Jordan: Second Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of Performance Criterion, an Extension of the Arrangement, and Rephasing of Access—Press Release; Staff Report; and Statement by the Executive Director for Jordan

Second Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of Performance Criterion, an Extension of the Arrangement, and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for Jordan

Abstract

Second Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for a Waiver of Nonobservance of Performance Criterion, an Extension of the Arrangement, and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for Jordan

Context

1. Jordan has continued to maintain macroeconomic stability against a difficult economic environment and complex socio-political challenges. It has faced a series of shocks, including the disruption of critical export routes and markets from protracted regional conflicts, the hosting of 1.3 million Syrian refugees, and rising oil prices and borrowing costs. Low growth, and high unemployment and poverty, as well as concerns about insufficient efforts to tackle corruption, are adding to public discontent, and eroding support for politically-difficult reform efforts.

2. Slippages in the implementation of critical reforms and in program targets in 2018 delayed the completion of the review. Notwithstanding some progress in 2017, including in meeting fiscal targets, a number of key fiscal and growth-enhancing reforms were delayed. Foremost among these were amendments to the income-tax law (a missed structural benchmark, originally plan for end-2016 and reset to end-2017 in the first review), which was a critical piece of the authorities’ plan to secure a fairer and more sustainable fiscal framework. Fiscal slippages, along with a weak external environment, resulted in shortfalls in international reserves targets.

3. A new government was formed in June 2018, rekindling reform efforts and giving a new impetus to the program. In May 2018 widespread protests over rising fuel and electricity prices and the submission to parliament of the delayed income-tax law, resulted in the resignation of Prime Minister al-Mulki. The new government of Prime Minister Omar al-Razzaz opened a broad national dialogue on Jordan’s economic and social challenges, including tax reform. After widespread consultation, the government successfully passed the income-tax law in December 2018, and in collaboration with international donors has formulated a comprehensive and concrete five-year reform plan.

4. These efforts have received renewed support from the international community. The “London Initiative” conference on February 28, 2019 provided the new government with a valuable opportunity to demonstrate to both development partners and investors its commitment to accelerated economic reforms, and to a more outward-oriented economy. Following on from that conference, the authorities have received additional financing commitments of about $5 billion; which are critical in both supporting reform efforts and in adequately funding the program.

Recent Developments

5. The economy has remained broadly stable, but low growth and insufficient job creation remain critical challenges (Figure 1).

  • Weak growth (Table 1). Nominal growth has been softer than expected at the time of the first review, with both lower real growth and a lower deflator.1 Over the past year growth has been supported by higher exports to Iraq, following the reopening of the border in August 2017, but exports to other key partners (such as GCC countries) are down.

  • High unemployment reached 18.0 percent in the final quarter 2018.2 Unemployment remains particularly high for youth (42.3 percent) and women (23.3 percent).

  • Subdued inflation. The removal of GST exemptions and higher excises on cigarettes and fuels supported under the program in early 2018, along with the authorities’ decision to remove bread subsidies and higher global food and oil prices, pushed inflation to a peak of 5.7 percent in July 2018. As the impact of these shocks faded, inflation returned to trend in the latter part of the year. Most recently in 2019, headline inflation eased further, due to positive food and electricity price shocks—bringing core inflation to 1.1 percent.

Figure 1.
Figure 1.

Jordan: Selected Economic Indicators

Citation: IMF Staff Country Reports 2019, 127; 10.5089/9781498313841.002.A001

Sources: National authorities; IMF staff calculations
Table 1.

Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2017–24

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

The Department of Statistics changed the methodology of the Survey of Employment and Unemployment in 2017 following ILO recommendations.

Includes other use of cash.

Estimated amount of fiscal measures that will need to be implemented to meet the programmed fiscal adjustment.

Includes statistical discrepancy.

Defined as the sum of the primary central government balance (excl. grants and transfers to NEPCO and WAJ), NEPCO operating balance, WAJ overall balance, and, starting in 2019, Aqaba, Miyahuna, and Yarmouk Water Distribution Companies overall balance.

Includes government-guaranteed debt of NEPCO, WAJ, and other public entities.

Data from the 2017 Revision of World Population Prospects of the 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.

6. Fiscal performance has fallen short of expectations, with important adjustment in 2017 followed by slippages on structural and fiscal reforms in 2018 (Figure 2).

  • Fiscal consolidation moved as programmed in 2017. Despite a significant revenue shortfall (about 1½ percent of GDP relative to projections in the first review), the authorities met the fiscal targets, helped primarily by current expenditure compression. The central government primary deficit (excluding grants and one-off payments of arrears) declined from 2.9 percent of GDP in 2016 to 1.1 percent of GDP in 2017.

  • But progress was not sustained in 2018. The fiscal program aimed at reducing the central government primary deficit (excluding grants and one-off payments of arrears) to 0.6 percent of GDP by rationalizing sales tax exemptions (a benchmark under the program) and increasing excises on selected products (a combined revenue yield of 1½ of GDP). In the end, revenue performance stalled, particularly in the second half of the year—reflecting lower collections of sales taxes (following the reversal of some tax increases legislated earlier in 2018, and the softening of non-energy imports); tax administration deficiencies; and weaker tax compliance in light of an anticipated tax amnesty (implemented November 2018–April 2019; for an overall yield of 0.3 percent of GDP). To contain the revenue shortfall, the authorities reduced budgeted expenditures by 1½ percent of GDP, but these were in turn offset by a surge in off-budget expenditures (about 1 percent of GDP).3 By end-2018, the central government primary deficit (excluding grants and one-off payments of arrears) reached 2.4 percent of GDP, partly reversing the consolidation gains from earlier in the program.

  • Measures to reduce the accumulation of health arrears have started to yield results. While further medical claims led to the accumulation of new arrears for about 1 percent of GDP in 2017, new arrears in 2018 were limited to 0.2 percent. This reflects strict adherence to new regulations implemented in early 2018, whereby medical exemptions could only be granted by the Royal Court, on a time-bound basis, following strict eligibility criteria and predetermined prices.

  • However, the electricity company (NEPCO) registered operating losses during 2017–18. NEPCO’s operating loss amounted to 0.3 percent of GDP in 2018, reflecting an uneven implementation of the automatic tariff adjustment mechanism. From December 2017 to September 2018 the authorities implemented regular tariff increases (totaling 24 fils per kWh, equivalent to a 30 percent increase of wholesale tariffs).4 However, notwithstanding NEPCO’s continued operating losses, tariffs were lowered by 2 percent in October, and remained unchanged in November—despite rising oil prices. A further reduction was implemented in December (5 percent) and during the first two months of 2019 (10 percent), following the sharp drop in Brent prices and in anticipation of cheaper natural gas flows from Egypt.

  • The water authority’s (WAJ) financial position was in line with projections, but higher electricity tariffs have placed added pressure on water distribution companies. WAJ’s overall deficit was 0.2 percentage points of GDP below projections for 2018 during the first review, owing mainly to a combination of lower current and capital expenditures, and some additional revenues from access to renewable energy. However, delayed transfers from the Ministry of Finance caused WAJ to temporarily accumulate arrears of 0.1 percent of GDP—which were cleared in February 2019. For the distribution companies, however, increased electricity costs resulted in the accumulation of arrears for 0.5 percent of GDP as of end-2018, which were cleared in April 2019.5

  • Overall, the combined public-sector deficit (defined under the program as the central government primary deficit plus NEPCO operational and WAJ overall deficits) worsened to 4.3 percent of GDP in 2018, compared to a program target of 1.8 percent at the time of the first review. Despite this deviation, public debt remained broadly stable in 2018 at 94.4 percent of GDP, owing mostly to a drawdown of treasury deposits (about 1¼ percent of GDP) and a rebasing of GDP.6,7

Figure 2.
Figure 2.

Jordan: Program Performance

Citation: IMF Staff Country Reports 2019, 127; 10.5089/9781498313841.002.A001

Sources: Haver, Bloomberg, national authorities, and IMF staff calculations.

7. The external position weakened in 2018 putting pressure on international reserves, which nonetheless remain adequate (Table 3a). The current account deficit (excluding grants) fell to 10¼ percent of GDP in 2018; reflecting buoyant tourism, increased exports to Iraq and the United States, and significant compression of non-energy imports (partly reflecting one-off capital-goods imports in 2017). However, the financial account was not sufficiently strong to cover the still-large current account deficit, reflecting a considerable decline in foreign direct investment and sizable private-sector outflows following the uncertain political and economic environment in the aftermath of the widespread protests in mid-2018.

  • International reserves fell slightly short of target in 2017. Net international reserves (NIR) were about $448 million below the December performance criterion, with gross usable reserves at $14.3 billion at end-2017 (114 percent of the Fund’s Reserve Adequacy Metric (RAM)). The shortfall reflected several one-off factors, including an exceptional spike in capital-goods imports, and an end-year surge in automobile imports, owing to an anticipated increase in taxes on hybrid vehicles.

  • Reserve losses picked up significantly in mid-2018, but have since stabilized. Outflows accelerated to around $900 million in June (compared to $300 million in May) with gross usable reserves dropping to less than 100 percent of RAM. However, a $500 million loan from the World Bank disbursed during July–August, the announcement of a $2.5 billion aid package from Saudi Arabia, Kuwait and UAE, and an additional $0.5 billion from Qatar, and the CBJ’s continued rate hikes since June 2018, helped calm local sentiment, with depositor confidence remaining steady and deposit dollarization stabilizing at 21 percent. In August, the CBJ buoyed gross reserves through a $800 million FX swap with domestic banks, which has been supplemented by the first elements of the aid package—a $500 million term deposit from Kuwait, two $333 million deposits from both Saudi Arabia and UAE, and combined budget grants for $100 million.8 Gross usable reserves ended 2018 at $12.5 billion (97 percent of RAM), and have broadly remained at that level over the past few months.

  • The real effective exchange rate appreciated somewhat in 2018, effectively unwinding the 4 percent depreciation of 2017, and remains moderately overvalued (see 2017 Article IV report).

Table 2a.

Jordan: Central Government: Summary of Fiscal Operations, 2017–24 1/

(In millions of Jordanian dinars)

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

Starting 2019, the fiscal accounts consolidate the operations of 29 government units, with a neutral impact on the overall balance.

Unidentified fiscal measures that will need to be implemented to meet program targets.

Includes net issuance of domestic FX bonds.

Primary government balance excluding grants and transfers to NEPCO and WAJ, plus NEPCO operating balance, WAJ overall balance, and starting in 2019, water distribution companies overall balance.

Table 2b.

Jordan: Central Government: Summary of Fiscal Operations, 2017–24 1/

(In percent of GDP)

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

Starting 2019, the fiscal accounts consolidate the operations of 29 government units, with a neutral impact on the overall balan

Unidentified fiscal measures that will need to be implemented to meet program targets.

Includes net issuance of domestic FX bonds.

Primary government balance excluding grants and transfers to NEPCO and WAJ, plus NEPCO operating balance, WAJ overall balance, and starting in 2019, water distribution companies overall balance.

Table 2c.

Jordan: Central Government: Summary of Quarterly Fiscal Operations, 2018–20

(In millions of Jordanian dinars)

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

Unidentified fiscal measures that will need to be implemented to meet program targets.

Includes net issuance of domestic FX bonds.

Primary government balance excluding grants and transfers to NEPCO and WAJ, plus NEPCO operating balance, WAJ overall balance, and, starting in 2019, water distribution companies overall balance.