Recent developments

2. The economy continued its gradual recovery in 2012. Unemployment dropped in spite of the freeze in public sector hiring. Although inflation increased towards the end of the year, owing partly to the removal of fuel subsidies, core inflation remained moderate at about 3 percent. Fiscal consolidation proceeded at a strong pace. A weaker balance of payments reflected lower official grants and higher oil and food prices. There was pressure on international reserves towards the end of the year, which was reversed in early 2013.

Economic outlook and risks

3. The authorities are expecting the growth momentum to pick up in 2013. Headline inflation is expected to rise on the back of the anticipated increases in fuel and electricity prices. The fiscal and external positions are projected to improve with higher grants and gas inflows from Egypt, as well as a result of the planned policies.

4. The authorities are fully aware of the downside risks facing the economy. Further escalation of the regional unrest and disruption in the supply of natural gas from Egypt remain key concerns. The authorities will continue to seek external financial support, and stand ready to take additional measures to safeguard the economy as needed.

Fiscal policy

5. Jordan’s fiscal consolidation strikes a balance between preserving macroeconomic stability, supporting growth, and guarding against the risk of social unrest. Substantial measures have been taken since the approval of the program last August. The authorities eliminated fuel subsidies, raised electricity tariffs, and cut non-priority capital spending and transfers. In January 2013, the monthly pricing adjustment for fuel product was reinstated. This mechanism resulted in a significant price increase in March, at a time when a new government was being formed, which attests to the authorities’ commitment to the program. The impact of liberalizing fuel subsidies on the most vulnerable was mitigated through a cash transfer scheme that had been introduced in late 2012. However, the National Electric Power Company (NEPCO) was unable to raise funds—which necessitated that the government service the company’s debt—resulting in the central government primary deficit slightly exceeding its end-December target (by 0.03 percent of GDP). The authorities are requesting a waiver for nonobservance of this performance criterion.

6. The 2013 budget envisages significant fiscal consolidation, with measures yielding around 4 percent of GDP to be implemented in a growth-friendly manner. Current spending has been cut in favor of development spending and the targeting of the cash transfer scheme is being strengthened. On the revenue side, taxes on luxury goods have been raised, some nontax fees increased, and tax exemptions eliminated. The income tax law which is awaiting parliament approval, along with tighter tax incentives, is expected to further increase revenues in 2014. On the structural front, tax administration measures are expected to reduce tax arrears, and a commitment control system will help to prevent the incurrence of arrears.

7. Energy sector reforms are at the center of the fiscal efforts. Despite the doubling of gas inflows from Egypt since November 2012, NEPCO’s operating losses remain substantial, though declining, and they are driving up public debt. The government has prepared a medium-term energy strategy with World Bank support to bring NEPCO back to cost recovery by 2017. The new strategy has a clear path for tariff increases, a plan for diversifying energy sources, with a focus on liquefied natural gas, and measures to enhance energy efficiency and the use of renewable energy. Given its scope, it will need to incorporate parliament’s views to secure broad public support. In case NEPCO is unable to meet the ceilings on its losses, the authorities stand ready to take offsetting fiscal measures.

Monetary and financial sector policies

8. Monetary policy continues to be geared towards preserving macroeconomic and financial stability, with the exchange rate peg remaining the anchor for monetary policy. Rising regional and global uncertainty in 2012 along with reduced public confidence led to pressures on official reserves toward the end of the year. The central bank responded by raising interest rates three times, which contributed to a sizeable reversal of deposit dollarization. While the net international reserves (NIR) target for end-September was met with a significant margin, the target for end-December was missed, for which the authorities are requesting a waiver. Following the central bank measures, reserves have increased sharply, and the program’s NIR targets for 2013 remain unchanged. The planned Eurobond issue and further donor support will further increase reserves. The central bank stands ready to further tighten monetary policy and take additional appropriate actions as needed to attain these targets.

9. The banking sector is sound. Recent indicators point to improved performance, and stress tests show resilience to potential shocks. The central bank recently created a financial stability department to enhance capacity in the assessment, analysis, and management of systemic risks. The preparation for the introduction of a new credit bureau is in its final stages, with operations to start in early 2014. The central bank also continues to strengthen banking supervision and regulations. The recently approved sukuk legislation is a key step in developing Islamic finance instruments. To manage market liquidity, the central bank introduced a weekly repo facility in the first half of 2012 and forward foreign exchange operations in September.

Structural reforms

10. Enhancing growth potential and addressing the high unemployment rate remain a priority. New legislation aimed at boosting growth and employment in the private sector is underway. This includes in particular the new investment law which is to be submitted to parliament by mid-2013. This law will enhance the transparency of rules related to the investment process, streamline tax incentives, and pave the way for a one-stop-shop. Access to credit by small and medium enterprises should be facilitated by the recently approved secured lending legislation which allows firms to use movable assets as collateral.

Conclusion

11. The authorities’ strong commitment to the program is apparent, and the program remains largely on track. Significant progress has been achieved since its approval last August. Moreover, all end-September 2012 quantitative performance criteria and indicative targets were met with one minor exception. All end-December targets were also met with two minor exceptions. The primary fiscal balance was slightly missed, by a very small margin as indicated, while corrective measures have helped to maintain the targets for international reserves.