VII Liberalization of Trade and Exchange Systems
- Ahsan Mansur, and Edouard Maciejewski
- Published Date:
- May 1996
In late 1988, in response to the balance of payments crisis, Jordan embarked on a reform of its external tariff and trade system. Trade liberalization gained momentum in 1990, when tariff and nontariff trade barriers were unilaterally reduced.1 These measures were complemented by a reform of the Encouragement of Investment Law and institutional reforms in support of the industrial sector.
The ongoing reforms seek to better integrate the Jordanian economy with the rest of the world by improving external competitiveness to gain market share in foreign markets and by promoting a more efficient allocation of resources—especially toward tradable goods—to widen the country’s narrow export base. On both counts, Jordan has registered a notable degree of success so far. Its external competitiveness (as measured by the real effective exchange rate) has improved considerably since 1988, as evidenced by the growth of nontraditional exports and the diversification of its trading partners. As for internal competitiveness, the tradables sector has become more competitive, with domestic production shifting toward the tradables sector since 1988.2 The continuing liberalization of Jordan’s trade system is a cornerstone of its outward-oriented growth strategy, and will enable the country to benefit from regional developments and new opportunities arising in the wake of the peace process.
Structure of Trade
Jordan’s trade is characterized by an unusually large imbalance: the merchandise trade deficit amounted to 31.9 percent of GDP in 1994 (down from 40.9 percent of GDP in 1993). In fact, in 1994, the value of receipts in the services account (factor plus nonfactor) was almost twice (191 percent) that of merchandise exports; in particular, workers’ remittances were equivalent to 77 percent and travel receipts to 41 percent of exports of goods.
Export diversification has continued to increase in recent years. Based on the Standard International Trade Classification (SITC) of commodities, Jordan’s exports in 1988–91 were dominated by traditional goods, mainly raw materials such as potash and phosphates. Other important exports are pharmaceuticals, detergents, and fertilizers, together with other manufactures, food, and live animals. But phosphates and potash, which accounted for 34.1 percent of exports in 1989, accounted for only 19.4 percent of exports in 1994. By contrast, the share of nontraditional exports has continued to increase: manufactures and chemicals accounted for 29 percent of exports in 1989 and 34 percent in 1994. As for imports, there has been a shift toward capital goods and raw materials: the share of capital goods increased from 21 percent in 1989 to 26 percent in 1994, allowing for sustained growth with lower imports.
Jordan’s exports and imports are not geographically concentrated, and there has been some further geographic diversification of exports over the last five years (Table 7.1). The principal destination of exports in 1994 was other Arab countries (42.4 percent), particularly Saudi Arabia, and India (11.1 percent), the European Union (EU) (5.1 percent), and Japan (1.6 percent). The relatively low share of the EU and Japan may be partly attributable to the still-dominant role of barter and protocol trade, the limited list of manufacturing products, as well as institutional barriers to access to those markets. Iraq remains one of the most important sources of imports, especially for crude oil, along with the EU (33.2 percent of the total) and the United States (9.9 percent), whereas Japan’s share (4 percent) is relatively small. Although more than 40 percent of Jordan’s exports are directed toward Arab countries, only 22 percent of imports come from Arab countries. Jordan maintains a trade surplus with Saudi Arabia and India, but has very large bilateral trade deficits with Iraq, the EU, and the United States.
|in millions of Jordan dinars|
|Domestic exports, f.o.b.||534.1||612.3||598.6||633.8||691.3||793.9|
|Eastern European countries||42.7||24.4||27.8||15.7||32.9||13.7|
|Eastern European countries||55.8||85.3||85.6||129.7||151.9||137.9|
|In percent of total|
|Domestic exports, f.o.b.||100.0||100.0||100.0||100.0||100.0||100.0|
|Eastern European countries||8.0||4.0||4.6||2.5||4.8||1.7|
|Eastern European countries||4.5||4.9||5.0||5.7||6.2||5.8|
Trade Regime and Trade Policy Reforms Since Late 1988
Trade Regime Prior to the Reforms
Jordan’s trade regime in the late 1980s was characterized by high tariff and nontariff barriers and by institutional inefficiencies that severely hindered its export and industrial sector performance. Although the average tariff rate on the value of total imports was about 19 percent, because of widespread exemptions, private firms and households in Jordan were shouldering a high burden of import taxation. The maximum tariff rate was 318 percent, while the bulk of imports were imported duty free. Nearly thirty institutions were exempt from paying import duty, which implied that about 51 percent of imports into Jordan were not subject to customs duty. Non-tariff barriers were widespread, with about 40 percent of domestic manufacturing activities being protected through quantitative restrictions in 1988. The high degree of variation in the tariff rates (between zero and 318 percent, with a standard deviation of 26.1 percent), combined with these nontariff barriers, led to a high degree of variation in effective rates of protection.
As a result of the protective system, the overall incentive structure favored production for the domestic market, despite its limited size. There were no significant export incentives to even partly offset the bias against exports. By the late 1980s, the long-term implications of the extensive protection of the domestic economy became apparent. The import-substitution policy promoted and protected an industrial sector that was generally inefficient, and the growth potential of the nontraditional export base remained unexploited. This trade policy stance, together with an appreciating exchange rate in real effective terms, contributed to a low and stagnant level of nontraditional exports. According to some estimates at that time, the protection regime imposed a heavy burden on consumers and industries that used the products of the protected sectors (equivalent to 9.6 percent of GDP).3
Policy Changes in the Trade Regime
• Phasing out of quantitative restrictions. To foster a broadly neutral system of incentives, the authorities lowered effective protection by shifting from quantitative restrictions to tariffs and, subsequently, by reducing tariff barriers as a whole. In August 1988, they removed import bans on thirty categories of products and replaced them with tariff protection. Following this shift, the remaining quantitative restrictions can be classified into four categories: (1) imports of 5 products—tomato paste, fresh milk, certain dairy products, mineral water, and table salt—remained banned (cigarettes were subject to quota); (2) 11 imported luxury, predominantly consumer, items were banned on a time-bound basis for balance of payments reasons; (3) products whose imports were regulated for a variety of reasons, including health and safety; and (4) mass consumption goods imported by the Ministry of Finance to protect the poor. At the next stage, the authorities eliminated a large number of quantitative restrictions, including those of the second category, thereby reducing the share of domestic manufacturing protected by such restrictions from 40 percent in early 1988 to less than 7 percent in 1990. In 1995, in the context of the World Bank Agriculture Sector Adjustment Loan (ASAL), the Government eliminated the remaining restrictions (with the exception of those on some essential food items).
Pricing policy also plays an important role in restricting imports. The Ministry of Supply sets distribution margins on imports of consumption goods and on 19 consumption goods produced in Jordan. The authorities set retail prices for fresh food and vegetables. Price interventions cover 11 percent of domestic consumption. The Government also provides consumer subsidies on sugar, rice, powdered milk, and wheat, which help reduce the domestic prices of these goods and may discourage production.
• Tariff reform. In designing the reform, the authorities were constrained by the need to protect revenues from customs duties because domestic tax potential was impaired by the underdeveloped nature of the tax system and administrative capacity. They therefore lowered high tariffs while raising low tariffs so that the average tariff was broadly unchanged. The effect of this act was to reduce the discrimination implied by a more differentiated structure, producing a more uniform tariff regime. Two groups of commodities required special treatment. First, tariffs on a short list of goods, primarily mass consumption items amounting to 6.5 percent of dutiable imports, were kept at zero in the face of the overall tariff reform. The main items on this list included capital goods (3.6 percent of dutiable imports), cereals (1.8 percent), books and newspapers (0.6 percent), and gold for financial transactions (0.5 percent). Capital goods were included as an integral part of the liberalization of investment controls (announced in 1989), under which all investment licensing was removed and a cumbersome discretionary tariff exemption approval process was replaced with a uniform tariff of zero on capital goods. Second, for luxury goods the total tariff was split into a basic tariff and a consumption tax, the tariff being subject to a statutory legal maximum. The consumption taxes on imports were collected at the import stage, while taxes on similar domestically produced items were introduced in connection with the general sales tax in 1994.
For the remaining 93 percent of the items subject to tariffs, the range between the maximum and minimum tariffs was reduced to 45 percentage points in two further stages over a two-year period. First, the maximum tariff rate was reduced to 60 percent, and the minimum tariffs (except those on a few basic items) were increased to 5 percent in 1990; this narrowing of the range reduced the variation in tariffs measured in terms of the standard deviation to 17.5 compared with 26.1 in 1988. Second, in early 1992, the maximum rate was reduced to 50 percent, and the standard deviation further declined to 15.9. Because of measures to increase the minimum tariff rate to 5 percent, the revenue loss resulting from these two rounds of tariff rationalization was less than JD 1 million.
In June 1993, as part of the move toward the introduction of the general sales tax, the coverage of the existing consumption tax was expanded while certain specific unit taxes were converted into ad valorem, and other rates were raised to 10-20 percent. In October 1994, the Government lowered all tariffs of more than 50 percent to 50 percent (tobacco, alcohol, and cars) or less, affecting 21 percent of imports. It also announced the reduction in tariff bands to six rates (5, 10, 20, 30, 40, and 50 percent). These measures were motivated mainly by the required synchronization with the newly introduced general sales tax, which is levied, unlike the consumption tax, on amounts that include customs duty. Further tariff reductions are being undertaken in the context of the new extended arrangement with the IMF
The trade reforms initiated in late 1988 resulted in a more uniform tariff regime, with reduced variance in tariff rates: the import-weighted average tariff was reduced from 34.4 percent in 1987 to 25 percent in 1994; and the tariff coefficient of variation was reduced from 167 in 1987 to 88.5 percent in 1994.4 The increased uniformity was achieved mainly by reducing the combined tariff and surcharges at the upper end of the spectrum. In May 1995, under the ASAL, the Government eliminated the remaining quantitative restrictions except on a few essential food items, and converted them to tariffs. Import-licensing requirements were eliminated (except for protocol trade and product standards).5 The introduction of an import registration system, switching from product-based licensing to a list of approved traders who would not require an import license once registered, is under consideration.
• Promotion of exports. Exports are generally not subject to taxes, and there are no explicit restrictions on exports from Jordan. However, to overcome the hidden bias against exports, a number of initiatives have been undertaken since 1989 to promote exports: a drawback system for import duty and taxes paid on inputs used in exports was introduced; measures streamlining administrative procedures were implemented; the requirements for admission of intermediate inputs were eased; and the arrangements for export finance were rationalized, as were incentives for investments in general. The Government upgraded the existing export-promotion institution—the Jordan Commercial Center Corporation (JCCC)—giving it primary responsibility for export and investment promotion. Moreover, to rationalize and improve export financing, the Central Bank of Jordan improved the operation of its export rediscount facility in 1990 and 1992 by extending both the coverage and duration of export credits. At the same time, it reduced the interest rate subsidy available to exporters and allowed the interest rate for export finance to vary in line with commercial rates.
Opening Up the Economy
Jordan has initiated negotiations on accession to the World Trade Organization (WTO) and for a trade agreement with the EU. Numerous benefits may derive from WTO membership: most-favored-nation treatment, the use of established settlement procedures for disputes, active participation in the formulation of multilateral trade rules, and access to various organizations that facilitate international trade. It would also help the authorities lock in trade liberalization measures and resist domestic protectionist pressures, because rules of the General Agreement on Tariffs and Trade (the WTO’s predecessor) foster the use of nondiscriminatory price-based instruments (tariffs); require equal tax treatment for domestic and imported goods; and constrain the use of quantitative restrictions and trade measures—such as surcharges—for exclusively balance of payments reasons.
In the context of a new Mediterranean strategy, the EU is working toward establishing a Euro-Mediterranean Economic Area, creating a 33-country free trade zone within 12 years. Agreements have already been signed with Morocco, Tunisia, and Israel. Against this backdrop, Jordan has initiated its negotiations with the EU. To facilitate the economic and social adjustment that this process entails, the EU will provide financial support.
Regional Developments and Future Challenges
Peace has created a number of opportunities for Jordan, including the possibility of an investment-led boom in the region that could increase the demand for Jordanian exports of goods and services. But peace also poses challenges. First, although the accord with Israel offers Jordan additional trade opportunities, a set of complex bilateral issues prevents Jordan from benefiting immediately from the expanding trade and investment opportunities in the region. Second, there is potential for an expansion of trade between Jordan and the West Bank and Gaza Strip, but it may be some time before it materializes. On the other hand, if a free trade area covering only Israel and the West Bank and Gaza Strip were constituted, it would represent competition for Jordan. A major restructuring of trade patterns in the region is also likely to ensue from the prospective early liberalization of trade between several regional economies and the EU. For Jordan to remain competitive, it would need to proceed with its efforts at swift trade liberalization.
Developments in the Exchange System
In the wake of the balance of payments crisis in 1989, the authorities tightened the payments and exchange system initially to cope with the intensifying balance of payments difficulties. As the balance of payments position improved, however, they gradually liberalized the exchange system, and by the end of 1992 Jordan had reverted to the liberal exchange system that it had enjoyed in the past. The specific measures adopted to liberalize the exchange system are summarized below.
In February 1991, Jordan reduced advance import deposit requirements markedly and eliminated them in May 1992. Jordan’s Central Bank doubled the amounts of foreign exchange that residents and nonresidents could take abroad in November 1991 and again in November 1992. It also increased substantially the limits for resident and nonresident holdings of foreign exchange deposits in Jordan. As a result of these liberalization steps, by mid-1992 the exchange system had became quite liberal; for all practical purposes, the remaining restrictions on current invisibles were not binding for bona fide transactions and did not hinder foreign investments.
Further liberalizing steps were taken during 1993 and early 1994. In 1993, banks were authorized to offer foreign currency accounts to residents. Licensed banks and financial companies were authorized to offer investment portfolio management services to nonresidents in major foreign currencies. They were also authorized to offer margin trading services for nonresidents through their nonresident foreign currency accounts credited with foreign means of payment coming from abroad, subject to a 30 percent margin. From January 1994, licensed banks and financial companies were authorized to open accounts in foreign currencies for nonresidents without restriction. Withdrawals and transfers from nonresident accounts were permitted freely. At the same time, the annual amount that residents were permitted to transfer abroad to meet current payments for invisibles, without prior approval or justifying documents, was raised to JD 35,000 from JD 20,000. Transfers by residents in excess of that amount were allowed with supporting documentation, and authorizations were granted liberally. As a result of these measures, current account convertibility was virtually achieved. The crucial step came in February 1995, when the Jordanian authorities formally accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF’s Articles of Agreement.
Jordan continues to take steps to further liberalize its exchange system. A draft law to regulate foreign exchange transactions has been submitted for parliamentary approval. The new law, which will supersede the Transitory Foreign Currency Supervision Law, guarantees complete current account convertibility for residents and nonresidents and capital account convertibility for nonresidents; in particular, no restrictions are imposed on the repatriation of profits and dividends for foreign investors. The law also allows residents to engage in a number of capital account transactions and to take out any funds originally brought into Jordan through the banking system. Under the new legislation, the Central Bank will allow interbank lending in foreign currency, thereby fostering the creation of a foreign currency interbank market.
Jordan’s effort to liberalize the trade regime was supported by an Industry and Trade Policy Adjustment Loan from the World Bank.
The share of tradables in GDP rose by 25 percent during 1986–92, and that of nontradables declined by 8 percent.
Jordan: Policies and Prospects for Small and Medium-Scale Manufacturing Industries, Report No. 6848–JO (Washington: World Bank, 1988).
In 1994, of a total of 6,735 tariff lines, 330 (4.9 percent) were zero rated, covering 16.7 percent of imports; 1,302 (19.3 percent) had a tariff of 5 percent and accounted for 24.6 percent of all imports; 672 (10 percent) had tariffs of 10 percent and accounted for 13.2 percent of all imports; 1,229 lines (18.2 percent) had rates between 15 and 30 percent, accounting for 20.3 percent of all imports; 1,926 (28.6 percent) had tariffs between 35 and 45 percent and accounted for 12.8 percent of imports; 999 (14.8 percent) had tariffs of 50 percent and accounted for 7.1 of imports; and 277 had tariffs in excess of 50 percent and accounted for 5.3 percent of all imports. Imports tend to be in commodities with lower tariffs and production in sectors with higher tariffs. Weighted average nominal rates of protection were quite low in agriculture (8.9 percent) and mining (1.0 percent) relative to manufacturing (24.1 percent), but there were wide variations within manufacturing industries.
As provided in Import and Export Regulation No. 74 of 1993.