Jordan: Staff Report for the 2017 Article IV Consultation, First Review of the Extended Arrangement Under the Extended Fund Facility, and Requests for Waiver of Nonobservance of Performance Criterion and Rephasing of Access
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
24 Jul 2017
eISBN:
9781484312056
Language:
English
Keywords:
ISCR; CR; deposit dollarization; electricity tariff; IMF director; central bank of Jordan; Jordanian dinar; U.S. dollar; IMF staff estimate; core inflation; banking sector; Global
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2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Jordan

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Jordan

Background—Persistent Headwinds and Economic Challenges

A. An Economic Performance Affected by Sequential External Shocks

1. Jordan has continued to experience difficult economic conditions since the 2014 Article IV consultation (Figure 1).

Figure 1.
Figure 1.

Jordan: Economic Developments Since 2014 Article IV, 2013–22

Citation: IMF Staff Country Reports 2017, 231; 10.5089/9781484312056.002.A001

Sources: National Authorities and IMF Staff Calculations.

  • The gradual pick-up in growth from 2010 to 2014 came to an end in 2015. Real GDP growth declined from 3.1 percent in 2014 to 2.4 percent in 2015 and 2.0 percent in 2016. This decline was broad based, with activity slowing in agriculture, construction, mining (whose production contracted by 12 percent in 2016 owing to temporary shutdowns in production), and most other sectors, except for transportation and financial services. But during the final quarter of 2016, nonprimary growth increased to 2.2 percent y-o-y, from 1.9 percent in the third quarter. Data for the first few months of 2017 are also encouraging, showing a recovery in exports, tourism receipts, and remittances relative to 2016 (Figure 2).

Figure 2.
Figure 2.

Jordan: High Frequency Economic Performance Indicators 1/

Citation: IMF Staff Country Reports 2017, 231; 10.5089/9781484312056.002.A001

1/ Original monthly time series are: top-right chart, Industrial Production Index base 1999 up to December 2015 merged with the same time series base 2010, both from CBJ, and real quarterly GDP from the authorities; top-left chart, total tons of production for each series from CBJ; middle-left chart, total Kwh sold for electricity, and tons for petroleum products from CBJ; middle-right chart, total remittances in USD from CBJ; bottom-left chart, total tons traded at Aqaba port and index numbers from CBJ; bottom-right chart, total number of people from CBJ.

Jordan: Real GDP Growth, 2015–16

(In Percent)

article image
Sources: Department of Statistics; and IMF staff estimates.

  • Global shocks and recent tax measures have contributed to substantial fluctuations in inflation. Inflation fell from 3.1 percent y-o-y at end-2013 to −2.2 percent y-o-y in June 2016, reflecting both a global decline in food and oil prices and a decline in core inflation (from 4.3 to 1.7 percent), which stemmed primarily from a slowdown in rents, as demand from Syrian refugees receded. Inflation rebounded sharply to 4.6 percent in February 2017, owing to the recovery of global oil and food prices as well as the pass through of increased fuel excises and the removal of general sales tax (GST) exemptions. Inflation has since eased to 3.5 percent in April, with the stabilization of global oil and food prices.

A01ufig1

Jordan: CPI inflation, 2011-17

(year-on-year, in percent)

Citation: IMF Staff Country Reports 2017, 231; 10.5089/9781484312056.002.A001

Sources: Department of Statistics; and IMF staff estimates.

  • Labor market conditions have deteriorated further. The unemployment rate, which has traditionally been broadly stable around 12–13 percent, rose sharply in 2015–16, to close to 16 percent—its highest level in at least 10 years, on the back of adverse external shocks and slower growth. It was particularly high for women and youth, at 24.8 percent and 36.1 percent, respectively. Reflecting the weakness in the economy, the labor force participation continued its gradual decline, amounting to 35.6 percent in the fourth quarter, while the employment rate declined further, to an extremely low 30 percent.

A01ufig2

Jordan: Unemployment and Labor Force Participation, 2008-16

(In Percent)

Citation: IMF Staff Country Reports 2017, 231; 10.5089/9781484312056.002.A001

Source: Department of Statistics.

  • The current account deficit remains high, despite lower oil prices. A decline in energy imports from 2014 to 2016 (from lower oil prices and NEPCO’s shift to LNG as its main primary energy source) was broadly offset by lower exports, tourism receipts, private grants and remittances and higher transportation costs. As a result, the current account deficit (excluding grants) was 12.6 percent of GDP in 2016—similar to 2014 and slightly higher than in 2015. Owing to the strength of the U.S. dollar, the real effective exchange rate appreciated by 16 percent from end-2013 to end-April 2017, reaching its highest level in more than ten years.

  • The pace of fiscal consolidation was strong, but slower than envisaged. The combined deficit of the central government and the National Electric Power Company (NEPCO) declined from 9.2 percent of GDP in 2014 to 3 percent of GDP in 2016, reflecting a sharp improvement in NEPCO’s operating balance and, to a lesser extent, a lower central-government primary deficit. The decline in the central government primary deficit, from 4.6 to 3.4 percent of GDP, was lower than envisaged at the time of the 2014 Article IV, owing in part to weaker nominal GDP growth, continued refugee-related spending pressures, and limited success in raising tax revenues. The implementation of the electricity-sector strategy, along with the sharp fall in generation costs, contributed to bringing NEPCO back to cost recovery by late 2015—well in advance of the expected date of 2017—and to operating surplus in 2016. Nonetheless, with a higher-than-envisaged combined deficit, lower nominal growth, and continued Water Authority of Jordan (WAJ) losses, public debt reached 95.1 percent of GDP at end-2016.

  • Monetary policy has balanced the need for comfortable reserves and growth-supportive conditions. From the time of the last Article IV to early 2016, the Central Bank of Jordan (CBJ) continued to gradually reduce its policy rate, from 3.5 percent to 2.5 percent. It also increased the gap between the policy and deposit window rates (from 25 to 100 bps), in an effort to stimulate large banks to on-lend their excess liquidity to less liquid ones and to stimulate credit. These decisions, together with targeted initiatives to promote lending to small- and medium-sized enterprises (SMEs), helped revive credit to the private sector, in particular to corporates. Together with falling oil prices, this lending has helped sustain private consumption and investment in the face of severe external shocks.

  • With an upturn in deposit dollarization and rising U.S. policy rates, the CBJ has tightened its monetary stance since November 2016. The CBJ gradually returned its policy rate to 3.5 percent and has stabilized deposit dollarization at around 19.5 percent (up from 17 percent at end-June 2016). To help preserve supportive domestic liquidity conditions and contribute to shore up reserves further, the government issued $500 million in U.S. dollar-denominated domestic bonds on March 8 and re-opened its 2015 Eurobond issuance for an additional $500 million on April 24.

2. Jordan’s challenging environment and performance largely reflect the impact of severe and repeated external shocks, including:

  • Protracted conflicts in Syria and Iraq, which are Jordan’s main export markets. The Syrian conflict continues to weigh on investor sentiment, tourism, transportation costs, and exports. The hosting of 1.3 million Syrians (about half of whom are registered refugees) has also stretched Jordan’s limited resources, with substantial costs to the budget.1 The extension of the conflict to Iraq was a further blow to investor confidence in the region and the closure of the border in 2015 has deprived Jordan of its main export route and market.2 More recently, the December 2016 terrorist attack in Karak and heightened ISIS-related security tensions at the border have prompted a tightening of Jordan’s security, socio-economic and political environment, which has become less conducive to major economic reforms.

  • The slowdown in the Gulf Cooperation Council (GCC). While lower oil prices initially helped improve Jordan’s current account and domestic demand, their longer-term impact has been to reduce exports, tourism, and remittances from GCC countries. Tighter liquidity in the GCC may also have spilled over into the Jordanian economy, through reduced capital inflows and slowing non-resident deposits.

3. Jordan’s economic performance—in terms of productivity and per capita output growth—has also lagged other emerging markets, following the aftermath of the global financial crisis. Jordan’s per capita income has remained relatively stable since the crisis in 2008, owing to weak investment and productivity growth (Figure 3). This performance reflects structural challenges in the economy, including widespread tax incentives that have proved ineffective and increasingly costly. These now need to be reconsidered not only to boost investment and productivity, but also to put public debt on a safer downward path, while enhancing fairness and broader socio-economic welfare. The authorities, who have largely followed the recommendations of the 2014 Article IV consultation (Box 1), are well aware of these challenges. Their economic reform program, which is supported by the EFF, builds on the need for policies and reforms to: enhance the conditions for higher and more inclusive growth; preserve macroeconomic stability; and advance gradual fiscal consolidation to reduce public debt, while mitigating the impact on the poor.

Figure 3.
Figure 3.

Jordan: A Look at Longer-Term Economic Performance

Citation: IMF Staff Country Reports 2017, 231; 10.5089/9781484312056.002.A001

Sources: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2013), “The Next Generation of the Penn World Table” available for download at www.ggdc.net/pwt; UNDP Human Development Report; World Development Indicators; and IMF WEO.

4. The 2017 Article IV consultation and First Review under the EFF provided a timely opportunity to discuss the policies that:

  • Sustain macroeconomic and financial stability, through fiscal consolidation and public-utility reforms, along with prudent monetary and financial policies.

  • Enhance the conditions for inclusive growth through reforms to enhance competitiveness, employment (especially for women and young people), access to finance, and to foster equity, fairness, and good governance.

B. The Fund-Supported Program—Broadly on Track

5. Program implementation has progressed, with a reassuring fiscal outturn in 2016 and some progress in implementing structural measures, but with lower-than-targeted international reserves (MEFP, tables 1a and 2):

  • Broadly in-line budget implementation. Despite a shortfall in nontax revenue (mainly from surpluses from some regulatory bodies and other public entities), the end-December performance criterion on the central government primary deficit was met, with the primary balance (excluding grants) coming in at ½ percentage point of GDP better than programmed. This better performance reflects the implementation of low-quality measures, such as cuts in capital expenditures and lower repayments of health and fuel arrears to compensate for the revenue shortfall, and also for higher-than-projected military spending. There was also a shortfall in social spending relative to the indicative target.

  • Overperforming energy and water utilities (Table 2d and 2e). NEPCO’s operating balance and WAJ’s overall balance were better than projected in 2016. Reflecting higher efficiency gains, NEPCO’s operating profits were JD 107 million (0.4 percent of GDP) above program projections, pointing to a breakeven oil price of $51 to $53 per barrel. WAJ’s overall deficit was smaller by JD 75 million (0.3 percent of GDP), owing mainly to lower capital expenditures.

  • CBJ’s net international reserves (NIR) have been below target. They amounted to $12.7 billion (at program exchange rates) at end-2016, about 1.1 billion lower than the adjusted performance criterion. This underperformance mainly reflected an accumulation of net foreign assets (NFA) by the commercial banks in response to higher deposit dollarization, and a further decline in loan dollarization, along with a drop in non-resident deposits.3 Despite a stabilization of deposit dollarization, the NIR underperformance increased slightly in the first quarter, to $1.2 billion—as higher imports and the one-off purchase by Jordanian investors of foreign participations in Arab Bank and Dubai Islamic Bank more than offset a drop in commercial banks’ NFA that resulted from the authorities’ issue of domestic U.S. dollar-denominated bonds.

Table 1.

Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2014–22

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

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

Estimated amount of fiscal measures that will need to be taken by a given date to meet the program public debt reduction objectives.

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.

Jordanian Central Government: Summary of Fiscal Operations, 2014–22

(In millions of Jordanian dinars)

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

Estimated amount of fiscal measures that will need to be taken by a given date to meet the program public debt reduction objectives.

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

Table 2b.

Jordanian Central Government: Summary of Fiscal Operations, 2014–22

(In percent of GDP)

article image
Sources: Jordanian authorities; and Fund staff estimates and

Estimated amount of fiscal measures that will need to be taken by a given date to meet the program public debt reduction objectives.

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

Table 2c.

Jordanian Central Government: Summary of Quarterly Fiscal Operations, 2016–18

(In millions of Jordanian dinars)

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

Estimated amount of fiscal measures that will need to be taken by a given date to meet the program public debt reduction objectives.

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