Jordan’s economic expansion accelerated in the 1970s in the wake of the regional economic boom, which opened up opportunities for Jordan’s exports and for employment of Jordanians in the area; these developments led in turn to a markedly higher inflow of external grants from neighboring oil-exporting countries. This process continued through the mid-1980s, even when the regional economies started to experience recessions resulting from the collapse of petroleum prices.

Jordan’s economic expansion accelerated in the 1970s in the wake of the regional economic boom, which opened up opportunities for Jordan’s exports and for employment of Jordanians in the area; these developments led in turn to a markedly higher inflow of external grants from neighboring oil-exporting countries. This process continued through the mid-1980s, even when the regional economies started to experience recessions resulting from the collapse of petroleum prices.

Emergence of the External Debt Crisis

Despite the ensuing substantial reductions in remittances and foreign grants, the authorities attempted to maintain their domestic economic policies unchanged during 1984–88. Instead of adjusting to the lower financing available, Jordan resorted increasingly to foreign borrowing on commercial terms; as a result, its external outstanding public or publicly guaranteed debt built up steadily during this period to $8 billion by the end of 1988 (127 percent of GDP), while its outstanding short-term debt reached $400 million. By that time, with the slowdown in economic activity and high real interest rates in the world market, the debt burden had reached unsustainable proportions.

In response to these developments, Jordan’s external scheduled debt-service payments rose to nearly $1.4 billion in 1989; at the same time, receipts from remittances declined and exports slowed markedly, so that the scheduled debt service as a percentage of exports of goods and services increased to 46 percent in 1989, about five times the corresponding ratio in 1983.1 Jordan’s external vulnerability was exacerbated, and its creditworthiness impaired, by the high debt-to-GDP ratio and high dependence on receipts from services; about one-half of the external current account receipts in Jordan derived from services, mostly remittances and receipts from tourism and travel. Arrears on external debt-service payments began to accumulate in 1989.

Debt Management Strategy After the Debt Crisis

As payments difficulties emerged, and as part of an overall strategy to achieve external current account adjustment, the authorities initiated an external debt-management policy in 1989 aimed at obtaining debt relief through rescheduling, lengthening the maturity structure of debt, and reducing the debt burden in relation to GDP over the medium term. This strategy has four major elements. First, the authorities concluded a restructuring agreement with Paris Club creditors in July 1989 and regularized relations with other bilateral creditors along terms similar to those obtained from the Paris Club. Second, they initiated negotiations with the commercial banks to obtain a multiyear rescheduling of obligations falling due, with provisions for new money and the option for debt conversion at a discount. Third, they limited all new borrowings to longer-term maturities, mostly at concessional interest rates. Along these lines, they also converted all short-term debt to medium-term maturities and incurred no new short-term or nonconcessional debt in the maturity range of 1–12 years. Finally, Jordan canceled most new commercial borrowings that were in the pipeline; the cancellation of a military aircraft purchase agreement reduced the debt burden by $1 billion.

Paris Club Agreement, 1989

About half of Jordan’s public and publicly guaranteed external debt was owed to Paris Club creditors, in the form of either official development assistance or officially guaranteed suppliers’ credits. Another 15 percent of the debt was owed to other official creditors, such as Arab countries and the former Soviet Union. At the request of the Government of Jordan, Paris Club creditors rescheduled Jordan’s external debt on July 19, 1989. The 18-month consolidation period (July 1, 1989–December 31, 1990) coincided with the term of the first stand-by arrangement.

Under the Paris Club agreement, all arrears and amortization falling due during the consolidation period on account of debt from before the cut-off date2 and six months of interest payments were subject to rescheduling. Total debt relief from Paris Club creditors was estimated to be $587 million over the 18-month period.3 Jordan was also required to offer other bilateral official creditors terms not better than those offered to Paris Club creditors. This provision allowed Jordan to receive additional debt relief worth $645 million during the same period.

Negotiations with Commercial Bank Creditors

Unlike many other heavily indebted developing countries, Jordan’s debt to commercial banks was small in relative terms, accounting for about 15 percent of the outstanding public and publicly guaranteed external debt. Initially, the authorities sought a multiyear rescheduling agreement with commercial bank creditors, extending the repayment period over a longer term. An informal agreement was reached with the steering committee of commercial banks in October 1990, under which Jordan agreed to pay all interest obligations in arrears through the end of March 1990, and the banks agreed to reschedule or refinance all remaining interest and all amortization obligations. In the event, however, agreement could not be reached by the time the regional crisis erupted in August 1990. Moreover, as operations to reduce debt and debt service were soon gaining momentum in negotiations between the commercial banks and a number of heavily indebted developing countries (including Argentina and Brazil), the multiyear rescheduling agreement was abandoned.

Changes in Debt Strategy

The August 1990 crisis severely aggravated Jordan’s external situation because of the loss of export markets for goods and services in neighboring countries and of foreign grants. Moreover, there was a sharp reduction in remittance flows, largely resulting from the massive return of Jordanians who had been working abroad. In the event, Jordan was unable to discharge its external debt-service obligations and made payments only to official creditors, primarily to multilateral organizations. Cumulative overdue obligations by the end of 1991 amounted to almost $800 million, and the amount falling due in 1992 was estimated at that time at $1.1 billion.

The authorities were aware that Jordan was unable to normalize payments relations with its creditors through regular debt servicing in cash and that exceptional financing through restructuring of the debt and debt-service payments was necessary. It also became clear that capitalization of the unpaid debt-service obligations would lead to a buildup of external debt and that growth in debt service would exceed the growth potential for the external current account receipts, making the overall situation unsustainable in the medium to long run.

Moreover, the new medium-term outlook implied that, in addition to limiting new borrowing to only concessional terms and longer-term maturities, the revised debt-management strategy would require more concessional rescheduling terms from Paris Club official bilateral creditors. Jordan would have to undertake operations to reduce debt and debt service through commercial bank creditors and several smaller official bilateral creditors.

Paris Club Rescheduling Agreements, 1992 and 1994

Immediately after the approval of a new 18-month stand-by arrangement with the IMF, Jordan concluded the second rescheduling agreement with the Paris Club in February 1992. Under the agreement, Jordan obtained debt relief through rescheduling of all interest and amortization on debt incurred before the cut-off date that would fall due during an 18-month period beginning on January 1, 1992, and all amortization arrears and 50 percent of interest arrears accumulated up to the end of 1991. The terms allowed for longer repayment and grace periods than the 1989 agreement. Overall, the debt relief from Paris Club creditors was estimated at $771 million over the 18-month period, and the amount for 1992 (including the rescheduling of arrears) was estimated to be $603 million. The agreement provided, on a voluntary and bilateral basis, for selling or exchanging debt, in the framework of debt for nature, debt for aid, debt for equity swaps, or other local currency debt swaps. The consolidation period was further extended to correspond to the extension of the stand-by arrangement.

After the IMF’s Executive Board approved on May 25, 1994 a new three-year program for Jordan under the extended Fund facility (EFF), the Jordanian authorities sought further debt rescheduling from Paris Club creditors for debt payments falling due during the program period. In recognition of Jordan’s efforts at macroeconomic stabilization and structural reform, creditors granted Jordan more favorable rescheduling terms than under the 1992 rescheduling agreement. They rescheduled all debt-service obligations that had not already been rescheduled (interest and principal) on debt incurred before the cut-off date; and current maturities (principal and interest) as a result of the 1989 agreement falling due during July 1, 1994–May 31, 1997 on graduated repayment terms (over a period of 18 years).4 In addition, all interest payments under the 1992 Paris Club agreement falling due during July 1, 1994—June 30, 1995 were also deferred, with repayments over five years, beginning December 31, 1997. Total debt relief obtained as a result was estimated at about $1.2 billion (including $50 million in deferred interest payments) over the consolidation period. Assuming similar terms from other official bilateral creditors, overall debt relief during the EFF period would amount to about $1.4 billion.

Revised Debt Strategy vis-à-vis Commercial Banks

After the regional crisis, it became evident that, to attain medium-term balance of payments viability, Jordan should undertake operations to reduce market-based debt and debt service. There were growing concerns regarding the impact of the external debt overhang on Jordan’s growth potential.5 While repeated principal rescheduling and interest refinancing (through concerted new money loans) could provide the necessary short-term cash-flow support, medium-term projections indicated that the resulting debt stock and debt-service ratios would remain high, well above the average level of some 40 percent of GDP and 27 percent of exports of goods and services for developing countries facing debt-servicing problems.

The increasing emphasis on operations to reduce debt and debt service was also motivated by a number of other considerations. First, given the balance sheet situation of some commercial banks, the assessment at that time was that it could prove difficult to arrange adequate interest refinancing through concerted new money loans.6 Second, apart from the financing implications, the potential absence of such concerted new financing raised comparability problems vis-à-vis other official creditors. Third, there was growing evidence that many commercial banks were willing to dispose of their claims on Jordan, often at substantial discounts. This shift in the overall debt strategy also gained momentum in Jordan in 1992 when, following the record level of repatriation of returnees’ savings after August 1990, Jordan’s official foreign exchange reserves increased markedly. By the end of December 1992, the foreign assets of commercial banks amounted to $1.4 billion, of which some $600 million was deposited with the Central Bank of Jordan.7

With a view to improving Jordan’s debt-servicing capacity and creditworthiness in the longer term, the authorities revised their strategy further, seeking a more comprehensive restructuring of the debt stock on the basis of a market-based financing menu.8 Given the favorable circumstances, in early 1993, the Jordanian authorities stepped up their efforts to buy back debt. By then, Jordan was able, through cash buybacks, to extinguish external debt owed to commercial banks for a total amount of about $600 million at a cost of $115 million. In addition, the country devoted $39 million during the earlier part of 1993 to buybacks from commercial banks, for debt with a face value of $100 million.

Negotiations proceeded in parallel and, finally, on June 30, 1993, the Jordanian authorities reached an agreement in principle with London Club creditors on the terms for restructuring Jordan’s external debt to foreign commercial banks. Jordan continued to pay 30 percent of interest due until the closing date, December 23, 1993. The agreement covered $736 million in principal and about $121 million in interest arrears. A recalculation of interest arrears using the lower interest rates that prevailed at the time saved Jordan about $33 million. Banks opted to exchange 32.8 percent of the debt ($243 million) for discount bonds9 and 67.2 percent ($493 million) for par bonds;10 only a small fraction of the debt ($0.25 million) was bought back in the context of the debt- and debt-service-reduction package, as the buyback price of 39 cents per dollar was well below the prevailing market price. On the closing date, Jordan made a cash payment of 10 percent of interest on eligible debt to be exchanged for par bonds and 50 percent of interest on eligible debt to be exchanged for discount bonds. The balance of interest arrears was exchanged for floating-rate, past due interest bonds (PDIs).11 The overall cost of the package was about $150 million, financed by a drawdown of gross official reserves and the issuance of CDs denominated in foreign currency.12

Negotiations with Other Official Creditors

The authorities have also sought rescheduling or refinancing agreements from all other external creditors (including suppliers, and official bilateral creditors other than the Paris Club) on terms no more favorable than those accorded to Paris Club creditors. As a result of the rescheduling of overdue obligations by Paris Club creditors, the stock of arrears outstanding has been gradually reduced from a peak of $780 million at the end of 1991 to about $120 million at the end of 1992 and $11 million at the end of 1993. The authorities have reported progress in formalizing rescheduling agreements with some official bilateral creditors not covered by the Paris Club agreements.

Finally, in line with the revised debt strategy, in 1992 Jordan completed an agreement with Russia, whereby $614 million of its debt to the former Soviet Union was extinguished at a large discount. The first payment for the buyback was made in cash for $88 million in 1992; further installments were settled during 1993 and 1994 in the form of commodity exports. Similarly, official debt to Brazil was bought back at a large discount.

As a result of its sound external debt management, geared to restoring access to world financial markets, Jordan’s creditworthiness has continued to improve. By limiting new borrowing and pursuing debt buybacks at substantial discounts, Jordan reduced its ratio of debt to GDP from 193 percent in 1990 to less than 110 percent at the end of 1994. Successive Paris Club reschedulings lowered debt service as a share of exports of goods and services from 45 percent in 1990 to 25 percent at the end of 1994. Moreover, in the wake of the peace process, $800 million of debt forgiveness was granted to Jordan, mostly by the United States ($702 million). Debt-for-equity and debt-for-nature swaps with Switzerland and Germany have already been concluded, and more are likely to follow.

Nevertheless, the debt-to-GDP ratio would still remain high—96 percent by the end of 1998—even under the assumption of continuing rapid growth of exports, yearly remittances of $1.1 billion, and substantial foreign direct investment. Whether these would materialize depends crucially on private sector perceptions of the debt and prospects for servicing the debt: the existing large debt overhang, however, could act as a disincentive to private sector investment. To reassure the markets, Jordan would need not only to continue its sound debt-management policies, but also to obtain sufficient new concessional financing and, possibly, further debt relief. Continued strong adjustment and proper incentives through eliminating distortions would also contribute to the attainment of sustainable export-oriented growth and help improve Jordan’s creditworthiness.


This compares with 16 percent for the developing countries in general and 27 percent for the heavily indebted countries as observed in 1989. The ratio of external debt to exports of goods and services reached 213 percent in 1989, compared with 290 percent for the heavily indebted countries and 135 percent for the developing countries as a group.


The cut-off date for Jordan was January 1, 1989, which was six months prior to the beginning of the consolidation period.


The maturity period for the rescheduled amortization obligations was 9.3 years with 4.8 years of grace, and for rescheduled interest obligations, the maturity period was 10.3 years with 5.8 years of grace.


These terms were being applied for the first time to a lower-middle-income country.


Specifically, foreign and domestic assessment of country risk may not improve when the stock of contractual debt surpasses economic agents’ perceptions of the debtor country’s capacity to service the debt. These uncertainties are perceived to increase the cost of capital in excess of the normal return and vitiate the environment for investment over a prolonged period. Issues related to debt overhang, linkage between domestic and foreign indicators of country risks, and impediments to access to credit have been covered in Michael P. Dooley and others, Debt Reduction and Economic Activity, IMF Occasional Paper No. 68 (Washington: International Monetary Fund, 1990); Hoe E. Khor and Liliana Rojas-Suárez, “Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness,” IMF Working Paper 91/12 (Washington: International Monetary Fund, 1991); and Joseph Stiglitz and Andrew Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review, Vol. 71 (June 1981), pp. 393–410.


As reflected in the case of other major debtor countries such as Mexico, Brazil, and Argentina, because of more stringent regulatory provisioning requirements on developing country exposure and the prospects of seemingly endless episodes of concerted new money packages based on existing bank exposure, the erosion of cohesion within the banking community intensified and made it extremely difficult to implement new money packages.


The proportion of commercial banks’ foreign assets held with the Central Bank of Jordan was higher than the legal requirement (35 percent) because the banks found it a preferred option, given the excess liquidity prevailing in the economy at that time.


The menu icluded such options as reduced interest par exchange, discount exchange, and buyback at a discount, which allowed the authorities, in particular, to bring the contractual value of commercial bank claims and other debt more in line with Jordan’s debt-service capacity.


A collateralized discount bond option, at 65 percent of face value, with a bullet payment after 30 years, and interest at a floating rate of six-month LIBOR (London interbank offered rate) plus 13/16 a year. Principal was fully collateralized, in addition to a six-month rolling interest guarantee.


Collateralized par bonds, with a 30-year bullet payment. The exchange bonds pay interest at a fixed rate of 4 percent for the first four years, 5 percent in year five, 5.5 percent in year six, and 6 percent thereafter. The principal amount and six-month rolling interest guarantee were fully collateralized.


Repayable in 19 semiannual installments with a three-year grace period, and carrying interest at six-month LIBOR plus l3/16 a year. The PDI bonds were not collateralized.


As follows: $21 million in interest collateral ($6 million for discount and $15 million for par bonds); $97 million for principal collateral ($24 million for discount and $73 million for par bonds); $29 million as a cash down payment for interest arrears ($21 million for discount and $8 million for par bonds); and about $3 million in transaction fees. For the balance of interest arrears ($91 million), PDI bonds were issued. The cost of the buy-back was marginal.