Jordan: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
04 May 2004
eISBN:
9781451820317
Language:
English
Keywords:
ISCR; CR; GDP; deficit; debt ratio; GDP Jordan; Jordan; fiscal policy stance; revenue base; potential GDP; GDP effect; Jordan dinar; Fiscal stance; Debt burden; Middle East
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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.

Abstract

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.

III. Fiscal Policy and Structural Transformation of the Jordanian Fiscal Structure18

A. Introduction

50. Faced with growing budget deficits and a high and unsustainable debt burden, Jordan embarked at the start of the 1990s on a fiscal consolidation effort to restore fiscal and public debt sustainability. This task was particularly complicated by the rigidities and imbalances in the structure of the fiscal system. The revenue base was heavily reliant on trade taxes whose potential was diminishing with trade liberalization. The structure of Jordan’s public expenditure was also rigid with limited scope for discretionary outlays, as interest and other statutory transfers comprised over two-thirds of overall expenditure. High population growth rates and a growing incidence of poverty and unemployment were also exerting pressures on social spending. Depressed real economic growth, partly resulting from the debt overhang and persistent balance of payments pressures, also complicated fiscal consolidation.

51. This chapter 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, the fiscal deficit (including grants) has been maintained at a broadly sustainable range and the debt burden is declining rapidly toward sustainable levels. Using a simple growth accounting framework, this chapter also identifies the factors and policies that contributed to Jordan’s progress toward fiscal sustainability. It examines how diversifying the revenue base away from trade-related taxes in favor of consumption-based taxes helped overcome the challenges posed by trade liberalization and other structural reforms. In addition, it shows how a conservative debt management strategy and the reform of the government assistance programs helped to improve the composition and flexibility of government spending. Finally, it reviews how progress toward fiscal sustainability has reduced the volatility in economic activity and contributed to short-term macroeconomic management.

B. Fiscal Consolidation in Domestic and International Contexts, 1991–01

52. A number of structural weakness posed serious challenges to the adjustment efforts over the course of the 1990s. Various features of the fiscal system in Jordan in the early 1990s made budget revenue and expenditure inflexible. Although high, budget revenues in the early 1990s were inelastic and volatile owing to the dependence on nontax revenues and grants. Moreover, the high share of trade-related taxes and transfers from state-owned enterprises in the revenue base meant that efforts to open the economy to international trade and domestic markets to private competition would have negative consequences for revenue. Expenditures were also rigid, leaving little scope for expenditure savings. Interest costs alone comprised almost one-quarter of total expenditures, with other statutory transfers for wages and salaries, pensions, and military comprising another one-third. The heavy reliance on grants also added to fiscal vulnerability. In addition, weak economic growth during most of the 1990s and the increasing share of the population living in poverty increased pressures for additional spending.

53. Against this background, fiscal policy in Jordan moved away during the 1990s from the rising debt burden and the large and volatile budget deficits that characterized its fiscal stance in the 1980s. The 1989 balance of payments crises imposed a heavy burden on Jordan’s public finances. Net central government debt had risen sharply due to the devaluation of the Jordan dinar, as well a combination expansionary fiscal policy and a slowdown in economic growth. For the period 1990–2001, Jordan succeeded in limiting the fiscal deficit to an average of 4.1 percent of GDP and a primary surplus of more than 2 percent of GDP. Reflecting the fiscal consolidation, special debt operations (such as debt buyback, debt swaps, and debt forgiveness), and saving of most privatization proceeds, net central government debt ratio declined to 97.4 percent of GDP in 2001. 19 Notwithstanding these gains, fiscal policy during the period experienced a number of shocks and positive developments, leading to wide variations in performance over different sub-periods. Based on fiscal performance, the 12-year period can be divided into three sub-periods: (a) an initial period (1990–91), characterized by the post-1989 balance of payments shock and the 1991 Gulf war; (b) followed by a period (1992–95) of rapid economic growth and strong fiscal consolidation lending to a substantial reduction in public debt; and (c) a period of continued fiscal consolidation (1996–2001), albeit at a slower pace in an environment of slower economic growth.

54. The initial phase (1990–91): The Gulf war severely disrupted adjustment efforts and highlighted the weaknesses in the fiscal system during the early 1990s. The collapse in trade and a sharp decline in external grants inflows underscored the budget’s dependence on trade taxes and other revenues which were highly susceptible to external shocks. The rigid structure of expenditures also meant that the extra outlays needed to absorb the inflow of expatriate workers and additional security-related outlays could not be offset through savings, causing total expenditure to rise. As a result there was significant widening of the overall deficit and a marked deterioration in the current balance and government savings by end-1991 (see Table III.1). In addition, the collapse in trade with Iraq due to the war led to a significant slowdown in economic growth and the proportion of the population living in poverty rose to 14.4 percent by 1992 from only 3 percent at the end of the 1980s creating extra pressures on the budget.

Table III.1:

Jordan: Summary Indicators of Fiscal Policy 1/

(In percent of GDP)

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Source: Fund staff calculations.

All balances include expenditure through off-budget accounts.

Positive sign indicates improvement.

For debt burden, relative to 1988–1989.

Year-on-year growth in percent.

2001 minus 1990.

Average of 11 year-on-year changes, 1990–2001.

55. The middle phase of rapid adjustment (1992–95): Aided by the boom following the end of the Gulf war, fiscal policy underwent a large adjustment starting in 1992 leading to a substantial reduction in the debt burden. Budgetary revenue peaked at a high of 34 percent of GDP in 1992 as imports surged in the post-war construction boom and temporary taxes were imposed on returning migrant workers. Pressures on expenditure also eased as growth surged and the reduction in the debt burden brought extra relief through lower interest payments. As a result the overall central government deficit moved close to balance in 1992. For the first time, budgetary revenue (excluding grants) covered total current expenditure. This improvement was largely sustained until 1995. With both the primary balance and government savings rates averaging about 5 percent of GDP over this period, significant inroads were made toward addressing debt sustainability and the debt burden of the central government fell sharply. 20 However, many of the factors underpinning the improvement in fiscal indicators over this period were transient. The temporary taxes that boosted collections during this period did little to enhance revenue buoyancy which continued to be eroded by trade liberalization and tax incentives. And while declining interest payments contributed to enhancing fiscal flexibility, part of this gain was being eroded by the rising cost of the pension system.

56. The recent (third phase) of slower adjustment (1996–2001): With economic growth slowing down, budget rigidities began to pose greater challenges to the adjustment effort. A combination of declining revenue collections and rigid expenditures caused the overall deficit to widen since 1996. A combination of declining revenue, partly associated with the reform of the trade system, and continued rigidities on the expenditure side (including rapidly growing pension liabilities), widened the overall fiscal deficit for the period 1996–2001 significantly to about 4 percent of GDP (Figure III.1). The primary balance, current balance, and government savings also deteriorated in tandem, although all of them on average remained in surplus. Despite the moderate deterioration in aggregate fiscal indicators, the debt burden continued to decline, although at a slower pace, reflecting the continued cautious debt management strategy and the global decline in interest rates. Jordan also intensified its debt reduction strategy through “below-the-line” operations such as privatization, debt buyback, and debt swaps. At this phase, Jordan’s fiscal management also moved to a more matured and stable stage, as shown by the decline the annual volatility of the overall and primary fiscal balances.

Figure III.1.
Figure III.1.

Jordan: Indicators of Fiscal Deficit 1990–2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

Source: Fund staff calculations.

57. The progress Jordan made over the 1990s in addressing the challenge of fiscal sustainability stands out in an international context. The majority of emerging market countries saw their debt burden rise over the last decade due in part to the financial crises in Asia (see Figure III.2). Although Jordan’s debt burden at the start of the 1990s was significantly above that of other emerging market economies, by end-2001, Jordan succeeded in bringing it closer to the average of other emerging market economies. The debt service burden in Jordan also declined significantly and is now below that of many emerging market economies.

Figure III.2.
Figure III.2.

Jordan: International Trends in Debt Service Burdens, 1990 and 2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

Source: Government Finance Statistics, WEO and Fund staff estimates.1/ For Jordan, debt equals net central government debt and guarantees, including autonomous budget agencies and collateralized bonds at face value.

58. Jordan’s goal of fiscal sustainability also dictated the need for a more conservative fiscal stance than what was evident in other economies of similar income levels (see Table III.2). As Jordan began to address its debt sustainability problem, it was able to reduce the primary deficit over the course of the 1990s from just over 4 percent of GDP in 1991 to about 1 percent of GDP by end-2002. In contrast, the average primary balance in countries across the region rose by almost 4½ percentage points of GDP. Relative to the emerging market economies which typically had lower debt burdens, the priority afforded to debt sustainability meant that Jordan had to run higher primary and current balances, and achieve a higher level of government savings. It also meant that the scope to loosen fiscal policy at times when world economic activity was slowing was generally more limited.

Table III.2.

International Comparison: Summary Indicators of Fiscal Policy, 1990–2001 1/

(In percent of GDP)

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Source: Fund staff calculations.

All balances include expenditure through off-budget accounts.

Data on primary balance only available from 1993–2001.

Data on primary balance only available from 1991–2001.

59. Jordan’s fiscal system still remains less buoyant and more inflexible than that of most other countries. Reflecting the trend in other economies, the tax system in Jordan has become increasingly more orientated toward consumption-based taxes over the course of the 1990s (see Figure III.3). Nevertheless, Jordan’s revenue base is still more reliant on trade related taxes and nontax revenue sources than other countries, leaving its fiscal system less buoyant and more vulnerable to external shocks. On the expenditure side, the absence of international data with respect to statutory and discretionary spending makes it difficult to assess how the transformation in the composition of government spending in Jordan compares internationally. Using the share of capital spending to proxy discretionary spending, it appears that Jordan, like many other countries gained little in terms of additional flexibility. However, the fact that Jordan was able to protect capital spending during a period of prolonged fiscal consolidation and despite a rapid growth in pension outlays, indicates its relative prowess in reducing the debt service cost. Furthermore, despite the rise in poverty levels during the 1990s, the level of poverty in Jordan still remains well below that of other countries at similar incomes, suggesting that government spending may be more effectively targeted.

Figure III.3.
Figure III.3.

Jordan: Budget Structure Across Central Governments, 1990–2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

Sources: GFS and Fund staff calculations.1/ Social security contributions plus taxes on payroll and manpower plus taxes on property

C. The Challenge of Debt Sustainability

60. Jordan made significant strides in addressing the high burden of public and publicly guaranteed debt over the past decade. 21 By end-2001, the overall net public debt burden had fallen from 1992 by almost 50 percentage points of GDP to close to 100 percent of GDP. A simple growth accounting framework identifies the relative role of various “debt-creating” and “debt-reducing” factors in reducing Jordan’s debt levels (see Table III.3). The major debtcreating elements for the central government include: (i) the overall central government fiscal deficit,22 (ii) the central government’s onlending to public entities, and (iii) the assumption of debt by the central government from other public entities. The debt-reducing factors include: (i) the effect of nominal GDP growth on the debt ratio; (ii) privatization proceeds used to retire debt; (iii) debt reduction operations, including Brady Bond buybacks, debt-for-development swaps, and debt forgiveness; (iv) valuation adjustments stemming from exchange rate movements; and (v) a residual factor for debt operations not captured in the above components or in the available data.

Table III.3.

Jordan: Public Debt Dynamics, 1992–2001

(In millions of Jordanian dinar)

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Sources: Fund staff estimates based on data provided by the Ministry of Finance and the Central Bank of Jordan.

The GDP effect is calculated relative to stock of debt in 1992; for all other components, changes are relative to 2001 GDP.

Official data for external public debt, including collateralized Brady bonds at face value (BOP values collateralized bonds at market rates).

Reflects various factors, including debt reduction operations not captured in the data, incomplete data on onlending and debt assumptions, and exchange rate effects not captured by estimates.

61. Economic growth, aided by a policy of prudent debt management and privatization, was the most important factor in addressing the challenge of debt sustainability. Growth in economic activity helped reduce the net public debt-to-GDP ratio by two-thirds, as nominal growth rates exceeded the average real interest rate by about 4 percentage points. Jordan also pursued a prudent debt management strategy by refraining from short-term and commercial borrowing, relying instead on lower cost multilateral debt and official bilateral grants. To address potential rollover problems and the associated financing gap, it actively utilized numerous debt rescheduling arrangements with the Paris Club and commercial creditors. Special debt reduction operations (debt swaps, Brady buybacks, stock of debt operations and other unidentified operations) combined with the policy of devoting privatization receipts to debt reduction contributed 22½ percentage points in relation to GDP to the overall decline. The valuation effect, stemming from exchange rate movements, recorded significant year-to-year volatility depending on the relative strength of the dollar vis-à-vis the euro, the yen, and the SDR. However, over the period, exchange rate effects contributed only 3½ percent to the overall reduction in the debt ratio.

62. Fiscal policy also played an important role. On a cumulative basis, fiscal deficits, onlending to public enterprises and the assumption of new debt in 2000 and 2001 contributed 41¼ percent of GDP to the public debt over the last decade. For most of this period, fiscal policy was tighter than what was needed to hold the debt burden constant. As a result, fiscal policy contributed to reducing the debt burden in relation to GDP, despite running an overall deficit. Figure III.4 compares the actual primary balance during the 1990s with the level of primary balance needed to hold the net debt ratio constant, given the actual rates of inflation and the effective interest rate on public debt. 23 Jordan maintained substantial primary surpluses that exceeded the level of the sustainable primary balance by large margins for much of this period. The primary balance began to decline after 1997, but remained above that needed to stabilize the debt burden in terms of GDP throughout this period except in one year (2000). However, from 1999, the fiscal stance was able to accommodate this lower primary balance without compromising the ongoing decline in the debt-to-GDP ratio owing to the substantial privatization receipts and debt for development swaps realized since the late 1990s.

Figure III.4:
Figure III.4:

Jordan: Actual and Debt Stabilizing Primary Fiscal Balances, 1993–2001

Primary surpluses contributed to rapid debt reduction.

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

63. Despite these significant advances, Jordan’s debt stock remains large. Reducing the debt ratio to a level comparable with international and comparators would require maintaining primary surpluses over the medium term. Jordan’s debt dynamics also remains vulnerable to exchange rate movements, as shown by the recent uptick in overall indebtedness at end-2002. The literature offers various concepts to evaluate sustainability of the recent fiscal policy. Simply defined, fiscal policy can be viewed as sustainable if it can be maintained indefinitely without leading the government into insolvency. In other words, solvency of the government requires a medium-term framework whereby primary surpluses can finance interest costs, given growth, inflation, and exchange rate assumptions. In the theoretical literature, this concept of fiscal sustainability is usually assessed using the long-run solvency criterion which assesses whether fiscal policy leads to a balanced budget in present value terms or results in an explosive debt accumulation. 24 The criterion implies that the current stock of debt must be offset by the net present value of future budget surpluses. However, from a practical perspective, the long-run solvency criterion has clear limitations. In particular, sometimes fiscal policy stances that are clearly unsustainable can satisfy the long-run solvency criterion while others do not. For example, Chalk and Hemming (2000) explain that the criterion implies that a government cannot run a small primary deficit followed by a primary balance thereafter, while a permanent overall deficit can be sustainable.

64. Simple numerical indicators, not backed by a formal definition of sustainability, can help determine if current fiscal policy is consistent with a minimum concept of debt sustainability where the debt burden remains constant. 25 This paper uses the indicators developed by Blanchard (1990) to assess whether current fiscal policy in Jordan is sufficient to prevent the debt burden from rising. The first, the primary gap indicator, shows the difference between the current level of the primary deficit/surplus and the deficit/surplus needed to maintain a constant debt-to-GDP ratio. 26 The second, the tax gap indicator shows the difference between the current tax-to-GDP ratio and that which is needed to hold the debt stock constant given current spending policies. While both indicators give the same result their emphasis is slightly different. The former shows the reduction in the primary deficit required for debt sustainability while the latter indicates the increase in the tax ratio required for sustainability given current spending levels.

65. These indicators show that Jordan’s current fiscal policy is consistent with this minimum notion of debt sustainability at current levels of economic growth and real interest rates. The primary balances and tax gaps shown in Table III.4 are positively correlated with the gap between growth and real interest rates. The higher the real interest rate and the lower real growth the larger the primary surplus or tax effort needed to stabilize the debt burden. However, should economic growth be lower or real interest rates higher, additional fiscal adjustment would be needed to stabilize the debt burden.

Table III.4.

Jordan: Fiscal Sustainability Indicators 1/

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Source: Fund staff calculations.

Takes stock of gross debt of 101.3 percent of GDP at end-2001. A negative value implies a primary deficit.

Difference between primary surplus needed to stabilize the gross debt burden and the 2002 primary deficit. A negative value signal that adjustment in current policies is needed.

Difference tax-to-GDP ratio needed to stabilized domestic debt and projected 2002 tax-to-GDP ratio. A negative value signal that adjustment in current policies is needed.

D. The Challenges Posed by Budget Structure

66. Over the last decade, the structure of the budget in Jordan underwent substantial reform as part of the effort to achieve debt sustainability. To bring the deficit to levels consistent with debt sustainability, one would expect the adjustment efforts to focus primarily on generating expenditure savings given the already high revenue ratio in Jordan. Yet the large share of statutory spending meant that there was little scope for expenditure cuts. Jordan’s development needs and increasing incidence of poverty also placed additional demands on government spending. The remainder of this section reviews how the fiscal system in Jordan adapted to these various challenges.

Reform of the revenue system

67. Heavy reliance on nontax revenue and trade-based revenue sources rendered the revenue system both inelastic and vulnerable to external shocks. In the early 1990s, nontax revenues comprised about half of total domestic revenue, and trade-related taxes accounted for about 16¾ percent of domestic revenues. Jordan’s dependence on nontax revenue was one of the highest among the non-oil producing, low-middle income countries. Nontax receipts are generally inelastic, as many of these sources reflect charges for government services that are often rendered at less than cost and whose demand is not very responsive to economic growth. In addition, in the case of Jordan, these revenues were also a considerable source of volatility for the budget owing to the operation of the oil surplus. 27 The system of administered petroleum prices has meant that any unwillingness to pass on increases in world prices to domestic petroleum product prices generated substantial revenue loss and volatility as the implicit system of excises adjusted to offset the increase in import costs. The reliance on trade-related taxes increasingly limited the buoyancy of the tax system as the structure of production in Jordan shifted toward export orientated sectors with the opening of trade. And, although external grant flows have been a relatively stable revenue source for the budget, they have declined substantially in the aftermath of the Gulf war. 28

68. Trade liberalization and privatization also placed considerable pressures on domestic revenues over the last decade. Jordan has been engaged in a steady program of trade liberalization starting from the early 1990s (see (Box III.1). From their peak in 1992, trade related tax receipts have fallen by almost 6 percentage points of GDP accounting for 3 quarters of the overall decline in domestic revenue ratio. The privatization process also generated pressures as the government lost the ability to earn revenue from state-owned enterprises. Since 1992, transfers from state-owned enterprises have declined by over 2 percentage points of GDP. 29

Trade Reform in the 1990s

The ambitious agenda to liberalize trade which began at the end of the 1980s implied substantial changes in the customs tariffs regime. The major steps taken over the course of the 1990s to reduce protection and taxes on trade include the following:

  • Between 1989 and 1992, reducing the maximum tariff rate from more than 300 percent to 50 percent and lowering the weighted average tariff from 34.4 percent in 1987 to 25 percent in 1994.

  • In 1994, the maximum ad valorem equivalent customs duty was reduced to 50 percent, as were customs tariffs on the transportation sector. The tariff rates on new and used cars were lowered from 125–320 percent to 70–200 percent and from 115–310 percent to 50–150 percent, respectively. Duties on spare parts were cut from 30 percent to 10 percent.

  • In January 1996, the maximum import tariff (including charges was reduced from 70 percent to 50 percent.

  • In conjunction with the broadening of the GST (General Sales Tax) base, the maximum tariff was reduced from 40 percent to 35 percent in 1999 and tariffs on industrial inputs were lowered to 10 percent.

  • In 2001, the tariffs on industrial inputs were reduced to 3 percent and then eliminated in 2002.

  • Reflecting the changes in the tariff rate, in line with the opening up of the economy under various bilateral and regional trade initiatives, the average effective tariff rate declined to 14.9 percent by 2001.

69. In response to these challenges, Jordan embarked on a number of initiatives to diversify its revenue base. The government introduced a general sales tax (GST) in 1994 (see (Box III.2). As a tax on consumption, the GST was also more broadly based and had greater buoyancy. Important steps were also taken in reforming the system of excises. The special sales tax (SST) was introduced at the same time as the GST, streamlining the earlier system of excises that had in some instances discriminated between domestically produced products and import goods. Notwithstanding some reduction in SST rates on certain goods in recent years,30 it remains an important revenue source, representing about 40 percent of taxes on domestic transactions (excluding additional taxes). As a result of the shift in the structure of the tax base away from nontax revenue sources in favor of tax revenue, and within the tax base from external to consumption based taxes (Figure III.5), Jordan succeeded in sustaining its revenue ratio at relatively high levels. In addition, the domestic revenue base has also become more stable as the share of tax revenue rose, presumably reflecting the gains from the diversification of the revenue portfolio. 31

Figure III.5.
Figure III.5.

Jordan: Changing Strucutre of the Tax Base Strucuture, 1990-2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

Source: IMF staff Calculations; Minstry of Finance.

70. Despite these efforts, the revenue system in Jordan still remains unbalanced and inelastic. Notwithstanding the expansion of consumption taxes, the domestic revenue system is still very inelastic and unresponsive to economic growth (see Table III.5). With nontax revenues still comprising over one-third of domestic collections and their elasticity negatively affected by structural reforms, the overall buoyancy of the revenue system has been compressed. In addition, the tax system has not exploited the potential for direct income taxation and a relatively extensive system of tax privileges (tax holidays, exemptions, sectoral and regional preferences) undermines the buoyancy of both direct and indirect tax sources. At about 3 percent of GDP, the contribution of direct taxes to the overall tax base is relatively low by international standards and has diminished over the 1990s in tandem with the decline in corporate tax collections. Although various reforms were made in the 1990s,32 personal income tax revenue suffered owing to exclusion of various forms of income including interest, dividends, and capital gains. The system of personal deductions is also generous.

Table III.5.

Jordan: Revenue Performance Through the 1990s

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Source: Fund Staff Calculations.

Includes excises (special sales taxes).

Milestones in the Move to a Consumption-Based Tax System

Efforts started in the early 1990s to extend the coverage of consumption taxes culminated in the introduction of the General Sales Tax (GST) and Special Sales Taxes (SST) Law in June 1994. The GST includes many of the basic features of a value added tax while SST is effectively a form of excise tax. The introduction and expansion of the GST base has raised the buoyancy of domestic consumption taxes from an average level of just under 0.8 in the early 1990s to 1.7 between 1996 and 2001. Revenues from GST and SST now amounts to 8.5 percent of GDP up from 3.3 percent of GDP in 1990.

At the time of its introduction, GST was applied only at the import and manufacturing levels and to certain services at a standard rate of 7 percent. Since 1994 various reforms have focused on improving the functioning of the GST and bringing it in line with a standard value-added tax. The September 1995 GST reform introduced tax rebates for exempted exports and a positive list of services subject to GST tax credits. The standard GST rate was also raised to 10 percent at the same time. In 1996, a separate GST directorate was created to administer the GST, while in 1997, exemptions for public enterprises were eliminated. Following these first-round reforms, receipts from consumption taxes rose to 6.3 percent of GDP in 1996 from 4½ percent of GDP in 1993. This gave a significant boost to the buoyancy of domestic taxes (see Table III.5).

The second round of reforms aiming to convert the GST into a full-fledged VAT began in 1999. Following the increase in the standard GST rate to the current rate of 13 percent in June 1999 and steps to widen the tax base,1 the GST was extended to sale of goods at the retail level by businesses with sales above JD 250,000 and to a broader range of services. In 2002, the GST law was again amended to reduce the incidence of zero-rating and exemptions by imposing the GST on essential consumer and zero-rated goods (other than exports) at a new low rate of 2 percent. The lower GST rate has been increased to 4 percent in June 2003.

E. Reform of Expenditure Policy

71. To address the large fiscal deficits and debt burden, expenditures in Jordan had to undergo a dramatic consolidation and change in composition. The pressures associated with the Gulf war had pushed spending to almost 50 percent of GDP. However, the scope to find savings was limited by the rigidity of the structure of expenditure. Since 1992, total central government spending (including spending through off-budget accounts) has fallen 3.2 percent of GDP to an average level of about 34½ percent of GDP. This adjustment was primarily attributable to savings on current outlays. In particular, a prudent debt management policy generated substantial reduction in the foreign interest burden. Subsidies were gradually phased out over the 1990s starting with the elimination of the net fuel subsidy and maize subsidy in 1992. 33 However, a large part of the overall savings were offset by the rising deficits on the civil and military pension systems. At the end of the 1990s, capital spending was close to its level in the early 1990s partly because of deliberate efforts to protect such outlays despite growing pressures from other sources. Nevertheless, it appears that the capital budget helped smooth year-to-year fluctuations in revenue inflows (see Figure III.6), especially toward the end of this period.

Figure III.6:
Figure III.6:

Jordan: Year-on-Year Changes in Total, Current, and Capital Expenditure 1991–2000

(In percent)

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

72. The government also worked to improve the quality of government spending, notwithstanding the reduction in overall expenditures. By replacing indirect transfers with direct transfers to poor families under the National Aid Fund (NAF), the government was better able to target its social program despite the shrinking budget envelope. Currently, assistance administered through the programs of the National Aid Fund amounts to about 1 percent of GDP. Total spending on health, education and social programs amounts to about 27 percent of total government expenditures (or 9.7 percent of 2001 GDP).

73. Despite substantial savings on interest and subsidy outlays, the composition of government spending remains rigid, with no progress being made in certain areas. The current budget has become increasingly inflexible over the 1990s. By end-2001, the share of wages and salaries for civil administration (18 percent of total outlays, excluding transactions on off budget accounts), pensions (14 percent), military outlays (26 percent), and interest payments (13 percent) increased to 83 percent of the current budget, up from 64 percent in 1992. Although savings on interest and indirect subsidies created room for a large increase in transfers, the share of total expenditures devoted to military and wage outlays also rose over the period (Figure III.7). Several factors have exerted mounting pressure on the structure of expenditure. Generous pension benefits and demographic factors have made the pension system—with pension outlays growing at almost 10 percent in real terms a year—increasingly burdensome. A difficult regional security environment has also limited the scope for a significant reduction in on-budget military outlays and military spending continues to exceed that in many other emerging market economies in more stable regions (see Figure III.8). The very high proportion of foreign debt to total public debt (about 80 percent) also limited the scope for recouping some of the interest payments in the form of taxation of domestic interest income (from banks and households), and indirectly through higher absorption resulting from the interest income of residents.

Figure III.7.
Figure III.7.

Jordan: Composition of Current Expenditure, 1990-2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

Figure III.8:
Figure III.8:

Jordan: Military Spending

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

The challenge of smoothing economic volatility

74. The objective of achieving debt sustainability had also to be balanced with the need to smooth the large shocks to economic activity that occurred during the 1990s. Economic activity in Jordan was extremely volatile during the 1990s reflecting the impact of several shocks (see Figure III.9). 34 During the Gulf war, per capita income fell sharply. In the post Gulf war boom, real GDP growth surged allowing real GDP per capita to rise by an average of 4.2 percent per annum between 1992 and 1995. The real growth rate has since decelerated to an average level of 3.6 percent per annum despite the substantial progress made toward macroeconomic stability. In a standard Keynesian world, fiscal policy can help smooth these fluctuations by expanding in economic downturns, and tightening during upturns. Figure III.9 shows that Jordan’s overall fiscal deficit during the downturns in economic activity—associated with the Gulf war and the end of the post-war boom—were indeed accompanied by a widening of the overall fiscal deficit. However, this observed relationship could be a reflection of the automatic response of fiscal policy to the decline in economic activity rather than discretionary policy efforts to stimulate economic demand. The remainder of this section takes a closer look at the evolution of the overall deficit to disentangle the automatic policy actions from the discretionary ones in order to determine whether deliberate efforts were made to influence aggregate demand through fiscal policy at times of economic fluctuations.

Figure III.9.
Figure III.9.

Jordan: Economic growth and fiscal policy, 1990–2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

Sources: MOF and IMF Staff calculations.

75. The overall balance is decomposed to isolate the impact cyclical fluctuations in economic activity from other structural factors and discretionary policy actions. 35 The overall balance (Bt) in year t thus comprises four major components as follows:

Bt=(ta−ga)⁢Y⁢Pt+ta⁢(Yt−Y⁢Pt)+D⁢P⁢Bt−rt⁢Dt−1

The first term on the right-hand side of this equation represents the structural component of overall balance, that is, what the deficit would be if the economy were operating at its full potential. The second term captures the cyclical component of the deficit that reflects the deviation of actual economic activity from its potential. The third term (DPBt) is the discretionary primary balance reflecting the net value of annual discretionary revenue and noninterest expenditure measures, and the final term is the interest bill. Thus the stance of fiscal policy could be described as expansionary relative to the average between 1990–2001, if the actual budget deficit in a particular year t, is greater than the cyclically adjusted deficit.

76. The objective of debt sustainability left little scope for discretionary fiscal policy for much of the 1990s. Fiscal policy consistently maintained a primary structural surplus of about 2.1 percent of GDP (see Table III.6). By aiming for the average annual primary surplus well above the average cyclical surplus of ½ percent of GDP, a conscious decision also appears to have been made to offset the operation of automatic stabilizers during economic downturns to aim for a more ambitious adjustment effort. This is not surprising given the share of expenditure devoted to interest costs, an average of 6.2 percent of GDP per annum, exceeded the average annual level of the deficit. Jordan’s experience in this regard reflects that of many other countries facing high debt burdens. In a cross section of emerging and developing countries, Hemming and others (2002) find that the scope for countries with high debt burdens to pursue expansionary fiscal policy in economic downturns was limited.

Table III.6:

Jordan—Estimates of Fiscal Impulse

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Source: IMF staff estimates.

Assuming potential GDP is equal to the average nominal growth rate observed between 1990–2001 of 8.4 percent. Potential output in 2001 is such that the sum of the output gaps over the period is equal to zero.

Overall fiscal balance, including grants as part of revenue, and transactions through off-budget accounts.

77. As the lower debt burden began to yield savings on debt service in the late 1990s, the scope for discretionary fiscal action improved. As economic growth fell significantly below its potential from 1998, the average annual deficit widened by about 2¾ percentage points of GDP and the primary surplus fell by 3.8 percent of GDP relative to the average maintained during 1992 and 1997. However, just less than 40 percent of the reduction of the primary surplus reflected the automatic response of fiscal policy to the slowdown in economic activity. The bulk reflected the impact of discretionary fiscal measures, especially in 1998.

78. The effectiveness of fiscal policy in smoothing economic volatility and supporting output over the 1990s may also have been constrained by transmission lags which make fiscal policy in Jordan pro-cyclical. Talvi and Végh (2000) found that revenue and government spending in Jordan and other developing countries were positively correlated with movements in output rather than moving in a countercyclical fashion. 36 Figure III.10 illustrates the co-movement of the relationship between the primary balance and the output gap, which became more highly correlated after 1993. It also compares the demand impact of fiscal policy in Jordan as measured by the weighted budget balance with the actual annual fiscal impulse. 37 Although fiscal policy turned expansionary in the periods 1993–94, 1997–98, and again in 2000, in most instances the impact on aggregate demand was felt with a lag of about a year and was smaller than the original impulse. In addition, the impact of such a stimulus appeared to have diminished from the mid-1990s.

Figure III.10.
Figure III.10.

Jordan: Macreconomic Impact of Fiscal Policy, 1990–2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A003

Source: Fund staff calculations.

F. Conclusion

79. Throughout the 1990s, fiscal policy has been dominated by the need to target large fiscal primary surpluses to reduce the debt burden from unsustainable levels. Aided by a conservative debt management strategy, this policy has been largely successful. The debt burden has declined substantially from the peak of the late 1980s. This reduction was achieved despite somewhat higher overall fiscal deficits which, in part, reflected the negative impact of structural reforms such as trade liberalization and privatization on tax revenues and rigidities in budget expenditure. The easing in the debt burden has begun to yield substantial dividends in terms of lower debt service costs allowing for a gradual relaxation of the fiscal stance and the primary adjustment effort while still allowing for the debt burden to decline. The reduction in debt service costs and the replacement of indirect commodity subsidies with direct income transfers also created room for the government to improve the quality and effectiveness of public expenditure despite the on-going consolidation effort.

80. Looking ahead, Jordan’s debt burden although high, appears consistent with debt sustainability and further reductions in the debt burden should be within the government’s control. The government has established a revised medium-term goal for debt reduction under the revised Public Debt Management Law (2001). The law requires the total public debt stock to fall to 80 percent of GDP, and the external public debt stock to 60 percent of GDP by end-2006. 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. However, maintaining the current stance of fiscal policy assumes that the government can continue to run a primary balance over the next five years. This will not be an easy task. Underlying structural characteristics of the budget system will require substantial reform if the stance of fiscal policy is not to deteriorate. A broad-based consolidation effort will be needed to reverse the secular decline in tax revenues and the underlying rigidities in government spending. 38 The new Public Debt Management Law formally signals the government’s commitment to the goal of debt sustainability and the consolidation efforts needed to underpin it. The challenge now is to sustain and broaden the reform momentum.

ANNEX I Derivation of Primary Gap Indicators

The primary gap indicator is based on the primary deficit necessary to stabilize the debt ratio. The latter is given by:

d¯=(nt−rt)⁢bt,

where bt=BtYt is the target ratio of debt to GDP, nt is the real gowth rate and rt is the real

interest rate. Thus the primary gap indicator is:

d¯−dt=(nt−rt)⁢bt−dt,

where a negative value implies that the current level of the primary balance is too large to stabilize the debt burden and that fiscal policy is unsustainable. Similarly, the tax gap indicator is based on the tax-to-GDP ratio necessary to reduce the debt ratio to a target level. This is given by:

t¯=gt−(nt−rt)⁢bt,

where gt is the ratio of government noninterest spending to GDP. Thus the tax gap indicator is:

tt−t¯=tt+(nt−rt)bt−gt.

Again, a negative value for this indicator implies that current taxes are too low to stabilize the debt to GDP ratio at bt the target rate.

ANNEX II Methodology for Estimating the Cyclically Adjusted Fiscal Balance

The purpose of this annex is to describe the methodology used to assess the interrelationship between fiscal policy and growth. In particular the methodology makes a distinction between changes in government revenue and expenditure that are associated with cyclical fluctuations in economic growth and the changes that reflect policy changes. The analysis constructs a normative measure of fiscal policy by assessing how the actual fiscal deficit compares to a cyclically neutral deficit that is derived by assuming that revenues and expenditure are unit elastic with respect to growth.

We estimate the normative value of the deficit in any particular year using the average values in lieu of taking the normal base year approach. In the absence of reliable proxies, such as the unemployment rate, potential output (YPt) is assumed to grow at a constant rate equal to the average nominal growth rate observed between 1990 and 2001, 8.4 percent. The initial level of potential output is adjusted iteratively in such a way that the sum of the difference between potential and actual GDP growth (Yt) between 1990 and 2001 is zero. The starting point of the analysis is that the budget balance can be decomposed into two parts, the primary balance and interest payments.

Bt=P⁢Bt−rt−Dt−1,

where Bt, is the overall budget deficit, PBt is the primary balance, rt is the effective nominal interest rate and Dt is the public debt, all in period t.

The primary balance decomposes into total revenue and total primary expenditure

P⁢Bt=Tt−Et,

where Tt is the overall revenue ratio, including grants and Et is total primary expenditure, including expenditure through off-budget accounts, all in period t. Tax revenue can be decomposed into three components, structural, cyclical, and discretionary components. Absent discretionary tax measures, tax revenue is a function of observed output and the average tax ratio. To isolate the structural component from the cyclical effect, potential output is substituted for actual output to determine structural tax revenue and the difference is the cyclical effect.

Tt=ta⁢Y⁢Pt+ta⁢(Yt−Y⁢Pt)+I⁢Tt,

where ta is the average revenue to GDP ratio between 1990 and 2001 (33.3 percent) and ITt is discretionary tax revenue in year t. Primary expenditure is decomposed in a similar way, as a function of potential output and the average expenditure ratio with the exception that there is no cyclical impact, which is not an unrealistic assumption in the case of Jordan, given the absence of unemployment insurance.

Et=ga⁢Y⁢Pt−I⁢Et,

where IEt is discretionary primary expenditure in period t.

Substituting these variables into the original equation leads to

Bt=(ta−ga)YPt+ta(Yt−YPt)+IBt+rtDt−1,

where IBt is the discretionary primary balance.

Following Chand (1992), the annual primary fiscal impulse to aggregated demand used in Section V is given by:

F⁢I=(Δ⁢E−ga⁢Δ⁢Y⁢P)−(Δ⁢T−ta⁢Δ⁢Y),

where Δ denotes first differences.

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18

Prepared by Ahsan Mansur and Catriona Purfield.

19

Net central government debt and guarantees, including the debt of autonomous budget agencies and collateralized Brady bonds (net of the market value of the collateral).

20

To permit international comparisons, this section reports the total net debt burden of the central government including guarantees. The debt data reported in the subsequent sections covers the broader public sector.

21

This includes government-guaranteed debt and public sector debt. Domestic debt is net of government deposits with the banking system. External debt includes collateralized Brady bonds (net of the market value of the collateral). This is a broader definition than that used in Section I.

22

Measured from below-the-line financing data.

23

The required minimum primary surplus is given by:

p=((i−π−g)d−π−gυ)

where (i–π) is the real interest rate, d is the ratio of net debt to GDP at which the level of public debt is stabilized, g is the real growth rate, and v is the velocity of base money (nominal GDP divided by base money).

25

For example, Goldsbrough and others (1996) calculate how the level of primary balance deviates from that which would be consistent with maintaining a constant public debt-to-GDP ratio in the context of low inflation and no financial repression. Buiter (1985) constructs a sustainability indicator that estimates the permanent adjustment in the primary balance needed to maintain the ratio of public sector net worth to output constant.

26

See Annex 1 for a more detailed explanation.

27

The standard deviation of nontax revenue sources averaged about 1.6 percent of GDP during the 1990s, increasing from about ½ percent of GDP between 1990–91 to almost 1 percent of GDP between 1996 and 2001.

28

The standard deviation of grants inflows since 1992 has been about 0.3 percent of GDP, considerably lower than the level of volatility exhibited in other segments of the revenue base.

29

The loss is mainly due to the privatization of the state telecom company.

30

For example in 1999, the SST on imported cars was reduced from a range of 150–240 percent to 60–120 percent. In 2001, SST collections on cars represented about half of SST revenue.

31

The standard deviation of budgetary revenue declined to 1.1 percentage points of GDP between 1996–2001 from 2.3 percentage points of GDP between 1992 and 1995.

32

In 1996, the top marginal corporate tax and personal income tax rates were reduced from 50 to 30 percent, and from 55 to 33 percent, respectively. At the same time, the number of corporate tax rates was streamlined from five to three with a 15 percent rate applicable to companies in certain preferred sectors, 35 percent on bank and financial institutions, and 25 percent on all other companies. Dividends also became subject to a withholding tax of 10 percent. In 2001, the corporate tax rate for banks and financial institutions was lowered to 25 percent and the top personal tax rate cut to 25 percent. The tax on dividends was abolished in January 2003.

33

See Chapter VI for further discussion on the elimination of food subsidies.

34

The standard deviation of real economic growth between 1990 and 2001 was 4.1 percentage points.

35

See Appendix II for further explanation.

36

For the data reported in this paper between 1990 and 2001, the correlation coefficient between real outturn [do you mean output?]and real expenditure and revenues was 0.95 and 0.97, respectively, and the coefficients are statically [should this be statistically?] different from zero at the one percent level.

37

The fiscal impulse used here is measured relative to the previous year. Following, Chalk (2002), the demand impact of fiscal policy is measured by the weighted budget balance (i.e., the change in fiscal aggregates weighted by their multipliers). The analysis assumes multipliers are 0.5 for changes in government savings and 1.2 for changes in government consumption and spending. The elasticities on consumption and investment reflect those estimated in other empirical studies. For example, Kneller and others (1999).

38

See Chapter V below, ‘A Medium-Term Fiscal Strategy’ for a detailed discussion on fiscal reform priorities for the medium-term.

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Cover IMF Staff Country Reports
Jordan: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2004: Issue 121
Publisher:
International Monetary Fund
ISBN:
9781451820317
ISSN:
1934-7685
Pages:
216
DOI:
https://doi.org/10.5089/9781451820317.002
  • View in gallery

    Jordan: Indicators of Fiscal Deficit 1990–2001

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    Jordan: International Trends in Debt Service Burdens, 1990 and 2001

  • View in gallery

    Jordan: Budget Structure Across Central Governments, 1990–2001

  • View in gallery

    Jordan: Actual and Debt Stabilizing Primary Fiscal Balances, 1993–2001

    Primary surpluses contributed to rapid debt reduction.

  • View in gallery

    Jordan: Changing Strucutre of the Tax Base Strucuture, 1990-2001

  • View in gallery

    Jordan: Year-on-Year Changes in Total, Current, and Capital Expenditure 1991–2000

    (In percent)

  • View in gallery

    Jordan: Composition of Current Expenditure, 1990-2001

  • View in gallery

    Jordan: Military Spending

    (In percent of GDP)

  • View in gallery

    Jordan: Economic growth and fiscal policy, 1990–2001

  • View in gallery

    Jordan: Macreconomic Impact of Fiscal Policy, 1990–2001

Jordan: Indicators of Fiscal Deficit 1990–2001

Jordan: International Trends in Debt Service Burdens, 1990 and 2001

Jordan: Budget Structure Across Central Governments, 1990–2001

Jordan: Actual and Debt Stabilizing Primary Fiscal Balances, 1993–2001

Primary surpluses contributed to rapid debt reduction.

Jordan: Changing Strucutre of the Tax Base Strucuture, 1990-2001

Jordan: Year-on-Year Changes in Total, Current, and Capital Expenditure 1991–2000

(In percent)

Jordan: Composition of Current Expenditure, 1990-2001

Jordan: Military Spending

(In percent of GDP)

Jordan: Economic growth and fiscal policy, 1990–2001

Jordan: Macreconomic Impact of Fiscal Policy, 1990–2001