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© 2004 International Monetary Fund

September 2004

IMF Country Report No. 04/287

Jordan: Third Review Under the Stand-By Arrangement; and Press Release on the Executive Board Discussion

In the context of the third review under the Stand-By Arrangement with Jordan, the following documents have been released and is included in this package:

• the staff report for the third review under the Stand-By Arrangement, prepared by a staff team of the IMF, following discussions that ended on May 23, 2004, with the officials of Jordan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 15, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

• a Press Release summarizing the views of the Executive Board of the staff report that completed the review.

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.

Copies of this report are available to the public from

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International Monetary Fund

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INTERNATIONAL MONETARY FUND

JORDAN

Third Review Under the Stand-By Arrangement

Prepared by Middle East and Central Asia Department in Consultation with Other Departments

Approved by Amor Tahari and Martin Fetherston

June 15, 2004

Contents

• List of Acronyms

• Executive Summary

• I. Introduction

• II. Recent Economic Developments

• III. Discussions with the Authorities

  • A. Overall Performance under the SBA

  • B. Fiscal Policy

  • C. Monetary Developments, Interest Rate Policy, and Banking Sector Soundness

  • D. Post-Program Monitoring and Other Issues

• IV. Staff Appraisal

• Tables

• 1. Summary of the Macroeconomic Framework, 2000–09

• 2. Summary Fiscal Operations 2000–07

• 3. Summary Monetary Survey, 2001–04

• 4. Summary Accounts of the Central Bank of Jordan, 2001–04

• 5. Summary Balance of Payments, 2000–09

• 6. Consolidated Fiscal Operations and Net Debt of the Public Sector, 2000–09

• 7. Medium-term External Debt and Debt Service, 2000–09

• 8. Indicators of Financial Vulnerability, 2000–04

• 9. Indicators of Bank Soundness, 1998–2003

• 10. Indicators of Fund Credit, 2000–10

• 11. Quantitative Performance Criteria and Indicative Targets under the Stand-by Arrangement, 2004

• Figures

• 1. Selected Coincident Indicators, 2000–04

• 2. Amman Stock Exchange, 1996–04

• 3. Indicators of Poverty, 1997–2002

• 4. Overall Fiscal Balance

• 5. GST, Income Tax, and Customs Duties Collections

• 6. Year-on-Year Merchandise Export Growth 2003–04

• 7. Merchandise Exports, Real, and Nominal Effective Exchange Rate Indices

• 8. International Reserves, Interest Rates, and CD Sales, 1997–04

• Annexes

• 1. Performance under the Current Stand-By Arrangement

• Annex Tables

• 1. Macroeconomic Performance under the Stand-By Arrangement, 2002–04

• 2. Fiscal Performance under the SBA, 2002–04

• 3. External Performance under the SBA, 2002–04

• 4. Structural Performance Criteria and Benchmarks under the SBA, 2002–04

• Annex Figures

• 1. Overall Fiscal Deficit under the SBA

• 2. Export Growth under the SBA

• 3. Current Account Balance under the SBA

• 4. Gross Usable Reserves under the SBA

• Appendices

• 1. Relations with the Fund

• 2. World Bank Group Strategy and Operations

• 3. Statistical Issues

• 4. Letter of Intent

• Attachment to Appendix IV

• 1. Memorandum on Economic and Financial Policies

List of Acronyms

Executive Summary

The Jordanian authorities have requested completion of the third and final review under the SBA. All performance criteria were met and structural benchmarks implemented. Because of the strengthened external outlook, the authorities do not intend to make the remaining purchase under the arrangement. The authorities are keen to maintain close relations with the Fund in the context of the Post-Program Monitoring (PPM) and technical assistance support.

Background: Economic activity has strengthened substantially, following the disruptions caused by the 2003 Iraqi war. Real GDP grew by 6.9 percent in the first quarter of 2004, boosted by exports and domestic demand. Inflation remained moderate through April 2004 (3.2 percent). The central government registered a fiscal surplus of 1.8 percent of GDP in the first quarter of 2004, reflecting strong tax revenues resulting from the pickup in economic activity, better revenue administration, higher foreign grants, and expenditure restraint. Net government debt declined by 8 percentage points to 93½ percent of GDP. Jordan’s external position remained strong—the external current account registering a surplus of 1.0 percent of GDP—despite a surge in imports associated with the robust domestic activity. Reflecting large public debt repayments and settlement of official transfers (US$250 million), gross international reserves fell by US$410 million to US$4.3 billion during the five months through end-May 2004. Interest rates on CBJ-CDs were allowed to increase modestly, reflecting tighter monetary conditions globally. Banking sector health improved significantly in 2003, reflecting stronger profitability and prudent credit policies.

Program discussions: The macroeconomic framework for 2004 was updated to reflect the favorable developments in the first quarter, and the projection for real GDP growth was increased by ½ percentage point to 5½ percent. In 2004, Jordan is essentially insulated from higher international oil prices because the increases in oil import payments and budgetary subsidies are largely matched by increased oil grants. External sector performance is likely to remain strong and the current account surplus is expected to reach 5½ percent of GDP. Gross usable reserves of the CBJ are expected to recover to a comfortable level of US$4½ billion. The strong fiscal performance in the first quarter bodes well for the remainder of 2004 and the program deficit target of 3.9 percent of GDP should be attainable. Additional grants and a somewhat higher tax revenue will offset the loss of the oil surplus and the increase in petroleum subsidies. The authorities intend to limit total budgetary expenditure to the program level with a view to achieving the fiscal deficit target. The authorities recognized an upside potential on the revenue side, and in such an event, they intend to save a large portion of the over performance for further deficit and debt reduction. They believe that the current levels of interest rates are consistent with the revised international reserves target, but are committed to managing interest rates in a flexible manner in line with developments in the spread with U.S. interest rates. The authorities are considering all possible options to resolve the last small bank under temporary CBJ administration and expect that no public funds would be needed for this purpose. These positive developments and outlook notwithstanding, significant challenges remain over the medium term, particularly with regard to oil price vulnerability, grant dependence, and improving the direct tax system.

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Press Release No. 04/136

FOR IMMEDIATE RELEASE

July 6, 2004

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