- International Monetary Fund. Independent Evaluation Office
- Published Date:
- April 2006
© 2005 International Monetary Fund
Production: IMF Multimedia Services Division
Typesetting: Alicia Etchebarne-Bourdin
IMF support to Jordan 1989–2004/prepared by a team headed by Tsidi Tsikata…[et al.]—Washington, D.C.]: International Monetary Fund, 2005.
p. cm.—(Evaluation report)
Includes bibliographical references.
1. International Monetary Fund—Jordan. 2. Economic assistance—Jordan—Evaluation. 3. Jordan—Economic conditions—Statistics. I. Tsikata, T.M. (Tsidi M.). II. Series: Evaluation report (International Monetary Fund. Independent Evaluation Office).
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- Abbreviations and Acronyms
- Summary of Findings and Lessons
- 1 Introduction
- 2 The Design of Jordan’s IMF-Supported Programs
- Approaches to External and Fiscal Sustainability in Program Design
- Growth Objectives and the Magnitude and Composition of Targeted Adjustment in Key Macroeconomic Variables
- Inflation Objectives and the Design of Monetary and Exchange Rate Policy
- Structural Reforms Addressed by IMF-Supported Programs
- Design of Conditionality
- 3 Effectiveness of the Programs—What Was Achieved and How
- Substantial Progress Toward External Viability
- Limited Progress Toward Fiscal Sustainability
- Success in Achieving and Maintaining Low Inflation
- Growth Performance Was Strongly Influenced by Factors External to the Programs
- Mixed Record on Program Implementation and Effectiveness of Conditionality
- 4 The Role of IMF Surveillance and Technical Assistance Activities
- 5 Issues Related to IMF Internal Processes and Policies
- 2.1. Medium-Term Targets for External Current Account and Projected Evolution of External Grants
- 2.2. The Envisaged Adjustment in Fiscal Balance, Excluding Grants
- 2.3. Envisaged Adjustment in Public Expenditures
- 3.1. Current Account Balance, Including Official Transfers
- 3.2. Current Account Balance, Excluding Official Transfers
- 3.3. External Debt and Debt Servicing
- 3.4. Projections and Outturns of Fiscal Indicators
- 3.5. Inflation
- 3.6. Jordanian Dinar and U.S. Dollar Interest Rates and International Reserves
- 3.7. “Adequate” Versus Actual Level of Reserves
- 3.8. Real GDP Growth
- 3.9. Trends in Private Investment
- 3.10. Real GDP Growth
- 4.1. Real Effective Exchange Rate and Export Volume
- 1.1. Jordan's IMF Arrangements
- 2.1. Target Dates for Elimination of Exceptional Financing Needs
- 2.2. Some Stylized Facts About the Composition of Targeted Adjustment
- 2.3. Medium-Term Fiscal Objectives and Projections of Different IMF-Supported Programs and Papers
- 3.1. Cross-Country Comparison of Debt Burden Indicators
- 3.2. Envisaged Versus Actual Fiscal Adjustment
- 3.3. Poverty Indicators
- 5.1. Access Limits
- 1 Jordan’s IMF Arrangements
- 2 Chronology of Selected Political and Economic Events, 1989–2004
- 3 Review of IMF Staff’s Debt Sustainability Analyses and Their Input into Program Design
- 4 Objectives, Strategies, and Policies in Jordan’s IMF-Supported Programs
- 5 Review of the Fiscal Structural Content Under IMF Arrangements
- 6 Chronology of Exchange Rate Policy Changes and Related Events
- 7 Objectives and Macroeconomic Policies in Jordan’s Recent Economic and Social Development Plans
- 8 Variables Used for Setting Quantitative Performance Criteria Under IMF Arrangements
- 9 Review of Fiscal Outcomes
- 10 Structural Conditionality
- 11 The Political Economy of the General Sales Tax in Jordan
- 12 Results from Survey of Stakeholders
- 13 Background Tables
- 14 List of People Interviewed During IEO Mission, November 21–December 1, 2004
- Annex Boxes
- Annex Figures
- A1.1. Outstanding IMF Credit
- A9.1. Government Revenues
- A9.2. Composition of Tax Revenue
- A9.3. Composition of Current Expenditures
- A12.1. IMF Influence over Domestic Policies
- A12.2. Assessment of Domestic Ownership of Programs and Conditionality
- A12.3. Impact of IMF-Supported Programs on Policies and Performance
- Annex Tables
- A1.1. Jordan’s IMF Arrangements
- A5.1. Follow-Up on Specific Suggestions for Reforms Contained in the 2002 Fiscal Strategy Paper
- A9.1. Fiscal Adjustment, 1989–2004
- A13.1. Selected Financial Indicators
- A13.2. Medium-Term Macroeconomic Framework in IMF Arrangements
- A13.3. Summary of Key Adjustment Targets in IMF-Supported Programs
- A13.4. Summary of Key Adjustment Outturns in IMF-Supported Programs
- A13.5. Selected Economic Indicators
- A13.6. Structural Conditions Per Program Year
- A13.7. Findings of the Report on the Observance of Standards and Codes and Action Taken by the Authorities
- Statement by the Managing Director, IMF Staff Response, IEO Comments on Staff Response, and Summing Up of IMF Executive Board Discussion by the Acting Chair
- Statement by the Managing Director
- IMF Staff Response
- IEO Comments on Staff Response
- Summing Up of IMF Executive Board Discussion by the Acting Chair
The following symbols have been used throughout this report:
– between years or months (e.g. 2003–04 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g. 2003/04) to indicate a fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
Some of the documents cited and referenced in this report were not available to the public at the time of publication of this report. Under the current policy on public access to the IMF’s archives, some of these documents will become available five years after their issuance. They may be referenced as EBS/YY/NN and SM/YY/NN, where EBS and SM indicate the series and YY indicates the year of issue. Certain other documents are to become available 10 or 20 years after their issuance depending on the series.
This report evaluates the role of the IMF in supporting economic reform in Jordan during 1989–2004. The country has had a long period of participation in IMF-supported programs, initiated by a severe balance of payments crisis, as well as deep-rooted macroeconomic and related structural problems. A massive external public debt, large deficits in the external current account, and fiscal rigidities impeded the country’s return to sustainable growth. In addition, Jordan was susceptible to shocks related to regional economic and political developments throughout the period of IMF engagement.
The evaluation of IMF support to Jordan provides an opportunity to assess typical features of relations between the IMF and its borrowing members, and to put into a specific country context IEO’s earlier findings on program design and the links between programs, surveillance, and technical assistance. The key issues for evaluation are threefold: (1) the effectiveness of programs, including strategies, policies, as well as conditionality, in achieving their objectives, and the factors that determine outcomes; (2) the extent to which IMF surveillance activities contribute to identifying and tackling deep-rooted macroeconomic problems; and (3) identification of what drives the provision of technical assistance, and how effectively IMF technical assistance contributed to Jordan’s capacity to formulate, implement, and monitor macroeconomic policies and performance.
Jordan has made major progress over the 15-year period of its IMF program involvement—it has achieved macroeconomic stability, restored external viability, and transformed the structure of its economy. However, fiscal sustainability has only been partly achieved and will remain a challenge in the medium term. While attribution of specific final outcomes is not possible, the report is of the view that IMF-supported programs did make an important contribution. Technical assistance was also crucial in this regard, and the report argues for a broader dissemination of technical assistance findings, both within the government and, as appropriate, with other interested stakeholders, recognizing that publication is ultimately the decision for the authorities. Going forward, the biggest adjustment challenge that Jordan faces is how to adjust to a projected decline from exceptional high levels of grants. This will require a more candid assessment by the IMF of the potential risks associated with this adjustment than was contained in previous staff reports. The report highlights a number of broad lessons suggested by IMF experience in Jordan as well as other lessons focusing on the IMF’s future role in Jordan.
Following standard practice, this volume includes, alongside the evaluation report itself, the response of IMF management and staff to the evaluation, as well as the Summing Up of the Executive Board discussion of this report. The full case study report can be found on our website at www.imf.org/ieo.
Thomas A. Bernes
Independent Evaluation Office
IMF Support to Jordan, 1989–2004
This evaluation report was prepared by a team headed by Tsidi Tsikata and including Steve Kayizzi-Mugerwa, Daouda Sembene, and Inder Sud (consultant). Chapters of the report also benefited from inputs from David Goldsbrough, Marcelo Selowsky, and Marko Skreb. Ibrahim Saif (consultant) and Marwan Kardoosh (consultant) contributed background papers. Research assistance from Patricia Yang-Yang Chen and Teresa Perez; administrative support by Arun Bhatnagar, Annette Canizares, and Maria S. Gutierrez; and editorial assistance from Ian S. McDonald and Esha Ray are gratefully acknowledged. The report was approved by Thomas A. Bernes, Director of the Independent Evaluation Office.
Abbreviations and Acronyms
Amman Chamber of Commerce
Amman Chamber of Industry
Aqaba Special Economic Zone
Central Bank of Jordan
Certificate of deposit
Consumer price index
Department of Statistics
Debt sustainability analysis
Economic Consultative Council
Extended Fund Facility
Foreign direct investment
Fiscal Affairs Department
Financial Sector Assessment Program
Financial System Stability Assessment
Gross domestic product
Gross national income
General sales tax
Letter of Intent
National Aid Fund
Net domestic assets
Net present value
Official development assistance
Operations Evaluation Department1
Public expenditure management
Public expenditure review
Poverty Reduction and Growth Facility
Poverty Reduction Strategy Paper
Program for Social and Economic Transformation
Qualifying Industrial Zone
Report on the Observance of Standards and Codes
Special drawing right
Social Security Corporation
Standard & Poor’s
United States Agency for International Development
World Trade Organization
Name changed to Independent Evaluation Group on November 8, 2005, after the Jordan evaluation was completed.
Summary of Findings and Lessons
This evaluation assesses the extent to which the IMF contributed to tackling Jordan’s major macroeconomic challenges during the extended period (1989–2004) of the country’s engagement in IMF-supported programs. The programs were supported under three Stand-By Arrangements (SBAs) (approved in 1989, 1992, and 2002), and three Extended Fund Facility (EFF) arrangements (approved in 1994, 1996, and 1999). Although the main focus of the evaluation is on the effectiveness of the IMF-supported programs, the roles of IMF surveillance and technical assistance activities are also examined. This detailed case study provided an opportunity to revisit—in a specific country context—previous IEO findings and lessons on issues related to (1) program design; (2) interactions between programs, surveillance, and technical assistance activities; and (3) the impact of prolonged engagement in IMF-supported programs on the development of domestic institutions and policymaking processes.
The report’s overall assessment of the IMF’s role in Jordan is that it has been moderately successful. The IMF helped the authorities to address macroeconomic stabilization challenges successfully, but some of the main structural rigidities that underlay the financial crisis that led Jordan to its first IMF-supported program still remain, particularly on the fiscal side. It is important to recognize that, as in all programs that are the outcome of a complex negotiating process, the IMF was required to make judgments reflecting considerations of domestic ownership and political feasibility. The result is inevitably tempered by this reality. Whether the fiscal system is flexible enough to adapt to shocks will be again tested in the next few years if external grants, as projected, decline sharply relative to recent historically high levels.
The principal findings and lessons from the evaluation are summarized below, after a brief overview of initial conditions. Since the main focus was on the IMF’s program activities in Jordan, which is now concluded, the evaluation does not make specific recommendations. However, the evaluation generates a number of lessons about the IMF’s role in Jordan that are likely also to be of more general applicability as well as two key lessons about what should be the primary focus of the IMF’s future role in Jordan.
At the start of its long period of participation in IMF-supported programs, Jordan faced a severe balance of payments crisis as well as deep-rooted macroeconomic and related structural problems. The country had virtually run out of international reserves and was on the verge of defaulting on its external debt payment obligations. It faced a massive external public debt, and large deficits in the external current account and government budget. A rigid fiscal structure and structural impediments to growth meant that sustainable adjustment was going to be hard to achieve, and would require time to be addressed effectively. In addition, Jordan’s close regional economic ties made it susceptible to shocks related to economic and political developments in the Middle East.
The overarching evaluation questions may be summarized as follows:
- Was the overall design of programs relevant and appropriate to Jordan’s circumstances?
- What was achieved in terms of the broad objectives of programs, and what can be said about the contribution of the IMF to observed outcomes?
- What has been the contribution of IMF support in addressing fundamental structural and institutional rigidities in Jordan and helping the country to strengthen its capacity to cope with shocks?
- How well did internal IMF processes and policies work in the institution’s dealings with Jordan? In particular, did Jordan receive preferential treatment from the IMF on account of geopolitical considerations?
Appropriateness of program design
Program objectives were relevant to Jordan’s circumstances and were consistent with the broad objectives spelled out in the authorities’ national development plans. The core elements of the strategy to foster sustainable growth remained the same under all arrangements: the private sector was expected to be the main engine of growth; significant declines in public sector dissaving would help sustain domestic investment and contribute to reducing the public debt “overhang;” and structural reforms would boost productivity and export performance.
The programs supported under the early arrangements approached issues of external and fiscal sustainability primarily in flow, not stock, terms, reflecting the general status of international approaches to official debt relief at the time. Later programs did incorporate a more comprehensive approach to analyzing debt sustainability, in line with institution-wide developments. In the specific case of Jordan, a medium-term fiscal strategy paper prepared by IMF staff in early 2002, which informed the design of the 2002 SBA, was of high quality. Such an approach would have been helpful at an earlier stage in establishing a framework for looking beyond the short-term horizon that has characterized Jordan’s budget process.
While there was some improvement in recent years, most Executive Board papers on Jordan did not provide a clear rationale for the magnitude and composition of targeted adjustment. This made it difficult to make judgments on the factors underlying any subsequent failures to achieve key objectives, and on the appropriateness of any program modifications. Moreover, analysis of the links between growth objectives and program design was limited for most of the program period.
In general, structural conditionality was reasonably well designed and seems to have observed a clear division of labor with the World Bank. The main exception was the 1999 EFF, where the IMF adopted a number of detailed benchmarks on privatization that were not well designed. More generally, many senior Jordanian officials credited IMF conditionality with helping to implement politically sensitive reforms (e.g., introduction of the general sales tax (GST), rationalization of subsidies, and pension reforms), but also cited examples in which pressure from the IMF for speedy action backfired (e.g., submission of a draft income tax law to parliament with little prior consultation with members of parliament).
In general, there was not much difference in the macroeconomic policy discussions undertaken during Article IV consultations and those in program discussions. Surveillance generally did not step back and explore alternative policy options. Following the 2002 biennial surveillance review, new guidelines were issued to staff that expanded the scope of surveillance. The one consultation report (for 2004) produced after issuance of the new guidelines did a good job of delineating program discussions from the consultations and examining longer-term sustainability and financial system stability issues.
Macroeconomic outcomes and the role of IMF support
Jordan has made major progress over the 15-year period of its IMF program involvement in achieving macroeconomic stability, restoring external viability, and transforming the structure of its economy. A deepening of the export base and a large buildup of external reserves have reduced somewhat the economy’s vulnerability to shocks. While attribution of specific final outcomes to IMF involvement is clearly not possible, our overall judgment is that IMF-supported programs did make an important contribution. This view is shared by many Jordanian officials, past and present, who indicated that the presence of the IMF was important in reinforcing necessary macroeconomic discipline and in helping advance some key reforms.
However, fiscal sustainability has been only partly achieved. While total and external public debt ratios have fallen substantially, only some of the underlying fiscal rigidities have been resolved. Specific areas of success included the introduction of broader-based consumption taxation, the replacement of food price subsidies by targeted cash transfers, and reforms in the pension system; most of the latter reforms only took place late in the period of IMF program involvement and should have been given greater emphasis earlier. Less successful were the following areas:
- Direct taxes still have significant levels of exemptions that erode potential revenue.
- Jordan has still not adopted a system of pricing for domestic petroleum with an automatic link to world prices—in spite of significant policy dialogue and technical assistance (TA) on the part of the IMF.
- In spite of IMF documents constantly reminding readers about the inflexibility of public expenditures, little progress was achieved in these areas. The IMF did not put sufficient emphasis at an early stage of its program involvement on efforts at civil service reform aimed at reducing the share of the public sector wage bill in GDP.
Going forward, the biggest adjustment challenge that Jordan faces is how to adjust to a projected decline from exceptional high levels of grants, envisaged to be 10 percent of GDP in 2005, to about 1.2 percent in 2007. IMF staff projections call for an extraordinary adjustment in public expenditures over that period, by about 10 percentage points of GDP. The IMF could have highlighted more candidly and forcefully the potential risks if policies—especially public expenditure policies—do not adjust as rapidly as currently assumed. It could also have done more to advise early on possible approaches to smooth the massive upsurge of grants so as to avoid major expenditure reductions in short periods of time as these grants return to more normal (historical) levels.
IMF support and domestic institution building
In retrospect, the IMF could have taken a longer-term perspective from early on in its program involvement and could have started earlier to help the authorities put in place the necessary policies and institutions to achieve fundamental expenditure reforms. Later programs began to address some, but not all, of these rigidities. But shortcomings in reforms, like successes, cannot be attributed only to the IMF. As some of the above examples indicate, the authorities were not able to act on a number of rigidities even when the IMF did clearly diagnose the problem and suggest possible courses of action.
We found that IMF TA priorities adapted quite well to Jordan’s critical needs—with an increased involvement of the authorities in setting such priorities. However, a greater focus on public expenditure policy to advise on the major expenditure cuts envisaged in the early programs would have been desirable; in this respect, IMF–World Bank cooperation, for whatever reason, was not effective (see below). Based on an examination of policy implementation as well as interviews with authorities and experts in the field, we believe IMF TA made substantial and concrete contribution in the areas of taxation, rationalization of food subsidies, public financial management, and pension reforms. Senior officials interviewed in Amman also acknowledged monetary operations, payment systems, and banking supervision as areas where the IMF made important contributions.
We found little awareness of the contribution of IMF TA and the associated policy dialogue outside recipient agencies. In our view, a wider publication of IMF TA reports would have contributed to more informed public discourse on a number of policy issues and also shed light on the rationale for IMF policy advice in key areas.
IMF internal processes and policies
Coordination between the IMF and World Bank staffs was effective in many areas, with a clear division of labor between the two from an early stage. However, in the key area of public expenditure policy, collaboration was not effective; in particular, the World Bank’s public expenditure reviews provided limited input to the fiscal policy content of IMF-supported programs.
We found no significant evidence that Jordan enjoyed preferential treatment from the IMF. On access levels, the evidence indicates that they were well within the limits under prevailing guidelines. Although the programmed magnitude of fiscal adjustment in the Jordan programs was somewhat less “ambitious” than the average for IMF-supported programs, the difference was not large. With respect to TA, we found the overall amount to be within the norm provided to countries with IMF-supported programs.
Although the lessons highlighted here reflect the experience of Jordan, they are clearly relevant to IMF operations in other countries and many tend to echo recommendations reported in earlier IEO evaluation reports. While not couched as specific recommendations, we also conclude with two key messages about the IMF’s future role in Jordan.
Broad lessons suggested by the IMF experience in Jordan
Lesson 1. The Jordan case reinforces the view that the underlying rationale for key program design elements should be explained clearly in Executive Board papers. In particular, judgments on the magnitude and composition of targeted adjustment need to be grounded in an explicit assessment of external and public debt sustainability over the medium term.
Lesson 2. Internal notes by staff tended to be franker than reports prepared for the Executive Board about the risks to Jordan’s programs. For example, the treatment of the upsurge in grants during 2003–04 said relatively little about the risk of a sharp reversal and the challenges of managing such a reversal. This illustrates the need for more candor in staff report assessments of risks to programs.
This, and the previous lesson, are critical to ensuring accountability by staff and management and allowing the Executive Board to exercise effectively its oversight responsibilities.
Lesson 3. ordan’s experience suggests that the nature of short-term fiscal conditionality alone—that is, whether to set performance criteria on the fiscal deficit before or after grants—can be of only limited help in dealing with the underlying issue of large and abrupt surges in grants. Such situations require that programs be set in an explicitly longer-term perspective that take account of the likely duration of the upturn in grants. But when the expected upturn is temporary, the IMF’s policy advice and program design should be aimed at ensuring that the upsurge is not fully translated into immediate surges in public spending and should analyze explicitly how they will be reversed when necessary.
Lesson 4. The IMF’s program involvement in Jordan would have been more effective if programs had given greater emphasis at an earlier stage to the formulation of key institutional reforms in the fiscal area even if, as was likely, they could not be fully implemented during the initial program period.
Lesson 5. While the reasons why World Bank inputs on public expenditure policy and management could not be incorporated into IMF program design were probably specific to Jordan, the lesson of more general applicability is that the two institutions need to set clear objectives for this to be achieved, including through signaling what the needs and obligations of each institution are along with candid and timely reporting to the Executive Board on any emerging problems in meeting these priorities.
Lesson 6. Jordan’s experience suggests that, at least in certain circumstances, structural conditionality can have significant value added in terms of encouraging and monitoring progress on reforms. However, unrealistically “tight” deadlines can be counterproductive. Timetables need to be designed carefully, taking account of the political economy situation, especially when legislative action is involved.
Lesson 7. A wider dissemination of IMF TA reports for Jordan would have contributed to more informed public discourse and shed light on the rationale for IMF policy advice on key issues.
The IMF’s future role in Jordan
Lesson 8. Looking ahead, the IMF’s main challenge will be to help Jordan manage the projected decline in grants in a manner that preserves the gains made in the areas of macroeconomic stability and longer-term fiscal sustainability. This suggests that the highest priorities for policy advice and technical assistance should be on helping the authorities design a macroeconomic framework—and an explicit delineation of accompanying policies—that will achieve a smooth transition.
Lesson 9. An important part of IMF assistance should focus on helping to design strategies to tackle Jordan’s key remaining fiscal rigidities. The focus should be on exploring alternative policy options to achieve the necessary structural reforms in the fiscal area. Previous experience suggests that short-term quantitative targets without analyzing in greater depth the underlying strategies to achieve these targets are unlikely to be successful.