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© 2013 International Monetary Fund

May 2013

IMF Country Report No. 13/130

Jordan: First Review Under the Stand-By Arrangement, Request for Waivers of Nonobservance of Performance Criteria, Modification of Performance Criteria, and Rephasing of Access—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Jordan.

In the context of the first review under the Stand-By Arrangement, the following documents have been released and are included in this package:

• The staff report for the First Review Under the Stand-By Arrangement, Request for Waivers of Nonobservance of Performance Criteria, Modification of Performance Criteria, and Rephasing of Access, prepared by a staff team of the IMF, following discussions that ended on March 2, 2013, with the officials of Jordan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 27, 2013. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

• A Press Release summarizing the views of the Executive Board as expressed during its April 10, 2013 discussion of the staff report that completed the review.

• A statement by the Executive Director for Jordan.

The documents listed below have been or will be separately released.

• Letter of Intent sent to the IMF by the authorities of Jordan^*

• Memorandum of Economic and Financial Policies by the authorities of Jordan^*

• Technical Memorandum of Understanding^*

• ^*Also included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

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International Monetary Fund

Washington, D.C.

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INTERNATIONAL MONETARY FUND

JORDAN

FIRST REVIEW UNDER THE STAND-BY ARRANGEMENT, REQUEST FOR WAIVERS OF NONOBSERVANCE OF PERFORMANCE CRITERIA, MODIFICATION OF PERFORMANCE CRITERIA, AND REPHASING OF ACCESS

March 27, 2013

Executive Summary

Jordan has been through challenging times. Gas inflows from Egypt were severely reduced for most of 2012, resulting in expensive fuel imports. Moreover, the conflict in Syria has resulted in a large influx of refugees. Together with regional uncertainties, this contributed to pressures on fiscal accounts and also international reserves in late 2012. The situation improved toward year-end, as the central bank managed the pressure on reserves and, with sizeable grants coming in early 2013, rebuilt its buffers. A marked increase in gas flows in November further helped. Finally, political uncertainties were alleviated by the parliamentary elections in early 2013 and the re-appointment of the prime minister.

Despite the socially difficult elimination of the fuel subsidy, program performance was mixed. The subsidy was eliminated in November, and most targets related to the central government were met, even though the end-2012 performance criterion (PC) on the primary deficit was missed by a very small margin. The electricity company’s financial performance was in line with the program, but the company did not repay its arrears. The end-December PC on the Net International Reserves (NIR) was missed, but the central bank took corrective action. The implementation of the energy sector reforms has been delayed, but it is now being tackled.

Fiscal consolidation, additional reserve build-up, and higher growth are key program objectives. The fiscal position will be strengthened mostly through expenditure measures, making room for a large increase in capital spending. Strengthening the electricity company’s finances is part of an energy strategy to ensure full cost recovery by 2017. Efforts are being made to protect the vulnerable segments of the population from the impact of fiscal consolidation. Bolstered by external financing, NIR are expected to end 2013 in line with the program target. Structural reforms focus on enhancing access to financing and improving labor-market skills.

Significant challenges remain. Achieving cost recovery in the energy sector in a socially acceptable way requires a broad buy-in from key stakeholders, which could be affected by the ongoing political reforms. Risks also relate to the implications of the Syria conflict on Jordan’s economy, a weaker current account, and program implementation capacity.

The completion of the first review makes available SDR 255.8 million (about $387 million).

Approved By

Adnan Mazarei and James Roaf

Contents

• CONTEXT

• PERFORMANCE IN 2012

• A. Recent Developments

• B. Policy Implementation

• C. Outlook

• POLICY DISCUSSIONS

• A. Fiscal Consolidation

• B. Monetary Policy—Building Buffers

• C. Structural Policies—Stronger and More Inclusive Growth

• RISKS TO THE PROGRAM

• PROGRAM MODALITIES AND SAFEGUARDS ASSESSMENT

• STAFF APPRAISAL

• BOXES

• 1. The Impact of the Syria Conflict on Jordan

• 2. Replacing the Fuel Subsidy with Cash Transfer

• 3. Energy Strategy

• 4. Fiscal Spending Multipliers

• 5. Risk Assessment Matrix

• FIGURES

• 1. Real Sector Developments, 2010–12

• 2. Monetary Developments, 2012–13

• 3. External Sector Developments, 2007–12

• TABLES

• 1. Selected Economic Indicators and Macroeconomic Outlook, 2010–18

• 2a. Central Government: Summary of Fiscal Operations, 2011–18

• 2b. Central Government: Summary of Fiscal Operations, 2011–18

• 2c. Central Government: Summary of Quarterly Fiscal Operations, 2012–13

• 3. Summary Balance of Payments, 2011–18

• 4a. Summary Monetary Survey, 2011–13

• 4b. Summary Accounts of the Central Bank of Jordan, 2011–13

• 5. Financing Shortfalls, 2012–15

• 6. Indicators of Bank Soundness, 2005–12

• 7. Access and Proposed Rephasing Under the Stand-By Arrangement

• 8. Indicators of Fund Credit, 2013–20

• 9. Capacity to Repay Indicators, 2013–18

• ANNEXES

• I. Public Debt Sustainability Analysis

• II. External Debt Sustainability Analysis

• APPENDIX

• I. Letter of Intent

• ATTACHMENTS

• 1. Memorandum of Economic and Financial Policies

• 2. Technical Memorandum of Understanding

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Press Release No. 13/113

FOR IMMEDIATE RELEASE

April 11, 2013

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