Jordan continues to face a very difficult regional environment. The conflicts in Syria and Iraq—which led to a massive influx of refugees—have resulted in the closure of Jordan’s main land trade route, and have had an adverse effect on socioeconomic stability. Moreover, the fiscal retrenchment and tighter liquidity in neighboring oil exporting countries have weighed on remittances and capital inflows. These developments have depressed investment sentiment, undermined growth, and led to a further increase in unemployment.
Despite these unprecedented challenges, the Jordanian economy has remained resilient. The authorities’ reform agenda—which is supported by the EFF—rightly aims at maintaining macroeconomic and financial stability, and at reviving growth and employment. The need to undertake a significant fiscal adjustment and structural reforms during a period of heightened demands associated with developments in the region has added to these challenges. The difficult internal and external environments are likely to persist as the conflicts in Syria and Iraq do not show signs of abating nor has the GCC economic outlook improved.
An important aspect of the authorities’ macroeconomic policies has been the ongoing fiscal adjustment. Fiscal consolidation has aimed at balancing the need to reduce public debt without unduly undermining growth, while maintaining a sufficient social safety net as part of efforts to preserve social cohesion. Despite these considerations, the overall fiscal deficit has significantly fallen, from 10.3 percent of GDP in 2014 to 3.2 percent of GDP in 2016, and is projected to fall to 2.5 percent of GDP in 2017. The fiscal position will continue to be strengthened with the aim of having an overall surplus in 2020.
The authorities have used the 2017 budget to make the fiscal system more equitable and efficient. Revenues are being strengthened through measures that broaden the tax base. General sales tax and customs duty exemptions were eliminated on a large number of products, providing 0.4 percent of GDP in 2017. Most of the remaining exemptions were difficult to remove because of their importance for low income households. Nevertheless, further removal of exemptions is planned for 2018, together with better targeting of support to the most vulnerable. The shortfall in projected revenues for 2017 relative to program targets was addressed by increases in fees and excises, most notably on fuel products. Expenditure policy continues to aim at streamlining non-priority current spending, prioritizing capital and social spending, clearing arrears, and accommodating pressures from Syrian refugees. The fiscal deficit for 2017 is projected to be substantially lower than had been targeted under the program.
The authorities adopted an automatic tariff adjustment mechanism to ensure that electricity costs are fully covered in 2017, similar to the approach that was used to liberalize gasoline prices under the SBA. This will be followed by the implementation of a strategy to bring the water company into financial balance. The water company’s financial deficit has been largely due to capital spending, which is needed given the scarcity of water resources in Jordan and the increase in demand related to Syrian refugees.
Measures are being taken to strengthen the fiscal policy framework. Tax administration measures have focused on improving compliance, facilitating procedures, and promoting fairness. Public financial management is being strengthened, including the selection and management of investment projects. In support of this framework, an organic budget law is under preparation which will strengthen macro-fiscal policy, budget preparation, fiscal strategy, treasury control, and audit functions. Reforms also aim at strengthening the debt management framework. These initiatives benefit from technical assistance from the Fund and other providers.
The Central Bank of Jordan (CBJ) continues its strong track record of skillful monetary policy, which has been anchored by the peg to the US dollar. The exchange rate peg has served the economy well, and has been very important for monetary and macroeconomic stability. The authorities remain fully committed to the peg, including through undertaking the necessary fiscal adjustment, adjusting interest rates as necessary, and implementing structural reforms. Within the constraints of the peg, the CBJ has balanced monetary and financial stability with growth objectives, keeping interest rates as low as possible to support credit growth, subject to maintaining a comfortable level of foreign reserves. While international reserves were lower than program targets at end-2016, they remained at a comfortable level. The CBJ increased its policy rate by a cumulative 125 bps since December 2016, including a 25 bps increase effective June 18, 2017, and is prepared to use its monetary policy instruments as appropriate to ensure that reserves remain at an adequate level. The term of the CBJ’s management team was renewed for a second five-year period in early 2017.
The CBJ has been a very effective regulator and supervisor of the financial system. It monitors banks closely to ensure that the sector remains sound. Banks are highly capitalized, liquid, profitable, and resilient to possible shocks. Non-performing loans are low and well-provisioned, with limited Jordanian bank exposure to conflict countries. The CBJ stress tests the banking system regularly. The results confirm the system’s ability to absorb a wide range of severe shocks. Nevertheless, several initiatives are underway to further strengthen the financial supervisory framework. The CBJ issued regulations on domestic systemically important banks in mid-June and is working toward issuing regulations on Basel III liquidity ratios. The CBJ is in the process of taking over responsibility for the supervision of the insurance sector from the Ministry of Industry and Trade. This move will greatly enhance the supervision of the sector given the CBJ’s capacities, and in view of the interconnection between insurance companies and banks. The CBJ is also working closely with microfinance institutions to help them meet the new licensing requirements under the new supervision framework.
Structural reforms for growth and employment
Structural reforms are focused on strengthening inclusive growth. This is reflected in the focus of Vision 2025, the country’s framework for social and economic policies, on structural reforms to boost growth, employment, and equity. The reform agenda is wide-ranging, covering the business environment, the labor market, and public finances.
Efforts to strengthen the business environment aim to facilitate access to finance and to reduce the cost of dealing with the government. The establishment of a credit bureau will help to expedite credit decisions for SMEs. Several measures are also underway to facilitate access to finance, including the implementation of a secured transactions law and an insolvency law in line with international best practice. The reforms to strengthen the business environment aim to reduce the cost of starting and operating a business, including through simplifying procedures and eliminating unnecessary regulations.
With regards to the labor market, the National Employment Strategy has been updated to help bring about better functioning and competitive markets, and to help youth find and secure meaningful work and steady employment in the private sector. Policies aim at reducing skills mismatches, introducing more flexible work arrangements, and reforming public sector hiring practices. The authorities recognize the necessity of the education system to support the private sector by improving the skills and job-readiness of university and vocational training center graduates. The National Strategy for Human Resources Development aims to improve education at all levels, including vocational training.
Foreign assistance and refugees
Jordan needs help with managing the cost of hosting refugees. The national development gains achieved over the previous decades are threatened unless international support is received in a timely manner. There are an estimated 1¼ million Syrian refugees, compared with a population of about 6 million Jordanians. The government has incurred significant direct and indirect costs in support of refugees, host communities have been stressed, and infrastructure has been overburdened. The United Nations estimated the cost of hosting Syrian refugees at US$2.9 billion in 2015, for which limited budgetary support was received. For 2016, Jordan received about 60 percent of the funding required under the Jordan Response Plan to the Syrian crisis. As part of the Compact, Jordan plans to create up to 200,000 jobs for Syrian refugees, contingent on international support, under which 46,000 work permits have already been issued. While the authorities are appreciative to donors for their increased support, a sustainable assistance framework is needed given the significant indirect costs related to the Syrian refugee crisis, including those related to security, health, education, and subsidies, as the crisis shows no sign of abating in the foreseeable future; this is necessary for Jordan to continue to be able to host refugees in a stable and equitable environment. The authorities are hoping for international support in attracting new investment and in providing incentives to development zones that employ Syrian refugees. It would be important for international assistance to be in the form of grants especially as Jordan is shouldering the burden of refugees on behalf of the international community and given the need to reduce Jordan’s debt burden.