Recent Developments

2. As a small, open economy, Jordan is facing unprecedented social and economic challenges due to successive crises in the past two years—notably the pandemic, tighter financial conditions, and spillovers from the conflict in Ukraine—that compound a decade of exogenous shocks. Despite these challenges, the economy started to recover in 2021, supported by timely and adequate fiscal and monetary measures, although unemployment remained stubbornly high, particularly among the youth. Government revenues have overperformed, reflecting determined efforts to reduce tax evasion and close tax loopholes. Inflation was contained in 2021 owing to Jordan’s strategic twelve months’ wheat reserves and the country’s long-term stable-price import contracts for gas used in electricity generation. Soaring fuel prices since the onset of the conflict in Ukraine, however, necessitated temporary and targeted introduction of fuel subsidies to mitigate passthrough to households. International reserves remained comfortable above 100 percent of the ARA metric. The financial sector remained resilient, well-capitalized, profitable, and liquid, and the EMBIG spread remained among the lowest in the region. Earlier in June, Jordan was able to access turbulent international markets by issuing U.S.$650 million of Eurobonds that were oversubscribed by more than three times, reflecting investor confidence in the country’s fiscal and monetary stability.

3. The Government of Jordan and the CBJ welcomed the focus of the Article IV consultation; they continue to fully own their EFF-supported reform program and remain committed to its objectives. The Article IV consultation and program discussions appropriately focused on reforms to preserve fiscal sustainability, enhance inclusive growth—through boosting labor productivity, female and youth employment, and business competitiveness—to achieve fiscal consolidation, and to address climate adaptation needs.

Performance under the EFF

4. Notwithstanding a continuously challenging external environment, Jordan’s performance under the Extended Fund Facility-supported program remains remarkably strong. All December 2021 quantitative performance criteria (QPCs), as well as key end-March 2022 indicative targets (IT), were met. The authorities have also implemented an ambitious structural reforms program including two critically important structural benchmarks (SBs): (i) the roll-out of new electricity tariffs, which will lower tariffs for key business sectors while making household subsidies more targeted, and (ii) legislation unifying the tax and customs administration in the Aqaba Special Economic Zone (ASEZA) with the national tax and customs authorities to address smuggling and tax evasion. In light of the more challenging outlook and the expected monetary tightening, the program has been recalibrated to allow for a more gradual pace of medium-term fiscal consolidation, while safeguarding debt sustainability. The authorities have also committed to and specified additional measures to close the fiscal gap in the medium term.

5. Given the higher financing needs resulting from the external shocks, the authorities have requested an augmentation of access by SDR 75.482 million, accompanied by some rephasing, which will increase 2022 disbursements by SDR 120.085 million relative to the third review. Stepped-up and timely support by the international community is critical for Jordan to continue to face the challenging environment, maintain reform momentum, and address climate adaptation challenges. Jordan also requires a more reliable stream of financing, in line with the support pledged by the international community under the Jordan Compact and the 2019 London Initiative, to enable the country to continue shouldering the global public good burden of hosting 1.3 million Syrian refugees, which constitute a very large share of the population.

Fiscal Policy and Reforms

6. Notwithstanding the difficult environment, the MOF’s fiscal strategy, anchored in equitable tax reforms by closing tax loopholes and combating tax evasion, continues to be successful, allowing an overperformance of the 2021 domestic revenues relative to the budget projections and exceeding pre-pandemic levels. Measures to broaden the tax base and the MOF’s Income and Sales Tax Department’s compliance campaign resulted in an overperformance of the 2021 domestic revenues projections by 0.5 percent of GDP. Together with contained non-priority current spending, this contributed to creating space for increased social spending and capital spending, both essential to supporting an inclusive recover. The authorities are committed to adhering to their 2022 deficit target of 3.4 percent of GDP, notwithstanding the challenges created by temporary subsidies to smooth the passthrough of global commodity prices—which would be offset by a reduction in non-priority spending.

7. The government is advancing key fiscal structural reforms, as detailed in the Memorandum of Economic and Financial Policies (MEFP). Building on recent efforts to curb tax evasion and strengthen tax administration, the authorities have passed legislation to impose a single tax and single customs system for Jordan, bringing ASEZA participants under ISTD and Customs national control, which will help further combat tax evasion. They are also advancing for parliamentary discussion key legislations introducing place-of-taxation rules into the GST law and strengthening the governance of fiscal incentives for investment. In January 2022, the Cabinet approved a major customs reform which simplifies and unifies the tariff system and is expected to reduce tax evasion and corruption. Moreover, the MOF has produced, ahead of schedule, (i) the first report on the macro-fiscal outlook and risks by the newly established Macro-Fiscal Unit; and (ii) an assessment of explicit fiscal costs and fiscal risks related to the three largest PPPs. Moreover, the authorities have enacted a procurement bylaw to strengthen the transparency and efficiency of public spending and facilitate the rollout of e-procurement. In addition, demonstrating their continued commitment to good governance and transparency, the authorities have completed and published ex-post audits of all COVID-related spending for the second consecutive year, including beneficial ownership information.

8. Over the medium term, the authorities’ debt sustainability goal remains the reduction of public debt to below 80 percent of GDP. Nonetheless, the combination of headwinds from the U.S. Federal Reserve tightening and higher food and fuel prices, as well as high unemployment in Jordan, warrant a more gradual path to achieving this medium-term fiscal goal. The revised path will help Jordan entrench the nascent recovery, and position the authorities better to support the vulnerable, support job creation programs in the private sector, and undertake critical human and physical capital investments.

Monetary and Exchange Rate Policies and Reforms

9. The CBJ continued its strong track record of prudent management of monetary policy in 2021, anchored by the peg to the U.S. dollar. As a result of the CBJ’s policies, confidence in the financial system remained strong, as reflected in the lowest deposit dollarization level (at 19 percent) in recent years. Moreover, robust international reserve buffers were maintained and the QPCs on net international reserves as well as the ITs on net domestic assets were met with comfortable margins. The peg, backed by comfortable reserves, has served the Jordanian economy well and helped to maintain market confidence despite successive exogenous shocks. As the U.S. Federal Reserve tightened policies, the CBJ acted firmly and swiftly to maintain monetary stability, with two rate hikes since March of a cumulative 75 basis point. The CBJ will remain alert to changes in domestic, regional, and global financial conditions, and stands ready to undertake the policy adjustments necessary to credibly protect monetary stability.

10. Balancing monetary and financial stability and growth objectives, the CBJ, with the support of the government, provided essential support for Jordanian businesses, including SMEs, in protecting employment and production operations through two subsidized lending programs. The two lending schemes have been seen as crucial for Jordanian businesses in weathering the economic impact of the pandemic and in protecting private sector jobs. In March 2021, the CBJ increased the envelope of the JD 500 million SME scheme to JD 700 million, raised the borrowing limits for sectors hard-hit by the pandemic, including tourism and trade, and extended the scheme until June 2022. In March 2022, the CBJ also raised borrowing limits for firms that import basic commodities such as wheat, sugar, and oil, whose prices have increased sharply due to the Ukraine conflict. Looking ahead, as the recovery firms up through 2023, and demand for the SME scheme declines, the CBJ will unwind the scheme. The CBJ considers that the JD 1.3 billion scheme remains helpful in capitalizing on the growth momentum, by supporting productive economic sectors.

11. The CBJ has a strong and effective prudential and supervisory framework, which has helped to maintain the soundness and resilience of the financial system. Jordan’s banking system remained resilient, well-capitalized, profitable, and liquid in 2021. The system-wide capital adequacy ratio remained at 18 percent at end-2021 for the third consecutive year, well above the CBJ regulatory minimum of 12 percent, supported by the CBJ’s decision not to allow the distribution of banks’ 2019 profits and to cap the distribution of 2020 profits as a share of banks’ paid-in capital at 12 percent. Although non-performing loans remained low at 5 percent as of end-2021 and the provisions-to-NPLs coverage ratio increased to about 80 percent at end-2021, the CBJ will continue to closely monitor and address risks in the banking system, leveraging its strong prudential and supervisory framework. In this connection, it continuously conducts stress tests to ensure that all banks have sufficient buffers in the case of a significant rise in NPLs. Moreover, to ensure that asset quality problems are recognized and addressed in a timely manner, the CBJ has continued to require banks to follow strict provisioning requirements, in line with IFRS9’s forward-looking expected loss approach. Should capital adequacy fall below the 12 percent CBJ threshold for any bank, the CBJ will require the bank to submit a credible capital restoration plan to rebuild capital. Reforms to facilitate access to finance have been progressing well, and the CBJ is committed to developing a risk-based capital and solvency regime for the insurance sector, bringing it in line with international best practices. The authorities look forward to the conclusion of the joint IMF/World Bank FSAP that they requested.

12. Strengthening the regime for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) is a priority for Jordan. The CBJ continued to make progress in strengthening the AML/CFT regime. The authorities have completed the assessment to identify non-profit organizations that are vulnerable to terrorist financing abuse. They have also addressed AML/CFT deficiencies such that Jordan would no longer qualify for referral to the FATF’s ICRG process on the basis of its technical compliance ratings. Furthermore, the authorities have committed to an action plan for resolving the identified strategic deficiencies to facilitate exit from the watch list by October 2023.

Other Structural Reforms

13. In the electricity sector, the authorities are continuing their efforts to reduce NEPCO’s losses and restore its financial sustainability. The authorities successfully rolled out the new electricity tariffs on April 1 a reform which is expected to enhance private sector competitiveness and support job creation. Long-term natural gas contracts have so far helped to shield NEPCO from the significant increase in oil and gas prices in international markets. However, going forward, the authorities are pursuing a comprehensive strategy to restore NEPCO to financial viability over the medium term, which will include revenue-enhancing, cost-reducing, and governance measures.

14. In the water sector, the authorities are committed to scaling up reforms to contain rising losses and to ensure a sustainable path for the supply of water, critical for both growth and macroeconomic stability. The authorities are aware that developing additional infrastructure to boost water supply has become more urgent as Jordan’s low water resources are depleting at a fast pace. In this connection, they plan to adopt a Financial Sustainability Roadmap for the water sector in which they are committed to due process for projects to address water scarcity, including the Aqaba-Amman National Conveyor Project, as well as to reducing non-revenue water, stopping the accumulation of arrears, and addressing the water-electricity nexus.

15. With regards to promoting jobs and growth, the authorities are focused on measures to increase labor force participation and encourage formal, female, and youth employment. The government is working on addressing obstacles to female employment and has issued revised instructions to businesses on childcare provision for female employees and completed the Amman BRT project to provide safe and affordable transport to women. The government also continues to give special attention to promoting youth employment and has launched a National Employment Program to support 60,000 new private sector jobs for the youth.

16. Important progress is also made on the Government Priorities Plan 2021–23, which guides policy efforts to improve the business climate and enhance competitiveness. In this connection, recent reforms to customs and electricity tariffs are expected to significantly reduce costs for businesses. The authorities are also submitting a new omnibus law for Regulating the Business Environment, which aims to modernize and streamline the regulatory framework. This includes legislation to strengthen the competition framework and market analysis to identify sectors that demonstrate signs of unfair practices. The authorities are also working to further improve insolvency legislation.

Conclusion

17. The Jordanian authorities value the strong partnership with the Fund. They found the Article IV consultation discussions fruitful and engaging. They continue to fully own their EFF-economic supported program, as reflected in continuously strong program implementation notwithstanding challenging circumstances.