Jordan: Staff Report for the 2006 Article IV Consultation and Fourth Post-Program Monitoring Discussions
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International Monetary Fund
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Publication Date:
26 Mar 2007
eISBN:
9781451820362
Language:
English
Keywords:
ISCR; CR; discussion; discussions informational annex; broad money; Jordanian dinar; assets growth; banking system; fiscal policy; net lending; interest rate
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This 2006 Article IV Consultation highlights that the Jordanian economy has performed remarkably well in recent years, mainly owing to far-reaching macroeconomic and structural reforms. Despite negative shocks, growth has been robust, inflation has remained low, public debt has continued to fall, and reserves have reached an all-time high. Economic performance remained strong in 2006. Growth is estimated at 6 percent for the year, reflecting buoyant domestic demand, in part financed by large private capital inflows. Average inflation was 6.3 percent, stemming mainly from fuel and imported food price increases.

Abstract

This 2006 Article IV Consultation highlights that the Jordanian economy has performed remarkably well in recent years, mainly owing to far-reaching macroeconomic and structural reforms. Despite negative shocks, growth has been robust, inflation has remained low, public debt has continued to fall, and reserves have reached an all-time high. Economic performance remained strong in 2006. Growth is estimated at 6 percent for the year, reflecting buoyant domestic demand, in part financed by large private capital inflows. Average inflation was 6.3 percent, stemming mainly from fuel and imported food price increases.

I. Background

1. The Jordanian economy has performed remarkably well since 2000. Despite large negative external shocks (increasing oil prices, uncertainties related to the Iraq war, and volatile foreign grants), growth increased to 6 percent during 2001–06, almost double the preceding five-year average, and total factor productivity rose by 2½ percent a year, far above historical norms. The public debt ratio fell sharply. The exchange rate peg to the U.S. dollar anchored inflation, which generally remained in low single digits. Despite a large current account deficit, foreign reserves are now at an all-time high due mainly to a surge in foreign (regional) direct investment.

A01ufig01

Real GDP

(1995=100)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Jordan: Average Output Growth and Sources, 1986–2006

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

This is proxied by total employment.

A depreciation rate of 10 percent is assumed to calculate the capital stock. Capital share is assumed to be 0.44. Varying the capital share makes very little difference to the results.

2. This success is due mainly to far-reaching macroeconomic and structural reforms. Under successive Fund-supported programs, the Jordanian authorities pursued sound fiscal policy; negotiated successfully several debt reschedulings; reduced budget deficits (following the passage of the 2001 Public Debt Law); eased trade barriers substantially, acceded to the World Trade Organization in 2000, and completed several bilateral trade deals (notably the free trade agreement with the U.S.); deregulated extensively food and fuel prices; undertook a successful privatization program; and took measures to improve the business environment

Jordan: Main Macroeconomic Indicators, 1990–2006

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3. Jordan’s performance also reflects a stable and supportive political environment. The cabinet, reshuffled in November 2006, is pursuing its mandate to implement the 10-year National Agenda, which aims at advancing political and economic reforms, and strengthening internal security. And, following a forum held in July, the government has established the “We are All Jordan” Commission to help implement reforms in the economic and political spheres. General elections are scheduled to be held in 2007.

4. Against this background, discussions covered policies needed to sustain Jordan’s strong economic performance. The authorities’ response to past Fund advice is summarized in the table below. The specific questions discussed with the authorities arise in the following areas:

  • The medium-term external outlook and competitiveness: Will the recent narrowing of the current account deficit continue? Is the level of the peg appropriate? Are there any competitiveness issues?

  • The macroeconomic policy mix: What kind of fiscal adjustment is required to maintain macroeconomic stability, reduce the current account deficit, and further lower the public debt-to-GDP ratio? How can monetary policy contribute to maintaining the exchange rate peg and reducing the current account deficit?

  • Structural reforms to support medium-term growth and reduce unemployment: What macroeconomic and structural reforms are needed to maintain robust growth and reduce unemployment and poverty? What steps are needed to further improve the business environment?

Jordan: The Authorities’ Response to Fund Policy Advice from 2005 Article IV Discussions

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II. Recent Developments

5. With sound policies in place, economic performance remained strong in 2006(Table 2 and Table 3). Growth of 6¼ percent was recorded during the first three quarters, and is estimated at 6 percent for the year. This reflected buoyant domestic demand (private consumption and investment), in part financed by large private capital inflows. Although average inflation increased to 6.3 percent, this stemmed mainly from fuel and imported food price increases, with core inflation (excluding food and energy) well contained. Unemployment declined to 14 percent, from 15 percent a year earlier. The Amman Stock Exchange index declined sharply in the first half of the year, but has since stabilized. Following interest rate developments in the U.S., Jordan’s yield curve flattened over the course of the year.

Table 1.

Jordan: Indicators of Fund Credit, 2002–11

(In millions of SDR)

article image
Sources: IMF Finance Department; and Fund staff estimates.

On an expectation basis for purchases made after November 17, 2000.

Includes SDR charges.

Table 2.

Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2003–12

(Quota: SDR 170.5 million)

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Sources: Jordanian authorities; and Fund staff estimates and projections.

Net of short-term foreign liabilities, foreign currency swaps, and commercial bank foreign deposits with the CBJ.

NIR exceeds gross usable international reserves in years where the net fund position is negative.

Table 3.

Jordan: Indicators of Financial Vulnerability, 2002–06

(End of period, unless otherwise noted)

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Sources: Jordanian authorities; Bank for International Settlements; WEO; and Fund staff estimates.

Data for 2006 are as of end-June.

Short-term public debt is defined as nonresident treasury bill holdings and amortization falling due during the year

Excluding foreign currency deposits held by commercial banks with the central bank

A01ufig02

Contribution to y-o-y GDP Growth

(percentage points)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

A01ufig03

Inflation

(y-o-y, in percent)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

A01ufig04

Yield Curve

(in percent - end of period)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

A01ufig05

ASE: Main Indices

(2000=100)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

6. The current account deficit narrowed—albeit to a still-high 16 percent of GDP—and was financed by long-term capital inflows Table 4. A broad-based slowdown in import growth and continued strong performance of exports and remittances have been key. At the same time, private capital inflows rose to record levels on the back of foreign investments in banking, mining, telecommunications, and real estate. As a result, gross usable reserves reached US$6.1 billion at end-2006—more than US$1¼ billion higher than at end-2005—equivalent to about five and a half months of prospective imports Figure 1. Following four years of modest depreciation, the real effective exchange rate (REER) appreciated by 6 percent during 2006, a return to levels prevailing in the early part of the decade.

Table 4.

Jordan: Summary Balance of Payments, 2003–12

(In millions of U.S. dollars, unless otherwise noted)

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Sources: Jordanian authorities; and Fund staff estimates.

The change in Fund credit outstanding is deducted from the change in NFA from monetary survey.

The difference between the face value of debt reduction and the cost of debt operations.

In months of prospective import of goods and nonfactor services (GNFS) of the following year, excluding imports for re-export purposes.

Figure 1.
Figure 1.

Jordan: External Sector Developments, 2000–06

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Sources: Jordanian authorities, JGATE, US OTEXA and Fund staff projections.

7. The fiscal situation also improved (Tables 5 and 6, Figure 2.) Stronger revenue performance (income tax and general sales tax receipts), larger-than-expected grants (especially from Saudi Arabia), and the authorities’ decision to raise domestic fuel prices (lowering substantially oil subsidies) more than offset higher primary spending on transfers, security, and wage bonuses. Preliminary estimates suggest that the fiscal deficit (including grants) was about 4¼ percent of GDP in 2006 and 7½ percent excluding grants, both lower than in 2005. The deficit was financed comfortably without adding to macroeconomic pressures. A narrowing of the fiscal deficit, together with partial privatization of Jordan Telecom and strong growth, reduced the public debt-to-GDP ratio further, to 73 percent by end-2006, from 83 percent in 2005.

Table 5.

Jordan: Summary of Fiscal Operations, 2003–12

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Sources: Jordanian authorities; and Fund staff projections.

Staff projections are in line with the policy framework agreed with the authorities.

Until 2003, the authorities recorded oil grants net of the fuel subsidy, whereas starting in 2004 the fuel subsidy is shown as expenditure and oil grants are calculated at market prices. Starting in 2007, revenue from petroleum products is shown as oil surplus in the nontax revenue.

2005 data include JD 58.5 million of spending carried out in 2004 but paid in 2005.

Includes some current expenditure, such as maintenance and wage-related spending.

Includes discrepancy and spending out of privatization proceeds. In 2003, includes spending on building up the strategic oil reserve.

2007 preliminary budget includes JD 55.2 million (about 0.5 percent of GDP) amortization to IMF.

Domestic debt is net of government deposits with the banking system.

Table 6.

Jordan: Summary of Revenues and Expenditures, 2003–12

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Sources: Jordanian authorities; and Fund staff projections.

Staff projections are in line with the policy framework agreed with the authorities.

Includes some current expenditure, such as maintenance and wage-related spending.

Figure 2.
Figure 2.

Jordan: Fiscal Sector Developments, 2001–06

(in percent of GDP)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Sources: Jordanian authorities; and Fund staff estimates.

Jordan: Summary of Fiscal Operations, 2004–06

(In percent of GDP, unless otherwise noted)

article image
Sources: Jordanian authorities; and Fund staff projections.

8. Meanwhile, monetary policy supported well the U.S. dollar peg (Tables 7 and 8). The spread on 3-month JD-denominated CDs issued by the Central Bank of Jordan (CBJ) over the U.S. dollar 3-month T-bill rate has been kept to a 1½–2 percentage point range during the past year. Broad money increased in line with nominal economic activity, with strong private sector credit growth (24 percent year-on-year) broadly offset by reductions in credit to government (privatization receipts) and a large contraction in other items net (bank capital increases). The dollarization ratio has been stable, at about 27 percent of deposits—reflecting continued confidence in the Jordanian dinar (JD).

Table 7.

Jordan: Summary Monetary Survey, 2003–08

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Sources: Central Bank of Jordan; and Fund staff estimates and projections.

Includes central budgetary government and own-budget agencies, but excludes SSC.

Excludes UN compensation funds and Brady bonds held by Jordanian banks.

Table 8.

Jordan: Summary Accounts of the Central Bank of Jordan, 2003–08

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Sources: CBJ; and Fund staff estimates and projections.

Excludes UN compensation funds and Brady bonds held by Jordanian banks.

Excludes foreign assets pledged as collateral for the 1993 commercial debt restructuring and the yearly change in foreign currency swaps.

A01ufig06

Interest Rate Spread, 2002–07

(in percentage points)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

III. Policy Discussions

A. Macroeconomic Outlook

9. The macroeconomic outlook is positive, with steadily declining inflation and a sustained growth rate of 6 percent (Figure 3.)

Figure 3.
Figure 3.

Jordan: Illustrative Medium-Term Macroeconomic Framework, 2000–12

(In percent of GDP, unless otherwise stated)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Sources: Jordanian authorities; and Fund staff estimates.

  • Under the currency peg, and as the oil and food price shocks work their way through the system, inflation is expected to fall to 5.7 percent next year and then to decline to levels closer to those of the U.S.

  • The high growth rates experienced over the last five years—well in excess of what would be expected from factor accumulation—are indicative of a structural shift in trend growth, likely reflecting the impact of Jordan’s ongoing reforms, a major step up in foreign direct investment (FDI) and private investment levels, and improving productivity.

  • For next year, the authorities expect growth to remain strong given the coming on stream of large investment projects. Staff believes that growth could be slightly lower because of slowing housing and equity markets (wealth effects), declining corporate profits (investment effects), and the delayed effects of higher interest rates.

10. The external outlook is more uncertain, but staff’s analysis suggests the risks are limited given recent trends.

  • While the current account deficit has been large in the past few years, it has partly reflected a sizable increase in private investment. Foreign investors have ratcheted up operations in Jordan since 2003, boosting private investment (and associated imports) by an estimated 8 percentage points of GDP. But this has also increased substantially Jordan’s foreign exchange earning capacity for the coming years.1

  • The current account is expected to narrow further. The strong export momentum of recent years is likely to continue, reflecting the free trade agreement with the U.S., strong regional demand, and large investments in traditional export sectors. Import growth is projected to stabilize on account of falling import unit prices (a substantial reversal of recent trends) and import volume growth more in line with overall economic activity. Assuming tourism and remittance growth in line with recent norms, the current account deficit would decline steadily to 7½ percent of GDP by 2012.

  • The narrowing of the current account deficit will come mainly from higher savings. Investment is expected to decline only modestly and from a high starting level, supporting Jordan’s medium-term growth prospects. Savings should increase, however, from 11 percent of GDP in 2006 to about 18 percent in 2012. Public saving increases reflect medium-term fiscal adjustment. Private savings are also expected to increase—as tighter credit conditions, weaker asset prices, and declining fuel and food subsidies put private consumption back on trend.

  • External debt dynamics and liquidity ratios do not signal vulnerability. With a falling current account deficit, and continued strong FDI inflows, reserve ratios to imports and short-term debt should remain comfortable, and external debt (mostly concessional) could be halved in five years (to 23 percent of GDP). As discussed in the external debt sustainability analysis (DSA), these baseline projections are robust to several assumed shocks, but are more sensitive to private capital inflows, including regional FDI (Appendix I).

B. Fiscal Policy

11. The authorities intend to base their policies on achieving a public debt-to-GDP ceiling of 60 percent by 2011.2 They are considering updating the Public Debt Law’s existing 80 percent limit, which was instrumental in securing past adjustment. At a minimum, meeting the new target will likely imply overall budget deficits (including grants) not exceeding 3½ percent of GDP a year over the medium term. However, a still-high public debt, large current account deficits, and uncertainties over foreign grants and capital inflows would suggest that an even more ambitious fiscal adjustment is warranted. The fiscal DSA highlights the dependence of debt sustain ability on sustained fiscal adjustment (Appendix II).

A01ufig07

Revenue and Expenditure, Average 2000–05

(in percent of GDP)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

12. Both sides agreed that medium-term fiscal adjustment should rely primarily on spending measures. With the Jordanian economy well taxed, the authorities indicated that any higher tax revenue (on top of higher expected fuel-related revenues, see below) should come from further strengthening tax administration and broadening the tax base. Accordingly, the authorities will concentrate their efforts on keeping non-priority current spending constant in real terms, while protecting priority spending. This requires savings on transfers and other current spending, a better targeted social safety net, and improved public financial management (see table below).

Jordan: Summary of Fiscal Operations, 2006–12

(In percent of GDP)

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Sources: Jordanian authorities; and Fund staff projections.

2007 preliminary budget includes JD 55.2 million (about 0.5 percent of GDP) amortization to IMF.

13. The draft 2007 budget is consistent with the new medium-term debt target. The overall deficit, including grants, is set to improve by about 1 percentage point of GDP, to 3.4 percent. While planned fiscal adjustment could have been more ambitious, the authorities indicated that this was the best they could do given high priority spending needs. (These include large one-off defense and security spending of about 2 percentage points of GDP that is expected to be unwound the following year.) At the same time, the authorities had reiterated their plan to eliminate fuel subsidies in 2007, to be followed by an automatic formula-based fuel price adjustment mechanism to help insulate pricing decisions from political considerations.3 In addition, they are considering introducing specific inflation-indexed excises and full general sales tax (GST) on selected petroleum products that could generate at least 1 percent of GDP a year, although this will not likely take place this year.

14. Despite continued fiscal adjustment, securing appropriate domestic financing will resume its importance over the medium term. Although requirements are expected to remain low next year, net domestic financing will likely average 2¾ percent of GDP on an annual basis over 2008–12. This is due to a marked decline in net foreign financing—linked to an end of Paris Club reschedulings—and completion of the privatization program. The authorities are considering extending the yield curve beyond five years and issuing long-term JD-denominated bonds on regional markets mainly to test the confidence of regional investors in the JD and to avoid squeezing private sector credit. They are also considering issuing Islamic financial instruments (sukuks) for budget financing needs and for mopping up excess liquidity of Islamic banks.

15. The authorities intend to continue with structural fiscal adjustment as a key part of their reform agenda:

  • Tax and expenditure policy measures include broadening the GST base; strengthening the income tax regime; phasing out food subsidies; and proceeding with civil service reform.

  • Revenue administration measures are continuing apace, in line with Fund technical assistance recommendations. These include strengthening further the large taxpayer office and setting up medium taxpayer offices. Staff called for accelerating reforms in the area of public financial management, including on strengthening macrofiscal management, completing work on the treasury single account, modernizing the budget classification, implementing Government Financial Management Information System (GFMIS), and strengthening budget processes.

  • Reforming the pension system is essential for its long-term viability. Although the Social Security Corporation has been achieving surpluses of about 1½ percent of GDP, it needs to put its finances on a sustainable footing to ensure that early retirement is actuarially fair, benefits are linked to lifetime contributions, and pensions are indexed to inflation to prevent an erosion of their real value over time. The World Bank is providing assistance in this area.

C. Monetary and Exchange Rate Policy

16. The CBJ stressed its commitment to continued prudent monetary policy, to maintain the dollar peg and keep inflation low.

  • The CBJ and staff consider the existing interest rate spread over U.S. interest rates appropriate, with no pressures evident in the foreign exchange market. International reserves are adequate, covering more than five months of prospective imports.

  • With the recent inflation increase reflecting mainly a one-time jump in the price level due to supply shocks, staff and authorities do not see a need for an immediate monetary response. The CBJ stands ready, however, to tighten monetary policy further should inflation show signs of becoming entrenched.

  • The CBJ intends to continue to remove excess liquidity through the issuance of CDs. This will help slow domestic credit growth, and contain consumption and imports. It will also help strengthen further the interbank market by reducing reliance on the CBJ’s overnight deposit window. The CBJ is also considering increasing the frequency of its CD auctions to help better manage aggregate liquidity conditions in the market.

  • The CBJ and the ministry of finance (MOF) will continue to coordinate closely. The government is considering options to retire gradually its debt to the CBJ (incurred in earlier years), including through the issuance of marketable interest-bearing securities.4 Such an initiative will not only bolster the CBJ’s profitability and its operational independence, but also help jumpstart the domestic bond market since 40 percent of government debt is held by the CBJ.

A01ufig08

Excess Reserves and Overnight Interest Rate

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

17. Staff agrees with the authorities that the exchange rate peg provides a stable nominal anchor. This requires supportive macro economic and structural policies, including bringing inflation in line with that in the U.S. The value of the dinar is appropriate from several perspectives (Box 1):

Jordan: External Outlook and Competitiveness

Although Jordan’s current account deficit is large, external sustainability is not a concern. Even with high oil prices and the continued presence of Iraqi migrants (key factors behind the import surge of recent years), import growth moderated in 2006, aided in part by adjustments in domestic fuel prices. At the same time, one-third of the current account deterioration reflects a jump in private investment (the counterpart to rising capital goods imports), a foundation for future growth. The external DSA also suggests no real grounds for concern.

The outlook for the current account and external competitiveness appears positive:

  • REER and terms of trade: The REER level appreciated by 6 percent this year. However, this follows four years of steady depreciation, and returns the REER to levels prevailing in the early part of the decade, a period of strong export growth. And, as explained in the main text, export growth, gains in market share, productivity improvements, and the capital inflow surge do not suggest misalignment of the dinar.

A01bx01ufig01

Effective Exchange Rates

(2000=100)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Source: IMF Information System; and Central Bank of Soundness.

  • Exports volumes: Annual export volumes have grown by 14 percent on average since 2000, aided by a free trade agreement with the U.S. and strong mineral exports to the Middle East and Asia. These developments, in addition to recent sector-specific agreements covering agriculture and pharmaceuticals, should help to sustain Jordan’s strong export performance in the years ahead.

The outlook for the capital and financial account looks similarly positive. Despite the large current account deficit, there are no signs of foreign exchange shortages, given record remittances and FDI (both near 20 percent of GDP). Looking ahead, new FDI inflows, although likely to fall following exceptional bank- and telecom-related flows in 2006, look set to remain well above US$1 billion a year over the medium term reflecting (i) record registrations of new investor commitments; (ii) privatization plans; (iii) inflows into special economic zones of about US$½ billion a year; and (iv) announced real estate, retail, and tourism projects that could collectively bring inflows of US$3–5 billion over the next five years.

  • The current account deficit has not been associated with weak export performance, a typical symptom of a misaligned exchange rate—exports have been growing at double-digit rates for five years. Market shares in the U.S. have risen substantially, despite tough competition in the apparel industry, and productivity in the manufacturing and textile sectors has increased sharply in recent years (Figure 1).

  • There are no signs of foreign exchange pressures, with the CBJ a net buyer of foreign exchange in the past few years, and net foreign assets of the banking system increasing substantially.

  • While the REER appreciated modestly in 2006, the equilibrium REER might have appreciated with the recent surge in private capital flows.

  • Finally, the dramatic increase in FDI suggests confidence in the economy’s ability to generate sufficiently high rates of return in the future, and indicates investors’ favorable views on prevailing competitiveness conditions.

D. Financial Sector Policies

18. Bank indicators remain sound despite the major correction in the equity market. Capital adequacy and liquidity ratios are comfortable; nonperforming loans are low and provisions high; profitability has increased despite narrowing loan margins; and polarization remains steady.

A01ufig09

Private Bank Deposit-Lending Rates

(In percent)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Jordan: Indicators of Bank Soundness, 2000–06

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Source: Central Bank of Jordan.

The regulatory minimum is 100.

This indicator was 0.5 in Morocco, 0.6 in Egypt and Tunisia, 0.8 in Lebanon, and 3.2 in Kuwait as of end-December 2005.

This indicator was 6.3 in Morocco, 6.9 in Tunisia, 10.7 in Egypt, 11.9 in Lebanon, and 25.7 in Kuwait as of end-December 2005.

19. The authorities have made much progress on adopting key FSAP recommendations in the areas of banking regulation and supervision. A prompt corrective action framework and comprehensive corporate governance/risk management guidelines have been published, and off-site surveillance should soon benefit from the installation of a new electronic reporting system. The implementation of Basel II’s Second Pillar is progressing well. The latest Anti-Money Laundering/ Combating Financing of Terrorism (AML/CFT) assessment of Jordan revealed a need to improve the overall legislative and institutional framework. As part of the authorities’ response to these findings, parliament is expected to pass soon the AML/CFT legislation, prepared with World Bank advice. The Credit Bureau Law is at discussion stage. The CBJ welcomed the prospect of an FSAP update, possibly during the second half of 2007, once readiness for Basel II is complete and payments system reforms are fully implemented.

A01ufig10

Private Sector Credit Growth

(y-o-y, in percent)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

20. However, rapid private sector credit expansion calls for continued vigilance and strict bank supervision. New forms of lending, such as margin and noncollateralized loans, as well as credit card usage, have grown rapidly over the past two years, and banks may not have the capacity to assess associated risks. And the consequences of banks’ increased indirect exposure to a declining stock market could become more visible in 2007. Against this backdrop, the CBJ has improved its staffing to support on- and off-site supervision activities, and has started to enforce a finer classification of credit facilities and associated stricter provisioning rules since June 2006.

E. Investment Climate

21. The authorities are determined to build on Jordan’s strong record of attracting regional investors.

  • This will require further improvement in the business environment (the World Bank’s latest Doing Business Survey has shown slippages in most areas except trade). Possible reforms here include simplifying procedures for starting and closing a business, and for registering property; improving credit information through a Credit Bureau Law; increasing labor market flexibility by containing public sector wage increases and easing hiring and firing legislation; and strengthening further basic infrastructure.

  • Continued privatization will also help. In this context, the authorities plan to sell stakes in Royal Jordanian Airlines and three electricity generation and distribution companies, as well as to sell in early 2007 the remaining shares in Jordan Telecom.

  • The authorities see a greater role for the use of public private partnerships (PPPs) in attracting investment. Potential schemes include projects related to water supply, airports, and railways, among others. They acknowledged that any plans to introduce PPPs should be accompanied by an appropriate legal and institutional framework, and proper accounting and transparent disclosure of fiscal risks.

IV. Staff Appraisal

22. Jordan’s economic performance in recent years has been stronger than expected by staff. Despite negative external shocks, growth has increased sharply and inflation has remained low, anchored by the exchange rate peg. Public debt has continued to fall, foreign reserves are at an all-time high, and banks have gathered strength. Although the current account deficit is high, it is narrowing and has been comfortably financed mainly by long-term capital inflows.

23. This success reflects successive rounds of supportive economic policies. Over the past decade, the Jordanian authorities have pursued sound fiscal policy, limited CBJ public credits, maintained the exchange rate peg through prudent monetary policy, lowered trade barriers, deregulated domestic prices, implemented a successful privatization program, and improved the business environment.

24. Sustaining this good economic performance is now the key challenge Jordan faces. Despite its major achievements, Jordan’s current account deficit and reliance on capital inflows remain high, as does its public debt burden. And still-high unemployment and poverty also have to be tackled. Making further progress on these issues requires both sustained policy reforms and a supportive external and regional environment.

25. The authorities’ policy package appropriately relies primarily on continued fiscal adjustment. This is expected to lower the debt burden further and support the currency peg and low inflation. It should also contribute to a sharp narrowing of external imbalances over the medium term, with the current account deficit falling sharply, and external debt halving, to 23 percent of GDP, by 2012. Further structural reforms are also needed to improve the investment climate, create jobs, and support growth.

26. Staff believes that the introduction of a new binding public debt ceiling—60 percent of GDP by 2011—will play a critical role. The previous fiscal anchor worked well, guiding successive governments to adopt a series of budgets that helped further ease Jordan’s debt burden. To help ensure that the new anchor is similarly successful, the new target should be legislated and accompanied by a medium-term path for the primary balance (excluding grants, given their volatility) in line with the new target. The margin created by the recent oil price declines should be used to adjust to negative external shocks, rather than to make room for additional spending or tax cuts. Also, measures to further develop the domestic debt market would be important to secure adequate financing on reasonable terms over the medium term.

27. Achieving the new debt goals will require spending restraint and ambitious fiscal structural reforms. Initial steps should include the introduction of an automatic fuel price adjustment mechanism—current international fuel prices afford the opportunity to do this without an accompanying price increase—and specific inflation-adjusted excises on selected petroleum product. This fuel price adjustment mechanism should play a key role in preventing the re-emergence of fuel subsidies in case world fuel prices increase in the future. With Jordan already well taxed, and beyond resisting pressures to cut taxes (e.g., recent parliamentary income tax law proposals), the new debt targets will mainly require keeping current primary expenditure constant in real terms. Given competing demands on expenditure, eliminating fuel subsidies in early 2007, containing nonpriority current spending, better targeting the social safety net, and improving public financial management should be priorities. Additional capital spending should also be well prioritized with due consideration to absorptive capacity constraints.

28. The 2007 budget is consistent with the new medium-term fiscal targets, but more ambitious adjustment would have been desirable. Not only would this make reaching the debt target less susceptible to shocks in the outer years, it would likely help with the current account deficit and inflation. It would also set the stage for lower domestic financing needs in the medium term, thereby limiting any potential crowding out of private sector activity. Further adjustment might have been achieved through containing nonpriority current and capital spending growth.

29. The dinar is fairly valued and the exchange rate peg should continue to serve Jordan well as a nominal anchor. The interest rate spread of CBJ CDs (1½–2 percentage point range) relative to the U.S. 3-month T-bill has contributed to maintaining confidence in the peg. But the CBJ needs also to remove remaining excess liquidity through the issuance of additional CDs. This should help slow domestic credit growth over time and further strengthen the interbank market. Staff welcomes the authorities’ decision to keep credit and inflation developments under close review—and to react as needed should developments diverge from expectations. Staff also welcomes the joint plan of the CBJ and the MOF to strengthen CBJ’s balance sheet.

30. Staff welcomes the authorities’ commitment to a strict financial sector supervision. A sound banking system will provide a base for sustainable growth in Jordan. Banks are now well capitalized, nonperforming loans have declined and profits remain comfortable. The implementation of FSAP recommendations, including introducing a prompt corrective framework and improved off-site surveillance, is welcome. Staff looks forward to the early passage by parliament of AML/CFT legislation and to an FSAP follow up later this year.

31. The authorities’ commitment to continue with PPM is welcome. This reflects the continued close and fruitful cooperation between the authorities and staff.

32. It is recommended that the next Article IV consultation be held on the standard cycle.

Table 9.

Jordan: Central Government Medium-Term External Debt and Debt Service, 2003–12

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Sources: Jordanian authorities; and Fund staff estimates and projections.

Includes government guaranteed external debt.

On a commitment basis.

For 2003, includes prepayments of $456 million.

Table 10.

Jordan: Consolidated Public Sector Fiscal Operations and Net Debt, 2003–12

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Sources: Jordanian authorities; and Fund staff estimates. Latest data available.

Includes guaranteed debt and Brady bonds excluding their collateral value.

Own-budget agencies domestic banking system debt only. Domestic and external debt of these agencies are captured under the central government debt.

Includes net debt of subnational governments. Transfers and common debt obligations between sectors are eliminated.

CBJ assets are net foreign assets plus net domestic assets less currency in circulation.

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

Appendix I: External Debt Sustainability Analysis

Jordan’s external debt is expected to be halved in five years under the staff’s baseline scenario (Table 9 and A.1.) Besides favorable macroeconomic policies, this assumes a continuation of the cautious external borrowing policies adopted by the government in recent years, which has reduced annual external borrowing to an average of 1.8 percent of GDP in 2005–06, half the borrowing rate in the early part of the decade. The projections also reflect expectations that Jordan will rely predominantly on concessional sources of external financing over the next five years (mainly the World Bank).

Table A.1.

Jordan: External Debt Sustainability Framework, 2001–12

(In percent of GDP, unless otherwise indicated)

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Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

Defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) and rising inflation.

For projection, line includes the impact of price and exchange rate changes.

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

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both noninterest current account and nondebt inflows in percent of GDP

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and nondebt inflows in percent of GDP) remain at their levels of the last projection year.

The debt reduction path is robust to the usual bound tests, but shows more sensitivity to an assumed sharp decline in non-debt creating capital inflows:

  • Standard bound tests (Figure A.1) reveal that external debt sustainability is most vulnerable to developments in the current account position. If the actual current account were one-half standard deviation worse than currently assumed, there would be only a marginal decline in the debt ratio by 2012. At the same time, bound tests show that the debt-to-GDP ratio is robust to shocks in the external interest rate or GDP growth. A sharp depreciation would lead to an immediate deterioration in the debt ratio, but would not have an adverse impact over time, provided other assumptions remain achievable.

  • A potentially important source of risk in Jordan’s case is a shock involving a larger-than-expected decline in (non-debt creating) capital inflows. To assess the impact of such a decline, a shock scenario is considered in which capital inflows remain the same as in the baseline scenario for 2007, but fall to the historical average for the remainder of the projection period. This scenario shows that the debt ratio would no longer decline (it remains broadly unchanged from its current level by 2012), leaving the economy more exposed to other shocks.

  • If key assumptions are held at their historical averages, Jordan’s debt would fall even faster than expected, due to the high current account surpluses that have characterized most of the period prior to 2004.

Figure A.1.
Figure A.1.

Jordan: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Sources: Jordanian authorities; and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent ½ standard deviation shocks. Figures in the boxes represent the average projections for the respective variables in the baseline and the scenario being presented. The 10-year historical average for the variable is also shown.2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2006.

Overall, the debt sustain ability analysis shows that policies that help reduce the current account deficit and maintain the recent growth and FDI momentum would provide the strongest assurances of a sustainable debt position.

Appendix II: Public Debt Sustainability Analysis

Public and publicly guaranteed debt is expected to decline steadily to just above 50 percent of GDP by end-2011 under the baseline scenario (Table 10 and A.2) Fiscal adjustment is expected to proceed as discussed in the main text, anchored by the new medium-term debt goal. Also, the government is assumed to continue to abstain from short-term and commercial borrowing, and external borrowing is expected to decline as the domestic financial market continues to strengthen. The following discusses briefly the impact of most relevant external shocks to both public and external debt sustainability.

Table. A2.

Jordan: Public Sector Debt Sustainability Framework, 2001–12

(In percent of GDP, unless otherwise indicated)

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Sources: Jordanian authorities; and Fund staff estimates and projections.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 1/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 1/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium- and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP

Derived as nominal interest expenditure divided by previous period debt stock

Although baseline projections show a large decline in the debt burden, this outcome is vulnerable to large shocks. Standard bound tests (Figure A.2) reveal that:

Figure A.2.
Figure A.2.

Jordan: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2007, 128; 10.5089/9781451820362.002.A001

Sources: Jordanian authorities; and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent ½ standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. The end-period values are also shown.2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2007, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

  • Under a 30 percent real effective depreciation—as defined in the Fund-standard template, equivalent to a much larger depreciation in local currency terms—the public debt ratio would first jump sharply before returning to current levels by end-2011.

  • If real GDP growth during 2007–12 were to be a half standard deviation below the baseline, the public debt burden would still decline sharply, but would be 6 percentage points of GDP higher than under the baseline by end-2011. Half standard deviation permanent shocks to real interest rates or to the primary balance has a somewhat smaller medium-term impact. By contrast, the impact of a contingent liabilities shock—which is assumed to increase the debt ratio by 10 percent of GDP in 2007—would be a little higher.

  • With combined, small but permanent shocks (¼ historical standard deviations) on real interest rates, real growth and the fiscal primary balance in 2007–12, the debt-to-GDP ratio would decline sharply but exceed the baseline by about 5 percentage points by end-2011.

Jordan’s debt profile is heavily dependent on adjustment policies. Under a no-policy-change scenario (keeping the primary deficit of 2006 constant during 2007–12), the public debt ratio would increase to 84 percent of GDP by end-2011, instead of declining to 52 percent of GDP, as in the baseline.
1

Higher private investment played an important role in Jordan’s current account deterioration, but high oil prices and an influx of about ½ million Iraqi migrants had boosted domestic consumption by up to a combined 12 percentage points of nominal GDP.

2

With the recent oil price decline, the 60 percent target becomes easier to reach, leaving room to adjust, as needed, to exogenous shocks. The medium-term fiscal adjustment entails declines in debt ratios of about 3½ percentage points per year, which appears feasible given falling deficits and assumed strong growth; debt reduction in recent years has on average been far larger.

3

At the time of the discussions, it was projected that the elimination of the subsidy required an average 10 percent fuel price increase in March 2007. Given recent fuel price declines, these price increases no longer appear necessary.

4

These could then be used in the future by the CBJ as needed to conduct open market operations.

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Cover IMF Staff Country Reports
Jordan: Staff Report for the 2006 Article IV Consultation and Fourth Post-Program Monitoring Discussions
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 128
Publisher:
International Monetary Fund
ISBN:
9781451820362
ISSN:
1934-7685
Pages:
56
DOI:
https://doi.org/10.5089/9781451820362.002

Real GDP

(1995=100)

Contribution to y-o-y GDP Growth

(percentage points)

Inflation

(y-o-y, in percent)

Yield Curve

(in percent - end of period)

ASE: Main Indices

(2000=100)
Figure 1.

Jordan: External Sector Developments, 2000–06
Figure 2.

Jordan: Fiscal Sector Developments, 2001–06

(in percent of GDP)

Interest Rate Spread, 2002–07

(in percentage points)
Figure 3.

Jordan: Illustrative Medium-Term Macroeconomic Framework, 2000–12

(In percent of GDP, unless otherwise stated)

Revenue and Expenditure, Average 2000–05

(in percent of GDP)

Excess Reserves and Overnight Interest Rate

Effective Exchange Rates

(2000=100)

Private Bank Deposit-Lending Rates

(In percent)

Private Sector Credit Growth

(y-o-y, in percent)
Figure A.1.

Jordan: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)
Figure A.2.

Jordan: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)