Jordan
Staff Report for the 2012 Article IV Consultation
Author: International Monetary Fund
Publication Date:
22 May 2012
eISBN:
9781475503784
Language:
English
Keywords:
ISCR; CR; consumer; Jordanian dinar; exchange rate; rebound; real GDP; prices of oil imports; financing need; inflation expectation; GCC economy; economy well; headline inflation; Fiscal stance; Current account deficits; Current account; Global; Middle East; minimum wage; potential GDP; net foreign assets
Download PDF (1.3 MB)

1. Economic activity slowed sharply in 2010. This slowdown followed a period of robust growth during 2000–09 (averaging about 6½ percent) supported by a favorable external environment. The Jordanian economy is among the most open in the Middle East, and remains highly dependent on commodity imports (oil and grains), tourism receipts, remittances, FDI flows, and external grants. While the authorities have implemented structural reforms to develop the private sector, Jordan has a chronic unemployment problem, with overall unemployment averaging around 13 percent during 2000–11. Unemployment is particularly high among the young and graduates (estimated at around 31 percent at end-2011).

Abstract

1. Economic activity slowed sharply in 2010. This slowdown followed a period of robust growth during 2000–09 (averaging about 6½ percent) supported by a favorable external environment. The Jordanian economy is among the most open in the Middle East, and remains highly dependent on commodity imports (oil and grains), tourism receipts, remittances, FDI flows, and external grants. While the authorities have implemented structural reforms to develop the private sector, Jordan has a chronic unemployment problem, with overall unemployment averaging around 13 percent during 2000–11. Unemployment is particularly high among the young and graduates (estimated at around 31 percent at end-2011).

BACKGROUND

1. Economic activity slowed sharply in 2010. This slowdown followed a period of robust growth during 2000–09 (averaging about 6½ percent) supported by a favorable external environment. The Jordanian economy is among the most open in the Middle East, and remains highly dependent on commodity imports (oil and grains), tourism receipts, remittances, FDI flows, and external grants. While the authorities have implemented structural reforms to develop the private sector, Jordan has a chronic unemployment problem, with overall unemployment averaging around 13 percent during 2000–11. Unemployment is particularly high among the young and graduates (estimated at around 31 percent at end-2011).

2. Jordan’s social indicators compare well among neighboring countries. Jordan’s key social indicators are generally better than the average of Arab states. Jordan’s ranking on the Human Development Index has been improving over time, and with Lebanon is among the highest in the Mashreq region.

Jordan: Progress for Selected Social Indicators, 1980–2011

Citation: IMF Staff Country Reports 2012, 119; 10.5089/9781475503784.002.A001

Sources: UNDP, World Development Indicators and the World Bank.

3. In the wake of the Arab Spring, Jordan has accelerated the pace of political reforms. However, in comparison with other MENA countries, Jordan is implementing a more gradual process of political reforms. The aspirations of the Jordanian people have broadened to embrace enhanced accountability, transparency of government, and an increased voice in the decision-making process. Historic revisions to the Constitution were made in late 2011, to better balance power between the executive, legislative, and judicial branches of government. In 2012, Jordan will build on these reforms by passing legislation establishing a new Elections Law, a Political Parties Law, an independent electoral commission and a constitutional court, as well as hold parliamentary and municipal elections under the auspices of these revised arrangements. These steps are intended to consolidate the move towards a multi-party political system, where future governments are drawn from parliamentary majorities.

4. Jordan has a continuing commitment to sound economic policies. Notwithstanding the series of adverse shocks which have recently affected the economy, Jordan has a track record of sound economic fundamentals and prudent policies, which have been supported by a well-developed institutional policy framework and strong implementation capacity. These attributes have yielded a set of positive macroeconomic outturns, including: robust real growth; a low inflation environment, and stable exchange rate; limited external debt and adequate reserve buffers; an external capital account dominated by private capital flows; fiscal imbalances which stabilize debt at sustainable levels; a well supervised and sound banking system, funded mainly by local deposits; region-leading social and development indicators; and good quality data and statistical practices (Box 1). The authorities remain committed to sound policies in the future to reduce any remaining vulnerabilities.

5. There is broad consensus on economic priorities. Staff’s discussions with a range of stakeholders yielded a broadly common view on key economic priorities, in line with those developed by Jordan’s Economic Dialogue Committee. These include: ensuring that fiscal and external balances are sustainable; maintaining the robustness of the exchange rate peg; fighting corruption and bolstering the transparency of public policymaking; improving the quality of government services, particularly in health and education; combating poverty through well-targeted transfers and reducing unemployment; dampening adverse effects of shocks to the economy arising from its heavy dependence on imported oil and food; and boosting industry competitiveness, particularly in the tourism sector.

RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK

While economic activity remains subdued, unexpected additional fiscal and external pressures have arisen from instability in neighboring countries. Uncertainties related to regional economic and political developments will continue to pose significant challenges to Jordan in 2012. Moderate economic performance is expected over the medium term.

A. 2011—A Challenging Year

6. Subdued real GDP growth is expected in 2011. Following a downturn in 2010, real GDP is expected to rise by 2½ percent, mainly due to modest growth in mining, finance, and government services sectors. Regional unrest, high imported food and fuel prices, and rising sovereign financing costs have adversely affected the economy.

7. Inflation fell and unemployment edged up. Headline inflation fell to 4½ percent in 2011, due in part to the absence (since January 2011) of pass through of international oil prices. However, core inflation picked up to around 4½ percent y-o-y. The unemployment rate increased to almost 13 percent in 2011, and is expected to continue to rise given the country’s muted growth prospects (Table 1 and Figure 1).

Table 1.

Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2008–17

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

Includes statistical discrepancy.

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

Figure 1.
Figure 1.

Jordan: Real Sector Developments and Outlook

Citation: IMF Staff Country Reports 2012, 119; 10.5089/9781475503784.002.A001

Sources: Jordanian authorities; and Fund staff projections.

8. Fiscal policy was accommodative. The overall fiscal deficit increased to about 6 percent of GDP in 2011, mainly due to increased commodity subsidies and other social spending (costing an additional 2⅓ percent of GDP) and a cyclical weakening in domestic revenues. Budgetary grants of $1.4 billion (5 percent of GDP) were provided by Saudi Arabia during 2011, which helped fund the cost of fuel subsidies. Excluding grants, the overall fiscal balance registered a relatively high deficit of around 12 percent of GDP (Tables 2–3, and Figure 2).1

Table 2.

Jordan: Summary of Fiscal Operations, 2008–17

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

Based on existing commitments, and staff estimates.

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

The discrepancy is accounted for in part by the inclusion of non-budgetary accounts in the domestic financing data.

In 2008, foreign financing includes repayment of Paris Club debt, partly financed through domestic financing (drawdown of the privatization account).

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

The 2012 budget ratios to GDP are based on staff’s GDP estimates.

Table 3a.

Jordan: Summary of Revenues and Expenditures, 2008–17

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

The 2012 budget ratios to GDP are based on staff’s GDP estimates.

Table 3b.

Jordan: Summary of Revenues and Expenditures, 2008–17

based on GFSM 2001 classification 1/ 2/

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

In accordance with the Government Finance Statistics Manual 2001 (GFSM2001).

Preliminary and subject to revisions.

For 2012 is based on existing commitments, and staff estimates.

In 2008, foreign financing includes repayment of Paris Club debt, partly financed through domestic financing (drawdown of the privatization account).

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

Figure 2.
Figure 2.

Jordan: Fiscal Developments

(In percent of GDP, unless otherwise noted)

Citation: IMF Staff Country Reports 2012, 119; 10.5089/9781475503784.002.A001

Sources: Jordanian authorities; and Fund staff projections.1/ The output gap is actual output less potential output, as a percent of potential output.2/ The cyclically adjusted fiscal balance is expressed as a percent of potential output.

9. The debt-to-GDP ratio increased considerably. In addition to central government borrowing, increased borrowing on behalf of Jordan’s National Electric Power Company (to accommodate more costly imported fuel products used during the frequent periods of interrupted natural gas supply from Egypt) and other own-budget agencies increased the public debt-to-GDP ratio to about 64½ percent at end-2011 (Box 2).

10. The external position worsened, as a result of a series of adverse shocks. The external current account deficit is expected to widen to 9½ percent of GDP in 2011, as a robust export performance is offset by increased energy imports and declining remittances and tourism receipts.2 International reserves fell by 14 percent to reach $10.7 billion (equivalent to 6⅔ months of imports) at end-2011, as shortfalls in foreign direct investment (FDI) flows accompanied the deterioration in the current account (Table 4 and Figure 3).

Table 4.

Jordan: Summary Balance of Payments, 2008–17

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

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

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.