Jordan: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix on Jordan underlies stabilization and structural transformation of the economy. Current fiscal policy appears to be broadly sustainable and should be sufficient to allow for the continued fall in the debt burden, absent large external macroeconomic shocks. Over the past decade, Jordan has made commendable progress in replacing an informal family-based social safety system with well-defined and well-targeted social protection institutions. The government will need to remain committed to periodic increases of fuel prices to close the gap between domestic and international petroleum product prices.


This Selected Issues paper and Statistical Appendix on Jordan underlies stabilization and structural transformation of the economy. Current fiscal policy appears to be broadly sustainable and should be sufficient to allow for the continued fall in the debt burden, absent large external macroeconomic shocks. Over the past decade, Jordan has made commendable progress in replacing an informal family-based social safety system with well-defined and well-targeted social protection institutions. The government will need to remain committed to periodic increases of fuel prices to close the gap between domestic and international petroleum product prices.

II. Stabilization and Structural Transformation of the Jordanian Economy1

A. Introduction

10. In 1993, the Jordanian economy was just recovering from a devastating exchange rate and banking crisis that nearly halved the living standard of the average Jordanian and left the government submerged in public debt. The economy had barely withstood the negative impact of the Gulf war and was struggling to absorb the large influx of Jordanian refugees that were expelled from Kuwait following the war. External trade was highly regulated and merchandise exports were mainly concentrated in mining and agricultural products. At the same time, the government controlled a significant share of industrial production and regulated most commodity prices, with significant distortions in the relative price structure.

11. A decade later, the Jordanian economy looks substantially different. Despite the continued negative effects of the Palestinian-Israeli conflict and the recent disruption associated with the war in Iraq, economic growth is steadily rising and the export sector is booming. The structure of economic activity is shifting in support of export-led growth, while domestic demand, which in the past was the main source of growth, has so far lagged behind. The government has privatized most state-owned enterprises and freed most commodity prices. More important, Jordan is slowly gaining the reputation in the region of a place for foreign investors to do business. Once the regional security situation is resolved, the potential for economic growth will be significantly higher.

12. The main contention of this paper is that the transformation of the Jordanian economy over the last decade can be attributed to a large extent on the economic reforms implemented by the government with support from the Fund. These reforms have aimed at (i) stabilizing the economy, so as to foster growth; (ii) liberalizing foreign trade and domestic prices; (iii) reducing public debt; and (iv) privatizing state-owned enterprises. These reforms have, in turn, brought about a structural transformation that is just beginning to bear fruit, in terms of higher export-led growth and more foreign direct investment. To the extent that the reform momentum continues and that the regional security situation improves, growth should increase further and make a serious dent in poverty and unemployment.

13. The chapter is organized as follows. Section B presents evidence on the stabilization and structural transformation of the Jordanian economy in the last decade. Section C discusses the main policies that have brought about this transformation, namely macroeconomic stabilization, trade liberalization, and privatization (fiscal consolidation is discussed in Chapter III). Section D gives a brief overview of the remaining policy challenges from a Fund perspective. In this section, the paper also briefly discusses the impact of the war in Iraq.

B. Evidence of Stabilization and Structural Transformation

14. Evidence of the stabilization and the structural transformation of the Jordanian economy in recent years is widespread. Even a casual observer visiting Amman after 10 years would be hard pressed not to recognize the reorientation of economic activity in favor of foreign trade, tourism, and other export-oriented services. Indeed, it is not only the continued expansion of first class hotels that is changing the landscape of the city, but also of internationally-renowned medical hospitals, universities, training centers, and regional trade fairs. More important, this reorientation is spreading outside of Amman, with the development of the qualified industrial zones (QIZs),2 the Aqaba Special Economic Zone, and industrial development in the north of the country. The structural change in the economy seems to be widespread, both geographically and in terms of economic sectors.

15. This section covers some of the evidence of structural transformation. It focuses on the following points: (i) macroeconomic stabilization and the improved confidence in the Jordanian dinar; (ii) the increasing importance of the export sector; and (iii) the evidence from a growth accounting exercise. The main macroeconomic and financial indicators for the last 11 years are presented in Table II.1. Overall, the economy has undergone a transformation from an inward-oriented to an export-oriented economy led by a dynamic private sector for the reasons addressed in the following section.

Table II.1.

Jordan: Selected Economic Indicators, 1993–2003

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Sources: Jordanian authorities; and Fund staff estimates and projections.

Domestic debt is net of government deposits with the banking system, and external debt includes collateralized Brady bonds.

Net of short-term foreign liabilities and excluding commercial banks’ foreign currency deposits with the Central Bank of Jordan.

Excludes pledged assets under the 1993 commercial debt rescheduling agreement and the yearly change in foreign currency swaps.

Imports of goods and nonfactor services, excluding imports for re-export, in subsequent 12 months.


16. There is a general consensus in the economic literature that macroeconomic stabilization is essential for sustainable and equitable growth. The empirical literature has convincingly shown that high inflation is harmful for growth3 and the development of the financial sector. 4 In addition, high inflation is shown to have a significant negative impact on the poor, as it taxes lower income groups disproportionately more than higher income groups. 5 For small developing countries, the achievement and maintenance of macroeconomic stability poses the additional challenge of choosing appropriate monetary and exchange rate policies that are consistent with the ultimate goal of economic development. 6

17. Jordan’s experience since the late 1980s is an example of the importance of macroeconomic stability (Figure II.1). The exchange rate crisis of 1989—which forced a nominal devaluation of almost 50 percent against the U.S. dollar—had a severe adverse impact on Jordanian living standards, particularly of the poor. In 1989 alone, real GDP contracted by 13 percent, while inflation jumped to over 25 percent. Notwithstanding a significant recovery in 1992, the negative impact of the crisis was long lasting. Per capita GDP fell from $2,237 in 1987 to $1,404 in 1993, while unemployment nearly doubled to about 20 percent. The most damaging effect was on poverty: the percentage of the population below the poverty line increased from 3 percent in 1986–87 to 14.4 percent in 1992, before declining to around 11.7 percent in 1997. 7

Figure II.1.
Figure II.1.

Jordan: Macroeconomic Developments, 1987–2002

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A002

Source: IMF International Financial Statistics.

18. Following the crisis, macroeconomic stability and confidence in the Jordanian dinar were restored only after a number of years. The initial stabilization, based on a peg of the Jordanian dinar to a basket of currencies comprising the Fund’s Special Drawing Rights (SDR), was effective in moderating inflation (Table II.2). However, growth and inflation remained quite uneven, as shown by the standard deviation of the two variables. Confidence in the Jordanian dinar took longer to restore and only took root after the switch of the peg to the U.S. dollar in November 1995. Confidence in the domestic currency under the peg to the U.S. dollar can best be seen in terms of the stock of international reserves of the central bank. As shown in Figure II.2, the official reserves of the Central Bank of Jordan (CBJ) have increased ninefold since the switch of the peg to the U.S. dollar and reached $4.7 billion at end-2003. As the increase in reserves gradually alleviated concerns about macroeconomic stability, monetary policy could slowly be relaxed, yielding the lowest short-term interest rates on record. Such a strengthening of confidence has created an enabling environment for sustainable growth.

Table II.2.

Jordan: Selected Macroeconomic Indicators, 1987–2003

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Source: IMF International Financial Statistics.
Figure II.2.
Figure II.2.

Increased Confidence in the Jordanian Dinar, 1997–2003

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A002

Source: Central Bank of Jordan.

A more export-led economy

19. The most notable evidence of structural transformation in the Jordanian economy comes from the rapid growth in merchandise exports over the last 2½ years. For most of the 1990s merchandise exports had virtually stagnated, calling into question the competitiveness of the manufacturing sector. Starting in the second half of 2000, however, exports—especially nontraditional exports like textiles and apparel, pharmaceuticals, and some agricultural exports—have expanded rapidly. While a significant portion of the rapid growth in exports is associated with the duty-and quota-free access to the U.S. markets from the QIZs (Box II.1), exports from other areas of Jordan have also expanded rapidly, although at a slower pace. The geographical destination of exports has also widened significantly, with exports to the U.S. market increasing tenfold over a span of four years. Overall, exports grew by an average of 20 percent per year in 2001–02. This has increased the share of merchandise exports in the economy, from 22 percent of GDP in 1993 to 30 percent in 2002.

Jordan—Export Performance in 2001–02

Jordan’s export growth in 2001 and 2002 was very strong—estimated at about 20.8 percent each year, compared to an annual average growth of 1 percent in the preceding five years. The export boom has come despite a deterioration in the terms of trade in 2001–02. Trade liberalization, combined with such preferential market access schemes as the QIZs, appear to have been the engine behind this sudden improvement in export performance.

The legal provisions for QIZs were established in 1996 when the United States offered special duty-and quota-free access to goods produced in designated zones with specified minimum Jordanian, Israeli, and Palestinian contents. QIZ status is generally granted to an industrial estate, and manufacturers in these estates must seek approval of their products from a committee jointly chaired by Jordan and Israel with a U.S. observer. To meet eligibility requirements, the product must be “substantially transformed” with 35 percent of its value added in Israel, a Jordanian QIZ, or the West Bank/Gaza. Of this 35 percent, a minimum of 11.7 percent must be added in a Jordanian QIZ, 8 percent in Israel (7 percent for high tech goods), and the remaining 15.3 percent from a QIZ in Israel or West Bank/Gaza; or Jordanian and Israeli manufacturers must contribute at least 20 percent of the total cost of production). Textiles and apparel have been the central focus of activity in these zones, since the QIZ circumvents an otherwise onerous U.S. duty of up to 22 percent and is exempt from quotas established under the WTO Multifibre Agreement. However, QIZs were initially slow to establish and begin operations. While the legal framework was agreed upon in 1996, The first QIZ was designated in 1998. Nine more QIZs have been designated since that time, and most of the plants operating in these zones have only recently begun full-scale production. The establishment of two additional zones was approved during the World Economic Forum in June 2003.

The QIZs have helped to diversify exports and contributed to export growth. Over the last five years, Jordan’s exports have shifted away from reliance on mining, in favor of textiles, apparel, footwear, pharmaceuticals, and light manufactures. Much of the rapid growth in overall exports seen in 2001 and 2002 is also captured by these goods, and the most rapidly growing industrial base for such merchandise is the QIZs. Jordan’s QIZ exports surged as a large number of new companies completed installation and came on line in 2000–01. Official data indicate that exports from the seven largest QIZs rose from $2.4 million in 1999 to $382 million in 2002. These seven zones have reportedly created 26,000 new jobs.

The U.S.-Jordan Free Trade Area Agreement (FTA) has given rise to some concern that companies operating in the QIZs will lose their competitive edge. But there are substantive differences between the market access granted under the FTA and that under the QIZ scheme. First, the FTA is a phased arrangement, with duties on a number of products eliminated only after 10 years. Products exported from the QIZs, on the other hand, have immediate duty and quota free access. Second, the rules of origin between the two schemes are significantly different. Under the FTA, goods must have a minimum of 35 percent value added in Jordan to qualify for duty-free access, versus 11.7 percent under the QIZ scheme. The combination of phased access and tougher value added requirements suggests that QIZs will retain their attractiveness to investors for some time.

20. The growth in merchandise exports stands in contrast to the weakening of global trade during the last three years. World exports grew by 5.7 percent during that period, mainly reflecting the slowdown in advanced economies in 2001–02. As a result, Jordanian exports have increased their market share and now account for 21 percent more of total world exports than in 1993. Over the same period, Jordan had one of the fastest growth in exports in dollar terms in the MENA region in 2001–03, despite the negative impact of the war on Iraq (Table II.3).

Table II.3.

Merchandise Export Growth, 1993–2003

(Cumulative growth rates in U.S. terms)

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Source: IMF World Economic Outlook database.

21. The booming export sector is also indicative of Jordan’s growing level of integration with the world economy. One measure of integration is given by the index of intra-industry trade (IIT), which provides a quantitative statistic of the degree of specialization in global production, or, in a broader sense, the degree of complexity of trade linkages between one country and the rest of the world. 8 The IIT measures the percentage of total trade that occurs within the same three-digit SITC industry. Based on data available through the United Nations Comtrade database,9 Figure II.3 presents the IIT for Jordan, the G7 and the Middle East and North Africa (MENA) excluding Jordan. It clearly shows the increasing integration of the Jordanian economy into global trade in the last ten years, with the IIT index increasing by 10 percentage points to 35 percent. Most of the increase is concentrated in the machinery and transport industries, which are key to the development of the industrial sector in Jordan. However, it is also clear that there is great potential for further integration, as the IIT of the G7 economies has hovered around 80 percent for the last decade.

Figure II.3.
Figure II.3.

Greater Integration in the World Economy: Intra-Industry Trade Index, 1993–2002

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A002

Source: U.N. Comtrade Database and IMF staff estimates.

Increases in productivity

22. One disappointing aspect of economic growth in the 1990s was the lack of improvements in productivity. According to studies done by the World Bank in 1994 and 2001, most of the economic growth in the 1990s could be accounted for by the expansion of capital (both physical and human) and the labor force. 10 This implied that total factor productivity (TFP)—the residual in a Solow growth accounting model11—had hardly increased. In fact, the evidence for the second half of the 1990s pointed to unchanged TFP, which called into question the competitiveness of the Jordanian economy.

23. An updated growth accounting exercise points to a moderate rebound in productivity in 2001–02. Table II.4 presents the updated results of the growth accounting exercise for the period 1981–2002, based on the same methodology and factor shares of production as in Maciejewski and Mansur (1996). 13 The results show that, while the second half of the 1990s witnessed no growth in productivity, this was reversed in 2001–02, when productivity expansion was the largest contributor to overall growth. This was probably the result of the increased productivity of the export sector, particularly in the QIZ, that lifted overall productivity in the economy. Moreover, it is noteworthy to point out that the years 2001–02 also witnessed the strongest expansion in productivity for the last two decades, with the exception of the early 1990s.

Table II.4.

Total Factor Productivity Estimates, 1981–200212

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Source: Jordanian authorities, Barro and Lee (2002), and Fund staff estimates.

24. Overall, the strengthening of confidence in the Jordanian dinar in the second half of the 1990s, the robust export performance of the last two years, and the rebound in productivity all suggest that the structure of the economy has been transformed. The policies that led to this structural transformation are discussed in the next section.

C. Policies of Stabilization and Structural Transformation

25. The previous section provided evidence of the structural transformation which has become apparent in the last two years. Based on this evidence, this section traces the origin of the transformation to the policies pursued by the Jordanian authorities in the 1990s. While undoubtedly the response and resourcefulness of the private sector in Jordan have been essential ingredients, the importance of the appropriate policies should not be underestimated.

Macroeconomic policies

26. After the crisis of 1989, the first priority of macroeconomic policies was to restore stability and confidence in the Jordanian dinar. The difficulties of macroeconomic management had been exacerbated by the collapse of the third largest bank in August 1989 and a doubling of the external debt burden, which amounted to about twice the level of GDP in 1990. 14 In addition, the Jordanian authorities had to respond to further external shocks, like the Gulf war and the return of Jordanian workers expelled from Kuwait in 1991–92.

27. Within the framework of two IMF Stand-By Arrangements in 1989 and 1992, inflation was brought under control rapidly. As a result, the Jordanian dinar stabilized against the U.S. dollar and the SDR in 1992. The Central Bank of Jordan (CBJ) kept monetary expansion broadly in line with macroeconomic developments, thus holding a tight control on excess liquidity. Initially, monetary policy was enforced through direct controls and high reserve requirements. Over time, the CBJ shifted to indirect controls of monetary policy, notably with the introduction of CBJ certificates of deposit in 1993, a gradual reduction of reserve requirements, and the liberalization of current and capital account transactions. However, confidence in the Jordanian dinar was only fully restored following the decision to peg to the U.S. dollar in November 1995. The peg provided a transparent framework for monetary policy that brought about the gradual strengthening of international reserves and the reduction of interest rates shown in Figure II.2. Inflation also declined to advanced country levels and price stability was fully achieved by 1999.

28. Monetary policy, however, could only be effective to the extent that it was supported by sound fiscal policies. While a detailed discussion of the government’s fiscal strategy in the 1990s is covered in Chapter III, the strategy can be summarized here as one that aimed at reducing the heavy debt burden through an appropriate mix of fiscal adjustment and bilateral debt relief. As part of that strategy supported by two IMF extended arrangements in 1994 and 1996, the government increasingly reduced its reliance on direct credits from the CBJ, which were finally barred with the passage of the 2001 Public Debt Law. At the same time, the Ministry of Finance developed a market for its debt instruments that partly contributed to the control of monetary liquidity. In addition, the government successfully negotiated six rescheduling agreements with bilateral creditors through the Paris Club in order to defer the heavy external debt burden, with the last rescheduling approved in July 2002 as an exit rescheduling covering debt service falling due through 2007.

29. The authorities’ macroeconomic policies were severely tested during the prolonged illness and eventual death of H.M. King Hussein in 1998–99. The uncertainties surrounding the illness and the succession to the throne led to a loss of confidence in the Jordanian dinar and a change in favor of foreign currency deposits. As a result, international reserves of the CBJ were nearly halved to about $1 billion in early 1999, which called into question the stability of the peg. The authorities acted quickly. With the support of a new extended arrangement with the IMF, the CBJ doubled short-term interest rates to defend the peg. Fiscal policy was tightened significantly, resulting in a reduction of the fiscal deficit of the central government to 3½ percent of GDP in 1999, compared to 6 percent in 1998. Overall, the authorities’ forceful actions averted a new crisis and quickly restored confidence in the Jordanian dinar.

Trade liberalization

30. Trade liberalization has resulted in a greater integration in the world economy. In successive rounds of liberalization, quantitative barriers to imports and tariffs were eliminated or reduced on a multilateral or regional basis, opening Jordan to world markets. Simultaneously, the Jordanian government pursued bilateral free trade agreements, including with the United States and the European Union, that provided exporters with preferential market access to the largest markets in the world. Overall, these policies have produced one of the most open and dynamic export-led economies in the region.

31. The comparison with the import-substitution policies of the past is striking. Until the late 1980s, Jordan had a high and complex tariff structure, with a maximum tariff rate of 318 percent and an average weighted tariff rate of 19 percent. Widespread exemptions implied that 51 percent of all imports were exempt from import duty. In addition, about 40 percent of imports were subject to quantitative restrictions. The tariff structure was also characterized by a high degree of variation (the standard deviation was 26.1 percent). Today, Jordan has a simple import tariff structure, with an average weighted import tariff rate of 13 percent, a maximum rate of 30 percent, and a standard deviation of 15.7 percent. Nontariff barriers are limited to the exclusive trading rights for petroleum products, due to expire in 2008. Exemptions from import duties now account for less than 15 percent of total imports. More important, Jordan acceded to the World Trade Organization (WTO) in 2000 with a commitment to gradually reduce tariff and nontariff barriers. In particular, the maximum tariff rate will be reduced to 20 percent by 2010 under the WTO agreements.

32. Multilateral liberalization has been complemented with a series of bilateral trade agreements aimed at increasing market access for Jordanian exports. Beyond the special access granted to the QIZs, Jordan ratified a free trade agreement with the United States in 2001 and an association agreement with the European Union (EU) in 2002. Jordan is also a member of the Arab Free Trade Agreement since 1998, and has signed bilateral free trade agreements with most countries of the MENA region and some European countries that are not yet members of the EU. In addition, the government launched in 2001 an ambitious project, the Aqaba Special Economic Zone, aimed at providing a free-trade zone and a streamlined administration with significant tax and infrastructure incentives ((Box II.2).

33. Overall, the trade policies pursued over the last decade have made Jordan an attractive channel for duty-and quota-free access to major world markets. So far, this has become apparent mainly in textiles, apparel, and small manufacturing goods, where investors from Asia have taken advantage of Jordan’s market access to circumvent import quotas applied to exports from their own countries. However, the export base is likely to diversify further in the coming years, as Jordan’s reputation for foreign direct investment improves and investors realize the potential in other areas of manufacturing. This development potential is substantial, as barriers to trade are phased out and Jordan catches up to the level of trade integration of more advanced economies, as shown in Figure II.3.

The Aqaba Special Economic Zone

The last decade has seen a renewed interest in the free zone concept in the Middle East—stemming in part from the need to spur trade and investment. Despite a near doubling of population, the Middle East’s share of world exports, excluding oil, dropped from 10 percent in 1980 to 4 percent in 2001. Similarly, foreign direct investment (FDI) flows to the Middle East were only $4 billion—roughly one-third of annual flows to some of the smaller European economies, such as Sweden, Ireland, or Finland. Another notable factor has been the success of the Jebel Ali Free Zone in Dubai, which has been able to attract some 2,200 international companies, create 35,000 jobs, and generate $4 billion in exports since its establishment in 1985.

Jordan has been one of the more proactive countries in the region with regard to trade and investment liberalization. Perhaps the most ambitious among these schemes is the Aqaba Special Economic Zone (ASEZA), which seeks to marry a free trade zone with a streamlined business and investment environment. Launched in 2001, the ASEZA is a 375 square kilometer area—one of the largest free zones ever created—and is established as a liberalized, low-tax, duty-free, and multi-sector development area. A simplified business environment has been designed with streamlined administration to attract investment and maximize private sector participation in zone operations and development. The project is ambitious—seeking to raise $6 billion in investments and create 70,000 jobs over 20 years.

The zone offers the following benefits: 1) no foreign equity restrictions on investment in tourism, industry, retail, and other commercial services; 2) a regional multimodal transportation hub, with a full service seaport and international airport; 3) business income tax set at 5 percent (excluding land transport, insurance, and banking, which are taxed at the prevailing rates of 15, 25, and 30 percent, respectively); 3) sales tax of only 7 percent on goods and services sold within the zone, as opposed to the 13 percent general sales tax (GST) paid in the rest of Jordan; 4) no tariffs or import taxes on imported goods for individual consumption and registered enterprises. Registered enterprises also enjoy exemption from the social services tax, annual land and building taxes on utilized property, taxes on distribution of dividends and profits on activities in the ASEZA and outside Jordan; 5) streamlined labor and immigration procedures.

The ASEZA has enjoyed some measure of success so far. The Zone has registered 350 new corporations since its establishment in 2001, and contracted some $1 billion in investments during this time. Roughly $180 million in contracts for land development were signed, shipping through the Aqaba port (by tonnage) increased 23 percent, and transfers to the central government grew by approximately 600 percent in 2002 to JD 6 million (approximately $8.5 million). A new QIZ was also established in early 2003, the Aqaba International Industrial Estate (AIIE), which will capitalize on the combination of easy access to ASEZA port facilities and the duty-and quota-free access to the U.S. market.

Deregulation of commodity prices

34. Another policy challenge facing the Jordanian authorities in the early 1990s was the extensive regulation of domestic commodity prices. These regulated prices included most food staples (including wheat, barley, sugar, rice, milk, meat, etc.) and domestic petroleum product prices, accounting for an estimated 34 percent of the average consumption basket. 15 The food subsidies were established in 1989–90 with the intent of protecting the poor following the exchange rate crisis, but resulted in substantial distortions of relative prices and a generalized subsidy system that benefited the rich more than the poor. 16 The impact on the budget was also substantial, with the overall cost of food subsidies amounting to over 3 percent of GDP in 1990. The prices of petroleum products had been regulated even before the crisis, reflecting subsidized crude oil received from neighboring Arab countries. The subsidies on petroleum products covered all industrial and commercial uses.

35. The main goal of government policy was to move away from general subsidies in favor of direct transfers to the poor. 17 This involved a gradual increase in commodity prices that was politically very difficult. Most explicit food subsidies were gradually reduced and eliminated in 1999. In addition, the market for two food staples (chaff and barley) was liberalized in 2002, leaving only a small subsidy on wheat. For petroleum product prices, the authorities adopted a policy of gradual price increases to bring prices in line with international market prices over the long run. This has resulted in a gradual freeing of resources for development needs and poverty alleviation. Overall, only 10–15 percent of the average consumption basket is estimated to be currently still regulated.

36. The gradual phasing out of commodity subsidies enabled the government to increase direct transfers to the poor. Transfers to the National Aid Fund—an autonomous public agency established in 1987 to administer direct transfers to the poor—quadrupled as a share of GDP to reach 1 percent of GDP in 2003. In addition, health and education provisions are being substantially expanded under the authorities’ Plan for Social and Economic Transformation (PSET) and financial support from bilateral donors.

Privatization and improvements in business environment

37. Privatization has been a key element of Jordan’s structural adjustment strategy since mid-1996. Stated objectives of the divestment program have been to enhance economic efficiency, attract domestic and international investment, develop domestic capital markets, and consolidate public finances. Through a combination of strategic sales and public offerings, the program is progressively transferring ownership of virtually all commercial public enterprises to the private sector.

38. The privatization program has benefited from a transparent institutional environment, supported by legislative and regulatory reforms. A higher Ministerial Privatization Committee was formed in 1996 to guide the process, and an Executive Privatization Unit (EPU) was established as the main implementing agency. The arrangement was formalized in 2000 with the enactment of a Privatization Law, which created a Privatization Council chaired by the prime minister, transformed the EPU into the Executive Privatization Commission, and established a Privatization Proceeds Fund. Supporting legislation included, inter alia, the Companies Law (1997), the Stock Exchange Law (1997), the Temporary Electricity Law (2002), as well as various intellectual property rights laws.

39. Asset sales commenced in 1998 and have proceeded apace. A 33 percent stake in Jordan Cement Factories was sold to Lafarge in 1998, and the remaining shares were sold in February 2002. A 40 percent stake in the Jordan Telecommunications Company was sold to a consortium of France Telecom and Arab Bank in 2000, and a further 10.5 percent via an initial public offering (IPO) in October 2002; the IPO was successfully completed at a time of deep geopolitical uncertainty, and attracted 10,000 domestic retail investors. Together with smaller divestments, including a stake in the local oil refinery and some side businesses of Royal Jordanian, total proceeds to date have amounted to about $800 million, equivalent to about 8 percent of 2002 GDP, which compares well with other countries in the MENA region over the same period (Table II.5).

Table II.5.

Privatization Proceeds in Selected MENA Countries, 1998–2002

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Source: Fund staff estimates.

Based on GDP estimates for 2001/02 fiscal year.

40. The privatization program has gone hand in hand with legislative reforms aimed at improving the business environment. Together with the public debt and privatization laws mentioned above, the government has passed legislation in the last two years to accomplish the following objectives: (i) abolish remaining controls on the foreign ownership of property and land; (ii) strengthen the judiciary system and regulatory agencies; (iii) encourage and regulate leasing activities, electronic commerce, and e-government; (iv) streamline the efficiency of government agencies; and (v) strengthen companies’ disclosure requirements. Overall, a large number of economic laws have been revised in the last three years to provide a more conducive regulatory environment for a dynamic private sector.

41. The privatization program and the legislative reforms have increasingly made room for a more dynamic private sector. As summarized in Table II.6, various indicators of regulatory quality, government effectiveness, rule of law, corruption, country risk, competitiveness, and business environment, point to Jordan as one of the highest ranked countries in the region. Once again, however, there is also substantial room for improvement, compared to other emerging markets, particularly in South-East Asia.

Table II.6.

Country Ranking of Selected Indicators of Attractiveness for Foreign Direct Investment

(Percent share of countries with lower score, latest available information)

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Sources: International Monetary Fund (2003), p. 11.

Includes Morocco, Tunisia and Algeria.

Includes Czech Republic, Hungary, and Poland.

Aggregate indicators of governance developed in Kaufmann, D. et al., Governance Matters, Policy Research Paper No. 2196, World Bank, 1999; and database available at, and

Index of Economic Freedom published by the Heritage Foundation and The Wall Street Journal, 2002.

Composite risk ratings by International Country Risk Guide, October 2002.

Aggregate scores of business environment in the Economist Intelligence Unit’s Country Forecast, September 2002.

Growth Competitiveness index published in Competitiveness Report by World Economic Forum, 2002.

Based on results of survey used for the World Bank’s World Development Report 1997 as presented by Brunetti, A. et al., in Institutional Obstacles for Doing Business, Policy Research Paper No. 1759, World Bank, 1997; and database available at\wbi\governance\wdr97data.htm

D. The Challenges Ahead

42. Overall, the substantial policy initiatives implemented over the last decade point to the Jordanian authorities’ determination to excel in economic management in order to overcome a very difficult geopolitical situation. Despite the negative impact of the Palestinian-Israeli conflict on the one hand and the U.N. sanctions and the war in Iraq on the other, the authorities have managed to bring about a structural transformation of the Jordanian economy that is beginning to bear fruit.

43. Notwithstanding the achievements of the last decade, substantial challenges remain to complete the transformation of the Jordanian economy. The first and foremost challenge is to improve the living standard of the average Jordanian. Despite a decade of moderate growth, living standards have yet to return to the level they were at before the exchange rate crisis of 1989, and poverty and unemployment remain stubbornly high in the double digit range. In the short term, the main challenge will be to limit the negative impact of the war in Iraq. Over the medium term, the goal of increasing the sustainable level of economic growth will require: (i) continued policy efforts to maintain macroeconomic stability; (ii) further fiscal consolidation so as to reduce public debt; (iii) the deregulation of the market for domestic petroleum prices; (iv) the privatization of the remaining public entities; and (v) continued improvement in the business environment. These policies, together with a further strengthening of social assistance programs, should make a serious dent in poverty and unemployment.

44. The war in Iraq has so far had a significant negative impact on the Jordanian economy. During the war, bilateral trade with Iraq came to a halt and tourism to Jordan was significantly disrupted. In particular, the flow of subsidized oil from Iraq stopped, implying a significant loss of budgetary grants (3 percent of GDP). The transport sector, which relies heavily on the re-export trade with Iraq, also took a significant hit, with one-third of Jordan’s 11,000 trucks idled by the war. More important, the uncertainty before and during the war led to a slowdown of domestic demand and a significant increase in private sector saving. As a result, real GDP growth slowed to 3.2 percent in 2003, compared to 5 percent the previous year.

45. The financial support of the international community helped withstand the negative shock of the war. Additional external grants in the amount of 7 percent of GDP were used to provide a fiscal stimulus at a time when both external and private sector demand were weak. At the same time, steps were taken to limit the loss of the Iraqi oil grant to the budget through an increase in domestic petroleum prices and other tax increases. These policies were successful in maintaining confidence in the Jordanian dinar.

46. Over the medium term, macroeconomic stability will continue to hinge upon a prudent fiscal policy. With public debt still hovering around 100 percent of GDP, it will be important to continue the process of fiscal consolidation through an effective rationalization of the tax system and a reduction of recurrent expenditure. In this regard, as discussed in Chapter III, the recently implemented pension reform will have a substantial impact over the medium-and long-term, as it is expected to reduce the net present value of pension liabilities by over one-third. More, however, could be done to provide a simple and equitable income tax system, with a larger tax base and fewer income brackets. In addition, an improvement in the geopolitical situation may allow for a “peace dividend” to materialize, in the form of an effective but less costly military infrastructure.

47. With the loss of the Iraqi oil grant, the need for eliminating the remaining petroleum subsidies has become even more pressing. A gradual elimination of the subsidies over the medium term would allow for the elimination of relative price distortions in preparation for the eventual liberalization of the petroleum sector, a commitment to be met by 2008 under the WTO agreements. A partial liberalization could also be implemented beforehand through the divestment of the distribution network for petroleum products. In addition, the freeing of additional resources in the budget could help the fiscal consolidation without jeopardizing priority development spending.

48. The privatization program will continue to be the anchor to attract foreign investment and reduce public debt. The plan for 2003 and beyond is to sell the remaining wholly-owned enterprises to strategic investors, and the remaining government shares in partially-divested enterprises to the public via initial public offerings (IPOs) to encourage ownership and deepen the stock market. Major enterprises to be sold include the phosphate company, the power generation and distribution companies, and the national airline. With an improved geopolitical environment, the privatization program should be able to accelerate in the coming years. This should enable the government to continue reducing public debt with additional privatization proceeds, thus swapping public assets for a reduction in public liabilities. In turn, this will retrench the role of the state in the economy, thereby leaving room for a dynamic private sector to play a more significant role.

49. Finally, further improvements in the business environment will require additional legislative and regulatory changes aimed at reducing further the cost of doing business in Jordan. Deregulation of the domestic transport sector, the establishment of a one-stop shop for foreign investors, and improvements in the effectiveness of government services are just a few examples of regulatory changes that could lower business costs. In addition, the financial system can be brought to play a more active role in financing domestic investment, including by lengthening the maturity structure of its lending portfolio, developing an effective corporate bond market, and providing advisory services for small and medium enterprises.


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Prepared by Ahsan Mansur and Joannes Mongardini.


Qualified industrial zones (QIZs) are industrial estates in Jordan, whose products enjoy special duty-and quota-free access to the U.S. market. This special access was approved by the U.S. Congress in 1996 as an incentive for economic cooperation between Jordan and Israel following the 1994 Peace Agreement. Products produced in the QIZs must have a minimum Jordanian and Israeli input to qualify for special access.


See English (1999) and Boyd, Levine, and Smith (2002).


See Easterly and Fischer (2000) and Romer and Romer (1998).


The IIT index is defined as IIT=i=1n(Xi+Mi)i=1n|XiMi|i=1n(Xi+Mi), where Xi are total exports in product category i and Mi are total imports in product category i. For the theory behind the index of intra-industry trade, see Bhagwati and Davis (1994). For an application to Arab countries, see Havrylyshyn and Kunzel (1997).


The United Nations Comtrade Database is available at


See World Bank (1994, 2001).


See Mankiw, Romer, and Weil (1992) and Bosworth, Collins, and Chen (1995) for an application with three factors of production (human capital, physical capital, and labor force).


The source for data on growth and capital investment is the IMF’s International Finance Statistics database. The capital stock series is derived through an assumption of a constant depreciation factor of 4 percent. Data on labor force participation is published in the World Bank’s World Development Indicators database. Data on human capital is derived from estimates for Jordan published in Barro and Lee (2001). The data was extrapolated for 2001–02 using the same growth rate as in the period 1996–2000.


Cf. page 17. The factor shares are 0.44 for physical capital accumulation, 0.23 for labor force growth, and 0.33 for human capital accumulation.


Estimated on the basis of current weights of the consumer price index.


See Chapter VI for a more detailed discussion on the government’s food subsidy elimination in the 1990s.

Jordan: Selected Issues and Statistical Appendix
Author: International Monetary Fund