Request for a Stand-By Arrangement—Staff Report; Staff Supplement; Request for Modification of Performance Criteria; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Jordan.

Jordan’s external vulnerabilities, arising mainly from the energy sector, increased during the last decade. Aided by exceptionally large grants, fiscal policy accommodated the social impact of these shocks. Concerns about social tensions at the beginning of the year put on hold the needed fiscal consolidation. At the same time, balance of payments pressures intensified. The authorities’ program is designed to correct the fiscal and external imbalances and support the exchange rate peg. Structural policies will focus on supporting growth and employment.


Jordan’s external vulnerabilities, arising mainly from the energy sector, increased during the last decade. Aided by exceptionally large grants, fiscal policy accommodated the social impact of these shocks. Concerns about social tensions at the beginning of the year put on hold the needed fiscal consolidation. At the same time, balance of payments pressures intensified. The authorities’ program is designed to correct the fiscal and external imbalances and support the exchange rate peg. Structural policies will focus on supporting growth and employment.

I. Background and Recent Economic Developments

2011—Vulnerabilities Coming to the Fore

1. Jordan’s external vulnerabilities, stemming mainly from the energy sector, increased in the last decade. Growth averaged about 6 percent during that period, supported by a favorable external environment, with strong tourism receipts, exports, remittances, and FDI. At the same time, however, the economy became dependent on imports of cheap gas from Egypt. External grants made it possible to run substantial government deficits while reducing domestic revenue since 2007. Low regulated electricity tariffs supported by gas from Egypt since 2005 as the main source of fuel for generation allowed extensive electrification of the country, which contributed to growth but also created an important external vulnerability.

2. Vulnerabilities were exposed in 2011, when a series of external shocks hit Jordan. Repeated sabotage of the Arab Gas Pipeline in the Sinai Peninsula reduced the average daily flows of natural gas from Egypt. This necessitated an increase in imports of expensive fuel products for electricity generation while oil prices were high. At the same time, regional tensions adversely affected tourism, remittances, and FDI. As a result, growth slowed, investor confidence weakened, and the external current account deficit (including grants) widened to 12 percent of GDP in 2011 from 7 percent in 2010.

3. Aided by exceptionally large grants, fiscal policy accommodated the social impact of these shocks. In 2010, the authorities embarked on substantial fiscal consolidation, reducing the primary fiscal deficit (excluding grants) to 5.6 percent of GDP from 8.6 percent in 2009. In 2011, however, concerns grew that the regional turmoil could spill over to Jordan and deepen long-standing social problems.1 These include unemployment, which averaged 13 percent in the last decade (with youth unemployment over 30 percent), and poverty, which, according to Jordan’s Poverty Analysis Report issued in 2010 and based on the Household and Expenditure Survey of 2008, is estimated at about 13.3 percent. These considerations led the authorities to focus their attention on social policies, and to increase commodity subsidies, other social spending, and also wages. Together with a weakening in domestic revenue, these measures raised the primary fiscal deficit (excluding grants) to 9.6 percent of GDP in 2011. This increase was financed in large part by budgetary grants from Saudi Arabia of 5 percent of GDP.

4. Losses of the electricity company also rose sharply. Expensive fuel imports caused losses of the publicly owned National Electric Power Company (NEPCO) to increase to 4.9 percent of GDP in 2011 from 0.8 percent of GDP in 2010. NEPCO financed these losses through central government guaranteed bonds, borrowings from domestic banks, as well as arrears to suppliers of 1.9 percent of GDP. With widening NEPCO and central government deficits, gross public and publicly guaranteed debt (which also includes guaranteed debt of government agencies other than NEPCO) increased considerably to 70.7 percent of GDP at end-2011.

2012—External Shocks Result in Large Macro Imbalances

5. Concerns about social tensions at the beginning of the year put on hold the needed fiscal consolidation. The 2012 budget envisaged an adjustment in the primary fiscal deficit (excluding grants) of more than 3 percent of GDP, as well as electricity tariff increases to contain the losses of NEPCO. In addition to tax and nontax measures, the general fuel subsidy was to be eliminated by reinstating the monthly fuel price adjustment, while providing targeted assistance to the needy. However, an increase in electricity tariffs implemented in February had to be reversed because of social tensions due to technical mistakes in the billing of tariff changes and the authorities put on hold all other measures until May.

6. At the same time, balance of payments pressures intensified. New sabotage of the gas pipeline in February and again in April nearly shut off all gas inflows, further increasing imports of expensive fuel for electricity generation. Though gas flows resumed at moderate levels in May, June, and July, they have been unreliable and, after another sabotage in July, it remains uncertain whether and when they will resume fully. The more expensive fuel imports resulted in a decline in the Central Bank of Jordan’s (CBJ) reserves, which was exacerbated in May by an increase in deposit dollarization, reflecting depositor nervousness. Though the reserve loss has decelerated in recent weeks, CBJ reserves dropped to $6.5 billion at mid-July—a decline by almost 40 percent since end-2011. In order to increase the attractiveness of JD-denominated assets, the CBJ raised overnight interest rates by 50 bps in February and again by 50 bps in May to 3.25 percent.

7. With large public financing needs, the private sector is being crowded out. Jordan’s banking system appears to remain sound. Nonperforming loans (NPL), which picked up when the economy slowed after the global financial crisis, stabilized at 8½ percent of total loans in 2011. Bank provisioning, capital adequacy, and profitability are weaker than in 2006–07 before the global financial crisis, but remain adequate. However, private sector credit declined in percent of GDP in the first five months of 2012.


Jordan: Sectoral Contribution to Total Credit Growth

Citation: IMF Staff Country Reports 2012, 343; 10.5089/9781475598520.002.A001

II. The Program

8. The authorities’ program is designed to correct the fiscal and external imbalances and support the exchange rate peg. The program would provide the authorities with a framework to achieve a gradual fiscal consolidation and thus address fiscal and external vulnerabilities, without jeopardizing growth prospects and social stability. The peg has served the country well and remains important by anchoring inflation expectations and providing macroeconomic stability in a challenging regional and global environment. Fund support would provide the necessary liquidity to maintain reserves at a safe level until alternative sources of energy are put in place (a process that could take up to three years).

9. The authorities are facing a difficult policy trade-off. The need to embark on ambitious fiscal consolidation to reduce public sector financing needs, lower public debt, ease pressures on reserves, and secure fiscal viability had to be carefully balanced against the risk of a recession and social unrest. The acceleration in the loss of reserves on the account of high oil prices in the beginning of the year and the sharp decline in Egypt gas flows made the need for corrective action more urgent. Thus, the new government that came into office in May alerted the public to the difficult economic situation. This communication strategy helped them take the first steps toward consolidation, including by implementing politically sensitive increases in fuel and electricity prices. Further consolidation will be implemented over the medium term. Staff urged the authorities to opt for a more ambitious adjustment, in light of high vulnerabilities and risks, but the authorities felt that what was done is sufficient and that it was not feasible in the current political environment. They believe that including the public in policy decisions will be key in creating consensus on how to design the medium-term adjustment in a socially acceptable manner.

10. The main objectives of the program, in line with the findings of previous engagements (Box 1), are:

  • Achieving fiscal sustainability. Fiscal consolidation is the cornerstone of the program, aimed at gradually resolving Jordan’s structural fiscal issues. The deficits of the central government and NEPCO (as well as other loss-making public agencies) will be reduced in order to return public debt to a sustainable path. To a large extent, this will hinge on the success of Jordan’s strategy to diversify its energy sources and move electricity generation back to cost-recovery levels by establishing transparent and sustainable energy prices, pursued with assistance from the World Bank. Also, fiscal policies will be redesigned to reduce the high vulnerability to oil prices, as well as dependence on grants, while providing targeted support to vulnerable parts of the population.

  • Strengthening growth. The large fiscal adjustment will withdraw some stimulus from the economy, and will have to be accompanied by growth-enhancing and employment-generating policies. Such policies will also help in ensuring broad support of the program.

  • Mobilizing additional external financing. In addition to continued high grants, support is expected in the form of official support for investment projects, in particular from the Gulf Cooperation Council (GCC), including in the energy sector. Over the longer term, reliance on external grants is expected to be reduced through more frequent market financing, following Jordan’s successful first-time access to sovereign international capital markets in November 2010.2

Main Recommendations of Previous Engagements

The program addresses the main policy challenges identified in the previous engagements:

  • Reducing the dependence of fiscal policy on grants and energy prices to make Jordan less vulnerable to exogenous shocks. Prior engagements highlighted the need to reform the system of administered fuel prices, which had resulted in unsustainably high and ill-targeted subsidies. They also noted the need to strengthen the social safety net to shield the poor from the impact of price increases.

  • Consolidating the fiscal sector through an effective rationalization of the tax system, a reduction of current expenditure, and a more rigorous assessment of capital expenditure plans.

  • Improving the business environment to reduce the cost of doing business.


Jordan: Spreads and Eurobond Yields

Citation: IMF Staff Country Reports 2012, 343; 10.5089/9781475598520.002.A001

11. The program envisages a package of strong policy measures, combined with sizeable financial support.

  • Fiscal and energy policies will carry the burden of the adjustment. The adjustment will first and foremost require an increase in energy prices (both fuel and electricity) by reinstating pass-through and converting general subsidies to targeted ones. Beyond price adjustments, fiscal and energy policies will also address structural weaknesses. For NEPCO, this will require a comprehensive reform of the electricity tariff structure, which will be guided by the World Bank. It is also critical to diversify energy supply. For the central government, the adjustment in 2012 will be followed by further medium-term consolidation, underpinned mostly by boosting revenue through reducing tax exemptions and improving tax administration. Increasing taxes and rationalizing expenditure, including subsidies, will reduce aggregate demand, promoting a more viable current account and a more sustainable debt burden, and lower Jordan’s financial risk premium.

  • Monetary and exchange rate policies will continue to be centered on maintaining the peg to the U.S. dollar. Access to Fund resources and other financial support mobilized by the program would provide time for fiscal and external adjustment. Reform measures (in particular in the energy sector and tax revenue) and quantitative targets pursued in the context of the proposed arrangement would help address external vulnerabilities, thereby halting the pressure on reserves and creating room for private sector credit.

  • Structural reforms will underpin sustainable and inclusive growth. Measures will focus on improving the business environment; promoting trade; improving transparency and accountability of industrial policies; and fostering private sector-led innovation.

A. The Macro Framework

12. The macroeconomic framework incorporates the Egypt gas shock. While incorporating the recent and a further expected easing in oil prices, to be on the safe side, the framework assumes that, in 2012, gas inflows from Egypt would be at about half the level realized in 2011. Over 2013–14, the framework assumes that gas inflows from Egypt would remain at low levels—only marginally higher than in 2012—and that a new energy source will come on stream by mid-2015 (possibilities include importing liquefied natural gas from Qatar through a terminal in Aqaba, which could be completed within two years). The macro framework and debt sustainability analyses (Annexes 1 and 2) assume that the fiscal measures to support medium-term consolidation are implemented and that a Fund program is in place. In particular, reserves would be kept at a level of about four months of imports during the program period, and gradually increase in the outer years of the medium term.

  • Growth. Real GDP growth was 3 percent year-on-year in the first quarter of 2012, and is forecast to be at the same level for the whole year, supported in part by a recovery in remittances and a rebound in tourism receipts. Over the medium term, economic activity would gradually gain momentum with growth reaching 4.5 percent. This would reflect stronger investor confidence and increased FDI inflows (although to levels moderate in percent of GDP relative to the averages during 2004–11); increased political certainty following the end-2012 parliamentary election; an improved external environment, including an unwinding of regional tensions and continued growth in the GCC. It would reflect as well implementation of structural reforms to improve the business environment, address skills mismatches, enhance labor market flexibility, and foster competitiveness.

  • Inflation. The consumer price index (CPI) rose by 4.1 percent year-on-year in May 2012. Despite an expected moderation in international food prices, CPI inflation is projected to pick up to 4.4 percent by end-year, reflecting increases in domestic fuel prices and electricity tariffs. Over the medium term, sustained fiscal consolidation combined with further moderation in international food and fuel prices would help put inflation on a downward trend.

  • External position. The current account came under intense pressure during the first half of 2012, mostly reflecting imports of expensive fuel products for electricity generation. More recently, however, the decline in oil prices and a strong rebound in tourism receipts have started to alleviate such pressures. For the whole year, the current account deficit (including grants) is projected at 14.1 percent of GDP, about 2 percent of GDP higher than in 2011. The framework assumes a large turnaround in the current account in 2013 with a further easing of international fuel and food prices and strong export growth. Going forward, the emergence of alternative energy sources by mid-2015, continued growth in remittances and travel receipts, and implementation of structural reforms to enhance competitiveness are expected to gradually reduce the current account deficit to about four percent of GDP by 2017.


Jordan: Contribution to Year-On-Year Inflation

Citation: IMF Staff Country Reports 2012, 343; 10.5089/9781475598520.002.A001

Jordan: Medium-Term Scenario

(In percent of GDP, unless otherwise indicated)

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B. Fiscal Policy

13. Staff believes that fiscal vulnerabilities are large. Over the last decade, fiscal policies have been mostly procyclical and dependent on the availability of foreign financing. Expansionary fiscal policies during 2008 and 2009 were followed by a strong contraction in 2010. This adjustment was reversed in 2011, financed by extraordinarily high budgetary grants. Over the program period, fiscal policies are expected to provide stability and become more predictable, and also more pro-poor and pro-growth:

  • There is substantial scope for increasing tax revenue and improving tax administration. Tax revenue declined by five percent of GDP since 2007. Though this reflects to some extent a weakening of the economy, the main contributors were tax policy choices and weak administration. Exemptions on various taxes were introduced to stimulate foreign investment and subsidize specific sectors. Also, the social safety net was enlarged through a reduced sales tax rate on products deemed socially important. For instance, there were indirect tax cuts in 2008 in response to the food and fuel price hike, but these were not reversed when prices fell, and additional cuts were introduced as part of the fiscal stimulus package in 2009. Looking ahead, there is potential for additional revenue from better administration. Recent technical assistance pointed to poor taxpayer compliance and weaknesses in income tax administration core functions, as evidenced by low filing compliance, quickly growing tax arrears, and unproductive tax audits. In the medium term, Jordan could consider reviewing taxes on capital gains and dividends, as well as property and interest income. Staff noted that focusing on the revenue side, in particular property and consumption taxes, is likely to have a less negative impact on growth relative to capital spending, and thus the bulk of the consolidation should come from there.

  • Expenditure needs to be restructured. Current spending as a ratio of GDP is broadly at the same level as in 2008, but this masks large changes in the composition. Wages and salaries together with transfers have increased as a share of GDP. Pensions (which are included under transfers) cover about one third of the labor force at a cost of more than 4 percent of GDP; changes might be needed to increase coverage and make pensions sustainable. Subsidies were temporarily reduced when Jordan moved to a monthly fuel price adjustment in 2008, but increased again last year when the authorities froze pump prices. There are many small social assistance programs, but they suffer from waste and inefficiencies (for instance, only 15 percent of beneficiaries would be classified as poor according to the national poverty line). Capital spending has often been used as a residual to manage financing needs. According to the World Bank, capital spending on housing and social sectors has been increasing, at the expense of infrastructure, health, and other sectors that could contribute significantly to growth.

  • Despite recent progress, cash management and the control commitment system remain weak. This is reflected in a significant statistical discrepancy between the above-the-line deficit (calculated as revenue minus expenditure) and the below-the-line deficit (calculated from the financing side) (amounting to 0.5 percent of annual GDP in the first quarter of 2012).3 Looking forward, there is a need to improve cash forecasting and management and review whether the stock of accounts payable can be reduced.


14. Continuing pressures resulted in a further deterioration of the fiscal position. Though the 2012 budget adopted in February had projected a large adjustment compared with 2011, by mid-year, this was no longer feasible. Additional spending of about 4 percent of GDP came from a much-higher-than expected fuel subsidy reflecting a large hike in oil prices at the beginning of the year (by 2.5 percent of GDP); a higher wage bill (by 0.6 percent of GDP as a result of a civil service reform expected to yield savings in the medium term); higher pensions and health outlays (0.3 percent of GDP); and spending on housing and medical assistance for Syrian refugees (0.5 percent of GDP). Also, revenue projections in the budget were overoptimistic by some one percent of GDP. Thus, without any measures, the 2012 budget, if implemented, would have resulted in a further widening of the primary deficit (excluding grants) by 1.9 percent of GDP compared with 2011.

15. Since May, the authorities have taken substantial measures. (¶7-11).4 They amount to more than 3 percent of GDP and are mostly on the expenditure side (Text Table). The new government needed to act swiftly and put together a package of measures that could be implemented quickly and was aimed at reducing the financing needs of the government while targeting parts of the population with a higher ability to pay. Because the authorities kept fiscal policies tight in the first five months of the year (capital spending was only 0.7 percent of annual GDP), the adjustment is broadly evenly distributed over the year. If downside risks materialize, the authorities stand ready to take measures, most likely cuts in capital spending.

  • Revenue measures would keep the revenue-to-GDP ratio broadly unchanged from last year. They focus on luxury goods (such as airline tickets, alcohol, and tobacco products). The authorities believe that further revenue increases could come from a tax amnesty (tax arrears could be repaid during July-December 2012 without penalty; the fiscal projections do not include any revenue from the amnesty). Staff believes that regular tax amnesties could undermine revenue in the long run, and urged the authorities to focus instead on enhancing compliance and enforcement.

  • On the expenditure side, the most important measures have been an increase in the pump price of gasoline 90 (by 13 percent) and reinstating the monthly price adjustment for gasoline 95, jet fuel, and heavy fuel oil. The only outstanding measure in 2012 is an increase in the price of diesel (structural benchmark). Given the high vulnerability of fiscal accounts to oil price developments, staff urged the authorities to reinstate the monthly fuel price adjustment as soon as possible (Box 2). Cuts in current spending on various other items were also implemented and extended to the military. Cuts in capital spending focused on projects with the least impact on growth, such as land acquisitions for future mega projects.

Jordan: Savings from Fiscal Measures in 2012

(In Percent of GDP)

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

Increasing diesel and kerosene prices is the only measure that is not yet taken in 2012.

Oil Prices, Gas Supply, and Energy Subsidies

Energy subsidies make Jordan highly vulnerable to external shocks. Energy imports increased from 9 percent of GDP in 2003 to19 percent of GDP in 2011, to a large extent reflecting higher fuel imports to generate electricity.

Energy subsidies

Fuel price subsidy. The Jordan Petroleum Refinery Company is the sole importer of crude oil and refined oil products, which it sells countrywide, including to the power generation sector, at administered prices. Until early 2011, Jordan had a monthly fuel price adjustment to change pump prices in line with international oil price developments. Responding to social pressures, this adjustment was put on hold. Prices for most oil products were set at what was deemed a socially acceptable level, and the central government has been subsidizing the refinery for the difference between the sale price and the cost of oil products. The subsidy for 2012 would have amounted to 3.7 percent of GDP without any measures.

Electricity tariffs. NEPCO, the wholesaler of electricity and the transmission company, purchases gas from Egypt at a below-market price and also imports electricity from Egypt and Syria. Non-gas fuel is bought from the refinery at administered prices. On top of these fuel supply arrangements, NEPCO buys electricity from the generation companies and sells it to distributors and large consumers at a tariff set by the Electricity Regulatory Commission.

The shock

The shock to gas supplies from Egypt in 2011 had an adverse impact on public finances through an increase in the subsidy paid to the refinery, as well as indirectly through NEPCO’s mounting losses, as electricity tariffs were not adjusted to reflect the more expensive fuel mix (producing electricity with fuel is about three time more expensive than the gas from Egypt). The shock was exacerbated by a large increase in oil prices in 2011 (see below on different gas scenarios).

Gas Scenarios: Annualized NEPCO Losses and BOP Impact, 2012 Prices 1/

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Based on 3 percent growth of annual energy supply from 2011 onward.

Reducing Jordan’s vulnerabilities

Fuel price subsidy

In June 2012, the government reinstated the monthly fuel price adjustment for less socially sensitive types of fuel (gasoline, jet fuel, and heavy fuel oil). This, together with the planned increase in the price for diesel in 2012 and lower international prices, is expected to limit the subsidy to 2.8 percent of GDP in 2012. Based on WEO prices, the subsidy in 2013 is estimated at 0.7 percent of GDP.

The authorities plan to reinstate the monthly fuel price adjustment for all fuels in 2013. At an international price level of 100$/barrel, staff estimates that an increase of $10 per barrel would currently increase the subsidy by around JD 450 million (2 percent of GDP).


Jordan: Total Government and NEPCO Cost on Fuel Products in 2013

Citation: IMF Staff Country Reports 2012, 343; 10.5089/9781475598520.002.A001

Sources: Jordanian authorities; staff estimates.Note: (1) Total government and NEPCO cost includes government subsidies for fuel products consumed by the public, plus additional NEPCO cost on diesel and heavy fuel oil (HFO) when crude oil price deviates from the baseline; (2) Crude oil price is the average of spot prices for U.K. Brent, Dubai and West Texas Intermediate.

Electricity tariffs

In the short term, the only way to cover NEPCO’s losses is to increase electricity tariffs to cost recovery level. Because this would require an almost doubling of the current average tariff, the authorities intend to move gradually. Increases will be done in an equitable way, by making the tariff schedule more progressive and ensuring that households in the lowest income decile do not suffer any increase.

In the medium term, Jordan must diversify its energy sources. Tenders have been announced to build a Liquefied Natural Gas (LNG) terminal in Aqaba. Construction is expected to take around two years, with an estimated investment of $100 million. Availability of LNG from international sources would decrease NEPCO costs by around 20 percent in the medium term. There is also potential to expand gas extraction from Jordan’s own field at Risha, and start the production of shale oil from domestic fields.

2013 and Beyond

16. Stronger adjustment will be implemented in 2013 (¶13). The authorities will reduce the primary deficit, excluding grants, by almost 2 percent of GDP to 6.3 percent of GDP. Assuming no further spending on Syrian refugees and with an expected reduction in the wage bill as a percent of GDP, this would require measures of about 1 percent of GDP. The authorities have already changed the mining royalty from specific to ad valorem in agreement with mining companies, to become effective in March 2013 (yielding an annual revenue gain of 0.3 percent of GDP). Because the preparations for the 2013 budget are at an early stage, staff discussed possible measures, which would aim primarily at increasing revenue and further containing fuel subsidies. Details will be agreed at the time of the first review. On the revenue side, options include increasing excise rates on fuel products (0.4 percent of GDP) and reducing tax exemptions by restoring the standard sales tax rate on specific goods (0.2 percent of GDP) as well as raising nontax revenue from licensing agreements (0.1 percent of GDP). Staff noted that more decisive reductions in tax exemptions would be welcome. On the expenditure side, the authorities plan to gradually reinstate the monthly fuel price adjustment for diesel and kerosene in the course of 2013 and introduce targeted subsidies if the price of oil exceeds $100 per barrel (structural benchmark). The speed of reinstating the fuel adjustment will depend on international prices. If oil prices are higher than projected or other risks materialize, the authorities stand ready to cut low-priority capital spending.


Jordan: Corporate Income Tax Rates Compared to PeerGroup

(Tax rate in percent)

Citation: IMF Staff Country Reports 2012, 343; 10.5089/9781475598520.002.A001

Source: IMF staff estimates.

17. Work is underway to boost revenue beyond 2013. Though not expected to yield much revenue in 2013, the authorities will submit a revised income tax law to parliament in September 2012 (structural benchmark), which could boost revenue substantially in 2014. Staff welcomed the general features of the law, including the lowering of the personal income tax threshold as it is very high (lower-income households would not be affected) and the increase in the top individual and corporate tax rates, which would bring Jordan in line with its peers. It noted that the authorities’ plan to set different corporate tax rates based on company size (intended to make small- and medium-size enterprises more competitive) may encourage large companies to evade taxes by splitting or setting up branches. In response, the authorities decided not to do so. The authorities will also review by end-2012 the tax system to explore further options for increases in revenue and will refrain from providing new tax incentives. Also, if implemented appropriately, improvements in tax administration could yield substantial revenue gains.

18. Fiscal adjustment has to go beyond the central government. There is a need to gradually reduce the deficits of other public enterprises and own-budget agencies not included in the central government’s budget (including the various regulatory commissions and public funds). These entities have on a consolidated basis run deficits between zero and two percent of GDP in the last three years. The water company is incurring the highest losses and the authorities plan to reduce its deficit, which might require increases in water tariffs. Led by the World Bank, staff will discuss with the authorities their program for addressing the financial problems of the other public agencies within the first year of the program. Staff also underscored the risks of mega-projects during the adjustment and urged the authorities to refrain from issuing any form of debt guarantees for borrowing by public entities, given the already high debt ratio.

Tax Administration

19. The authorities are focusing on steps to enhance their tax administration strategy (¶15). They recognize that fair, equal, and efficient treatment of taxpayers will go a long way in creating a level playing field for businesses and increasing taxpayers’ willingness to contribute. Efforts aim appropriately at making the taxpayer register accurate, raising filing compliance, and bringing arrears under control.5

Public Financial Management

20. The program has a strong emphasis on improving cash management (¶16). This will help program monitoring as well as enhance coordination with the CBJ. Starting in August, the authorities will generate monthly reports on stocks of pending checks and trust account balances to better monitor accounts payable. The program also includes an indicative target on the stock of accounts payable, in order to encourage better cash management and forecasting. Accelerating the rollout of the Government Financial Management Information System (GFMIS) (introducing a commitment control system through the GFMIS to register, report, and account for expenditure commitments against cash allocations by January 2013 is a structural benchmark) and the treasury single account are expected to facilitate this process.

C. Energy Policy

21. The World Bank has long been engaged in Jordan’s energy sector. Jordan has been at the forefront of energy sector reform in the region, and is a role model of public-private participation in the sector. Jordan’s no energy subsidy policy—first implemented in 2008—encouraged efficient use of energy and should be gradually reinstated. The gas supply shock provides a strong rationale for Jordan to expedite the diversification of its energy sources, including the use of alternative energy.

22. Recent tariff increases reduce NEPCO’s losses by almost 1 percent of GDP on an annual basis (¶17). Increases in electricity tariffs for some sectors (banks, the mining sector, and hotels) and large consumers were implemented in June. Nevertheless, NEPCO’s financing needs are expected to rise to 7.1 percent of GDP in 2012, taking into account the repayment of arrears incurred in 2011. This estimate, however, is sensitive to unpredictable gas flows from Egypt. The projections for the remainder of 2012 assume inflows slightly above those in the first half of the year. Under this scenario, NEPCO operating losses in the second semester would decline only marginally compared to the January-June level, and amount to 5.3 percent of GDP for the full year. Further disruptions in gas supply are possible, but there is also the upside of a significant and sustained resumption. Should gas flows resume at the maximum contracted levels in the near future, NEPCO’s annualized operating losses would narrow to 1.2 percent of GDP (see Box 2 for scenarios).

23. Restoring cost recovery for NEPCO will be critical for the success of the program (Box 2; ¶18-20). The authorities will reduce NEPCO’s operating losses to 3.8 percent of GDP in 2013, 2.7 percent of GDP in 2014, 1.8 percent of GDP in 2015, to reach cost recovery in mid-2016. To this end, they will formulate and announce a medium-term plan to address Jordan’s energy issues, incorporating the inputs already provided by the World Bank (structural benchmark for September). This plan will include a specific time table on measures for 2013 and beyond.

  • In the short term, the authorities plan to increase tariffs. According to the World Bank, NEPCO is a well-run company and savings from making it more efficient are expected to be minor. Thus, there is little scope for efficiency gains. Even in the best case scenario of Egypt gas coming fully back on stream, cost recovery will not be achieved given the current tariff profile and the volume and price levels set in the recently renegotiated contract with Egypt. Tariff reform that brings the average tariff close to cost recovery and does not harm the vulnerable parts of the population is both technically achievable and socially acceptable with the right communication strategy. According to the World Bank, the thrust of the tariff reform would be to preserve the current tariff for households that consume less (the lowest brackets of the current tariff schedule) and impose increases, possibly sequenced, on larger consumers, including the commercial users not affected by the recent tariff hike.

  • In the medium term, Jordan needs to diversify its sources of gas supply not only to enhance its energy security, but also to meet its growing electricity demand.6 The main option is the construction of a liquefied natural gas terminal in Aqaba, which would require upfront capital investment, but would be the cheapest way to provide gas in the long term. Complementing this strategy would be the development of the existing small gas field and of the prospected oil shale field in Jordan.

D. Monetary and Exchange Rate Policy

24. The exchange rate peg remains an appropriate anchor for financial stability. With a strong improvement of the balance of payments projected in the medium term, the real effective exchange rate is estimated to remain broadly in line with medium-term fundamentals. Maintaining the peg in the medium term will hinge on following through on the strong adjustment path and a favorable external environment. In the short term, the key objective will be maintaining an appropriate level of reserves, by restoring confidence: staff estimates based on the Fund’s reserve adequacy metric suggest that the current level of reserves is sufficient.7 Over the medium term, reserve coverage would increase.


Jordan: Bank Deposits at the CBJ

(In million JDs)

Citation: IMF Staff Country Reports 2012, 343; 10.5089/9781475598520.002.A001

25. The CBJ will also focus on preserving the attractiveness of dinar-denominated assets. In response to dinar liquidity drying out (see chart) and because banks can lend in foreign currency only to hedged borrowers, the CBJ injected liquidity in late May through a new weekly repo facility and buying government papers on the secondary market. The announcement of the Fund program is expected to have a beneficial impact on confidence and lead to an arrest and then gradual decline in dollarization. This will allow the CBJ to gradually reduce its liquidity injections. Should confidence not strengthen adequately, the CBJ would consider tightening monetary policy to make dinar-denominated assets more attractive and stem the pressure on CBJ’s reserves, by using all available instruments, first and foremost further interest rate increases. The CBJ felt that an increase in reserve requirements for foreign exchange deposits would be less effective because banks keep excess reserves in foreign currency with the CBJ. In addition, the very low return on banks’ foreign assets due to the low interest rate on the U.S dollar—the main currency in which foreign currency deposits are denominated—render raising reserve requirements ineffective in widening the JD-USD interest rate margin.

E. Structural Policies

26. The CBJ will further strengthen the banking supervisory framework (¶23-24). Banking sector indicators show that, despite some deterioration following the global financial crisis, banks remain generally sound. To enhance the ability of supervisors to monitor banking sector conditions, the authorities will improve the frequency and timeliness of banking system indicators. This would allow them to increase the frequency of publication of Financial Stability Reports, and shorten the time lag to publication. Complementing these efforts are the introduction of an automated bank data collection system for supervisors, expected in 2013, and an early warning statistical model that is being developed with Fund technical assistance. At the same time, the new credit bureau, expected to be licensed by end-2012, is expected to improve banks’ risk assessment capabilities. To further improve the supervisory framework, the authorities are strengthening the governance code for banks, customer protection rules, fit and proper criteria for bank board members and managers as well as risk management by banks within the current Basel II framework. Staff welcomed the authorities’ efforts. It highlighted the importance of continued strong supervision to assess any pressure on banks from fiscal tightening and the regional and global situation, as well as from recent dollarization. Accelerating the completion of the Internal Capital Adequacy Assessment Process (ICAAP) exercise might be useful. With possible technical assistance from the Fund, the authorities also intend to enhance their AML/CFT regime.

Jordan: Indicators of Bank Soundness, 2005–11

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Source: Central Bank of Jordan.

27. Structural policies will focus on supporting growth and employment (¶25). Although Jordan compares favorably with other countries in the region on governance and business environment indicators, improvement has been slow, and firms continue to identify problems in the areas of tax and tax administration as major constraints to doing business.8 Fiscal consolidation will trigger a change in the relationship between the public and private sectors. As noted by the World Bank, well-connected private firms have been benefitting from tax exemptions and weak enforcement by the tax administration. In parallel, public expenditure remains high, partially fueled by demand for public employment and funds to compensate for the lack of job opportunities in the private sector. Fiscal reforms will aim to reverse the decline in tax revenue and reduce expenditure toward enhancing the role of the private sector as the driving force for growth and employment. The authorities will step up ongoing efforts to:

  • Enhance the business investment framework in favor of job-creating activities. To reduce the unemployment rate among the educated Jordanians, further emphasis will be placed on educational reforms and training programs aimed at addressing skill mismatches and on encouraging private investment in skill-intensive sectors where Jordan has a comparative advantage. Reforms will also aim at improving the business environment for all firms in an equal manner to create a level playing field, and strengthening Jordan’s trade promotion programs.

  • Increase trade openness. Jordan has negotiated several free trade agreements in recent years. Negotiations with the European Union and Mercosur countries as well as enhancing linkages with the GCC hold the potential for further enhancing trade and economic integration.

F. External Adjustment

28. Exogenous factors will contribute to facilitating external adjustment, but so will policy actions. After peaking at 14.1 percent of GDP in 2012, the current account deficit is projected to undergo large adjustment in 2013, reflecting lower food and fuel prices, a strong rebound in export growth—following a sharp deceleration in 2012 due to disruptions in transit trade through Syria and in potash and phosphate production (caused by long worker strikes)—and continued improvements in travel receipts, including from the GCC. The expected further moderation of international food and fuel prices would help further external adjustment over the medium term, and so would the authorities’ commitment to sustained fiscal consolidation and diversification of Jordan’s energy sources. Implementation of structural policies aimed at improving the business climate; enhancing transparency and leveling the playing field for all firms; addressing skills mismatches; and fostering trade and competitiveness should also help in this regard.

III. Program Modalities

A. Length, Access, and Financing

29. Jordan faces sizeable financing gaps in the next three years. Current estimates point to a sizable balance of payment need and a financing gap through 2015, owing in large part to the liquidity needs to finance more expensive energy imports. Under the assumption that budgetary grants will come in as projected (3-4 percent of GDP), staff estimates suggest that to maintain reserves at about four months of imports, Jordan’s additional external financing needs would reach $0.8 billion in 2012, $1.1 billion in 2013, $1.1 billion in 2014, and $0.9 billion in 2015.

30. Donors are expected to cover most of the gap, with the Fund closing the remaining gap. The program is fully financed, with discussions advanced on budgetary grants (including from the U.S., the European Commission, and the GCC9) and official financing (including loans from France and Japan). In addition, World Bank financing is expected to continue through new Development Policy Loans ($150 million is envisaged for 2013), as well as through a Micro, Small, and Medium Enterprise Facility; there is also a possibility of World Bank and IFC loans for Jordan’s solar power program (Table 5). The EBRD’s investments are set to begin in the coming months, focusing on the power/energy sector (wind farm and electric generation projects), agribusiness, and financial institutions (trade finance credit line), with operations reaching an annual average of about €250-300 million. Steadfast commitment of the authorities to consolidation would ensure that financing will come in as programmed. Nonetheless, if there are early indications that projected financing will not be received, the authorities will consult with the Fund on alternative financing approaches (including market access) or further fiscal adjustment. On the upside, the amount under discussion with the GCC could be larger than currently included in the macro framework.

Table 1.

Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2009–17

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

Includes statistical discrepancy.

Includes NEPCO debt.

Table 2a.

Jordan: Summary of Fiscal Operations, 2011–17

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

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.

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 2b.

Jordan: Summary of Revenues and Expenditures, 2011–17

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Sources: Jordanian authorities; and Fund staff estimates and projections.
Table 2c.

Jordan: Summary of Quarterly Fiscal Operations, 2012

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

Discrepancy includes expenditure financed by foreign project loans, errors in statistical coverage etc.

Table 3.

Jordan: Summary Balance of Payments, 2011–17

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

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

The change in Fund credit outstanding and change in foreign currency deposits of commercial banks at the central bank are deducted from the change in NFA from monetary survey.

Excluding prospective and IMF financing from 2012, includes bank foreign currency deposits at the central bank.

The change in gross usable reserves excludes banks foreign currency deposits at the central bank and valuation effects

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

Including prospective and IMF financing.