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


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

VI. Development of Social Protection Institutions60

A. Introduction

150. In the aftermath of the 1989 crisis, Jordan was confronted with a large devaluation and a contraction in output, a decline in real income, and a sharp deterioration in the level of poverty. However, the lack of an adequate social safety net significantly inhibited the effectiveness of the government’s response to these mounting challenges. Prior to the crisis, Jordan had largely relied on the informal family-based social protection system. While the family-based system was useful in smoothing occasional idiosyncratic welfare shocks, it was inadequate in coping with a systemic crisis that dramatically reduced the welfare of all segments of the Jordanian society.

151. Faced with the rapidly deteriorating public welfare and rising poverty, the government responded by reinstating price controls on basic food items and petroleum products. While the price controls helped alleviate the impact on the poor of sharp increases in food and fuel prices, they were poorly targeted, vulnerable to adverse external shocks, and burdensome on the budget. The government attempted to contain expenditure on subsidies associated with the price controls by introducing commodity rationing schemes. However, these schemes were only marginally successful in limiting the subsidies that remained vulnerable to import price volatility.

152. The inefficiency and fiscal unsustainability of price subsidies underscored the need for establishing a comprehensive formal social protection program with three pillars: a state-funded social safety net for the poor and vulnerable segments of the society; a basic self-funded social security system that would provide a comprehensive coverage for all workers in the economy; and a well-targeted and efficient expenditure program for health and education, ensuring equal access to all citizens with the emphasis on underdeveloped areas.

153. Over the past decade, the Jordanian government made substantial inroads in all three areas. In the late 1990s, the government successfully replaced generalized and open-ended subsidies with a system of means-tested cash transfers administered through the National Aid Fund (NAF). Despite some coverage limitations, the cash transfer scheme was much more successful in reaching the poor than the system of generalized subsidies. At the same time, the government restructured pricing of petroleum products with a view to cross-subsidizing the energy products consumed by the poor, while generating net revenue for the budget. Regarding old-age and disability pensions, the government’s strategy focused on consolidating various types of pension plans into an expanded, broad-based, and uniform social security system. Finally, despite the ongoing fiscal consolidation, Jordan maintained a respectable level of social spending, while pursuing an active poverty-alleviating strategy by allocating more resources to areas with high poverty incidence and restricted access to primary health care and public education system.

154. This chapter tracks the progress that Jordan achieved over the past decade in developing social protection programs and the resulting gains in social indicators and alleviation of poverty, despite the difficult economic and geopolitical environment. It begins by providing a historical context for the weak state of institutional arrangements prevailing at the time of the 1989 crisis and sets the stage for discussing the government’s initial response to the deterioration in poverty levels brought on by the crisis (Section B). Section C of the paper examines the evolution of the NAF and the key social safety net systems in Jordan. It starts by describing the introduction and reform of price subsidies and offers a cross-country comparison of subsidy reforms in the MENA region. It proceeds by reviewing the evolution of petroleum product subsidies, including the most recent reforms in this area that were triggered by the loss of the Iraqi oil grant. The section concludes by examining the evolution of the NAF. Next, the paper examines the government’s approach to expanding the social security coverage and making it more equitable by gradually phasing out separate pension schemes for civil servants and the military and consolidating them with the social security system for nongovernmental employees (Section D). Section E discusses the improvements in the effectiveness of health and education spending in Jordan, which helped in economic integration of the poor and the population residing in underdeveloped areas of the country. The paper concludes by outlining challenges ahead and sketching the future reform road map.

B. Social Protection Arrangements Prior to the 1988–89 Crisis

155. In the 1980s, Jordan lacked comprehensive and well-defined social protection institutions. Jordan’s social safety net systems consisted mainly of the traditional family-based social protection networks, generalized food subsidies, and the civil service and military pension systems for government employees and the military. In 1981, the pension system for government employees and the military was augmented by the introduction of state-operated contributory pension scheme for nongovernmental workers, administered through the SSC.

156. Food subsidies constituted a relatively insignificant share of Jordan’s budget until the economic crisis of 1989. In 1983–85, food subsidies accounted for less than 1 percent of total central government expenditure. The reduction in subsidy outlays in the early and mid-eighties followed the steady decline in the share of the population living below the poverty line during the economic boom of 1980–1986. As poverty declined steadily from 24 percent in 1980 to less than 3 percent in 1986–87, food subsidies were reduced from about 1 percent of total expenditure in the early eighties to less than half a percentage point of total expenditure in 1985 and were eliminated completely in 1986. With the elimination of the food subsidies in 1986, the NAF was established to provide a more formal social safety net for the unemployable poor.

157. The 1989 crisis led to a large devaluation of the Jordanian dinar and contraction of real economic activity, and resulted in a sharp increase in poverty. The devaluation caused market prices for food to increase by 78 percent between 1986 and 1992. At the same time, nominal wages did not keep up with the rise in inflation, resulting in a sharp decline in real income. Between 1987 and 1992, average per capita expenditure fell by 22 percent. By 1992, 14.4 percent of population lived below the poverty line, while the poverty gap, measured as the percentage of the national income by which expenditure of the poor would have to be increased to bring them up to the poverty line, widened from 0.3 percent in 1987 to 3.6 percent in 1992. 61

158. The Jordanian government responded to these developments by increasing expenditures on welfare programs. Since the coverage of the NAF was inadequate to address the systemic welfare shock brought on by the crisis, the government reinstated food subsidies in 1988. By 1989, food subsidies made up 7 percent of government expenditure (3.3 percent of GDP).

C. Social Safety Net Systems

159. The sharp deterioration in poverty levels brought on by the 1989 crisis underscored the need for a more comprehensive state-funded social safety net. The government’s initial response was to reinstate the generalized subsidies on basic food stuffs and petroleum products. However, these subsidies proved to be inefficient in reaching the poor and costly for the budget and were gradually replaced by means-tested cash payments administered by the NAF. By the late 1990s, the NAF emerged as the single comprehensive state-funded social safety net for the poor and most vulnerable segments of society. Recent empirical evidence indicates that the expanded NAF played a key role in alleviating poverty in the second half of the 1990s.

The evolution and reform of food subsidies

160. Food subsidies were initially designed to reach the entire population through a direct control of the cost of basic foodstuffs to consumers. The foodstuffs (including wheat, barley, sorghum, rice, sugar, fresh meat, frozen chicken, olive oil, and lentils) were imported solely by the Ministry of Supply and distributed through its outlets to wholesalers and retailers at fixed prices. Other foodstuffs, such as milk, maize, and chickpeas were imported both by the Ministry of Supply and the private sector and also sold at fixed prices to final consumers. In introducing the subsidy, the government did not set a limit on the quantities of goods that could be purchased, nor did it differentiate across consumers based on their income. While most subsidized goods entailed consumer subsidies, the price controls on barley, sorghum, and maize were meant to aid producers of livestock.

161. The system of generalized open-ended food subsidies had a number of serious drawbacks. First, by lowering the relative price of the subsidized foodstuffs without setting any limit on the quantity of purchases, it encouraged the substitution of those goods for other food items, thus increasing demand for the subsidized foodstuffs. In order to avoid shortages caused by the high demand, the Jordanian government had to import large quantities of foodstuffs. Second, since the subsidy was not targeted to the poor, all income groups could benefit from the low prices, resulting in perverse income distribution effects. For example, the 1994 Fund technical assistance (TA) report concluded that the subsidy for wheat largely benefited the upper-income groups, who consumed more bread per capita than the poor. Similarly, generalized producer subsidies for barley provided little benefits to the poor, as most meat is consumed by upper-income groups. Third, since the subsidy was open-ended, in the sense that there was no mechanism in place to put a cap on the subsidy per unit of product, the size of the subsidy was subject to wide fluctuations, depending on the level of international market prices of the imported foodstuffs. As a result, the food subsidy became increasingly burdensome with the continuing depreciation of the Jordanian dinar in 1989–90 and the rise in international commodity prices.

162. Concerned with the pressure of subsidies on the budget, the Jordanian government introduced a number of measures to address some of the above-mentioned drawbacks in 1990. In particular, meat subsidies were eliminated and a rationing system was introduced for sugar, rice, and powdered milk. Under the new system, fixed quantities of these commodities were made available through coupons at subsidized prices. Additional quantities of these commodities were offered at controlled, but nonsubsidized prices. While the new system addressed the problem of excess demand to some extent, it did not resolve the income distribution problems, nor did it completely address the open-ended nature of the subsidy.

163. The subsidy reform of the early nineties, combined with the beneficial developments in the world markets for foodstuffs, resulted in substantial savings to the budget. Following the full implementation of the food coupon system and a decline in the international prices for wheat, the total food subsidy bill fell by 1 percent of GDP to about 2 percent of GDP in 1991. In 1992, the government made further changes to the system by eliminating producer subsidies on maize and sorghum and raising the subsidized price for rice. In addition, the subsidized price of wheat was increased by 12 percent in 1993. The resulting savings, combined with the additional savings realized through the decline in import costs and increases in surpluses on nonsubsidized sales controlled by the Ministry of Supply for imported commodities, led to a further decline in the subsidy bill to 1 percent of GDP by 1994 (Table VI.1).

Table VI.1.

Jordan: Food Subsidies 1990–96 1/

(In millions of Jordanian Dinars)

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Sources: Ministry of Supply, and Ministry of Finance and Customs.

Negative sign indicates subsidy.

164. Despite the authorities’ efforts to curtail the subsidy bill, it remained vulnerable to adverse external developments. The authorities managed to temporarily restrain the expenditure on subsidies by reducing the number of subsidized commodities and adjusting controlled prices to reflect changes in the prices of imports. Nevertheless, the total subsidy bill doubled by 1996, reaching 2 percent of GDP following substantial increases in international prices for wheat and barley. In 1996, the subsidies for these two commodities accounted for two-thirds of the total subsidy bill.

165. Recognizing the need for a swift action to contain the subsidy bill, the authorities launched a comprehensive reform of price subsidies in 1996. With the assistance of Fund technical assistance, the authorities developed an ambitious reform program. In August 1996, the prices of bread and barley were increased sharply to the level of average economic cost and the private sector was permitted to import wheat directly. The short-term impact of the price increase on the poor was ameliorated by compensatory cash payments, amounting to some JD 20 million (0.4 percent of GDP) in 1996.

166. At present, Jordan employs international in-kind grant assistance to subsidize bread consumption. The subsidy is financed through an off-budget, in-kind wheat grants from the United States. In 2001, these grants amounted to $34 million. Despite these quasi-fiscal operations, Jordan’s progress in reforming food subsidies compares favorably to other countries in the region (Table VI.2 and Box VI.1).

Table VI.2.

Jordan: Wheat Grants

(In millions of U.S. dollars)

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Source: Jordanian Embassy in Washington D.C.

Petroleum product subsidies

167. As part of its poverty alleviation strategy in the aftermath of the 1989 crisis, the government introduced petroleum product subsidies for select products. While initially the system resulted in net fuel subsidy, by 1992 the government managed to collect net revenue on its fuel sales by introducing a cross-subsidization scheme, which was combined with a periodic adjustment of local fuel prices to reflect increases in world oil prices. Cross-subsidization maintained the low prices for energy products used for mass transit and electricity generation and for energy products consumed mostly by the poor (e.g., diesel, fuel oil, and kerosene) by setting local prices for these products below world market levels and subsidizing their consumption by charging above-market prices for gasoline.

168. Another factor that allowed Jordan to subsidize select petroleum products, while generating net revenue for the budget, was its oil agreement with Iraq. Since the Gulf War and until the recent war in Iraq, Jordan relied almost exclusively on Iraq to meet its oil needs. Of the total crude oil and refined products imported from Iraq under the food-for-oil program, approximately half took place in the form of a grant (amounting to 3 percent of GDP in 2002), while the other half was sold at preferential below-market prices negotiated each year between the respective governments. The government then sold the oil at preferential prices to the Jordan Petroleum Refinery Company. 62 The wholesale and the retail prices were set by the government. The distribution sector was state-operated, while the retail sector was privately owned and competitive. Since 1992, the cross-subsidization scheme coupled with the preferential oil agreement with Iraq produced a net revenue for the government that was classified as oil surplus under the nontax revenues in the budget. In 2002, the government collected JD 110 million (1.7 percent of GDP) in oil surplus. 63

Subsidy Reform in Jordan—Comparison With Selected Countries in the Region.

Jordan achieved significant success in implementing its reform of food subsidies compared to other countries in the region. Many countries in the region introduced food subsidies at about the same time as Jordan to counteract the negative economic impact of the Gulf War on the poor. In the early nineties, just like Jordan, most countries experienced problems in maintaining control over the rising subsidy bill (Figure VI.1). For example, in 1992 subsidies accounted for 16 percent of total expenditure in Egypt (5.5 percent of GDP). By 1996, Yemen faced a subsidy bill of over 7 percent of GDP, while Iran maintained its subsidies at slightly over 2 percent of GDP.

Figure VI.1
Figure VI.1

Jordan. Cross-Country Comparison of Food Subsidies, 1992–2001

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A006

While significant progress has been made in all the regional countries, performance of Jordan and Yemen stands out. At about 18 percent of total expenditure in 1996, Yemen’s subsidy bill was prohibitively high. Domestically administered wheat and flour prices were 75 percent below their world market levels. The subsidies were supposed to ensure impoverished families access to basic food items at low prices. However, according to World Bank staff estimates, only one-third of the subsidies reached consumers; the rest was captured by importers, distributors, and smugglers to neighboring countries. In addition, just like in Jordan, the poorest groups benefited very little from the subsidies because they spent disproportionately less on wheat and wheat flour than did high-income groups.

In 1996, the Yemeni government initiated a gradual reform of price subsidies through several rounds of administered price increases. Increases, ranging from 10 to 30 percent, took place between the second half of 1996 and January 1999, following a large increase (150 percent) in January 1996. As a result, food subsidies were eliminated entirely by mid-1999. In order to alleviate the negative impact of the subsidy reform on the poor, in 1997 the government established the Social Welfare Fund (SWF)—along the lines of the successful model of the Jordanian NAF—to provide targeted cash assistance to the poorest segments of the population. The SWF was successful in reaching the poor with its coverage increasing dramatically over the years from about 39,000 cases in 1997 to over 400,000 cases in 2001.

169. The oil surplus has been an unpredictable source of budgetary revenue. The revenue from oil surplus fluctuated widely over the years, reflecting the volatility of international oil prices (Figure VI.1). In addition, the complex system of implicit subsidies and taxes that the cross-subsidization scheme entailed was difficult to analyze and forecast. In November 2000, the authorities requested technical assistance from the Fund to advise them on petroleum product pricing. The mission recommended to replace the oil surplus with a system of GST and excises. In 2002, the authorities introduced a 2 percent GST on petroleum products that was raised to 4 percent in May 2003. Nevertheless, administered prices for petroleum products and the extensive system of cross-subsidization remain in place to this day (Table VI.3).

Table VI.3.

Jordan: Cross-Subsidization of Petroleum Products, 2003

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Source: Jordanian authorities; and Fund staff estimates.

Projected Italian ex-refinery price.

170. Cross-subsidization causes a number of market inefficiencies. First, it distorts the market price structure and creates perverse incentives for consumers to substitute cheaper subsidized products for potentially more suitable and effective, but artificially relatively overpriced products. For example, Jordanian consumers are likely to substitute diesel for gasoline by purchasing diesel-powered vehicles, which may be harmful for the environment and may result in inefficient product allocation. In addition, ready availability of cheap fuel for water pumps may lead to over-extraction of water for farming purposes. Furthermore, subsidized diesel is widely used for self-generation of electricity. This may lead to a substantial decline in demand for the more cost-effective centrally generated electricity, possibly resulting in a sizable loss to the electricity company. Finally, since the price of diesel does not reflect its production costs, it is likely to result in a substantial overuse by consumers, exacerbating the required subsidy from the budget.

171. In 2003, the oil surplus system was further complicated by the loss of the Iraqi grant and preferential oil price agreements on account of the war in Iraq. With the commencement of the war in March 2003, oil deliveries from Iraq have ceased, and Jordan had to start purchasing oil at world market prices. In May 2003, the authorities responded to the rising pressure on the budget from the increase in the world oil prices by raising local fuel prices by 4–20 percent. Furthermore, in anticipation of the war, the Jordanian government built up a substantial oil reserve during late 2002 and the early months of 2003. In addition, the government secured agreements with other Arab countries to supply oil to Jordan on preferential terms, essentially satisfying the country’s oil needs until the end of the year.

172. While the generous international assistance provided temporary relief, the medium-term need to recoup the revenue associated with the loss of the Iraqi grant and the oil price discount remained. The authorities recognized the need to adopt a comprehensive strategy to phase out the remaining petroleum subsidies and to reduce the vulnerability of the budget to world oil price fluctuations. As part of the strategy, the government intends to eliminate the subsidies on diesel, fuel oil, liquefied petroleum gas, and kerosene and to liberalize the domestic market for petroleum products. At present, the government anticipates a multi-year transition period during which discretionary price adjustments will gradually eliminate the existing gap between domestic and international prices for the subsidized products. Once the gap has been closed, a symmetric automatic price adjustment mechanism based on international prices will be introduced. The government is also planning to introduce competition into the distribution market in order to speed up the process of the full liberalization of the oil sector.

173. Table VI.4 shows for each petroleum product the price increase that would be required to bring the local price in line with the world reference price made up by the corresponding price from a refinery in Italy to which are added the marketing margin and the GST at a basic rate of 15 percent. Since the gasoline prices are already above the reference prices, an implicit excise tax rate is calculated under the assumption that the GST is levied on the reference price inclusive of the marketing margin and the excise tax; zero excises are assumed on all other products.

Table VI.4.

Jordan: Petroleum Product Pricing

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Source: Jordanian authorities and Fund staff estimates.

Projected Italian ex-refinery price plus domestic and international transportation cost and distribution margin. The reference price fluctuates with the world oil price.

As quoted by the Jordan Petroleum Refinery Company.

Assumes that a 15 percent basic VAT rate is levied on the reference price inclusive of the 10 percent transportation mark-up and the excise tax.

Includes additional trasportation mark-up, excise tax, and GST.

Subsidized products only. Weighted by volume.

174. A weighted average price increase of about 32 percent would be required for subsidized petroleum products to bring their prices to world market levels plus a fair marketing margin and a 15 percent GST all in one step in 2004. Such a sharp increase in domestic petroleum prices would not be politically feasible and would also have a substantial relative price shock for the real sector. Accordingly, the authorities plan to phase-in the required increases in annual steps over a three-year period through 2006. Since the reference prices move in tandem with the world oil prices, a lower projected oil price in 2006 results in lower projected reference prices, and therefore, smaller petroleum product price increases required to reach the reference prices if the envisaged elimination of all subsidies is to be achieved by 2006. The required increase could be even less if much of the domestic electricity generation is converted to natural gas by 2006.

National Aid Fund

175. The National Aid Fund (NAF) was created in 1986 with the objective to protect the poor unable to participate in the labor market by providing cash transfers and subsidized loans. The NAF target group was made up of households with heads who were unemployable because of age, social status, or disability. To be eligible, households could not have income, own assets, nor receive assistance from other sources, including the extended family. The amount of monthly assistance provided to eligible households began at JD 20 in 1987 and increased with household size to a ceiling of JD 40 per month. This ceiling was gradually revised to reach JD 156 per month for a family of six in 2003. Supplemental in-kind assistance was provided to disabled members of needy households as well.

176. The 1996 subsidy reform underscored the importance of the NAF in mitigating the adverse impact on the poor of eliminating food subsidies. In 1997, the food coupons were replaced by monthly cash transfers, while eligibility for the transfers was limited by imposing an income threshold of JD 50 per month. The cash transfers for the pensioners and civil service employees were distributed through a system of supplementary wage and pension allowances; nongovernmental workers had to register with government offices to receive the allowances; and the transfers for the most vulnerable groups were higher and were administered by the NAF. In 1998, total compensatory transfers amounted to JD 38 million (0.7 percent of GDP), half of which were administered by the NAF. In 1999, further changes were introduced when all cash transfers were eliminated, except for NAF beneficiaries, thereby establishing the NAF as the single state-funded social safety net for the poor and most vulnerable segments of Jordanian society.

177. As the food subsidy program was being phased out, the direct cash assistance administered by the NAF became increasingly more important. Thus, the number of beneficiaries of the NAF has increased from 8,000 households in 1987 to 66,000 households in 2002. At the same time, NAF cash assistance increased from JD 2 million in 1987 to JD 38 million in 2002. Furthermore, NAF assistance is estimated to have benefited about 7.4 percent of the population in 2002, up from 2.6 percent of the population in 1997. Preliminary data indicate that in 2003, the number of NAF beneficiaries was 67,000 and the total cash assistance was JD 47 million.

178. While NAF assistance covered a substantial share of the unemployable poor, the overall coverage of the fund remained incomplete. A technical assistance mission fielded by the Fund in November 1994 identified a number of deficiencies in the coverage of the NAF. In particular, the mission pointed out that the coverage could be extended to the working poor, especially when they head large families, and the long-term potentially employable unemployed. In addition, the NAF benefit did not sufficiently exceed the abject poverty line and the authorities were urged to consider generalizing the NAF cash transfers to all households below the abject poverty line to provide a safety net of last resort with complete coverage.

179. Despite the apparent weaknesses in coverage, the NAF was more successful in reaching the poor than the system of the generalized food subsidies. The World Bank’s 1992 and 1997 household expenditure surveys indicate that the food subsidies were generally regressive since richer households tend to consume more per capita than poor households. In 1992, the peak year for generalized food subsidies, the annual value of the food subsidy for the average person in the richest decile was almost twice the value of the food subsidy in the poorest decile. On the other hand, in 1997 as cash transfers replaced generalized food subsidies, the average value of cash transfers for the poorest decile was 1.7 times higher than the average value of cash transfers for the richest decile. The shift from the regressive food subsidies to the more progressive cash transfers resulted in a more pro-poor stance of government programs in 1997 compared to 1992.

180. The substitution of generalized food subsidies for a system of means-tested cash transfers has significantly reduced poverty. The poverty statistics in 1997 indicate that the Jordanian government was successful in reducing poverty, while implementing an ambitious structural adjustment program, including the virtual elimination of generalized food subsidies. The percent of the population living below the poverty line declined from 14.4 percent in 1992 to 11.7 percent in 1997. During the same period, the poverty gap was reduced from 3.6 percent to 2.5 percent, despite the low economic growth rates. The World Bank estimates that if it were not for the successfully reformed government programs, particularly the targeted cash transfers of the NAF, the proportion of population below the poverty line would have stood at 14.6 percent in 1997, thus exceeding the incidence of poverty in 1992.

D. Social Security and Pension Systems

181. Over the past decade, Jordan made substantial inroads in developing a comprehensive state-operated social security system. With the establishment of the SSC in the early 1980s, the defined-benefit civil service and military pension schemes were supplemented by a contributory pension system for private sector workers. However, as the civil service and military pension systems placed an increasing burden on the budget, the government set the goal of developing a single, uniform, and equitable social security system that would provide a comprehensive old-age pension and disability coverage for all Jordanian workers. As the first step, in 1995 the civil service pension system was supplanted by the private sector pension scheme administered by the SSC for all newly hired civil servants, with a view to phasing out the civil service pension system completely over the next 50 years. Next, in 2003 the government closed the military pension system to all new entrants, thereby completing the integration of the public and private sector pension systems. As a result of these reforms, Jordan is well on its way to enjoying a well-designed, equitable, and broad-based social security system that is self-funded and open to all Jordanian workers, both inside and outside of the public sector. The remainder of this section describes the wide-ranging reforms undertaken in recent years on all three fronts.

Social Security Corporation

182. The Social Security Corporation (SSC) was established under the Social Security Law of 1978. It began operations in 1981 by providing social insurance in the form of old-age pension, survivor pension, disability pension, and compensation for work-related accidents, and vocational diseases for nongovernmental workers. The establishment of the SSC brought nongovernmental employees under the social security net, previously only available to government workers through the civil service and military pension systems. The scheme is mandatory for companies with five employees or more and voluntary for others. About 16,200 companies are enrolled, totaling some 462,000 contributors. The number of beneficiaries is currently about 68,000. At present, the ratio of contributors to beneficiaries is 6.8 to 1.

183. The SSC runs a contributory, defined-benefit pension plan. The benefit formula for old-age pensions is based on the average salary over the last two years of activity, multiplied by 2 percent times the number of years of contributions. Once pensions are paid out, there is no subsequent cost of living adjustment. There is a minimum pension of JD 85 per month. Contributions are equivalent to 16.5 percent of gross wages, of which 11 percent is paid by the employer and 5.5 percent by the employee.

184. Financial operations of the SSC are audited by internal and external auditors every year, in addition to the audits performed by the Audit Bureau of the Government of Jordan. The external audit for the year ending December 31, 2002 was conducted by Deloitte & Touche. The audit report stated that net assets of the SSC at end-2002 stood at JD 1.7 billion (26 percent of GDP), of which 51 percent were held in bank deposits and 27 percent in equity holdings (Table VI.5).

Table VI.5.

Jordan: Social Security Corporation Balance Sheet, 2002

(In millions of Jordanian dinars)

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Source: Deloitte & Touche, Consolidated Financial Statements and Auditor’s Report, 2002

185. The Social Security Law stipulates that the financial position of the SSC has to be examined by actuarial studies at least once every five years. The most recent actuarial review, completed in 1997, projected that the cash flow of the SSC would fall below zero in 2028, and that assets would be exhausted in 2042. The SSC responded to some extent by increasing the rate of contributions from 15 percent to 16.5 percent in May 2001 and changing the rules for full pension and early retirement. 64 In addition, the SSC has separated its investment operations from other administrative operations by establishing an independent investment unit staffed with experienced professionals. Nevertheless, pension and disability benefits have increased significantly more than contributions, suggesting that the financial condition of the system has deteriorated. In light of these developments, the current actuarial review, expected to be finalized by end-March 2004 should be instrumental in not only assessing the SSC’s finances, but also in engendering reforms to bring the system into balance in the long run.

The civil service pension system

186. The civil service pension system caters to those civil servants who were hired prior to 1995 and a “special category” of civil servants who continue to enroll in the system under special provision. The special category includes primary legislators, high-level administrators, judges, and diplomats. As of 2001, roughly 69,000 civil servants, about five-sixths of those in previously eligible employment categories, were enrolled, earning JD 270 million (4.3 percent of GDP). The pension system had a total of 43,000 beneficiaries, of which 31,000 received old-age pensions, 1,000 drew disability benefits, and 12,000 received survivor benefits. Total benefit payments were JD 82 million (1.3 percent of GDP).

187. The civil service pension system is a pay-as-you-go program. Contributions are collected at a rate of 8.75 percent of the basic salary for public employees. However, given that the basic salary is less than half of the total salary for civil servants, the effective rate of contributions is less than half this rate. No explicit employer contribution is levied. The pension is calculated as the sum of a basic salary and flat allowances. The basic pensions cannot exceed 125 percent of the final basic salary. The flat allowances include (i) JD 12.5 in personal allowance; (ii) JD 47.0 in cost of living allowance; (iii) JD 7.0 in allowance for married males; and (iv) JD 2.0 allowance per child (up to a maximum of JD 8.0). Eligibility for an old age pension is gained without an age limit: prior to September 2003, 20 years for men and 15 years for women was the minimum necessary employment period for classified employees.

188. Although the phasing-out of the system places a cap on the unfunded liability, in the absence of corrective measures, the system would have experienced a sharp increase in retirements over the next decade. As of 2001, essentially all participants were at least 30 years old with the average age of system participants currently over 41 years.

As this age distribution shifts to the right every year, the system would have experienced a bulge in retirements over the next decade, which could have exerted a substantial strain on the budget over the medium term (Figure VI.4).

Figure VI.2.
Figure VI.2.

Jordan: Oil Surplus, 1997–2002

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A006

Figure VI.3.
Figure VI.3.

Jordan: NAF Transfers, 1987–2003

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A006

Figure VI.4.
Figure VI.4.

Delaying Retirement for Civil-Service Pensions, 2001–51

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A006

189. In 2002, the authorities took measures to limit the impact on the budget of the sharp short-term increase in civil service retirees. The authorities increased the minimum years of service by five years to be phased in by half-year increments each year. It is estimated that a five-year increase in the average length of service would reduce the estimated present value of net liabilities by 5 percent of GDP. In addition, it would keep net benefits from rising above 1.8 percent of GDP and would mitigate the bulge in benefits that was expected over the next 20 years.

The military pension system

190. The military pension system has been in operation since 1959. Military personnel received total compensation (basic salary plus allowances) of JD 278 million (4.4 percent of GDP). The pensions system had a total of 147,000 beneficiaries, of which 63,000 drew benefits based on lengths of service, 31,000 received disability benefits and 52,000 were survivors. Total benefits amounted to JD 209 million (3.3 percent of GDP). At 1 pensioner (not counting branch beneficiaries) per every 1.4 contributor (active-duty personnel) in 2001, the system already had a high ratio of beneficiaries to contributors.

191. The growing cost of military pension impeded a speedy introduction of expenditure policy reforms and fiscal consolidation. The number of beneficiaries has been growing much more rapidly than the number of contributors in recent years. As a result, a growing share of public spending had to be devoted to pensions, crowding out more productive expenditures, including not only social spending, but also outlays on active duty military personnel and other current military spending. Moreover, the large and rapidly increasing share of GDP devoted to pensions made it more difficult to reduce the budget deficit in a sustainable way.

192. The military pensions system is a pay-as-you-go program with very generous defined benefits. Until recently, the system allowed participants to pay a relatively low contribution (8.75 percent of basic salary only) over a short career (as few as 16 years) and then enjoy generous benefits for the remainder of their lives and throughout the eligibility periods for their survivors. In addition, the length-of-service requirement was completely waived for service-related disabilities, a large minimum benefit applied, and beneficiaries received a supplemental benefit that made the system even more generous. The generous disability benefits combined with the recent sharp increase in the incidence of disability raised concerns about the system’s efficiency and long-term solvency. Whereas in 2000 less than 30 percent of all pensioners received a disability pension, in 2001 over 90 percent of new pensioners qualified for a disability award, thus making this award a standard component of the pension package for almost all military retirees, rather than compensation for the severe cost of disability. These generous benefits were further exacerbated by the four-year-rule that allowed officers who have served more than four years at their current ranks to retire with an automatic increase in pension benefits based on the pay at the next higher rank, increasing the basic pension received by an officer by up to 41 percent.

193. As a result of the overly generous benefits, the system ran a deficit of 3.2 percent of GDP in 2001. The deficit has risen in recent years and was projected to rise steeply over the next several years because of (i) the phased effects of a substantial benefit increase awarded in 2001; (ii) the high rate of disability awards for new retirees; and (iii) an expected bulge of new retirees. Moreover, the system was inefficient as in present value terms retirement benefits were greater than active-duty compensation. The net present value of the military pension liability for the years from 2002 to 2051 is estimated to be JD 12.2 billion or 185 percent of GDP in 2002.

194. During 2002–03, the authorities implemented a number of important measures that should significantly reduce future military pension liabilities. In December 2002 the cabinet approved the enrollment of all new military personnel in the pension plan administered by the SSC, effective January 1, 2003. This measure was estimated to reduce the net present value of the government cash flow for military pensions (benefits less contributions, plus SSC contributions) by 40 percent of GDP (Figure VI.5). The cabinet also passed the tightening of eligibility criteria for military disability pensions in June 2003, which was approved by parliament in February 2004. In addition, the four-year rule was eliminated in March 2004. These reforms are estimated to reduce the present value of liabilities by an additional 16 percent of GDP. Furthermore, the government increased the minimum service requirement by military personnel by four years to be phased in by half-year increments each year. Overall, this reform package should help reduce the net present value of the military pension liability by almost 60 percent of GDP to about 125 percent of 2002 GDP.

Figure VI.5.
Figure VI.5.

Projected Net Outlays for Military Pensions, 2001–51

Citation: IMF Staff Country Reports 2004, 121; 10.5089/9781451820317.002.A006

E. Health and Education Expenditure

195. In addition to developing needs-based and means-tested social protection institutions and expanding the social security coverage, the Jordanian government allocated significant resources to public spending on health and education. International comparison suggests that Jordan spends a very respectable amount on health and education programs, compared to the size of its economy. These programs are targeted at improving the quality and standard of living for all Jordanians, with an emphasis on the residents of underdeveloped areas. By ensuring equal access to health and education services for all citizens, the programs play an important role in alleviating poverty and integrating the disadvantaged groups and the poor into the mainstream economy.

196. Improving the quality of basic government services, especially in social sectors, is one of the key goals of the government’s Plan for Social and Economic Transformation (PSET). The PSET was adopted in November 2001 with a view to better addressing the pressing social needs and improving the standard of living for all Jordanians, providing them with better opportunities for finding new jobs and alleviating poverty, without compromising macroeconomic stability that Jordan had achieved with ten years of adjustments and reforms. All PSET expenditure is funded exclusively by foreign grants and therefore is not debt-creating. The education component of PSET increased from JD 22.3 million in 2002 to JD 49.4 million in 2003 (0.7 percent of GDP).

197. Jordan’s success in improving the quality of spending on health and education is reflected in the noticeable improvements in the social indicators. In recent years, Jordan managed to achieve sizable gains in the quality of education, while reducing its education expenditure, indicating an improvement in the effectiveness of public spending on education. While public health indicators appear very impressive, especially compared to other countries in the region, there may be potential savings in improving the quality of spending on health.

Education expenditure

198. At 5 percent of GDP, Jordan’s spending on education exceeds industrial countries’ average (4.7 percent of GDP). Although education expenditure in Jordan has declined by 2½ percent of GDP between 1990 and 2001, Jordan remains the third largest spender in the region, following Yemen and Saudi Arabia (Table VI.6). Regarding public expenditure on education by level, Jordan spends about equal amounts on primary, secondary, and tertiary education. When it comes to spending on primary education, Jordan compares favorably to industrial countries that spend about a third of their education budgets on primary education. At the same time, industrial countries spend over 45 percent of their education resources on secondary education, with only 20 percent of resources devoted to tertiary education. These data suggest that Jordan’s allocative efficiency could be improved by shifting some resources from tertiary to secondary education.

Table VI.6.

International Comparison of Public Expenditure on Education

article image
Sources+A2: UNDP, Human Development Indicators.

Data refer to the most recent year available during the period specified.

Simple average.

199. While Jordan’s spending on education has declined over the past decade, the effectiveness of this spending has increased as indicated by substantial improvements in the quality of education indicators. In particular, the adult literacy rate has gone up from 81.5 percent in 1990 to over 90 percent in 2001, while the youth literacy rate has increased from 96.7 to over 99 percent during the same period. Another important achievement in this area is a dramatic improvement in the net primary enrolment ratio that increased from 66 to 94 percent over the past decade (Table VI.6).

200. Jordan’s ability to improve effectiveness of its public spending, while achieving substantial budgetary savings, can be favorably compared to other countries. For example, many countries in the region spend substantially more on education, but have lower literacy rates and enrolment ratios or show little improvement in these indicators over time. On the other hand, a number of middle income countries in East Asia that are comparable to Jordan, managed to maintain their youth literacy rates and net primary enrolment ratios in the upper 90th percentiles, while spending slightly over 3 percent of GDP on education. This evidence suggests that effectiveness of public expenditure may be more important for achieving government’s social objectives than the size of the spending.

Health expenditure

201. Jordan spends more on public health than any other country in the region. 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. Jordan’s health expenditure increased from 3.6 percent of GDP in 1990 to 4.2 percent of GDP in 2001. In addition, Jordan appears to have achieved a commendable balance between public and private health expenditure, with private spending standing at slightly less than half of total expenditure on health (Table VI.7). The high level of private spending on health and the emphasis on primary health care services indicate that a sizable part of public health expenditure may be largely catering to the needs of the poor.

Table VI.7.

International Comparison of Health Expenditure and Performance, 2001

article image
Sources: UNDP, Human Development Indicators.

Data refer to the most recent year available during the period 1995-2001.



Simple average.

202. Jordan’s commitment to providing quality health care as measured by various public health indicators remains strong. In 2001, close to a hundred percent of population had access to improved sanitation, 96 percent of population had sustainable access to an improved water source, and between 95 and 100 percent of population had sustainable access to affordable essential drugs. With 205 physicians per 100,000 people Jordan outstrips such well-endowed rich countries as Saudi Arabia (153) and Kuwait (160). In addition, Jordan’s access to affordable drugs has reached the level of industrialized countries. These factors have positively influenced Jordan’s life expectancy at birth which at 70.6 years is almost two years higher than the regional average of 68.7 years (Table VI.7). It is also noteworthy that at present, about 60 percent of the population are covered by the two publicly provided health care plans – the military (Royal Medical Services) and the civil service plans.

F. Conclusion

203. 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. By eliminating food subsidies and replacing them with a means-tested system of cash transfers administered by the NAF, Jordan achieved significant savings for the budget, while reaching the poor more effectively and making substantial inroads in reducing poverty levels. The reform of food subsidies was followed by the reform of fuel subsidies, with the net subsidy eliminated in 1992. The recent loss of the Iraqi oil grant underscored the importance of eliminating cross-subsidization in the oil sector in order to address the vulnerability of the budget to world oil price volatility. The Jordanian government responded by developing a strategy to phase out the remaining fuel subsidies by 2006. At the same time, Jordan had to address the rising liabilities of the pension system which placed an ever increasing burden on the budget. The recently completed pension reform is critical in this respect, although it may take several years before the pension savings begin to accrue.

204. Despite these achievements, the government continues to face important challenges in strengthening its social protection institutions. In particular, in order to protect the budget from the mounting pressures of petroleum product subsidies, the government will need to remain committed to the ongoing petroleum sector reform. Furthermore, consideration should be given to improving the coverage of the NAF by extending it to the working poor. It is also important to conduct regular actuarial reviews of the SSC to ensure long-term financial viability of the social security system. Finally, there is scope for improving efficiency of public spending on health.

205. The government will need to remain committed to periodic increases of fuel prices to close the gap between domestic and international petroleum product prices. Once this gap is closed, it will be paramount to introduce an automatic price adjustment mechanism to link the local and the international fuel prices. The authorities should also consider a replacement of oil surplus with a transparent system of the GST and excises on petroleum products. The government’s long-term goal should be full liberalization of the oil sector, once the exclusive concession rights of the Jordanian Petroleum Refinery Company expire in 2008.

206. The authorities should strive to further strengthen the social safety net system. The coverage of the NAF could be improved along the lines of IMF TA recommendations. Furthermore, the problem of unemployment should not be addressed by expanding the military or civil service. Instead, by curbing military and civil service employment and using the ensuing savings to provide adequate infrastructure to the disadvantaged areas and to offer professional training programs, these disadvantaged groups could be gradually integrated into the economic mainstream. At the same time, the NAF will continue covering the unemployable poor.

207. The pension reform is expected to have a beneficial impact over the medium term. The reform is an important step toward long-term fiscal sustainability. However, to safeguard the savings brought on by the reform and to ensure that the reversal of these gains does not take place, the authorities should be mindful of conducting regular actuarial reviews of the SSC and periodically revising pension benefits and contributions to ensure long-term financial viability of the social security system.

208. There is scope for improving the efficiency of public spending on health. In this regard, the focus should be on providing basic health care in an equitable manner to all Jordanians, while encouraging greater cooperation with private health care facilities. At the same time, the promotion of the private health sector in general, and medical tourism in particular, should not be at the expense of providing basic public health services to the poor, including in the remote rural areas. Sixty percent of the Jordanian population is already covered under public health insurance plans. Moving steadily toward more broad or universal coverage still remains a formidable challenge. An improvement in the costing of health care services will be key in establishing a viable and equitable health insurance system covering a broader segment of the population in Jordan.

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Prepared by Daria Zakharova.


R. A. Shaban et al., Poverty Alleviation in Jordan: Lessons for the Future, World Bank, 2001.


The Jordan Petroleum Refinery Company (the Zarqa refinery) operates under a 50-year concession agreement scheduled to expire in 2008.


The oil grant was recorded under budgetary grants and the oil surplus, defined as an operating profit of the Zarqa refinery, was recorded as a nontax revenue.


The minimum number of years of employment necessary to qualify for full pension at the age of 60 has been raised from 10 to 15, and for early retirement at the age of 45 the minimum number of the years of service has been increased from 16 to 18.

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