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.
The Executive Board of the International Monetary Fund (IMF) today approved a 36-month SDR 1.364 billion (about US$ 2.06 billion) Stand-By Arrangement for Jordan to support the country’s economic program during 2012-15 to address fiscal and external challenges and foster high and inclusive growth. The approval makes SDR 255.75 million (about US$ 385.35 million) immediately available, and the remaining amount will be phased in over the duration of the program, subject to quarterly reviews. The Stand-By Arrangement entails exceptional access to IMF resources, amounting to 800 percent of Jordan’s quota.
Jordan faced a series of exogenous shocks, beginning in 2011. Repeated damage of the Arab Gas Pipeline prompted an increase in imports of expensive fuel products for electricity generation. At the same time, regional tensions adversely affected tourism, remittances, and foreign direct investment. As a result, the current account deficit widened and growth slowed. The social impact of these shocks was contained because the authorities accommodated it by increasing subsidies and wages, financed by grants. At the same time, the losses of the public electricity company (NEPCO) rose due to the expensive fuel imports. External pressures intensified in 2012, when gas inflows were further reduced. Continuing large public financing needs, including from the electricity company, are pushing up government and government guaranteed debt and also started to crowd out the private sector.
Jordan’s home-grown economic program aims at maintaining macroeconomic stability by implementing fiscal, monetary, and structural policies that will address challenges while fostering high and inclusive growth. As part of this effort, the authorities plan to establish transparent and sustainable energy prices and reverse the recent trend in revenue losses. In this context, the authorities intend to cut the primary deficit (excluding grants) by about 6 percent of GDP during the program period while the losses of the electricity company are expected to fall by 3 percent of GDP. The authorities’ program will also focus on making economic policies more equitable and inclusive, providing targeted subsidies and better opportunities for the vulnerable segments of the population. To support growth and the medium-term external position, the program will also aim at improving the investment climate through targeted structural reforms, while strengthening labor-market skills.
Following the Executive Board discussion on Jordan, Ms. Christine Lagarde, Managing Director and Chairperson, said:
“Jordan is facing external and fiscal challenges stemming largely from exogenous shocks to its energy sector. These shocks have put pressure on the external accounts and increased the deficits of the central government and the public electricity company.
“The Jordanian authorities have developed an economic program focused on achieving fiscal and external sustainability in a socially acceptable manner, while strengthening growth prospects. The program envisages supporting confidence as well as strong medium-term consolidation in the fiscal and energy sectors.
“The authorities have already taken substantial measures to improve the fiscal position. Nonetheless, achieving fiscal sustainability will require continued commitment to adjust and implement difficult policies. Fiscal policies aim to reverse revenue losses of the last years through appropriate tax policy and tax administration reforms, while shifting the composition of spending toward better targeted subsidies and growth-enhancing investment, supported by improvements in public financial management. Energy sector policies, developed in cooperation with the World Bank, aim to bring the electricity company back to cost recovery through tariff reform and diversification of Jordan’s energy sources.
“The central bank’s prudent management of monetary policy is essential to underpin the exchange rate peg as an anchor for financial stability. Further efforts to strengthen the banking supervisory framework are welcome.
“Continued structural reforms to strengthen competitiveness are essential to foster high and inclusive growth and create employment. To this end, efforts to improve Jordan’s business climate, enhance trade, reform the education sector, and develop training programs will be important.”