I. Overview

1. Jordan’s economy today is radically different from that in the early 1990s. Prudent macroeconomic policies and effective structural reforms over the last decade have transformed Jordan from an inward-oriented, mostly state-controlled, and highly indebted to an export-oriented economy where the private sector is the primary engine of growth. Significant strides have been made in lowering the initially unsustainable public debt burden to sustainable levels and in reducing high budget deficits. The reform agenda, however remains unfinished, and growth has suffered from regional uncertainties.

2. The common thread running through the chapters of this Selected Issues paper is that although substantial progress has been made in macro stabilization, strengthening of the balance of payments, debt reduction, fiscal consolidation, and the development of social institutions, Jordan continues to face significant challenges over the medium-term. Jordan needs to realize its growth potential, reduce its still high public debt burden, and restrain its high budget deficits. Other challenges emanate from Jordan’s upcoming graduation from Fund support, and the elimination of textile quotas under the WTO. A brief summary of the chapters follows.

3. Chapter II provides an overview of the macroeconomic developments and related policies of the last decade. It focuses on three aspects of reforms: macroeconomic stabilization and growth, trade liberalization, and privatization, which have been pivotal in the transformation of the Jordanian economy in the last decade. It points to the benefits of macroeconomic stability for increased confidence in the Jordanian dinar and a resumption of growth. It elaborates on the linkages between trade reform initiatives and the recent surge in export activity. It finally discusses the privatization program and improvements in the business environment as ways to attract foreign direct investment. The chapter concludes that, notwithstanding the difficult regional situation, Jordan is likely to continue to reap substantial benefits from the reforms of the 1990s for the foreseeable future.

4. Chapter III reviews the key fiscal challenges Jordan faced in fiscal policy formulation over the 1990s and concludes that, although progress has often been slow and difficult at times, both the fiscal deficit and the debt burden have been declining toward sustainable levels. Using a simple growth accounting framework, the chapter identifies the factors that contributed to Jordan’s success in addressing the challenge of fiscal sustainability. It proceeds to review the progress made in enhancing the flexibility and effectiveness of fiscal policy. It also reviews how the goal of fiscal sustainability impacted the capacity of fiscal policy to smooth the volatility in economic activity and contribute to short-term macroeconomic management.

5. Chapter IV examines the path of Jordan’s external debt and the government’s debt management strategy over the last decade, and attempts to explain the dynamics of the external debt burden using a balance of payments accounting framework. The paper also uses cross-country analysis to assess the relative scale of the external debt burden, and further addresses the issue of sustainability over the medium term. The analysis suggests that due to proper demand management policies, Jordan’s external current and capital account balances have shifted to levels consistent with a sustained reduction in external debt. The nominal increase in external debt in recent years was primarily attributable to the authorities’ efforts to build-up a comfortable reserve cushion. However, its debt burden appears manageable under all but the most extreme external shocks.

6. Chapter V outlines a medium-term fiscal strategy for Jordan in order to achieve public debt reduction targets. The paper evaluates Jordan’s performance in fiscal consolidation and debt reduction under the current Stand-by Arrangement. It reassesses the outlook for public debt in light of recent developments. It then identifies and discusses fiscal priorities for the medium-term in order to achieve public debt targets and attain debt sustainability.

7. Chapter VI tracks Jordan’s significant progress over the past decade in developing social protection programs and the resulting gains in social indicators and in poverty reduction. The sharp deterioration in poverty levels brought on by the 1988–89 economic crises underscored the need for a formal social protection program in Jordan. The chapter discusses the government’s strategy for developing such a program which was based on three pillars: (i) a state-funded social safety net for the poor and vulnerable segments of society; (ii) a basic contributory social security system that would provide a comprehensive coverage for all workers in the economy; and (iii) a well targeted and efficient public spending system for health and education, ensuring equal access to all citizens with an emphasis on underdeveloped areas. The conclusions then outline a future reform agenda.

8. Chapter VII discusses Jordan’s prospects for accessing international capital markets against the background of its upcoming graduation from Fund-supported programs. Despite some recent upgrades, Jordan’s current sovereign credit ratings are two notches short of ‘investment grade’ and will need to improve in order to ensure uninterrupted access to international capital markets and favorable terms on market borrowing. The paper begins by providing an overview of the methodologies of the major international rating agencies and proceeds to apply them to Jordan, first by reviewing progress to date compared with other, similarly-rated countries, then by discussing issues related to private sector balance sheets, and finally by attempting to outline a roadmap to the investment grade. The paper concludes that Jordan’s macroeconomic framework and debt management strategy are consistent with further ratings upgrades and, if progress is sustained on these fronts, Jordan could be in contention for investment grade status within a few years.

9. Chapter VIII aims to assess the sustainability of the recent export boom by considering not only macroeconomic developments, but also the micro-foundations of export growth. It reviews the main indicators of Jordan external competitiveness, against the background of recent export developments. It then analyzes the primary supply and demand sources of comparative advantage that are likely to shape the medium-term export prospects of key sectors of the Jordanian economy. Finally, it provides a baseline medium-term outlook for Jordan’s exports, and estimates of the sensitivity of its external sector prospects to the impact of the elimination of apparel and textile quotas under the WTO. The analysis suggests that Jordan is likely to continue to sustain favorable external sector prospects over the medium-term, provided some remaining supply constraints are addressed.