Jordan: Request for an Extended Arrangement Under the Extended Fund Facility—Press Release; Staff Report; and Statement by the Executive Director for Jordan

Jordan has maintained macroeconomic stability and undertook significant policy adjustment against a difficult external environment, rising socio-economic tensions, high vulnerabilities, and the hosting of a large number of Syrian refugees. The economy still faces considerable challenges. Economic growth remains below potential, unemployment is high, particularly for youth and women, the refugee crisis is weighing on the economy and public finances, gross public debt has risen to about 93 percent of GDP, the current account deficit is high, and the regional outlook remains challenging.

Abstract

Jordan has maintained macroeconomic stability and undertook significant policy adjustment against a difficult external environment, rising socio-economic tensions, high vulnerabilities, and the hosting of a large number of Syrian refugees. The economy still faces considerable challenges. Economic growth remains below potential, unemployment is high, particularly for youth and women, the refugee crisis is weighing on the economy and public finances, gross public debt has risen to about 93 percent of GDP, the current account deficit is high, and the regional outlook remains challenging.

Background

1. Jordan has made substantial progress in strengthening its fiscal and external positions despite a very difficult regional environment. The conflicts in Iraq and Syria, the large inflow of refugees, along with large shortfalls in the supply of gas from Egypt at below-market-prices, constituted major shocks to the economy. The economic policies supported by the three-year Stand-By Arrangement (SBA) completed in August 2015 helped reduce vulnerabilities and maintain macroeconomic stability. The economy continued to grow, supported by a decline in oil prices and an accommodative monetary policy. A large fiscal adjustment was achieved, including through the implementation of ambitious fuel subsidy and electricity sector reforms.

2. Notwithstanding this progress, significant challenges remain. With regional conflicts constraining investor sentiment, tourism, and exports, real GDP growth averaged 2¾ percent per year in 2011–15, below the 2002–10 annual average of 6½ percent and what is required to meet job creation needs. While lower oil prices have provided relief since late 2014, the external current account deficit remains high owing to declines in remittances, exports, and tourism. Facing new external shocks, such as the closure of the Iraq trade route in July 2015, the 2015 fiscal adjustment was smaller than planned, delaying the stabilization of public debt. The hosting of Syrian refugees continues to represent a substantial strain on public finances.

3. The challenges posed by regional conflicts are also being supported under the Jordan Compact.1 The Compact geared towards promoting economic integration and development, while helping Jordan absorb the costs associated with the large influx of refugees. These goals will be supported by opening up the EU market with simplified rules of origin to help create jobs for Jordanians and Syrian refugees and in mobilizing grants and concessional financing to support the macroeconomic framework and external balance. The World Bank’s Concessional Financing Facility— combining resources from the World Bank and grants from official donors—will help the World Bank to finance projects, thereby reducing capital expenditure pressures on the central government budget stemming from hosting refugees, and improving the profile of public debt through longer maturity and lower borrowing costs (Box 1).

4. A caretaker government took office on June 1st and parliamentary elections are scheduled for September 20th. Prime Minister Al-Mulki’s government is committed to implementing policies and reforms underpinned by Vision 2025. This plan focuses on: i) sustaining macroeconomic stability through reducing fiscal needs and increasing reserves; and ii) enhancing the conditions for more inclusive growth through a better business environment, better public financial management and governance, improving labor force participation and competitiveness, to address in particular the challenges posed by the regional conflicts on exports, investment, and the labor market.

Recent Economic Performance

5. The economy performed favorably in 2015 under persistently difficult conditions. While the closing of Jordan’s borders with Syria (from mid-2013 to April 2015) and Iraq (in July 2015) continued to impinge on exports, tourism, and overall confidence, real GDP grew by 2.4 percent in 2015. Year-on-year inflation has hovered at about -1½ percent in recent months, reflecting the sharp decline in food and transportation prices, core inflation has stabilized at about 2.2 percent year-on-year since end-2015. Unemployment rose to 14.6 percent in the first quarter of 2016, its highest level in at least ten years.

uA01fig01

CPI Inflation

(Year-on-year, in percent)

Citation: IMF Staff Country Reports 2016, 295; 10.5089/9781475536263.002.A001

Sources: Department of Statistics; and IMF staff estimates.

6. The external current account deficit remained high in 2015. Excluding grants, it amounted to 11.7 percent of GDP, roughly the same level as in 2014, as the impact of lower oil prices was offset by lower exports of goods and tourism and a slowdown in remittances. The influx of refugees has stabilized, while private transfers and international humanitarian aid declined by almost 1 percent of GDP in 2015, relative to 2014.2 Despite the decline in private capital inflows, gross usable reserves increased to US$15.7 billion at end-2015 (136 percent of the Fund’s reserve adequacy metric, RAM),3 supported by the issuance of Eurobonds and Fund resources under the SBA. During the first quarter of 2016, developments in GCC countries appear to have contributed to some further deterioration in Jordan’s external position, with exports declining by 11.2 percent, tourist arrivals by almost 7 percent (including 18.4 percent from GCC countries), and remittances by about 7 percent (all y-o-y). These unfavorable developments contributed to a decline in gross usable reserves to US$15.1 billion (130 percent of the RAM) by March 2016. The exchange rate has continued to appreciate in nominal effective terms, given the peg to the U.S. dollar, but this has leveled off since mid-2015 on a real effective basis.4

uA01fig02

Jordan: Effective Exchange Rate Indices

(Feb 2012 = 100)

Citation: IMF Staff Country Reports 2016, 295; 10.5089/9781475536263.002.A001

Sources: INS; and Fund staff calculations.
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Jordan: Decomposition of the Change in the CAD 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 295; 10.5089/9781475536263.002.A001

Sources: Jordanian authorities; and Fund staff calculations.1/ Current account excluding grants and energy imports.2/ Include transfers related to Syrian refugees.

7. Fiscal consolidation was sustained in 2015, but at a slower pace than envisaged. The combined public sector deficit (i.e., the sum of the primary budget deficit and the operational balance of the state-owned electricity company (NEPCO)) declined from 9.2 percent of GDP in 2014 to 6.1 percent of GDP in 2015, well above the 3.5 percent of GDP deficit projected under the SBA (text table). As a result, gross public debt reached 93.4 percent of GDP at end-2015, substantially exceeding the authorities’ target of 90 percent of GDP. Several factors were at play:

  • Revenue shortfalls and some expenditure overruns. A higher primary budget deficit reflected revenue shortfalls (lower oil-related general sales tax owing to lower oil prices, tax-free LNG purchases by NEPCO, lower public enterprises’ financial surpluses, new tax exemptions, and various fees), as well as spending overruns, and one-off payments of arrears on land acquisition and other payables.5

  • Higher-than-expected losses of the Water Authority of Jordan (WAJ). WAJ’s performance has been severely affected over the last few years by the additional demand from Syrian refugees and increased electricity tariffs. WAJ’s losses were 1.1 percent of GDP in 2015, partly reflecting higher-than-expected capital expenditures and borrowing costs.

  • On the positive side, NEPCO’s operational losses were about ½ percentage point of GDP lower than projected under the SBA due to lower oil prices and improvements in efficiency.6

Key Drivers of Fiscal Deviations, 2014–15

(In percent of GDP)

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SBA definition.

8. Financial conditions have remained supportive. Lower policy rates, along with a shift of government borrowing away from banks toward the social security investment fund, led to a marked decline in interbank and lending rates and higher credit growth. Credit, excluding the refinery, increased by 9 percent y-o-y in March (Figure 1).7 Credit to households has been particularly strong, increasing by 13.8 percent y-o-y and contributing to a further increase in household debt, while credit to the corporate sector increased by 4.0 percent y-o-y. Banks have remained profitable and highly liquid with increasing capital adequacy and declining non-performing loans (Figure 2). Deposit dollarization has stabilized at about 17 percent, in line with its pre-2012 level, while loan dollarization has declined over the last few months, to about 13 percent, as the refinery repaid some of its foreign currency loans.

Outlook and Risks

9. The macroeconomic outlook assumes no major changes in the regional environment over the projection period.

  • Real GDP growth is projected to increase to 2.8 percent in 2016, supported by lower oil prices relative to their 2014 peak, an accommodative monetary stance, and some recovery in private investment. Growth is expected to accelerate gradually over the medium term toward 4 percent, reflecting the impact from the relaxation of EU rules of origin on exports, additional private and public investment associated with the Jordan Compact, and some efficiency gains stemming from structural reforms.8

  • Inflation would recover to about 1¼ percent y-o-y at end-2016. As the impact of the fall in oil prices subsides and the economy accelerates, inflation would gradually increase to 2½ percent by 2018 and stabilize thereafter.

  • The current account deficit (excluding grants) is projected to remain high in 2016–17 owing to subdued exports, tourism and remittance inflows, as well as declining private transfers to the refugees. Continued improvements in the fiscal position, a pickup in exports, and a gradual recovery in tourism and remittances would help bring the deficit down to 8½ percent of GDP over the medium term.

  • The capital account would improve with structural reforms restoring confidence and foreign direct investment, while also facilitating access to international capital markets. Staff projections assume a gradual rise in borrowing costs in line with expected developments in the U.S. monetary policy, but no change in Jordan’s credit ratings. Staff’s baseline scenario incorporates about US$3 billion (of which US$1 billion in off-budget grants from bilateral donors, US$1 billion in budget loans from bilateral donors, and US$1 billion in budget loans on concessional terms) of financial support under the Jordan Compact. Gross usable reserves would stabilize at about 125 percent of the RAM by the end of the program, a level deemed appropriate given Jordan’s exchange rate regime and extent of exposure to external shocks.

10. The outlook remains uncertain and subject to considerable risks. There are several downside risks. The continuation of the regional conflicts or a worsening of the GCC economic outlook is expected to exacerbate the already high pressures on the economy. Jordan’s prudent macroeconomic policies have been critical to preserve favorable overall conditions; however, an idiosyncratic shock that raises Jordan’s risk premium could raise domestic borrowing costs and further complicate debt dynamics.9 Delays in fiscal consolidation and structural reforms would also leave the economy highly exposed to adverse shocks. The impact of Brexit on the economy is uncertain at this juncture, with downside risks related to a higher risk premium and weaker growth outlook in Europe tempered by declining oil prices. Continued donor support and investment under the Jordan Compact would be essential to lessen these pressures and downside risks, and to support fiscal adjustment in order to preserve debt sustainability. A recent agreement with Saudi Arabia on large investment projects is an upside risk to the outlook. Progress toward normalizing regional conflicts would improve Jordan’s growth and external position through several channels, including a revival of tourism, a re-opening of trade routes, and the involvement of Jordanian businesses in reconstruction of Syria and Iraq (Box 3).

The Program

The authorities’ program is underpinned by Vision 2025. It is designed in a flexible manner by pursuing gradual and steady fiscal consolidation to bring public debt toward safer levels while protecting the most vulnerable, and by advancing comprehensive reforms to enhance the conditions for more inclusive growth, particularly in light of the challenges posed by the regional conflicts on exports, investment, and the labor market. Gradual and steady fiscal consolidation will be underpinned by revenue-enhancing reforms to the tax system. Structural reforms will be implemented in several areas to enhance competitiveness, job prospects, and foster equity, fairness, and good governance. These reforms will promote jobs, and help achieve higher and sustained growth.

A. Fiscal Policy

11. Fiscal policy will balance the need to reduce public debt with inclusive growth considerations. The authorities’ program aims at gradual fiscal consolidation. Facing continued pressures on the economy, the authorities have proceeded with fiscal adjustment to limit as much as possible the increase in public debt in 2016 and stabilize it at about 94 percent of GDP. They intend to lower it gradually to about 77 percent of GDP by 2021, as targeting faster consolidation would risk growth and social cohesion.10 The authorities and staff agreed that reaching this target while providing room for capital expenditures and preserving social spending would require fiscal measures of about 4½ percent of GDP over 2017–19 at the central government level—focused on addressing long-standing structural weaknesses on the revenue side—while maintaining operational balance at NEPCO.

uA01fig04

Medium-Term Fiscal Consolidation

(annualized, in percent) Debt-to-GDP (right-axis) Measures (in columns, left-axis)

Citation: IMF Staff Country Reports 2016, 295; 10.5089/9781475536263.002.A001

Source: IMF staff calculations.

12. The authorities adopted 0.8 percent of GDP of new fiscal measures in 2016 to contain the combined public deficit and allocate an additional 0.4 percent of GDP from government deposits and other assets to limit the increase in public debt (prior action, table below, Memorandum of Economic and Financial Policies (MEFP) ¶6)). While the authorities noted that adopting new fiscal measures was difficult in the current environment, they felt it was important to signal their commitment to sustaining fiscal consolidation and to putting public debt on a downward path. They have decided to include WAJ, as with NEPCO, into the program combined public deficit target, noting that this was important in light of the capital expenditure needs of the water sector and sustained pressures on the electricity sector. Tax measures on cigarettes, alcohol, and oil are expected to deliver 0.3 percent of GDP, along with the removal of some tax exemptions that were introduced in late 2015.11 Non-tax revenue measures and a 10-percent reduction in current expenditures relative to the budget would yield 0.4 percent of GDP. The authorities also saw scope for adopting some one-off non-tax revenues measures yielding 0.4 percent of GDP, which they saw as critical to limit the increase in public debt in 2016. The authorities also reversed a recent decision to reduce fees and taxes for 180 days on land purchases from 9 percent to 4.5 percent. The consolidation in 2016 would allow for preserving social spending, for increasing capital spending, including on the water sector, and for gradual clearance of energy arrears.12 As a result, the combined public sector deficit (including NEPCO and WAJ) would decline from 7.2 percent in 2015 to 5 percent of GDP in 2016 while public debt would stabilize at about 94 percent of GDP at end-2016.

Authorities’ Measures

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13. Medium-term fiscal consolidation will focus on revenue- and equity-enhancing tax reform, on prudent management of current expenditures, and on ensuring an effective social-safety net (MEFP ¶8). To underpin their fiscal consolidation efforts under the program, the authorities intend to rely primarily on simplifying and streamlining tax exemptions and broadening the income tax base.13 The authorities preferred to implement reforms to the tax exemptions framework before the income tax, as the new income tax law had been implemented only recently. They will also continue to maintain a prudent expenditure policy, streamlining non-priority current spending while gradually clearing arrears, prioritizing social and capital spending, and accommodating the continued pressures from Syrian refugees. More specifically, the authorities will:

  • Reform the tax exemptions framework, starting from 2017. The authorities will conduct a comprehensive review of the tax and customs duty exemptions (with the help of IMF technical assistance (TA)) with a view to establishing a more streamlined, efficient, and transparent regime under the authority of the Minister of Finance. Based on the recommendations of this review, the authorities will submit to parliament by mid-November 2016 a new tax exemptions framework for the general sales tax (GST) and custom duties (structural benchmark (SB)), with implementation expected to begin by end-March 2017 (SB).

  • Begin reducing tax exemptions with the 2017 budget. The authorities will submit to parliament by mid-November 2016 a draft budget law for 2017 that will include: i) 1½ percent of GDP in fiscal measures (including a significant reduction in exemptions) (SB) to reduce the primary budget deficit to about 2½ percent of GDP; and ii) detailed estimates of tax expenditures to better inform budget decisions and enhance transparency.

  • Begin preparatory work to amend the income tax law. The authorities intend to submit to parliament by end-December 2016 amendments to the income tax law (SB) to: i) reduce the exceptionally high personal income tax (PIT) exemption threshold, in line with international standards14; ii) raise the general corporate income tax rates and align it with the top PIT rate; iii) strengthen the framework for transfer pricing; and iv) establish a minimum corporate income tax to fight tax evasion. The implementation of the amended law is expected to begin before end-March 2017 (SB) and to become effective in 2018.

  • Contain current spending while enhancing social safety nets. They intend to keep the nominal growth of the public sector wage bill at about 1½ percent a year from 2017–19 and also take steps to better target transfers, including through establishing, with the support of the World Bank, an automated data exchange between the National Aid Fund (NAF) and public agencies in order to eventually put in place a National Unified Registry that would enhance information-sharing, eligibility, and enrollment in programs (MEFP ¶8). The authorities also noted that these efforts will help complement other mechanisms in place to protect low-income groups, such as those related to life-line tariffs on energy and water consumption. Staff agreed with the authorities that efforts to enhance the social safety net are a high priority and the program includes an indicative floor on social spending to shield low-income groups from the effects of fiscal adjustment. This spending primarily targets illness and disability, old age, family and children, housing, and research and development in the field of social protection.

  • Reduce stock of arrears gradually. The authorities are committed to clear the stock of energy arrears (about 1.6 percent of GDP) over three years, starting with 0.4 percent of GDP in 2016. They also intend to audit the stock of health arrears (about 1.1 percent of GDP as of end-March 2016) by end-December 2016, and begin clearing them in 2017, along with the adoption of measures aimed at preventing further incurrence of health arrears (MEFP ¶6 & 8).

14. The authorities and staff agreed that proceeding with reforms to electricity and water sectors was crucial to ensure sustainability of those sectors and support fiscal consolidation (MEFP ¶9). They intended to:

  • Preserve NEPCO’s operational balance. With fluctuations in oil prices not immediately passed through to electricity consumers, NEPCO’s goal of maintaining operational balance remains at risk, particularly if oil prices remain above its cost recovery threshold of about US$43–47 per barrel. Staff noted the need for electricity tariffs to be increased if NEPCO was projected to make losses in 2016. At the same time, and owing to the sizeable cross-subsidization of small consumers, large corporations face high tariffs, and some have begun to find it cheaper to leave the grid. To address these issues, the authorities will:

    • Reduce cross-subsidization. The authorities will conduct and publish by end-September 2016 studies identifying options for reducing cross-subsidization across different electricity consumers (while maintaining revenue and protecting poor households).

    • Announce (prior action) the adoption by mid-December 2016, and implementation on January 1, 2017 of an automatic tariff adjustment mechanism (SB) to shelter NEPCO finances from changes in oil prices. The authorities intend to use any profits accrued by NEPCO to reduce public debt. The authorities were confident that NEPCO would achieve operational balance during 2016 due to the profits made in the first four months of the year, despite oil prices being somewhat higher in recent months and above the cost recovery threshold.

  • Recalibrate WAJ’s strategy in light of new risks. The increase in oil and electricity prices, the additional demand from Syrian refugees, and the potential impact for the sector’s electricity costs of the adoption of the automatic electricity tariff adjustment mechanism have pressed the water sector financial resources. To tackle these problems, the government will begin allocating budgetary resources to help finance WAJ’s capital expenditures (about 1 percent of GDP per year) and will adopt and publish an updated “Action Plan to Reduce Water Sector Losses” (end-December 2016 (SB)) (Box 2).

15. The authorities intend to enhance fiscal planning and transparency, and pursue a more efficient selection, implementation, monitoring, and evaluation of investment projects (MEFP ¶11–12). They will establish a public investment management unit and adopt its action plan (prior action). They will also reorganize the macro-fiscal unit at the Ministry of Finance and improve fiscal transparency, and take steps to better manage fiscal risks (prior action). The authorities also intend to closely monitor public companies and decentralized units (MEFP ¶10). They remain committed to closely monitor Royal Jordanian’s restructuring efforts and to seek potential interest from private investors and existing shareholders in buying the airline by 2018. The authorities will also ensure that, once adopted, the decentralization law does not result in additional fiscal costs.

16. Revenue-enhancing efforts will continue to be supported by tax administration reforms (MEFP ¶13). These reforms will focus on strengthening the GST compliance management framework by streamlining the legislative requirements, establishing low-cost mechanisms to voluntarily deregister companies, and setting up standards on the role of liquidators and the use of information technology. These will help strengthen compliance, streamline procedures, and enhance fairness. In addition, the authorities will prepare by end-September 2016 an action plan to start tackling the other tax administration weaknesses identified in the IMF’s recent Tax Administration Diagnosis and Assessment Tool evaluation, including the lack of strategic approach to compliance risk management, the high rate of tax arrears, low rate of use of e-services, inefficiency of the GST refund payment system, and the lack of a formalized tax ruling system.

17. The authorities will enhance debt management capacity, improve public debt profile, and reduce rollover risks (MEFP ¶14). The authorities will finalize a medium-term debt management strategy (MTDS) analysis, and based on its findings, prepare and publish by end-September 2016 a debt management strategy for 2016–21 covering the central government and its agencies (SB).15 They will also adopt by end-December 2016 an action plan to build capacity in the middle and front offices of the Public Debt Directorate (PDD) and to review its structure and responsibilities in support of market development (SB). The plan will also clarify the roles and responsibilities of the PDD consistent with the provisions of relevant legislation. This action plan will be implemented by end-June 2017 (SB).

B. Monetary and Financial Policies

18. Monetary policy will remain focused on maintaining adequate reserves to anchor the exchange rate. The current policy stance is accommodative and policy interest rate appears appropriate in view of the decline in core inflation, the increasing output gap and unemployment, and the adequate level of reserves. CBJ officials argued that the deviation of the interbank rate from the policy interest rate reflected high excess liquidity in the system and helped, in the short run, with stimulating credit and growth. While agreeing with staff that this gap should not be sustained for long, in the short run they did not want: i) a reduction of the policy rate to be interpreted as signaling a permanent loosening of the monetary stance; or (ii) CBJ’s intervention (through increased repo operations or CD issuance) to jeopardize the credit recovery. They reiterated their commitment, however, to adjust monetary policy as needed given the uncertain balance of payments outlook and expected increase in U.S. interest rates. The CBJ and staff agreed that the fixed exchange rate regime served Jordan well, and the CBJ will continue to maintain adequate foreign exchange reserves to anchor the exchange rate (¶6). The CBJ also agreed on the need to monitor closely credit to households.

19. The authorities intend to advance several reforms to enhance the resilience and depth of the financial system. In particular:

  • Strengthen the regulatory framework (MEFP ¶17). The recent adoption of the CBJ law will help to foster transparency and align CBJ’s autonomy and oversight with best practices. Amendments to the Deposit Insurance Corporation law, together with the provisions in the new commercial banking law, will help ensure the establishment of a robust bank resolution framework (SB). The adoption and gradual implementation of Basel III regulations will help better tailor liquidity and capital requirements to the needs of the individual banks. Staff stressed that cross-border supervision should continue not only through onsite reviews but also through regular meetings of the Supervisory College of Arab Bank.

  • Enhance the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime (MEFP18). The CBJ will finalize the draft amendments to the AML/CFT law by end-2016 and harmonize the legislative and regulatory framework with the 2012 Financial Action Task Force standards by end-2017. In line with IMF TA recommendations, a risk-based framework for offsite supervision for banks and money exchange firms will also be implemented by end-October 2016 (SB). The authorities agreed that the focus should then shift to ensuring implementation of the AML/CFT framework, and they will start working on a National Risk Assessment in anticipation of the mutual evaluation under the FATF scheduled for 2018.

  • Promote better supervision of the insurance and microfinance sectors (MEFP19). The authorities will submit to parliament by end-March 2017 amendments to the Insurance Law to allow for the transfer of the supervision of the insurance sector to the CBJ (SB) and implement this transfer by end-September 2017 (SB). This will help foster stronger supervision, minimize spillovers of the sector to banks, and enhance financial development and transparency. The CBJ will also issue regulations for the supervision of microfinance institutions by end-July 2016, which will be implemented during 2016–17.

C. Structural Policies to Promote Jobs and Growth

20. The authorities seek to advance a broad agenda of structural reforms to promote higher, sustained, and job-creating growth. Reforms will aim at increasing labor force participation, particularly for women and youth, reducing informality, enhancing the business environment, ensuring sustainability in the energy and water sectors, preserving social spending, and enhancing governance.

21. Strengthening the business environment will help foster investment and enhance competitiveness (MEFP ¶20). The authorities are focusing on reducing the cost of starting and operating businesses, including through simplifying procedures and further strengthening investor protection. Specifically:

  • The Jordan Investment Commission’s investment window will be operational by end-June 2017 (SB).16 This will be done by eliminating all duplicative procedures and introducing a fast track approval mechanism through automation, introduction of time limits, and clearly defining agency accountabilities and responsibilities.

  • Administrative inspections of businesses will be streamlined. The authorities intend to submit a draft inspection law to parliament by end-October 2016 (SB). The law will reduce overlapping and unplanned business inspections, introduce risk-based targeting and help raise business awareness on compliance requirements.

  • The competition framework will be revamped to ensure independence of relevant agencies to monitor and enforce good market conduct. This will help create a level playing field and facilitate new investment.

22. Reforms to facilitate access to finance will help broaden the reach of financial services (MEFP ¶21). The authorities’ efforts for institutional reform will be critical to improve small and medium-size enterprises’ (SMEs) access to finance and help stimulate broad-based growth. In particular:

  • The credit bureau is expected to start compiling credit reports by end-2016 and will help assess borrowers’ creditworthiness and expedite credit risk assessment decisions for SMEs.

  • Collateral requirements for companies will be broadened while business exits will be facilitated. The implementation of the secured transactions law by end-March 2017 (SB) will allow SMEs to use moveable assets as eligible collateral. The amendments to insolvency law will bring it in line with best practice (end-March 2017 SB) and subsequent implementation will contribute to improving credit discipline and facilitate the liquidation of unviable firms, while providing rescue mechanisms for financially viable companies.

  • Financial inclusion strategy will be developed. The CBJ will publish a financial inclusion study by end-March 2017 (SB) and will then prepare a strategy aimed at promoting financial literacy, further developing payment systems, and strengthening consumer protection.

23. Measures to improve competitiveness will help bolster export growth (MEFP ¶24). Staff welcomed the proposed relaxation of rules of origin for exports to the EU, which will provide a significant opportunity to diversify Jordan’s markets and broaden Jordan’s product mix. The authorities agreed to develop and publish by end-June 2017, an export diversification strategy in advanced economies to help increase the market share of Jordanian products in these countries.

24. The authorities recognized the importance of advancing reforms to promote greater participation and formality in the labor market (MEFP ¶22). Specifically, the Ministry of Labor (MoL) is working on an action plan to:

  • Revamp the part-time employment framework to reduce costs to licensing and regulating home-based employment activities and allow flexible working hours.

  • Facilitate access to child-care. The MoL will amend the labor law to: i) allow large corporations to subsidize employees for child care, as an alternative to establishing nurseries; ii) establish and help promote public-funded nurseries for low-income employees working in SMEs; and iii) embark on a public awareness campaign along with establishing nurseries in all public sector institutions by end-2017.

  • Explore options for reducing wage costs for formal jobs, especially for youth and women. A cut in payroll taxes and the revamped business inspection law could address informality in the labor market, help small businesses, and help lower the burden on the employees due to proposed income tax reforms.

  • Build a low-cost and efficient public transportation system. Low-cost public transportation systems are designed to help low-income earners to join the labor market. The Greater Amman Municipality will issue a public tender by end-December 2016 for the private sector to set up bus transportation systems within Amman and surrounding cities with a view towards making operational the bus network by end-2017.

  • Evaluate a reduction in payroll taxes. To further stimulate job creation primarily among youth and women, the authorities will evaluate, in coordination with the Social Security Corporation (SSC), the impact of potential changes to payroll taxes and identify offsetting parametric reforms to maintain SSC’s actuarial position by end-September 2016.

25. The authorities give high priority to continuing to protect the most vulnerable (MEFP ¶8). Successful implementation of the program will require cushioning the potential impact of fiscal consolidation and structural reform on the vulnerable segments of the population. The authorities intend to establish a floor on social spending, primarily targeted at illness and disability, old age, family and children, housing, and research and development in the field of social protection.

26. The authorities recognized that it was important to improve public accountability and good governance (MEFP ¶23). The creation of a new Anti-Corruption Commission by end-August 2016 by the merger of the Ombudsman Bureau and the Commission will help better monitor progress with complaint and grievance resolution and improve the integrity of the public service, service delivery, good governance and anti-corruption. The authorities acknowledged that the unified legal framework for public procurement should be ratified and that a regulatory and policy committee/unit should be established by end-August 2016. They emphasized that this committee/unit will be tasked with developing procurement policy and oversight functions, handling the performance management system, developing the complaint mechanism, establishing a single e-portal, and managing capacity development.

Program Modalities

27. Access and phasing. At 150 percent of quota (SDR514.65 million or US$713.8 million— valued at USD/SDR exchange rate on July 26, 2016) will keep Jordan within normal access limits. Staff noted that, should program risks materialize, more adjustment would be needed to preserve reserves. Disbursements are slightly concentrated in 2017 to ensure sufficient reserve coverage (Table 6). The first disbursement would be at the time of program approval, and the remaining purchases would be contingent on completing semi-annual reviews.

Table 1.

Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2014–21

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

Government includes the central government and operating losses of NEPCO and WAJ.

Includes net lending, transfers to NEPCO and WAJ, and other use of cash.

Defined as the sum of the primary central government balance (excl. grants and transfers to NEPCO and WAJ), NEPCO operating balance, and WAJ overall balance.

Includes NEPCO and WAJ debt.

Data from UN population division.

INS data. CBJ staff’s estimates, based on updated trade weights, shows a more moderate pace of real appreciation over the past few years.

Table 2a.

Jordan: Central Government: Summary of Fiscal Operations, 2014–21

(In millions of Jordanian dinars)

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

For 2014, transfers to NEPCO and WAJ include government repayment of guaranteed debt. From 2015 onwards, the program assumes the utilities will repay their own debt.

Primary government balance excluding grants and transfers to NEPCO and WAJ, plus NEPCO operating balance plus WAJ overall balance.

Table 2b.

Jordan: Central Government: Summary of Fiscal Operations, 2014–21

(In percent of GDP)

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Sources: Jordanian authorities; and Fund staff estimates and

For 2014, transfers to NEPCO and WAJ include government repayment of guaranteed debt. From 2015 onwards, the program assumes the utilities will repay their own debt.

Primary government balance excluding grants and transfers to NEPCO and WAJ, plus NEPCO operating balance plus WAJ overall balance.

Table 2c.

Jordan: Central Government: Summary of Quarterly Fiscal Operations, 2016–17

(In millions of Jordanian dinars)

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

Primary government balance excluding grants and transfers to NEPCO and WAJ, plus NEPCO operating balance minus WAJ overall balance.