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; interest rate; exchange rate; debt management; GDP deflator; debt service profile; Debt service; Personal income
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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.

IV. External Debt Dynamics and Sustainability39

A. Introduction

81. Jordan has made significant strides in lowering its external debt burden and strengthening its balance of payments position during the last decade. Between 1992 and 2003, the ratio of total external debt to GDP declined from roughly 120 percent to 78 percent of GDP. Similarly, debt service, on a commitment basis, has declined from 20 percent of GDP in 1992 to about 9 percent of GDP in 2003 (or from 33 percent to 15 percent of foreign exchange receipts). Lower interest payments, combined with an ambitious structural reform agenda that has engendered a rise in economic growth and trade activity, have also facilitated a notable improvement in the balance of payments position—significantly increasing Jordan’s ability to withstand external shocks and to service its external obligations.

82. The objectives of this chapter are to (i) review the path of Jordan’s external debt and its debt management strategy over the last decade; (ii) explain the dynamics behind Jordan’s external debt in an effort to discriminate between “debt-creating” and “debt-reducing” factors; (iii) assess the relative scale of the external debt burden; and (iv) address the issue of sustainability over the medium term. The methodology for this exercise is based on accounting frameworks that illustrate the driving forces behind changes in Jordan’s external debt over the period 1992–2002—from a balance of payments perspective. The assessment of Jordan’s external debt burden is based on standard indicators and a comparison with other developing and lower middle-income countries.

83. In broad terms, the analysis suggests that external debt has not been driven by a need to finance external current account deficits. Successful demand management policies have in fact shifted the external current and capital account balances to levels consistent with a sustained reduction of external debt. Rather, the authorities’ efforts to accumulate a comfortable reserve cushion—bolstering confidence in the Jordanian dinar and the peg to the U.S. dollar—and the related decision to finance development spending through external loans instead of domestic debt have been the main forces behind Jordan’s external debt stock over the last decade. Further, from a sustainability standpoint, the growth in foreign exchange receipts over the last 10 years, and the impact of five successive Paris Club reschedulings strengthened Jordan’s capacity to repay its external obligations. Looking forward, Jordan’s debt burden appears manageable under all but the most extreme external shocks.

84. The remainder of this chapter is organized as follows: Section B reviews the origins of Jordan’s external debt burden, and the strategy that was implemented to deal with debt and debt service in the context of structural adjustment; Section C reviews the results of the strategy by examining the trajectory of external debt and debt service; Section D examines the underlying dynamics of public debt from a balance of payments perspective; Section E examines the dimensions of Jordan’s external debt through a cross-country comparison and by the use of a “solvency index.” Finally, Section F addresses the issue of the future sustainability of external debt.

B. Jordan’s Debt Management Policy

85. Jordan’s economy expanded rapidly in the 1970s in the wake of a regional economic boom that opened up opportunities for Jordan’s exports and the employment of Jordanians in other Gulf states. These developments were complemented by markedly higher grants from neighboring oil-exporting countries. This process continued through the mid-1980s, even when the region began to experience recessions from the collapse of international oil prices. 40

86. Despite the substantial reduction in remittances and grants that accompanied the regional economic downturn, the Jordanian authorities maintained their economic policies during the period 1984–88. Instead of adjusting to lower inflows, the authorities resorted to foreign borrowing on commercial terms. As a result, Jordan’s outstanding external public and publicly guaranteed debt built up to $8 billion by the end of 1988, while outstanding short-term debt reached $400 million. By that time, with the slowdown in economic activity and high real interest rates in the world market, the debt burden had reached unsustainable levels.

87. As payment difficulties emerged, the Jordanian authorities adopted domestic demand management policies supported by fiscal adjustment and a tighter monetary stance to reduce the external current account balance to a level consistent with a longer-term reduction of external debt. Simultaneously, the authorities initiated an external debt-management policy in 1989, aimed at alleviating debt service through a series of Paris Club rescheduling agreements, lengthening the maturity structure of debt, and reducing the debt-to-GDP ratio by containing domestic demand and enhancing growth. The strategy had four key elements:

  • A rescheduling arrangement with Paris Club creditors in 1989 and normalizing relations with other bilateral creditors along the same terms.

  • Negotiations with commercial banks to obtain a multiyear rescheduling of obligations and the option of debt conversion at a discount.

  • Limiting all new borrowing to medium-and long-term maturities, mostly at concessional interest rates.

  • Cancellation of most new commercial borrowings that were in the pipeline.

88. The Jordanian authorities, with the support of a series of IMF arrangements, have adhered closely to this four-point strategy. The first Paris Club rescheduling was followed by four additional reschedulings between 1992 and 1999. An exit rescheduling was granted in 2002 (Box IV.1). Taken together, these agreements facilitated the rescheduling of some $5 billion in obligations—significantly changing the debt service profile by a lengthening of maturities and restructuring of interest obligations on more favorable terms.

89. Negotiations with commercial creditors were also successful. Initially, an informal agreement was reached with the steering committee of commercial banks in 1990, under which Jordan agreed to pay all interest obligations in arrears through end March 1990, and the banks agreed to reschedule or refinance all remaining interest and amortization obligations. A final agreement was not reached before the Gulf crisis, but later negotiations led to a Brady Bond operation. Jordan concluded an agreement with commercial creditors in December 1993 to exchange $736 million in outstanding loans for $652 million in Brady bonds (par and discount bonds). 41

90. The Jordanian authorities have exercised considerable prudence with regard to new debt obligations. The government currently has no obligations to commercial creditors and no short-term debt. 42 The structure of public external borrowing also reflected the change in strategy. Multilateral borrowing, in particular, has come to play a more important role, with the share of multilateral debt rising from 13 percent of the outstanding debt stock in 1992, to roughly 33 percent as of end-2002.

91. In addition to the four central pillars noted above, Jordan’s debt reduction strategy has benefited from additional measures and operations. In the wake of the peace agreement with Israel, the United States unilaterally granted Jordan some $700 million in debt forgiveness. Debt for equity and debt for development swaps have also become a common feature in recent years, and have resulted in a face-value reduction of some $228 million between 1992 and 2002. The government also signed a debt for equity swap with a major bilateral donor in December 2003, resulting in a further reduction in external debt of $133 million. (1.2 percent of GDP) The Jordanian authorities have availed themselves of the opportunity to repurchase outstanding Brady Bonds at a discount. Through the end of 2002, the authorities retired a face value of $195 million at a cost of $146 million. In December 2003, Jordan bought back its outstanding stock of Brady bonds for an amount of $456 million, thereby recovering $180 million of collateral, of which $165 million of principal and $25 million of rolling interest guarantees.

C. External Debt Trajectory

92. While the nominal value of Jordan’s external debt has remained relatively steady at around $7 billion, the size of the debt burden in relation to other variables has declined substantially (Table IV.1). External debt to GDP declined from 120 percent in 1992 to 77 percent by end-2003. The stock of Jordan’s external debt also showed remarkable improvement relative to foreign exchange receipts43—reflecting the improvement in the balance of payments brought about by demand management and structural reforms. Total external debt as a share of foreign exchange receipts declined from 189 percent in 1992 to 114 percent by the end of 2003.

Table IV.1.

Jordan: External Debt, 1992-2003

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Source: Ministry of Finance; Central Bank of Jordan.

Includes Brady Bonds at face value.

History of Jordan’s Paris Club Operations

Jordan has had a total of six debt reschedulings through the Paris Club over the past 13 years—as many as some HIPC Initiative countries. Taken together, these agreements have rescheduled some $5 billion in debt service obligations. The terms have remained nonconcessional, however, reflecting Jordan’s status as a lower-middle income country and stronger capacity to repay. Jordan has benefited, however, from the Club’s changing approach to rescheduling operations. The most recent agreement, achieved in July 2002, was seen as an exit rescheduling. A general description of each agreement follows:

The 2002 agreement covers the period July 2002 to July 2007, and is intended as an exit rescheduling. It covers some $1.3 billion in debt relief over the consolidation period, and provides for a nonconcessional rescheduling of medium and long-term government and government guaranteed debt contracted before the cut-off date of January 1, 1989. The structure of the rescheduling follows Houston terms, but is unique insofar as it covers a consolidation period that extends three years past the end of the current IMF Standby Arrangement. The amount of relief is also digressive, gradually reducing the amount of pre-cutoff date debt subject to rescheduling in the outer years.

The 1999 agreement covered the period April 1 1999 to April 30, 2002. It treated some $821 million in debt service due to Paris Club creditors over the consolidation period. The agreement provided for a nonconcessional rescheduling of scheduled amortization and interest payments arising from medium-and long-term government and government-guaranteed debt contracted by the Jordanian public sector before January 1, 1989. The structure of Jordan’s rescheduling followed Houston Terms: ODA loans were rescheduled over 20 years with a 10-year grace period; repayment schedule was flat. Non-ODA loans were rescheduled over 18 years with a three-year grace period; the repayment schedule was graduated.

The 1997 agreement covered the period June 1997–February 1999. It treated some $400 million of debt service to Paris Club creditors over the period. This agreement was assumed to be an exit rescheduling, and creditors consequently granted relatively favorable coverage and terms. The agreement covered 100 percent of principal and interest payments on nonpreviously rescheduled debt (NPRD), as well as those rescheduled debts under the 1989 and 1992 agreements. Payments on ODA loans were rescheduled over 20 years, with a 10 year grace period. The repayment schedule was flat. Payments on commercial loans were rescheduled over 18 years with a 3 year grace period; the repayment schedule was graduated. The agreement provided for, on a voluntary basis, bilateral debt swaps of ODA loans as well as up to 20 percent of other eligible loans.

The 1994 agreement covered the period July 1994–May 1997, and treated some $1.2 billion of debt service from Paris Club creditors over the period. The agreement covered 100 percent of principal and interest payments on NPRD, as well as those due as a result of the 1989 rescheduling agreement. Payments on ODA loans were rescheduled over 19 years with a 9-year grace period; the repayment schedule was flat. Payments on non-ODA loans were rescheduled over 17 years including a 2-year grace period, on a graduated schedule.

The 1992 agreement covered the period January 1992–June 1993, and treated some $771 million of debt service from Paris Club creditors. The agreement covered 100 percent of principal and 50 percent of interest falling due on NPRD during the consolidation period, as well as similar proportions of arrears outstanding as of end-1991. Payments on ODA loans were rescheduled over 19 years with a 10-year grace period. Payments on non-ODA loans were rescheduled over 14 years including an 8-year grace period. Repayment schedules were flat.

The 1989 agreement covered the period July 1989 to December 1990, and covered $587 million of debt service from Paris Club creditors over the period. The agreement covered 100 percent of principal and 50 percent of interest falling due on NPRD debt during the consolidation period, and 100 percent of principal and interest arrears due at end-June 1989. Payments on arrears were rescheduled over 8 years, with a 4 year grace period. Payments on other debt service were rescheduled over 9 years, with a 5 year grace period. Repayment schedules were flat.

93. Jordan’s external debt has also shown a favorable trend in terms of the composition of creditors (Table IV.2). Commercial debt has virtually disappeared, replaced by an increased reliance on multilateral and concessional bilateral loans. In general, the terms and structure of new debt remain true to the original strategy. In 2001, new loans contracted by the government had an weighted average maturity of 20 years, and a weighted average grant element of almost 40 percent. 44 Terms were less generous in 2002, however, with a weighted average grant element of only 26 percent, and a weighted average maturity of 11 years, but improved again in 2003, with a weighted grant element of 33 percent and a weighted average maturity of 19 years.

Table IV.2.

Jordan: Structure of External Debt, 1992-2002

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Source: Ministry of Finance; Central Bank of Jordan

94. The burden of debt service has also declined (Table IV.3 and Figure IV.1). In 1992, service on scheduled public and publicly guaranteed external debt was just over 21 percent of GDP, 33 percent of foreign exchange receipts, and 65 percent of domestic revenue. By 2003, these ratios had declined to 9 percent, 13 percent, and 34 percent, respectively. On a cash basis, reflecting Paris Club reschedulings, external debt service was 7 percent of GDP and 10 percent of foreign exchange receipts. This performance compares favorably with developing countries as a group, which registered an average debt service equivalent to 6.1 percent of GDP and 19.3 percent of foreign exchange receipts in 2002. 45

Table IV.3.

Jordan: Scheduled External Debt Service, 1992-2003

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Source: Ministry of Finance; Central Bank of Jordan
Figure IV.1.
Figure IV.1.

Gross Debt Related Capital Flows, 1992-2002

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A004

95. The end-use of debt-creating inflows is also indicative of the government’s approach to debt management. External borrowing for reserves buildup, balance of payments and budget support has constituted less of the total lending portfolio than might be expected—roughly 44 percent over the course of 1992–2002 (Figure IV.2). Rather, project lending has been the strongest force behind new loan inflows over the period, accounting for 50 percent of the total. This suggests that the authorities have sought to fill balance of payments needs through grants and rescheduling of existing obligations rather than through contracting of new debt. The fact that inflows on a net basis exceed those on a gross basis confirm this conclusion, as the bulk of scheduled repayments have been rescheduled over the past 10 years. New external debt has been used to fill the authorities’ capital spending needs, substituting for the domestic debt, which remained relatively low at roughly 20 percent of GDP as of end-2002.

Figure IV.2.
Figure IV.2.

Jordan. Composition of Loans, 1992–2002

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A004

Source: Ministry of Finance and staff estimates.

D. Debt Dynamics

96. The dynamics of Jordan’s external debt profile is key to understanding the driving forces behind debt accumulation or reduction, and essential for policy prescriptions going forward. From an analytical standpoint, the mechanics behind Jordan’s changing debt profile can be decomposed in two ways—the first, relative to the balance of payments, and the second relative to fiscal policy. The balance of payments dimension of debt creation and debt reduction can be broken down into an accounting framework that relates the major components of the BOP to the annual change in external debt:

Δ⁢D=(C⁢A+I⁢F+K⁢A)+(Δ⁢N⁢F⁢A+Δ⁢D⁢A−D⁢R+Δ⁢V+Δ⁢X),

Where ΔD represents the nominal change in external debt, CA is the noninterest current account; IF is the interest factor; KA is the private capital account; ΔNFA represents the change in net foreign assets of the banking system; ΔDA is the change in deferred assets; DR is debt relief; ΔV is change due to valuation; and ΔX is change resulting from factors not accounted for elsewhere. A more detailed explanation of these components is contained in Appendix I.

97. The decomposition of Jordan’s external debt dynamics during the 1990s according to the BOP framework can be found in Table IV.4. In the following discussion of the results, it is convenient to distinguish between debt creating and debt reducing factors.

Table IV.4.

Jordan: BOP Dynamics of External Debt

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Source: Ministry of Finance and staff estimates.

98. Noninterest current account: The improvement in the non-interest current account balance is the predominant force behind the reduction in Jordan’s external debt. This reflects recent, sizeable improvements in the trade balance as a result of export growth, relatively low average import growth, sizeable grant inflows (an average of 4.4 percent of GDP annually over the period) and a steady rate of increase in inward remittances (an average growth rate of 10 percent).

99. Interest burden:. Interest payments were the clearest debt-creating factor in the balance of payments, contributing 50 percentage points of current GDP to the accumulation of debt in the 1992–2002 period. Although there are some fluctuations in debt service due as a result of rescheduling operations, interest payments have remained a relatively steady debt-creating component within the balance of payments.

100. Private capital account: The private capital account, which includes FDI and portfolio flows, private capital transfers, and errors and omissions, has also been a substantial debt-reducing factor over the last decade. FDI has shown considerable variation, with significant surges (reaching as high as 9 percent of GDP in 2000) driven by the government’s privatization program. Portfolio flows have been relatively small, reflecting low foreign interest in the Amman stock exchange. Errors and omissions have also been sizeable in some years, reaching over 7 percent of GDP, but largely a wash over the period, with an average value of under 1 percent of GDP.

101. Change in NFA: The accumulation of reserves to bolster confidence in the Jordanian dinar has been a consistent force for debt accumulation, particularly during the second half of the 1990s. Jordan’s gross official reserves were relatively low in the early 1990s, averaging about 2.5 months of imports and 9 percent of broad money. A more rapid accumulation of NFA since 1997, supported by IMF arrangements and Paris Club debt reschedulings, brought reserves up to 7 months of import coverage by end-2002, or 23 percent of broad money. Notably, the fact that reserve accumulation has been a driving force behind debt accumulation gives rise to an issue of how best to view the external debt burden. This would be on a gross basis, such as is usually the case, or net of reserves since reserves are presumably a liquid asset on which the authorities could draw for debt repayment.

102. Debt reduction operations: This category includes debt swaps, Brady Bond buyback operations, and bilateral debt relief. The results indicated in Table IV.4 show the impact of debt relief granted by Russia in 1992, and the United States in 1994–95 through debt write-off operations. Also important, however, have been the authorities’ efforts to utilize debt swap operations and to repurchase outstanding Brady Bonds when suitable discounts were available. Taken together, debt swaps and buybacks contributed approximately 11 percent of current GDP toward debt reduction.

103. Valuation effects stemming from changes among the major currencies have had an appreciable impact on reducing the value of the stock of debt, particularly in recent years. The peg of the Jordanian dinar to the U.S. dollar, along with the steady appreciation of the dollar vis-à-vis the yen and the euro in the second half of the 1990s, contributed an aggregate 6 percent of GDP to debt reduction. Notably, the weakness of the dollar in 2002 reversed some of the valuation gains of previous years, contributing to an increase in the nominal value of Jordan’s debt stock and debt service—an issue that will be treated in more detail in the section on external vulnerabilities.

104. Perhaps the most critical aspect of the preceding analysis is that Jordan’s debt creation is driven neither by the noninterest current account or the private capital account. To the contrary, these two components of the balance of payments have generally contributed to debt reduction. Indeed, Jordan’s external debt-to-GDP ratio could have declined by an additional 15 percent on the basis of current and capital account developments. This separates Jordan from a number of other developing country cases where the driving force behind external debt accumulation stemmed from the need to finance an external imbalance. For Jordan, the existing interest burden and the need to build up foreign reserves to a level deemed sufficient to defend the pegged exchange rate regime and withstand exogenous shocks were more the force behind Jordan’s limited net debt creation, in nominal terms, during the past decade. The level of reserves was further boosted in 2003 to reach some $4.7 billion, owing to the surge of grants associated with the Iraqi conflict.

105. The BOP accounting framework helps to illustrate two important points. First, that the authorities’ strategy of seeking interim debt service relief while strengthening external balances has been a success. Ten years of debt rescheduling has facilitated a host of structural reforms that effectively shifted the key external accounts from a debt-creating to a debt-reducing position. Second, it also highlights that fiscal dynamics—particularly the need to simultaneously finance domestic spending while building a strong foreign exchange reserves position—have been at the heart of debt creation during the last ten years. As noted earlier, BOP and budget support lending did not constitute the majority of new loans disbursed during 1992–2002. Rather, project lending has been predominant, suggesting that external debt has been by driven by domestic spending, and the decision to finance fiscal deficits through accumulation of external debt, rather than domestic debt. 46 This decision does change the composition of the balance of payments by injecting capital inflows, while the counterpart is reflected in net foreign assets. The external current account balance would be invariant to a decision to finance projects through external or domestic resources.

E. Dimensions of Jordan’s External Debt Burden

106. An assessment of external debt sustainability relies on a mix quantitative indicators, analysis of debt dynamics, and cross-country comparisons. The preceding analysis suggests that Jordan’s external debt burden has to some extent been a matter of choice insofar as some key debt-creating factors are within the authorities’ control. Accumulation of NFA, for example, is a policy choice rather than an endogenously determined result. The degree of fiscal consolidation and containment of off-budget lending operations also represent policy variables and issues of fiscal management rather than an exogenous gap which the government was forced to finance. However, Jordan’s record on servicing its international obligations, and the fact that the nominal value of external debt has remained relatively steady, would tend to suggest that these choices—although facilitated by generous treatment from creditors and a windfall from international exchange rate movements—have been part of a successful strategy to ensure that Jordan’s external debt burden remains sustainable.

Cross-country comparison

107. Table IV.5 compares various debt indicators for Jordan (a lower middle-income developing country) relative to different country groups. The comparison suggests a number of points.:

Table IV.5.

Jordan: Cross-Country Comparison of Debt Burden Indicators

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Source: World Bank, Global Development Finance 2003.

Cash basis.

  • The stock of debt relative to the economy remains large, making Jordan comparable to heavily indebted low income countries by this measure. This comes in spite of Jordan’s current status as a lower middle income country and satisfactory economic performance, and testifies to the size of the original debt problem and the authorities use of successive debt rescheduling operations. While the stock of debt is not a problem per se, the image of a debt overhang may dampen investor confidence and also limits Jordan’s ability to access international capital markets. As the economy continues to grow, however, and multilateral and bilateral lending presumably diminishes, the ability to tap capital markets may become a more pressing issue.

  • The debt service burden is also relatively high at, roughly 8 percent of gross national income in 2000 on a commitment basis – similar to heavily indebted low income countries, but lower than middle income countries.

  • Unlike many other developing country groups, Jordan’s debt ratios have been on a steady downward trend. Jordan has shown a substantial improvement over the past decade, both in terms of the stock of debt and total debt service relative to GNI.

  • The burden of external debt service is also less pronounced when compared to foreign exchange earnings. As a share of exports of goods and services, Jordan’s stock of external debt remains comparable to developing countries as a group, but is far below heavily indebted low and middle income countries.

  • With annual debt service, on a cash basis, at only 11 percent of foreign exchange receipts, Jordan also appears to have a relatively high degree of solvency compared to developing countries as a whole, and against virtually all subgroups.

108. The cross-country comparison suggests that Jordan’s debt burden is not a one-dimensional issue. Rather, the weight of the burden depends very much on the scale involved. From a stock perspective, and relative to the size of the Jordanian economy, external debt is sizeable by virtually any cross-country comparison. This legacy of debt overhang is illustrative of the scale of debt accumulation which led to the crisis of the late 1980s, and why a steady succession of reschedulings and other restructuring operations have been necessary to alleviate the burden and provide room for stabilization and growth.

109. The burden of debt service is also considerable, particularly the interest component. While the debt service burden has followed a steady downward trend, it is still relatively high in comparison to other developing country groups, particularly interest payments. This suggests that, while Jordan has adhered to a policy of seeking concessional new inflows, the grant element in new borrowing may still be less than that obtained by other developing country groups. 47

110. Table IV.6 compares the terms of new debt commitments of Jordan and various developing country groups. The table suggest several conclusions:

Table IV.6.

Jordan: Cross-Country Comparison of Terms of New Commitments

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Source: World Bank, Global Development Finance, 2003

  • For a lower middle income country, Jordan has received relatively generous terms on new borrowing. The average interest rate on new borrowing has generally been below the average for all developing countries, and generally on par with heavily indebted low-income developing countries. Maturities have varied, but have also remained roughly comparable with heavily indebted low income countries.

  • The overall grant element of new loans, which comprises the interest rate, maturity, and grace period of loans based on their currency of denomination, indicates that Jordan’s portfolio of new commitments has generally been on par with low-income and heavily indebted low income countries—considerably higher than that obtained by middle income developing countries.

  • The comparatively favorable performance in terms of interest rates that Jordan has achieved in recent years appears to stem from the absence of short-term and commercial debt. Middle income countries have made increasing use of private sector credit, particularly in recent years. Private credits as a share of total disbursements rose from 63 percent in 1990 to 83 percent in 2001 for middle income countries. 48 Jordan, on the other hand, has generally abstained from contracting commercial debt.

  • For a lower middle income country, Jordan has received relatively generous treatment on the terms and conditions of new borrowing. The average interest rate on new borrowing has generally been below the average for all developing countries, and generally on par with heavily indebted low-income developing countries. Maturities have varied, but have also remained roughly comparable with heavily indebted low income countries.

  • The overall grant element of new loans, which comprises the interest rate, maturity, and grace period of loans based on their currency of denomination, indicates that Jordan’s portfolio of new commitments has generally been on par with low-income and heavily indebted low income countries—considerably higher than that obtained by middle income developing countries.

  • The comparatively favorable performance in terms of interest rates that Jordan has achieved in recent years appears to stem from the absence of short-term and commercial debt. Middle income countries have made increasing use of private sector credit, particularly in recent years. Private credits as a share of total disbursements rose from 63 percent in 1990 to 83 percent in 2001 for middle income countries. 49 Jordan, on the other hand, has generally abstained from contracting commercial debt.

111. In contrast to the stock of debt overhang, however, Jordan’s external debt and debt service appear less onerous from a liquidity perspective—that is, relative to the annual inflow of foreign exchange receipts. With a more aggressive opening of the economy and use of preferential market access arrangements to ensure Jordan’s competitiveness, foreign exchange receipts have shown a sharp rise, increasing Jordan’s capacity to meet external obligations and weather shocks. A key component in this process has been the growth in inward remittances. As opportunities for Jordanian professionals in the Gulf have increased, inward remittances have grown in importance as a source of foreign exchange earnings. Inward remittances rose from 15 percent of GDP in 1992 to 23 percent in 2002, and from 24 percent of total foreign exchange receipts in 1992 to 35 percent by end-2002—roughly equivalent to the present contribution of domestic exports.

Assessment

112. Taken together, the analysis of debt dynamics and the cross country comparisons of debt indicators suggest that Jordan’s debt, while sizeable, has been sustainable because of the authorities’ strict adherence to the external debt management strategy. More broadly, it is apparent that the course of debt reduction has depended critically on a number of policy variables that were generally within the authorities’ control. A more rapid pace of debt reduction, for example, might have been achieved had the authorities been able to follow through with fiscal consolidation plans as conceived under successive IMF arrangements. Furthermore, were not the accumulation of a reserve cushion deemed sufficient to ensure confidence in the pegged exchange rate regime a pressing priority, the debt-creating impact of NFA accumulation might have been mitigated.

113. The nature of Jordan’s debt dynamics is promising, but also subject to a number of downside risks. On the positive side, the fact that a sizeable portion of debt-creating factors are within the authorities’ ability to control bodes well for future debt reduction. The authorities continued commitment to prudent debt management and debt reduction is embodied in the new Law on Public Borrowing, passed in 2001, which requires the government to limit external debt to less than 60 percent of GDP by 2006, while simultaneously allowing for increased domestic financing of the budget.

114. Assuming that the authorities continue to implement plans for fiscal consolidation, and make full use of the debt reduction options open to them, the downside risk to debt sustainability would stem largely from exogenous shocks. Although in recent years Jordan has benefited from some such external factors (e.g., strengthening of the U.S. dollar vis-à-vis other major currencies), much of these gains could be reversed in the coming years.

F. Sustainability/Vulnerability

115. On the basis of current balance of payments projections, Jordan’s external debt burden, while heavy, appears sustainable. As noted in the previous sections, the stock of Jordan’s external debt is high by virtually any measure. For end-2003, the stock of external debt is estimated at 173 percent of exports of goods and nonfactor services, and almost 300 percent of domestic revenue. Recent analysis suggests that these ratios would be even higher in NPV terms, with the NPV of debt to exports ratio likely in excess of 200 percent—much higher than the 150 percent NPV of debt to exports targeted under the HIPC exercise.

116. Jordan’s debt ratios should be taken from the proper perspective. The apex of Jordan’s external debt crisis is now 14 years in the past and, reflecting a strong commitment to debt management and structural reforms to improve the balance of payments, the key debt ratios have declined steadily until 2001. While capacity to pay continued to improve since then, the ratio of external debt to GDP stopped declining during the last two years, owing to valuation losses of about 11 percentage points of GDP caused by the depreciation of the U.S. dollar to which the Jordanian dinar is pegged, against the other major currencies. These adverse developments will prolong the external debt reduction period. Jordan’s external debt should however gradually converge to more sustainable levels over the medium term, under relatively conservative assumptions regarding the external accounts and bilateral debt relief. On the basis of current BOP projections, and program assumptions regarding the use of debt swaps under existing arrangements, the nominal value of debt to exports of goods and nonfactor services is projected to cross the 150 percent threshold by end-2004 (Table IV.7). The debt-to-revenue ratio is also expected to drop below the 250 percent level (considered “sustainable” in the HIPC initiative) by 2006.

Table IV.7.

Jordan. Medium-Term External Debt and Debt Service, 2002–09

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117. From a capacity to repay perspective, the outlook is also relatively positive. As a share of total foreign exchange receipts (i.e., exports of goods and nonfactor services plus gross remittances) Jordan’s debt and debt service profile looks strong. Total external debt stood at 119 percent of foreign exchange receipts as of end-2003, with this ratio projected to drop below 100 percent by 2005. Net of Jordan’s considerable foreign exchange reserves, the ratio of external debt to foreign exchange receipts drops to an estimated 45 percent at end-2003, and 22 percent by 2009.

118. Jordan’s substantial progress in reducing the stock of debt over the past years, and its ample capacity to repay future obligations highlights that the stock of debt and debt service as they are presently projected are not a problem as such. Under current projections, and assuming continued adherence to the long-standing debt management strategy, Jordan’s debt burden appears both manageable and sustainable. Rather, concerns about the sustainability of the external debt burden stem from the vulnerability of the balance of payments to potential shocks. Stress tests conducted within the Fund’s standard debt sustainability framework illustrate some potential vulnerabilities, although under all but the most severe shocks, Jordan’s debt burden would remain manageable.

119. Holding GDP, nominal interest rates, the non-interest external current account and other elements at their historical average during 2004–2008, flattens the downward path of the external debt-to-GDP ratio, but by a relatively small margin. 50 By 2008, the external-debt to-GDP ratio is only 1.5 percentage points above the ratio achieved that year under the balance of payments projections shown in Table IV.7. Lowering projected real GDP growth by two standard deviations below the historical average in 2004 and 2005, would increase the 2008 external debt-to-GDP ratio by some 3 percentage points relative to the stress-test baseline. The deviation above this baseline would increase to 4.7 percentage points, assuming the U.S. dollar GDP deflator is two standards deviations lower than the historical average in 2004 and 2005 (Table IV.8).

Table IV.8.

Jordan: External Sustainability Framework, 2000–08

(In percent of GDP, unless otherwise indicated)

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Derived as (r-r(1+g)-g)/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, and g = real GDP growth rate.

The contribution from price and exchange rate changes is defined as-r(1+g)/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency and rising inflation (based on GDP deflator).

Does not capture the impact of cross-exchange rate movements between the US dollar and other major currencies in which Jordan’s external debt is denominated.

Defined as non-interest current account deficit, plus interest and amortization on medium- and long-term debt, plus short-term debt at end of previous period.

120. A more challenging outcome would result from larger shocks to the external current account. In particular, decreasing the non-interest current balance by two standard deviation in 2004 and 2005 would cause the external debt-to-GDP ratio to spike in 2005, before gradually declining to a level still 14 percentage points higher than the stress-test baseline by 2008. A similar pattern would obtain from a combination of shocks (one standard deviation in 2004 and 2005 from the historical average for GDP growth, the current account balance and interest rates), leaving the external debt-to-GDP ratio some 21 percentage points above the baseline in 2008.

121. The most worrisome outcome would result from a large exchange rate shock. For instance, the standard simulation of a 30 percent depreciation of the JD against all currencies in 2004, would cause the external debt-to-GDP ratio to first jump slightly above 100 percent, and still be some 30 percentage points above the baseline in 2008. This standard simulation confirms the high vulnerability of Jordan’s debt burden to exchange rates movements, including between major currencies and the U.S. dollar to which the JD is currently pegged.

122. This key vulnerability needs to be effectively reduced over time through both proactive public debt and international reserve management policies. Indeed, the exposure of Jordan’s external debt to exchange rate risk could be partly offset by increasing the share of non-U.S. dollar currencies in international reserves. The CBJ has traditionally kept almost all of its international reserves in the currency to which the JD has been firmly pegged, namely the U.S. dollar. The CBJ started to adjust this policy, by increasing the share of international reserves denominated in euros from 1 percent at end-2002 to 10 percent at end-2003. Thus, the CBJ was able to take advantage of higher returns on short-term euro instruments, stemming from both higher short-term euro interest rates relative to U.S. dollar short-term rates and a substantial appreciation of the euro against the U.S. dollar in recent months. Nevertheless, the share of international reserves denominated in euros was still only about half the share of government debt denominated in the currency at end-2003. Similarly, only 1 percent of international reserves were held in Japanese Yen and the British Pound, while these two currencies account for close to 30 percent of the government’s external debt. A greater portfolio diversification by the CBJ toward major currencies other than the U.S. dollar would provide a significant hedge against increases in external debt service arising from currency movements.

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Prepared by Todd Schneider.

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For further details on the historical aspects of Jordan’s debt dynamics see Maciejewski, Edouard and Ahsan Mansur, Jordan: Strategy for Adjustment and Growth, IMF Occasional Paper 13.

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An additional $83 million in interest arrears bonds were issued at the same time. Payment of principal on these bonds is due in nineteen equal, semi-annual installments starting December 1996, with annual interest set at LIBOR plus 0.8 percent. The stock of these bonds as of end-2001 was $50 million, with payment to be completed in 2005.

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Jordan also has remarkably little private sector external debt—due in large part to the high premium that most corporations would have to pay to access international financial markets. Only two firms—the Jordan Phosphate Mining Company (JPMC) and the Jordan Telecom Corporation (JTC)—have issued international debt instruments. A total of $150 million in Eurobonds were issued by these two quasi-public firms in the mid-1990s, with bullet payments due in the second half of 2002. Neither issue had a government guarantee.

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Foreign exchange receipts are defined as the sum of exports of goods and nonfactor services and inward remittances.

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Source: Ministry of Finance and Fund staff estimates.

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Source: Staff estimates based on WEO data.

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Until recently, legal limits limited the ability of the government to finance fiscal deficits through issuance of domestic debt rather than through external borrowing.

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The debt burden also highlights the impact of previously rescheduled debt, and why a series of reschedulings have been necessary to allow for adjustment.

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Source: World Bank, Global Development Finance, 2003.

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Source: World Bank, Global Development Finance, 2003.

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Historical averages were taken over the ten-year period ending in 2002. The year 2003 was excluded from the averaging period, due to the fact that the truly exceptional level of the non-interest current account surplus achieved that year largely reflects the surge in grants associated with the Iraqi conflict. Including this large surplus under the stress-test baseline would have resulted in an excessively fast reference debt reduction path.

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