to start-ups and SMEs, whereas the opportunity to conduct business in mainland UAE will perhaps favour large multinationals as well as firms involved in industries like healthcare, which receive high-value government tenders that are only available to mainland UAE.

There are still many opportunities for free zones to adjust to the new investment conditions. Uncertainty remains over elements of the new law; for example, foreign investors may have to meet certain capital requirements to keep their 100 percent stakes on the mainland. The actual timeline for implementing the new law is similarly unclear. These factors provide free zone authorities with a window to bolster their offerings with increasingly business-friendly regulations or improved infrastructure.