Jordan
Fifth Post-Program Monitoring Discussions: Staff Report; and Press Release on the Executive Board Consideration
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This paper focuses on the Fifth Post-Program Monitoring Discussions with Jordan. Jordan’s economic performance remains strong. Growth is robust, core inflation is contained, the current account deficit is narrowing, reserves are comfortable, and the fiscal situation continues to improve. The Fifth Post-Program Monitoring Discussions focused on a large current account deficit, still high public debt, and rapid credit growth. The authorities consider the outlook for the Jordanian economy as strong, including on growth, inflation, and the current account.

Abstract

This paper focuses on the Fifth Post-Program Monitoring Discussions with Jordan. Jordan’s economic performance remains strong. Growth is robust, core inflation is contained, the current account deficit is narrowing, reserves are comfortable, and the fiscal situation continues to improve. The Fifth Post-Program Monitoring Discussions focused on a large current account deficit, still high public debt, and rapid credit growth. The authorities consider the outlook for the Jordanian economy as strong, including on growth, inflation, and the current account.

I. Introduction

1. In the recent Article IV consultation, staff reported on Jordan’s strong economic performance in past years and on policies to sustain this performance. The policy framework discussed in the last staff report remains valid: a medium-term public debt target, continuation with a currency peg, and policies to narrow the current account deficit (fiscal consolidation, prudent monetary policy, and measures to improve the business environment).

2. In the context of the present post-program monitoring (PPM) discussion report, the focus will be on three potential medium-term challenges: (i) the large current account deficit; (ii) the still-high public debt ratio; and (iii) rapid credit growth.

II. Recent Developments and Outlook for 2007

3. Jordan’s strong economic performance continues. Growth was 6½ percent last year, and was evenly spread between domestic and external demand. Average inflation increased to 7½ percent in January–April (yoy), reflecting mainly fuel and food price increases, but core inflation remains well contained (see charts). Aided by a broad-based import slowdown and strong export growth, the current account deficit narrowed last year to 13½ percent of GDP. Trade data for early 2007 show import growth slowing further and exports rising by more than 20 percent. With continued strong private capital inflows, reserves rose to US$6.3 billon at end-April (more than five months of prospective imports).

uA01fig01

Contribution to yoy GDP Growth

(percentage points)

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

uA01fig02

Inflation

(yoy, in percent)

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

4. The fiscal situation also continues to improve in the face of increased spending pressures. During 2006, strong revenues and fuel price increases more than offset higher spending on transfers (including wage bonuses) and investment. Preliminary estimates suggest that the fiscal deficit (including grants) was about 3¾ percent of GDP last year, compared to 5 percent in 2005, contributing to the fall in the public debt-to-GDP ratio to 72½ percent at end-2006. In implementing the amended 2007 budget, the authorities are targeting a deficit of 2¾ percent of GDP, as the increase in public sector wages and pensions in the supplementary budget is being offset by nonpriority spending cuts (mainly transfers to public sector employees) and additional revenue gains (particularly income tax overperformance).1 Strong fiscal performance appears to have continued through the first quarter of this year, with an overall surplus of about 1 percent of GDP, in line with normal seasonal patterns.

Jordan: Summary of Fiscal Operations, 2004–07

(In percent of GDP, unless otherwise noted)

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

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

Staff projections assume identified fiscal measures to be taken to meet the original 2007 budget target, as agreed with the authorities.

5. Meanwhile, private sector credit grew by almost 25 percent last year, but broad money growth was much lower, given reductions in credit to government—due to an increase in privatization receipts—and a large contraction in other items net because of bank capital increases. The pace of credit expansion has, however, slowed sharply over the past year due to the past impact of higher CBJ interest rates, tighter supervision, and the stock market correction.

uA01fig03

Annual Growth of Broad Money and Private Sector Credit

(In percent)

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

III. Near-Term Economic Outlook and Key Challenges

6. The macroeconomic outlook remains positive (Table 2).

  • Average inflation is expected to decline this year to below 6 percent. Given that large fuel price hikes contributed about 2 percentage points to the inflation outturn last year, this appears achievable. Recent double-digit import price increases could, if they persist, make the task more challenging.

  • Growth is expected to be about 6 percent, helped by large FDI projects. Liquidity in the region is high, and Jordan continues to be a favored investment destination. Other available indicators, including industrial production, imports, and credit growth, suggest a modest decline in growth from 6½ percent in 2006.

  • A further narrowing of the current account deficit is likely. The strong export momentum of recent years is likely to continue, reflecting strong U.S. and regional demand, a fairly-valued dinar, and large recent investments in traditional export sectors. Import growth is projected to stabilize with falling import unit prices (in line with World Economic Outlook (WEO) forecasts) and import volumes are expected to grow more in line with overall economic activity, following a level jump in recent years on account of FDI, oil prices, and the impact on consumption of the large Iraqi influx (Figure 1).

Table 1.

Jordan: Indicators of Fund Credit, 2002–11

(In millions of SDR)

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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.

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

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

Figure 1.
Figure 1.

Jordan: External Sector Developments, 2000–06

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

Sources: Jordanian authorities; JGATE; U.S. OTEXA; and Fund staff projections.

7. What are the remaining economic challenges?

  • A large current account deficit (Tables 3 and 4). Despite the recent narrowing, Jordan’s deficit remains one of the highest among emerging market (EM) countries. The deficit is fully financed by FDI and other long-term capital inflows and reserves are at an all-time high. But Jordan could potentially be exposed to sudden shifts in investor sentiment and to regional uncertainties.

  • Still-high public debt (Tables 5 and 6). Jordan has managed to rein in its public debt burden, but, at over 70 percent of GDP, it remains higher than generally considered prudent for EM countries. Jordan also remains reliant on volatile foreign grants. And as shown by the public debt sustainability analysis (DSA), while Jordan’s debt burden is expected to decline sharply even under adverse shocks, its profile depends on continued strong fiscal adjustment.

  • Credit growth (Tables 7 and 8). While bank prudential indicators are strong and financial sector supervision has strengthened, Jordan’s rapid private sector credit growth (until recently), which exceeded that of most peer countries, requires constant monitoring (see chart). Moreover, new forms of lending, carrying greater risks (such as margin and noncollateralized loans) have grown rapidly, although their share remains low.

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.

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.

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.

The projected 2007 deficit is about 1.1 percentage points of GDP higher than in the previous staff report (EBS/07/17) mainly reflecting a downward revision in the revenue from oil surplus (1 percent of GDP) as a result of recent international oil price increases.

The 2007 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.

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.

uA01fig04

Current Account Balance in percent of GDP (2006)

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

uA01fig05

Gross Public Debt in percent of GDP (2006)

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

1/ Average public debt level of recent EU accession countries.
uA01fig06

Credit Developments: Claims on Private Sector

(in percent of GDP) 1/

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

1/ Boxes denote growth in credit-to-GDP ratios during the 2000 to 2005 period, in percentage points.

Jordan: Indicators of Bank Soundness, 2000–06

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Source: Central Bank of Jordan.

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.

IV. Policy Discussions

8. The mission focused on the above key challenges. The macroeconomic framework is different from that discussed in the recent Article IV consultation only to the extent that it reflects recent economic developments, including a lower-than-envisaged external current account deficit for 2006, and an amended official budget (although the government plans to stick to the original budget deficit target).

A. Current account

9. The authorities were optimistic about Jordan’s current account and financing prospects. Staff agreed that the key sources of last year’s current account improvement—slower import volume growth, strong export momentum, and high remittance and tourism inflows—are likely to be repeated this year and over the medium term. The financing situation also remains positive, as the large pool of investable funds in the region continues to flow into special economic zones, greenfield projects, and new public-private infrastructure initiatives. Strong investment indicators for the first quarter support this view. With respect to the peg, the rapid narrowing of the current account deficit, continued large FDI inflows, and surplus foreign exchange conditions in the banking system do not suggest a need to move away from the long-standing fixed exchange rate regime. Indeed, with 2007 inflation expected to be close to that in trading partners and given strong export growth and foreign reserves accumulation, there are currently no indications of an exchange rate misalignment.2

uA01fig07

Effective Exchange Rates

(2000=100)

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

10. External debt dynamics also support the picture of underlying strength. 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 could be halved in five years (to 22 percent of GDP). As discussed in the external DSA, these baseline projections are robust to several shocks, but are sensitive to assumptions on private capital inflows (Appendix I). In particular, should FDI flows revert to historical norms, the envisaged decline in external debt would not take place, leaving the economy more exposed to exogenous shocks.

B. Public debt

11. The picture is similarly positive on Jordan’s public debt sustainability prospects.

  • In the context of the 2007 budget presentation, the authorities announced a new 60 percent of GDP debt ceiling by 2011. They intend to incorporate this in a revised Public Debt Management Law shortly after the November parliamentary elections. Absent severe shocks, the authorities and staff agreed that a more ambitious target could be achieved. (Under staff projections, Jordan’s debt burden is set to fall to 52 percent of GDP by end-2011.) However, maintaining the announced target would provide flexibility to deal with shocks (Table 9 and Appendix II).

  • The authorities are committed to achieving the original 2007 budget deficit target. Staff cautioned that the fiscal position was subject to risks that include a high budget sensitivity to oil prices (a US$5-a-barrel price increase adds about 1 percent of GDP to the deficit), possible food subsidy overruns (based on the high first quarter outturn), and likely spending pressures in an election year. Staff suggested that the authorities identify contingency measures, possibly to include cuts in budgeted cash transfers to the private sector and nonpriority current and capital spending, as well as increases as needed in domestic fuel prices. The authorities indicated that they did not intend to implement an automatic adjustment formula at this time, but if the price of oil increased much further, they would raise fuel prices (the budget provides for oil-related transfers).3

  • With medium-term domestic financing requirements set to increase—reflecting a winding down of Paris Club rescheduling and privatization—the authorities are planning to expand their set of debt instruments. To this end, they are considering issuing Islamic financing instruments (sukuk) and long-term regional local currency denominated bonds. Staff supported these goals and indicated that, given Jordan’s favorable economic conditions and ample regional liquidity, demand for these instruments could be high.

  • Discussions are underway between the ministry of finance (MoF) and the CBJ to settle the long-standing issue of government debt to the CBJ. Staff recommended that securitization of government debt to the CBJ take place soon, and that the MoF share its borrowing plans with the CBJ on a quarterly basis, to help the latter’s liquidity management.

  • Given its potential fiscal importance, the mission also discussed the plans for public-private partnership (PPP) projects.4 The authorities believe PPPs could generate public savings and harness private expertise and, to that end, they are preparing a legal and institutional framework for PPPs with World Bank assistance. The mission emphasized that the primary focus should be on strengthening public investment planning and creating an appropriate legal and institutional framework, with a strong role for the MoF in safeguarding public finances.

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.

12. In support of their medium-term public debt targets, the authorities will continue with structural fiscal reforms. Priorities include tax and expenditure policy, public financial management (PFM), revenue administration, and pension reforms.5 While progress in some areas has been good (establishment of a macro-fiscal unit at MoF, improved budget framework for own-budget agencies), other areas have seen delays (Treasury Single Account (TSA), budget processes, and income and sales tax regimes). Staff indicated that the current economic environment lent itself well to these reforms and that further progress was needed on the TSA, budget coverage and classification, and the medium-term expenditure framework.

C. Credit growth

13. While banking sector indicators remain sound, despite last year’s major equity market correction, the authorities intend to monitor the situation closely. Risky loans (margin, noncollateralized, credit card) have grown rapidly, and some banks may not have the capacity to assess associated risks. And bank profitability and other soundness indicators have yet to be tested in an economic downturn. Some small banks are actively seeking market share, with loan-to-deposit ratios increasing to 100 percent in certain cases. The CBJ has strengthened supervision, introduced a prompt corrective action framework, and has enforced a finer classification of credit facilities and stricter provisioning rules since June 2006. Parliament recently passed the Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) legislation, prepared with World Bank assistance. Looking ahead, the CBJ plans to introduce Basel II-based reporting by fall, to seek improvements in banks’ risk management systems, and to introduce shortly new corporate governance guidelines for banks that would aim, among other things, at keeping banking operations at arm’s length from owners.

14. The CBJ indicated that it would continue to absorb excess liquidity through CD issuance. Staff agreed that this would help strengthen the interbank market and help slow domestic credit and import growth.6 Staff also suggested that the CBJ increase the frequency of its CD auctions and promote the use of collateralized interbank lending (through the use of a master repo agreement) to help banks better manage their liquidity and limit interbank interest rate volatility.

15. Staff agreed with the authorities’ plans to simplify the interest rate structure by reducing the interest rate corridor width by 125 basis points. Staff also suggested replacing the seven-day CBJ repo facility with an overnight facility to ensure symmetry with the overnight deposit window. The move took effect early May. Given surplus liquidity, the move did not represent an easing of monetary conditions.

uA01fig08

Excess Reserves and Interbank Interest Rate

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

uA01fig09

Old Interest Rate Structure

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

uA01fig10

New Interest Rate Structure

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

V. Staff Appraisal

16. Jordan’s macroeconomic outlook is positive, but challenges remain. Barring large negative shocks, growth should remain strong, inflation is expected to decline modestly, the current account deficit will likely narrow further, and public debt should continue to fall. At the same time, external sector imbalances are large, the public debt burden remains high, and rapid private sector credit expansion warrants close monitoring.

17. With supportive policies, the current account deficit should decline steadily over the medium term (to 6¼ percent of GDP by 2012). These policies include sustained fiscal adjustment, prudent monetary policy, and improving the business environment.

18. Fiscal adjustment should aim to reduce the public debt burden to well below the new 60 percent of GDP target by 2011, given remaining risks. In the near term, this should include adopting contingency measures if the 2007 deficit target appears in danger of being breached. Also, given the budget’s sensitivity to international fuel price developments, domestic oil prices should be increased to compensate fully for any further increase in world oil prices and a fully automatic price adjustment mechanism instituted as soon as feasible. Over the medium term, most of the adjustment should be on spending. Further support could be given by pressing ahead with the structural reform agenda, against the backdrop of a positive economic environment. Given Jordan’s financing requirements, expanding the set of debt instruments to include sukuk and regional local currency-denominated bonds should help widen the investor base, possibly lower borrowing costs, and establish Jordan’s presence in international capital markets.

19. The authorities’ plans to strengthen further the banking sector supervisory and regulatory framework are appropriate. The CBJ has already taken many steps to improve its oversight of the banks. That said, Jordan’s credit growth in recent years stands out from other emerging market countries. And bank soundness indicators have yet to be tested in an economic downturn. Staff therefore looks forward to new corporate governance regulations, improved risk management, and an early FSAP update. Efforts should be made to approve the Credit Bureau legislation soon to help banks better assess credit risk.

Figure 2.
Figure 2.

Jordan: Fiscal Sector Developments, 2001–06

(in percent of GDP)

Citation: IMF Staff Country Reports 2007, 284; 10.5089/9781451820379.002.A001

Sources: Jordanian authorities; and Fund staff estimates.

Appendix I: External Debt Sustainability Analysis

The external debt sustainability outlook is broadly unchanged from staff’s assessment at the time of the 2006 Article IV report. In particular, external debt is still expected to be halved in five years under the staff’s baseline scenario (Table A.1). Besides favorable macroeconomic policies, most notably fiscal adjustment, this assumes a continuation of the cautious external borrowing policies of recent years, which have reduced annual external borrowing to an average of nearly 2 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 and regional development banks), though some portion of external financing is expected to be sourced from sovereign bond issues. Finally, the DSA reflects staff’s views that, despite declining official grants over the medium term, the external outlook is benign, given the support to exports provided by the U.S. free trade agreement and strong regional demand, WEO forecasts of falling import unit values, and favorable regional liquidity conditions (reflected in continued strong investor commitments) that should continue to provide nondebt-creating financing in the form of FDI (mainly from Kuwait, Saudi Arabia, and UAE).

Table A.1.

Jordan: External Debt Sustainability Framework, 2001–2012

(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 US 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.

The contribution from price and exchange rate changes is defined as [−r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

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 non-interest current account and non-debt inflows in percent of GDP.

The debt reduction path is robust to the usual bound tests, but remains quite sensitive to an assumed sharp decline in nondebt-creating capital inflows:

  • Standard bound tests (Figure A.1) reveal that the debt-to-GDP ratio is generally 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. If key variables are held at their historical averages, Jordan’s debt would fall even faster than expected (and imply a rising net creditor position to the rest of the world), due to the high current account surpluses that characterized most of the pre-2003 period.

  • Given the still large current account deficit, the main source of risk is a decline in (nondebt-creating) capital inflows that is much sharper than already expected. To assess the impact of such a decline, a shock scenario is considered in which capital inflows remain strong this year, but fall sharply to the historical average for the remainder of the projection period. This scenario shows that the debt ratio would show almost no improvement from current levels, leaving the economy more exposed to other shocks.

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, 284; 10.5089/9781451820379.002.A001

Sources: Jordanian authorities; and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 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 DSA shows that policies that help reduce the current account deficit and maintain the recent growth and FDI momentum would continue to provide the basis for a sustainable debt position.

Appendix II: Public Debt Sustainability Analysis

Public and publicly guaranteed debt is expected to decline steadily to about 52 percent of GDP by end-2011 under the baseline scenario (Table 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 A.2.

Jordan: Public Sector Debt Sustainability Framework, 2001–12

(In percent of GDP, unless otherwise indicated)

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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 − tt (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:

  • Under a 30 percent real effective depreciation, the public debt ratio would first jump sharply before returning to current levels by end-2011.

  • If real GDP growth during 2007–11 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 have 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 deviation) 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 5 percentage points by end-2011.

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, 284; 10.5089/9781451820379.002.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 cenario 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).

Jordan’s debt profile is heavily dependent on adjustment policies, which are key to meeting the new 60 percent of GDP debt target by end-2011. A no-policy-change scenario assumes that the primary deficit of 2006 (0.6 percent of GDP) is kept constant during 2007–11. While the public debt ratio would decline initially, the trend would reverse toward the end of the projection period, and, at about 66 percent of GDP at end-2011, the debt ratio would be well above the new debt target.

1

The primary fiscal deficit, excluding grants, is expected to widen, marking a modest reduction in fiscal effort in response to the expected increase in grants.

2

See http://www.imf.org/external/pubs/cat/longres.cfm?sk=20604.0 for details (paragraph 17 and Box 1).

3

The effective oil import price for Jordan in the first quarter was US$56½ a barrel, US$3½ a barrel lower than envisaged in the budget.

4

A PPP strategy is expected to be launched soon, outlining opportunities for international investors to run ports, utilities, postal services, and public transport, worth US$6 billion—more than a third of 2007 GDP—over the coming five years, including build-operate-transfer (BOT) type projects.

6

Staff research suggests that the impact on interest rate levels of bringing excess reserves towards zero should be relatively minor. However, staff estimates also suggest that when excess reserves fall below JD 50 million, the volatility of the spread between the interbank interest rate and the CBJ window rate increases sharply.

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Jordan: Fifth Post-Program Monitoring Discussions: Staff Report; and Press Release on the Executive Board Consideration
Author:
International Monetary Fund