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; debt projection; Jordanian dinar; net government debt; debt-ratio target; vulnerability to external shocks; Government debt management; Debt reduction
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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.

V. Medium-term Fiscal and Debt Reduction Strategy51

123. The primary challenge facing Jordan over the medium term is to reduce its high central government debt burden to a sustainable level. To address the problem, Jordan enacted the Public Debt Law in 2001 requiring the government to reduce total debt to no more than 80 percent of GDP and external debt to no more than 60 percent of GDP by 2006. In the context of the current Stand-by Arrangement, the authorities adopted a medium-term fiscal strategy for Jordan outlining the steps required to meet the Public Debt Law. In the event, as described below, adverse external developments have led to significant shortfalls in debt reduction relative to the baseline for the period 2001–03. Nevertheless, the authorities are committed to an updated fiscal strategy which would enable Jordan to significantly reduce its debt burden and achieve debt sustainability over the medium term. Key elements of this strategy are a sustained effort at fiscal consolidation and aggressive below-the-line operations in the form of accelerated privatization and debt reduction operations. This chapter reviews Jordan’s success in reducing public debt in the 1990s; evaluates its recent performance relative to the original strategy; reassesses the outlook for the medium-term in light of recent developments; and identifies fiscal priorities in order to achieve the required debt reduction.

A. Developments in Public Debt over the 1990s

124. Jordan made significant progress in reducing its high debt burden during the 1990s. Central government debt52 declined from 158 percent of GDP in 1992 to 101 percent by 2000. A decomposition of the change in debt into ‘debt-creating’ and ‘debt-reducing’ components53 shows that even though fiscal deficits did not come down as fast as envisaged under the Fund supported programs, higher nominal GDP growth entailed a steady reduction in the debt ratio. GDP growth accounted for 60 percentage points of reduction in the debt-to-GDP ratio primarily due to real growth. The gains from GDP growth were mitigated in part by the effect of fiscal deficits during the period. Cumulative deficits during 1992–2000 added some 20 percent of GDP to the debt ratio.

125. Based on the experience of the 1990s, the strategy for debt reduction agreed with the authorities at the inception of the current Stand-by Arrangement emphasized three key elements. First, continued fiscal consolidation, albeit at a gradual pace, with fiscal deficit reductions averaging ½ percent of GDP annually over the medium-term. Second, active ‘below-the-line’ operations such as an acceleration of privatization and the use of most of the proceeds for debt reduction, as well as further debt reduction operations such as debt swaps from bilateral creditors. Third, sustaining macroeconomic stability and creating an environment conducive for higher economic growth. The strategy aimed at reducing total central government debt to about 78 percent of GDP by 2003 and to 62.4 percent of GDP by 2006.

Figure V.1.
Figure V.1.

Jordan: Overall Fiscal Balance Including Grants and Net Government Debt, 1992–2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A005

Source: Jordanian authorities and Fund staff estimates.

B. Developments in Fiscal Consolidation and Public Debt under the SBA

126. The fiscal performance under the current program has been better than anticipated under the original baseline. Instead of a cumulative overall deficit of 8.8 percent of GDP for 2002–03, the deficit including grants has been contained at 6 percent of GDP, both due to fiscal consolidation efforts as well as a large inflow of grants in 2003. Fiscal consolidation has been driven by significant progress in: reforming the tax system, particularly the (GST); implementing an ambitious pension reform strategy; raising domestic petroleum product price, and increasing other taxes. Government savings during this two-year period surged to 8.7 percent of GDP compared with 2.9 percent envisaged under the original baseline scenario, in part reflecting lower current outlays. The sharply higher public sector savings also translated into higher capital spending entailing a qualitative improvement in the fiscal structure, while providing a boost to domestic economic activity.

127. There has, however, been a shortfall in reducing the debt ratio of about 19 percent of GDP relative to the original projections for the period 2001–03, largely due to adverse exogenous factors. 54 The main contributors were ‘below-the-line’ developments: adverse valuation effects (7.3 percentage points); lower privatization proceeds (4.4 percentage points); and lower than projected nominal GDP growth (3.3 percentage points) (Table V.1). The valuation changes arose from a weakening of the U.S. dollar relative to other major currencies during the last two years. The lower GDP growth was primarily due to the negative impact of the war in Iraq. These developments taken together have left Jordan with a total central government debt-to-GDP ratio roughly unchanged at 101.5 at end-2003.

Table V.1.

Jordan: Public Debt Dynamics, 2000-03

(In millions of Jordanian Dinar)

article image
Source: Fund staff estimates based on Ministry of Finance and Central Bank of Jordan data.

Total net domestic and external debt (excluding collateralized Brady Bonds).

Contribution to debt ratio is measured in percentage points. A minus (-) sign indicates debt reduction compared to baseline.

Reflects a combination of factors, including debt reduction operations not captured in available data, incomplete data on onlending and debt assumptions, and exchange rate effects not captured by valuation estimates.

128. The consolidated public sector debt,55 however, is substantially lower than central government debt because of the large surpluses generated by the Social Security Corporation (SSC) and to a lesser extent by the Central Bank of Jordan (Box V.1). Debt reduction at the consolidated public sector level has also been impressive over the last decade, although it has suffered from a lack of progress at the central government level during 2001–03. The consolidated public sector debt is conservatively estimated to be about 59.7 percent of GDP at end-2003, and is estimated to have declined by about ½ percentage points from its end-2000 level.

129. Jordan’s capacity to repay its debt, in terms of debt-service ratios and the interest bill remains strong, and very similar to the original baseline. Debt-service related indicators point to the fact that despite a very high debt ratio at the central government level, Jordan’s debt-service burden has been declining in recent years (Table V.2). 56 Current program projections suggest that debt service as a percent of GDP will fall to 7 percent by 2006 and debt service as a percent of exports of goods and non-factor services will decline to 16.1 percent. The interest bill will continue to decline to 3.4 as a percent of GDP and to 9.9 as a percent of total expenditures.

Table V.2.

Measures of Central Government Debt

article image
Source: Fund Staff Estimates based on Ministry of Finance and Central Bank of Jordan data

The debt service figures for 2003 are inflated due to the prepayment of Par Brady Bonds ($456 million or about 4.6 percent of GDP).

C. Outlook for the Medium-Term

Jordan—Consolidated Public Sector Operations and Debt

While the central government dominates the public sector, the fiscal or quasi-fiscal operations of other institutions are significant both at a macroeconomic level and in the provision of public services. The net debt of the public sector at 59.7 percent of GDP in 2003, is significantly lower than at the central government level.

The own-budget agencies have their budgets approved by the cabinet. There are 32 autonomous agencies and most of their fiscal operations are fully funded (generating balanced fiscal outturns), after taking account of the transfers from the central government. The CBJ earns seigniorage and interest on its foreign exchange reserves, but pays interest on certain liabilities, most importantly the large volume of central bank certificates of deposit (CDs). The SSC is an autonomous agency charged with providing old-age and disability pensions to private sector workers and civil servants hired after 1995.

Summary Operations of the Consolidated Public Sector 1999-2003.

article image
Sources: data provided by the Jordanian authorities; and IMF staff estimates. Latest data available.

Excludes municipalities and some minor public enterprises. Transfers and common debt obligations between sectors are eliminated. CBJ accounts are on a commitment basis.

Own-budget agencies domestic banking system debt only. Domestic and external debt of these agencies are captured under the central government debt. CBJ assets are net foreign assets plus net domestic assets less currency in circulation.

This definition is used by credit rating agencies to evaluate Jordan’s credit worthiness.

130. Against the background of the substantial shortfalls in debt reduction relative to the original baseline, three issues are important for analyzing Jordan’s medium-term debt sustainability. First, are the original debt-ratio targets likely to be met under the current program? Second, what is the likely evolution of debt over the medium-term? Third, what is the proposed phasing of the debt reduction in the revised strategy relative to the baseline?

131. The authorities’ current program projections suggest that Jordan should be able to substantially reduce its central government debt burden to 80 percent of GDP by end-2006 and to 61.6 percent of GDP by end-2010. The overall debt ratio is projected to be exactly at the debt ceiling mandated by the Public Debt Law. Compared to the original baseline, the central government debt burden will be about 11 percent of GDP higher at end-2010 relative to the original baseline (see Table V.3). In order to gain some of the lost ground, the program envisages a slightly higher rate of reduction in the debt ratio over the period 2004–10 (see Figure V.2).

Table V.3.

Jordan: Original Baseline and Program Projections

article image
Sources: Jordanian authorities; and Fund staff estimates.
Figure V.2.
Figure V.2.

Jordan Medium-Term Debt Projections, 2000–10

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A005

Source: Jordanian authorities; and Fund staff estimates.

132. In terms of the composition of the debt reduction, the authorities’ current program projections have a slightly lower rate of nominal GDP growth relative to the baseline,57 but a similar fiscal deficit path58 (see Figure V.3). Significant gains are expected to come from higher privatization proceeds relative to the original baseline due to the envisaged acceleration of the delayed privatization program (entailing an additional JD 80 million per annum). Overall proceeds from the privatization program, however, is assumed to be broadly similar to the original baseline.

Figure V.3.
Figure V.3.

Jordan Medium Term Government Balance Projections, 1998–2010

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A005

Source: Jordanian authorities; and Fund staff estimates.

133. While the fiscal deficit path is largely in line with the original program, the negative impact of the war in Iraq means that a stronger fiscal effort would be required to achieve medium term targets. The cumulative fiscal effort, measured by the change in the primary balance excluding grants between 2004 and 2007, amounts to 7.7 percent of GDP under the program, compared to 1.4 percent of GDP under the original baseline scenario. To achieve the targeted fiscal deficit path, the authorities would need to take additional measures in revenue and expenditure averaging about 1½ percent of GDP annually. The remainder of this chapter outlines fiscal priorities for the medium-term which will be necessary for Jordan to achieve the desired fiscal consolidation.

D. Fiscal Priorities

The achievement of the debt targets under the Public Debt Law will require substantial fiscal efforts on the part of the Jordanian authorities. The following are a set of priorities for further fiscal reforms to achieve the debt targets:

  • Jordan needs to increase buoyancy in tax revenue and reduce its dependence on inelastic and volatile revenue sources, such as nontax revenues and external grant assistance. In addition, it will have to recoup the permanent loss of the Iraqi oil grant (about 3 percent of GDP annually). Key priorities on the revenue side will be to reform the GST and income tax systems, and to align domestic petroleum product prices with international levels.

  • On the expenditure side, Jordan needs to increase flexibility in the budget by reducing current outlays, especially by containing the growth of the wage bill and military spending, continuing with pension reform, and increasing the efficiency of social spending on health and education.

  • Sizable below-the-line operations will be needed to complement revenue and expenditure reforms. These would include an acceleration of privatization, a continuation of special debt operations such as debt swaps, and an adherence to the fiscal funding strategy.

E. Revenue

134. Reforming the income tax should be a key priority. The current income tax system remains overly complex, inequitable, and inefficient. As a result, Jordan’s income tax performance lags significantly behind other countries in the region. The priorities for reforms in this area include: broadening the tax base by eliminating the numerous exemptions, especially on rental income and export profits; replacing the current system of deductions with a simple system of tax credits; having provisions for accelerated depreciation instead of the present system of partial tax holidays; subjecting capital gains received on all assets by all taxpayers to a similar tax; and reducing the number of tax rates to reduce the complexities of the current rate structure.

135. Enhancing the efficiency and elasticity of the GST system will require unifying the lower GST rate with the basic rate over time by increasing the basic rate. It will also be important to broaden the GST base by extending it to electricity and transportation. In addition, improving compliance and simplifying tax administration would help improve the elasticity of the GST system.

136. The permanent loss of the Iraqi oil grant and the associated oil price discount underscore the importance of aligning domestic petroleum product prices with international levels. The strategy should include a transition period during which discretionary price adjustments will gradually eliminate the gap between domestic and international petroleum product prices by 2006. Furthermore, the current system of implicit tax revenues from pricing some products above market levels should be replaced by a transparent system of GST and specific excises.

F. Expenditure

137. To gain much needed flexibility on the expenditure side, Jordan needs to limit its current outlays. Wages, pensions, military outlays, and interest payments account for about 70 percent of budgetary outlays. While progress on pension reforms has been commendable, it will be important to consolidate the gains over the medium term to limit wage and pension outlays and to reduce future contingent liabilities.

138. The growing burden of military spending needs to be contained to ensure the sustainability of Jordan’s fiscal position. Military spending remains the largest single expenditure category, accounting for about a quarter of total expenditure. Jordan spends more on military than any other country in the region in percentage of GDP and almost triple that of the major industrial countries. Further, Jordan has lagged behind its regional comparators in reducing military spending relative to GDP over the past decade. While its neighbors have been successful in significantly reducing military spending relative to GDP between 1995–2001, Jordan’s military spending increased by over ½ percent of GDP during the same period.

Figure V.4.
Figure V.4.

Cross-Country Comparison of Military Expenditures.

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A005

Figure V.5.
Figure V.5.

Cross-Country Comparison of Expenditures by Function

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A005

139. The recent completion of the comprehensive pension reform agenda will strengthen significantly Jordan’s fiscal position in the coming years by containing the increase of pension liabilities. In this context, it would be important to reform the contribution and benefit rules of the Social Security Corporation (SSC) to ensure its long-run financial solvency, based on the findings of the ongoing five-year actuarial review.

140. Spending on health and education compares favorably with other countries in the region and even with industrial countries. At 5 percent of GDP, Jordan’s spending on education exceeds industrial countries’ average (4.7 percent of GDP). Similarly, at 4.2 percent of GDP Jordan’s spending on health compares favorably not only to the regional average of 2.8 percent of GDP, but also to the industrial country average of 6.5 percent of GDP. However, there is a need for improving the effectiveness of public expenditure to achieve the government’s social objectives rather than increasing the size of spending.

141. Effective implementation of the ongoing public expenditure management reform, including the establishment of a Treasury Single Account (TSA), would greatly aid in improving budget coverage, execution, and reporting.

G. Below-the-Line Operations

142. Given that lower privatization proceeds has been a primary cause for the shortfall in debt reduction over the past two years, the government’s debt-reduction goals for the medium-term will depend critically on accelerating the privatization program and using all privatization proceeds for reducing debt. First, additional proceeds are required to compensate for the significant shortfalls in debt reduction over the past two years. Second, to the extent that lower privatization meant higher borrowing to finance the fiscal deficit, the associated debt service payments are an additional fiscal burden. Third, considering the one-off nature of privatization receipts, any use of them to finance expenditures which may have a recurrent component or call for any budgetary spending in the future, further jeopardizes the fiscal program. Fourth, over the longer run, privatization should potentially raise productivity and growth and some of these gains would accrue to the budget in the form of tax revenue. The current program envisages average annual privatization receipts of JD 200 million for the period 2004–08 and the use of all proceeds for debt reduction purposes.

143. The pre-payment of Brady Par Bonds is a step in the right direction. Financing the Brady Bond buyback by the issuance of domestic public debt and a drawdown of international reserves is consistent with the need to reduce Jordan’s external debt and debt service payments and its vulnerability of the public debt service burden to adverse exchange rate movements.

144. The pre-payment of high cost external debt should continue along the lines discussed in the fiscal funding strategy aimed at decreasing the proportion of external debt and increasing the reliance on domestic financing in consultation with the Paris Club Secretariat (see Box V.2). Sustained implementation of such a policy will result in an accelerated reduction of external debt and domestic excess liquidity, interest savings, and the establishment of a domestic yield curve, facilitating long-term lending to the domestic private sector. In addition, the authorities could continue in their efforts to seek debt swaps and debt for development deals from various bilateral official creditors to the extent possible.

Jordan—A New Fiscal Funding Strategy

The government’s fiscal funding strategy since the late 1980s has been characterized by a bias towards external financing due to efforts to secure the maximum possible financing from official donors and creditors. Central government net external financing averaged the equivalent of 6.0 percent of GDP per year in 1993–2002, about one-third of which was debt-creating. At end-2003, the gross external debt stock of the central government stood at the equivalent of about $7.5 billion, 83 percent of GDP. Domestic debt financing has generally been treated as a residual item, aimed at filling the gap between overall financing requirements and funds raised from external creditors or through privatization. In 1993–2002, net domestic borrowing by the central government averaged the equivalent of 0.7 percent of GDP per year. At end-2002, the gross domestic debt stock of the central government was equivalent to about 20 percent of GDP.

Despite progress in fiscal consolidation, Jordan remains one of the most externally overleveraged economies in its income group59 which constrains its foreign currency sovereign credit ratings to within the speculative grade. The fact that Jordan’s external financial liabilities are almost exclusively denominated in foreign currencies results in an element of financial fragility, insofar as government, financial institutions, and corporate balance sheets are exposed, to varying extents, to interest rate or exchange rate shocks. As discussed earlier, Jordan’s public debt has already suffered the consequences of valuation effects in 2002–03 and one of its critical macroeconomic vulnerabilities is the susceptibility of its public-debt profile to exchange losses in the event of depreciation of the Jordanian dinar (JD).

Balance of payments considerations have traditionally necessitated a certain minimum quantum of external borrowing. More than 77 percent of the government’s net borrowing requirements were funded from external sources during 1993–2002. Though necessary from a balance of payments perspective, the funding strategy was not free of fiscal cost. The interest rate on government domestic debt averaged about 3.7 percent per year during this period, while that on public and publicly-guaranteed external debt averaged about 5 percent. In addition to this, external borrowings had to be sterilized through CD issuance by the CBJ. On a consolidated basis, therefore, the true cost of external borrowing averaged some 8.5 percent per year during 1993–2002. Stated differently, every additional 1 percent of GDP worth of annual net domestic borrowing in lieu of net external borrowing during 1993–2002 would have resulted in fiscal savings worth up to JD 2.5 million per year.

The recent strengthening of the balance of payments and increase in gross usable international reserves has afforded Jordan the opportunity for a more selective external borrowing policy. A new fiscal funding strategy with increased emphasis on domestic borrowings is now a possibility, holding out the prospect of accelerated external debt reduction, domestic debt market development, and significant interest savings.

Beginning in 2002, the Jordanian authorities started to take steps to adjust the fiscal funding profile in favor of larger magnitudes of JD-denominated bonds. This process has been intensified in 2003 through the pre-payment of Brady Bonds, the issuing of larger quantities of 5-year government bonds to finance government expenditures, and by not drawing on much of the World Bank Public Sector Reform Loan (PSRL). Sustained implementation of such a policy would help achieve a more balanced distribution between local currency and foreign currency liabilities in the public debt; absorb excess liquidity; develop a longer yield curve; and facilitate longer-term bank lending to the domestic private sector. Such a policy would support the development of Jordan’s domestic financial and nonfinancial private sectors while also reducing Jordan’s vulnerability to external shocks.

H. Potential Vulnerabilities

145. The debt reduction path envisaged in the program faces significant risks in the event of adverse shocks. One of the most important risks is from valuation effects in case the Jordanian dinar were to depreciate. Given the high proportion of external debt, the initial impact on the stock of debt could be substantial, leading to a debt-to-GDP ratio which would remain markedly above the baseline, entailing a continued heavy burden on the budget, and a significant delay in meeting the targets specified under the Public Debt Law.

146. Any reduction in the GDP growth assumptions under the medium-term baseline scenario would make the debt targets difficult to achieve. The program assumes a growth rate of GDP of 5 percent in 2004, accelerating to 6 percent over the medium term. These are predicated on a sharp recovery from the Iraq conflict and a continued rapid expansion of exports.

147. Shortfalls in external grants from program levels could have a negative impact on the debt reduction strategy. The fiscal program for the medium term is based on fairly conservative assumptions about external grants, given Jordan’s past success in mobilizing grants. Hence, there should be limited downside risk of shortfalls in grant receipts. Other sources of vulnerability include higher than programmed real interest rates, and a deterioration in the security environment.

I. Conclusions

148. Even though there have been substantial shortfalls in debt reduction relative to the original baseline in recent years under the current SBA, the debt path for the medium term envisaged in the program is consistent with debt sustainability. Reducing the debt burden, particularly in the light of recent shortfalls and the impact of the war in Iraq, would require a strengthened commitment by the authorities to adhere to the fiscal deficit path in the program.

149. The lack of any cushion suggests that there are risks to the attainment of debt targets in case there are adverse valuation effects, slower growth, loss of external grants, or any political and regional instability which have not been explicitly factored in the baseline scenario. Nevertheless, by pursuing a medium-term fiscal strategy based on the priorities outlined above, the authorities should be able to considerably improve Jordan’s prospects for eventual debt sustainability.

51

Prepared by Tushar Poddar.

52

The definition of debt used is total net debt including collateralized Brady Bonds.

53

See Chapter III for a detailed discussion.

54

The original baseline envisaged a reduction in public debt of 17.7 percentage points of GDP (from 95.8 percent of GDP to 78.1 percent) over the period 2001–03. Instead there has been an increase of 1.5 percent of GDP over the same period. In nominal terms, total net debt has increased to JD 7.1 billion instead of JD 5.7 billion under the baseline.

55

Comprising the consolidated operations of the central government, autonomous public agencies, public financial institutions, nonfinancial public enterprises and local governments.

56

For 2003, the debt-service payments are inflated due to the pre-payment of Par Brady Bonds.

57

9.7 percent in program versus 10.2 in the baseline.

58

3.2 percent for the period 2004-07.

59

Jordan’s external debt of 80.4 percent of GDP at end-2002 compares unfavorably with Lebanon (31.9 percent of GDP), Egypt (31.6 percent of GDP), and Indonesia (35.3 percent of GDP) as of end-2002.

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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: Overall Fiscal Balance Including Grants and Net Government Debt, 1992–2003

    (In percent of GDP)

  • View in gallery

    Jordan Medium-Term Debt Projections, 2000–10

  • View in gallery

    Jordan Medium Term Government Balance Projections, 1998–2010

  • View in gallery

    Cross-Country Comparison of Military Expenditures.

  • View in gallery

    Cross-Country Comparison of Expenditures by Function

Jordan: Overall Fiscal Balance Including Grants and Net Government Debt, 1992–2003

(In percent of GDP)

Jordan Medium-Term Debt Projections, 2000–10

Jordan Medium Term Government Balance Projections, 1998–2010

Cross-Country Comparison of Military Expenditures.

Cross-Country Comparison of Expenditures by Function