Jordan: Sixth Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Performance Criteria-Press Release; and Staff Report
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
30 Jun 2023
eISBN:
9798400246043
Language:
English
Keywords:
Jordanian authorities; General government source; climate adaptation effort; SSIF government debt holding; government regulation
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This paper presents Jordan’s Sixth Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criteria. The IMF-supported program remains firmly on track, with key quantitative targets met and strong performance on structural benchmarks, reflecting the authorities’ strong ownership. Despite a challenging global environment, Jordan’s economy is projected to continue to grow this year at 2.6 percent, and inflation has remained relatively low and is declining. The Jordanian authorities have managed to successfully navigate recent external shocks and maintain macro-economic stability in an uncertain and challenging environment. Thanks to the steadfast implementation of prudent fiscal and monetary policies, fiscal consolidation is on track, capital market access has been maintained, and inflation has remained relatively low and is declining, while reserve coverage is strong. Monetary policy has responded quickly to U.S. Federal Reserve policy changes and remains focused on safeguarding the peg and maintaining strong reserve buffers.

Abstract

This paper presents Jordan’s Sixth Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criteria. The IMF-supported program remains firmly on track, with key quantitative targets met and strong performance on structural benchmarks, reflecting the authorities’ strong ownership. Despite a challenging global environment, Jordan’s economy is projected to continue to grow this year at 2.6 percent, and inflation has remained relatively low and is declining. The Jordanian authorities have managed to successfully navigate recent external shocks and maintain macro-economic stability in an uncertain and challenging environment. Thanks to the steadfast implementation of prudent fiscal and monetary policies, fiscal consolidation is on track, capital market access has been maintained, and inflation has remained relatively low and is declining, while reserve coverage is strong. Monetary policy has responded quickly to U.S. Federal Reserve policy changes and remains focused on safeguarding the peg and maintaining strong reserve buffers.

Recent Developments, Outlook, and Risks

1. The economic recovery continued in 2022, although slowing somewhat toward the end of the year. GDP grew by 2.5 percent in 2022, buoyed by exports and tourism.1 The current account deficit widened to 8.8 percent of GDP, mainly due to higher food and fuel prices, which were only partially offset by higher prices of mineral exports and a strong rebound in tourism, which surpassed pre-pandemic levels. Inflation has continued to decelerate after reaching a peak in September 2022 and dropped to 2.9 percent in April 2023. Despite the tightening of global financial conditions, Jordan successfully issued a 6-year US$1.25 billion bond at 7½ percent in April 2023.

uA001fig1

Economic Recovery and Inflation

Citation: IMF Staff Country Reports 2023, 240; 10.5089/9798400246043.002.A001

Sources: Jordan Department of Statistics, Haver Analytics; and IMF staff calculations.

2. The economy is expected to continue to grow, at around 2.6 percent in 2023. Growth is broad-based, but with manufacturing and tourism as key drivers. Inflation is expected to broadly stabilize at around 2.7 percent by end-2023, reflecting a tight monetary policy stance. The current account is projected to narrow, reflecting lower prices for grain and fuel imports and continued strong tourism receipts but considerably less than expected at the time of the fifth review, to 7.5 percent of GDP, due to a drop in prices of key mineral exports. Over the medium term, growth is projected to increase to 3 percent annually, supported by the reforms undertaken by the authorities as laid out in the attached Memorandum of Economic and Financial Policies (MEFP).

3. Social conditions remain challenging, however, with higher costs-of-living and persistent high unemployment. The unemployment rate stood at 21.9 percent by the end of the first quarter of 2023, with youth and female unemployment at close to 50 and 30 percent, respectively. The elimination of regressive and costly subsidies for diesel and gasoline sparked large-scale strikes and protests in December 2022, but these have subsided since then.

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Sovereign Spread and Exchange Rate Developments

Citation: IMF Staff Country Reports 2023, 240; 10.5089/9798400246043.002.A001

Sources: IMF IFS data; Bloomberg; and IMF staff calculations.

4. Uncertainty remains high due to elevated global headwinds. With inflation more stubborn in advanced economies, the tightening cycle by the US Federal Reserve may continue and, together with recent financial sector difficulties in advanced economies, this could lead to a further tightening of global financial conditions and weaker global growth, with knock-on effects for emerging markets. Geopolitical tensions and fragmentation could lead to a renewed surge in commodity prices or affect international trade and investment, which could put additional pressures on external and fiscal accounts and potentially raise social tensions. Climate-change risks exacerbating already-dire water scarcity could hurt growth and add further pressures on government finances. On the upside, regional political rapprochement may help de-escalate tensions and catalyze trade and investment.

Policy Discussions

With continued global headwinds, discussions focused on maintaining macro-economic stability and accelerating reforms, including by: (i) continuing with fiscal consolidation, while creating room for social and capital spending; (ii) safeguarding the exchange rate peg and preserving financial stability; (iii) ensuring the financial sustainability of the electricity and water sectors; and (iv) advancing structural reforms to boost growth and reduce unemployment.

A. Continuing with Fiscal Consolidation While Sustaining Growth

5. The outturn of the 2022 budget was broadly as expected. The central government primary deficit (excluding grants and transfers to NEPCO and WAJ) reached JD 1233 million in 2022, or 3.7 percent of GDP, slightly below the targeted JD 1298 million (MEFP ¶6). Higher outlays on food and fuel subsidies to cushion the population against higher import prices were offset by lower spending on non-priority items, including some transfers, and to a lesser extent on investment. With the operating losses of NEPCO and WAJ broadly in line with earlier projections, the combined public primary deficit target for 2022 was met as well. The overall general government deficit widened, however, due to a higher interest bill and a lower surplus of the social security fund.

December 2022 Fiscal Outturn vs. Fifth Review Targets

(In millions of Jordanian dinars)

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6. Fiscal consolidation is set to continue in 2023, in line with program targets. The approved 2023 central government budget targets a primary deficit (excluding grants and transfers to NEPCO and WAJ) of JD 1088 million (equivalent to 3.1 percent of GDP), backed by further tax administration efforts and the elimination of fuel subsidies. The budget allows for additional capital spending for public transport and rehabilitation of the water supply network, while continuing to support vulnerable households. End-March 2023 fiscal targets were met. With a somewhat worse financial outlook for NEPCO (see below), however, and with revenue collection performing well, the authorities agreed to reduce the central government primary deficit to JD 1014 million (or 2.9 percent of GDP), to keep the pace of general government consolidation this year on track in nominal terms (MEFP A7). Moreover, any further revenue overperformance will be used to retire debt.

7. The authorities remain committed to continuing fiscal consolidation over the medium term to strengthen debt sustainability. The downward revision of nominal GDP and higher interest rates have pushed the debt path slightly upward relative to what had been envisaged during the fifth review. Despite the challenging external environment and tighter financing conditions, the authorities are committed to reduce the public debt-to-GDP ratio to 80 percent by end-2028. This will be achieved mainly by additional revenue-raising measures, equivalent to 1.5 percent of GDP by 2028, as well as efforts to reduce expenditures while improving their efficiency, reaching 1 percent of GDP by 2028 (MEFP ¶8-10).

Jordan: Central and General Government Balances, 2021-28

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8. To support their fiscal efforts, the authorities are advancing the implementation of a broad range of structural fiscal reforms (MEFP ¶11):

  • Tax policy and administration: The authorities are making further headway in broadening the tax base and improving tax compliance. They have introduced e-invoicing, to enhance monitoring of economic transactions and tackle under-invoicing, and already covered nearly 60 percent of all sales transactions by end-April, exceeding the target of capturing one-third of transactions (met June 2023 SB). They are aiming to expand coverage to 90 percent of all sales transactions by end-2023. The authorities have also implemented Al-based e-audit systems for tax returns (met June 2023 SB). Significant progress has been made in implementing track-and-trace measures for alcohol (June 2023 SB), building on the success of tracing tobacco products, but given remaining technical challenges this SB is proposed to be reset for December 2023. More generally, the authorities are finalizing a medium-term revenue administration roadmap and will conduct a comprehensive tax expenditure analysis, both with assistance from FAD.

  • Expenditure efficiency: To contain the cost of food subsidies, the authorities have implemented an annual purchase plan for wheat and barley and strengthened audits throughout the supply chain. The National Aid Fund (NAF) continuously seeks to improve the targeting of its social assistance programs and aims to unify all programs into a single program. The authorities will also start implementing the Public Sector Modernization Roadmap to enhance the efficiency and accountability of the public sector. This includes implementing a merit-based hiring and promotion system, starting with senior positions, and strengthening transparency and independence of regulatory bodies. There has been further progress in rolling out e-procurement to the broader public sector, including government entities outside the central government. The authorities are establishing the infrastructure needed to transition the PIP/PIM appraisal process onto a unified electronic platform (National Registry of Investment Projects, NRIP), to help with strengthening project appraisal and feasibility/sustainability assessments.

  • Public financial management: New health and energy arrears have continued to be incurred, although the overall stock has not increased, with a tendency by hospitals to inflate bills submitted to the government. Accordingly, the authorities will issue a Cabinet decision to establish an inter-ministerial committee responsible for determining the total amount of outstanding arrears in the health and energy sectors, based on certified and confirmed audits (proposed SB for July 2023), and based on which a strategy will be devised to clear the existing stock and prevent the further buildup of arrears. Meanwhile, to help stem the accumulation of new energy sector arrears, the finance ministry has started to pay budget units’ bills directly to NEPCO, while the authorities are also working with development partners on broader health care reforms.

B. Ensuring Monetary Stability and Financial Sector Resilience

9. The CBJ has continued to successfully preserve monetary and financial stability (MEFP ¶12). Jordan's peg to the U.S. dollar, backed by adequate international reserves, has continued to serve as an effective anchor for macro-economic stability and has contributed to a relatively low rate of inflation. The CBJ has raised its policy rates ten times since March 2022, in line with the U.S. Federal Reserve, and issued sizable amounts of certificates of deposit to mop up excess liquidity. Credit growth has started to slow, reflecting the impact of the higher interest rates. With an appropriately tight monetary policy stance, end-December 2022 and end-March 2023 targets for the CBJ’s net international reserves (NIR) and net domestic assets (NDA) were met by comfortable margins. The CBJ stands ready to take additional measures as needed to protect the peg. In view of the large uncertainty surrounding the global and regional outlook and particularly the worsened outlook for the current account, the CBJ requests a downward modification by about US$ 0.5 billion of the end-2023 NIR PC, to allow for a cushion to support the peg in case of unexpected shocks, while maintaining adequate reserve coverage. Should such shocks materialize, reserve coverage would be expected to decline marginally and remain close to 100 percent of the ARA metric.

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Interest Rate and Foreign Exchange Developments

Citation: IMF Staff Country Reports 2023, 240; 10.5089/9798400246043.002.A001

Sources: Haver Analytics; national authorities; and IMF staff calculations.

10. The CBJ is gradually scaling back its subsidized lending schemes (MEFPA13). As an important first step, the scheme created in April 2020 to help SMEs weather the pandemic, amounting to JD 700 million, expired at end-April 2023. The interest rates of the other scheme, totaling JD 1.4 billion and introduced in 2011 to support vital economic sectors, will be gradually raised toward the policy rate, starting in early 2024. Ultimately, this scheme should also be phased out.

11. The banking system remains healthy (MEFPA14-15). While the system's capital adequacy ratio fell slightly during 2022, it remains well above the regulatory minimum of 12 percent. Non-performing loans (NPL) decreased, albeit mainly due to credit expansion, while provisioning increased slightly. The CBJ should continue its close monitoring of banks' asset quality, including by ensuring sustained application of prudent accounting, reporting, and provisioning standards in line with IFRS9.

Bank Soundness Indicators

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Source: Central Bank of Jordan.

12. The authorities are committed to implementing the recommendations of the joint IMF-World Bank Financial System Sustainability Assessment (FSSA). The assessment was completed in March 2023 (MEFP¶16). Key recommendations, and which the authorities plan to implement in the next few years, included: (i) further strengthening banking supervision, by making it more risk-based and forward-looking, including by developing pillar 2 supervisory assessments for more risk-sensitive capital requirements; (ii) enhancing systemic risk analysis, including by filling data gaps to enable stress tests on a globally consolidated basis, running systemic foreign currency liquidity analyses, and performing more granular analyses of household and corporate sector vulnerabilities; and (iii) improving the crisis management and bank resolution framework. Regarding the latter, the authorities will establish a crisis management committee (based on an MoU) that comprises the CBJ, MoF, and JODIC, to adequately monitor banking sector developments and operationalize the crisis management framework (proposed SB for December 2023). The CBJ furthermore developed a risk-based capital and solvency regime for the insurance sector, which came under the CBJ's purview in 2021, in line with international best practices (met SB for June 2023) (MEFP¶17).

13. The authorities have been making steady progress in strengthening the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime (MEFP A18). Many of the items of the action plan to comply with the Financial Action Task Force's (FATF) recommendations have already been implemented and the remaining ones are expected to be completed by the Fall of 2023. Full implementation will enable Jordan to exit from the FATF watch list, which, in turn, will help Jordan preserve correspondent banking relationships and effectively guard against financial integrity risks.

C. Reforming the Electricity and Water Sectors

14. While NEPCO managed to contain its operational losses in 2022, broadly in line with expectations, the outlook for 2023 and beyond remains challenging. The 2022 operational loss was estimated at 0.7 percent of GDP, in line with staff's estimate at the time of the fifth review. However, losses are expected to increase to 1.1 percent of GDP in 2023 (somewhat higher than the 1.0 percent of GDP expected at the time of the fifth review), due to larger energy purchases and lower savings from cost measures (see below). The losses are projected to gradually decline to 0.6 percent of GDP over the medium term, with the impact of a package of revenue and cost saving measures (see paragraph 15) partly offset by a shift in generation from cheaper imported natural gas to more expensive oil shale due to contractual obligations. As a reflection of NEPCO's financial challenges, its arrears to other energy companies have continued to exceed targets.

15. Steadfast implementation of revenue enhancing and cost saving measures is imperative to address NEPCO’s financial challenges (MEFP A21-23). The authorities are pressing ahead with strengthening NEPCO's governance and implementing the measures of the action plan adopted in December 2022, which aimed to generate a JD 90 million financial improvement in 2023, supported also by the recently approved World Bank Electricity Sector Efficiency and Reliability Program:

  • Steps have been taken to boost revenues, including by extending a connection fee for self-generation to businesses, transferring royalties from oil shale PPAs to NEPCO, setting targets for distribution companies on electricity losses and operations and maintenance (O&M) expenses, thus allowing for an increase in NEPCO's bulk tariffs, introducing time-of-use tariffs, and conducting a review of recipients of subsidies to exclude ineligible households. These measures will generate JD 50 million (0.15 percent of GDP) in revenues for NEPCO in 2023 (met SB for May 2023).

  • On the costs side, higher gas transit volumes will help reduce gas transportation costs, while minor savings will come from switching generation to more efficient power plants. However, these measures are expected to generate only JD 13 million in savings this year.

Additional efforts will be needed to ensure the medium-term financial sustainability of NEPCO. The authorities will hire a reputable consultant to conduct a comprehensive review of the electricity system (generation, transmission, distribution) and propose actions needed to achieve NEPCO's financial sustainability (proposed SB for November 2023). With electricity tariffs relatively high in comparison to neighboring countries and compared to the cost of new self-generation, the focus of proposed actions will need to be predominantly on lowering the cost of generation and financing, and on increasing efficiency.

16. The water sector’s financial conditions have evolved in line with expectations. The sector's 2022 operational losses are estimated at 0.8 percent of GDP and losses are expected to remain broadly unchanged in 2023. The cabinet issued a decision in February 2023 to form a joint committee between the Ministries of Finance and Water and Irrigation (met SB for March 2023) that will meet on a quarterly basis to help ensure clearance of all arrears accumulated by the water sector by end-2024. WAJ's arrears remained within targets, but those of the water distribution companies did not.

17. Facing formidable challenges in the water sector given the country’s water scarcity, the authorities have started implementing the financial sustainability roadmap (FSR) (MEFP ¶25). The authorities are committed to gradually reaching full cost recovery of water and wastewater services’ operations and maintenance (O&M, including of the new National Conveyor Project (NCP)) by 2030 and of both O&M and capital cost of the NCP by 2040. The authorities are also aiming to reduce non-revenue water (NRW) by 2-3 percentage points per year to 25 percent of total water supplied by 2040. Thus far, they have been able to reduce NRW by 2.3 percentage points since mid-2022, to 50 percent of water supplied. While reducing NRW is essential for ensuring financial sustainability of the sector, it will also require significant investment in the network.

18. More broadly, the authorities are scaling up their efforts to address the impact of climate change. Climate change will aggravate Jordan’s already severe water shortage, creating pressing and substantial financing needs for adaptation. The authorities have developed a National Climate Change Policy and National Adaptation Plan as a framework for implementing Jordan’s climate commitments, including the Nationally Determined Contributions. A Country Climate and Development Report prepared by the World Bank was published in September 2022. The authorities are aiming to mobilize a combination of public and private financing, including donor financing, and have expressed interest in accessing support under the Resilience and Sustainability Trust (RST).

D. Structural Reforms to Strengthen Employment, Investment, and Governance

19. Structural reforms should continue—and be accelerated—to attract investment, boost productivity and competitiveness, and create job-rich growth in line with the authorities’ Economic Modernization Vision (MEFP A27-29). This includes reducing the cost of doing business, promoting competition, increasing labor market flexibility and female labor participation, and enhancing governance and transparency. While some progress has been made in these areas, more is needed to create a more dynamic private sector, attract more investment, and create more jobs. Notably:

  • To improve the business environment, the authorities have been working to open markets, enhance competition, and reduce government regulation and interventions. Amendments to the Competition Law were enacted, curbing the prevalence of dominant firms, including by sharpening the definition for market concentration and increasing penalties for violations. The authorities are also making progress in reducing licensing requirements in the tourism sector, including by planning to submit related legislation (SB for December 2023), as well as in addressing transportation bottlenecks.

  • To remove impediments to female and youth employment, amendments to the Labor Law and Social Security Law were adopted. The amended Labor Law enhances protections for women from harassment and violence in the workplace and removes restrictions on female employment in certain professions and industries, and on permitted hours of work. The government will issue additional instructions to expand protections for pregnant women and persons with disabilities to ensure safe workplace conditions (proposed SB for December 2023), including to ensure that these legislative changes lead to a tangible increase in the still very low female labor force participation rate (13.7 percent in the first quarter of 2023). The amended Social Security Law lowered contribution rates for new workers under the age of 30, to help tackle youth unemployment.

  • To reduce labor market segmentation, the government repealed all Defense Orders that were introduced at the start of the pandemic, including those prohibiting employers from terminating worker contracts.

  • To improve data provisioning and transparency, the government will establish MoUs to allow the Department of Statistics regular and timely access to the latest and legally permissible government data sources (Ministry of Finance, Income and Sales Tax Department, Companies Control Department) and CBJ data (proposed SB for September 2023).

Program Financing and Safeguards

20. Despite an uncertain and challenging external environment, the program remains fully financed. Reserves are expected to remain above 90 percent of ARA in 2023-24, as projected in the fifth review. Staff's baseline includes the roll-over of GCC deposits of $833 million to 2024, additional financing under the seven-year MoU signed last year with the U.S. and new World Bank programs. The revised baseline includes the recent issuance of a US$1.25 billion Eurobond.

Current Account Deficit and Sources of Financing, 2023-24

(Millions of USD)

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Eurobond issued in Q1 2023 at USD 1,250 million

KSA deposit of USD 500 million and Kuwait deposit of 333 million extended to matu re in 2024

21. Jordan’s capacity to repay the Fund remains adequate. Despite the COVID-19-induced deterioration in indicators of Fund credit, they remain below peak values under past Fund-supported programs (see Table 6). Debt remains sustainable, and while debt sustainability risks remain, the authorities' policy efforts and the development partners' ongoing commitment to Jordan constitute important safeguards.2 Moreover, staff will commence discussions on a possible successor arrangement, as requested by the authorities.

22. Safeguards assessment. The CBJ has implemented almost all of the 2020 safeguards recommendations, with the enhancement of disclosures in the CBJ's financial statements still pending.

Staff Appraisal

23. The authorities have managed to successfully navigate recent external shocks and maintain macro-economic stability in an uncertain and challenging environment. Thanks to the steadfast implementation of prudent fiscal and monetary policies, fiscal consolidation is on track, capital market access has been maintained, and inflation has remained relatively low and is declining, while reserve coverage is strong. Moreover, the economy is projected to continue to grow this year at 2.6 percent, despite the global headwinds. However, job creation is still weak, and unemployment remains too high.

24. The authorities’ program ownership remains strong as manifested by the performance against targets. All PCs and most ITs have been met, and the delivery of structural conditionality has been robust. The authorities have met six out of seven SBs for the period through June 2023.

25. Fiscal policy will need to stay the course, continuing the gradual consolidation, to place public debt firmly on a downward path. Further improvements in revenue collection and the elimination of fuel subsidies are creating fiscal space for much-needed investment and additional social assistance. The government is on track to achieve a central government primary deficit (excluding grants and transfers to NEPCO and WAJ) of 2.9 percent in 2023. Over the medium term, the authorities are committed to bring the debt-to-GDP ratio below 80 percent by 2028. Achieving this will require steadfast implementation of measures to further broaden the tax base and improve tax compliance, as well as to contain spending while increasing efficiency, notably through further improving the targeting of social assistance programs and enhancing the productivity of the civil service.

26. Monetary policy should remain focused on safeguarding the peg and financial stability. The CBJ must continue to adjust its policy rates as needed to ensure the peg is credible and reserve buffers remain adequate. The CBJ should continue to gradually unwind its subsidized lending. It should also continue to closely monitor banks’ asset quality and further strengthen its financial sector oversight in line with the recommendations of the recently completed FSSA.

27. Implementation of electricity and water sector reform is critical to ensure public sector sustainability and a reliable and sufficient supply of electricity and water. The financial outlook of the electricity sector remains particularly challenging and decisive actions will need to be taken to lower costs and improve efficiency, while laying a robust foundation for the transition to cleaner energy. Similarly, steadfast implementation of the financial sustainability roadmap for the water sector is key to addressing water scarcity and reducing losses in the water sector.

28. While progress is made in implementing structural reforms to create a more dynamic private sector, more is needed to achieve stronger, inclusive growth and reduce unemployment. This includes further improving the business environment, including by strengthening competition, reducing bureaucracy, increasing labor market flexibility and female labor participation, and enhancing governance and transparency. Reforms need to be accelerated if the goals of the Economic Modernization Vision are to be achieved.

29. Staff supports the authorities’ request for the completion of the sixth review under the extended arrangement and modification of targets. Staff supports the authorities’ request for a modification of the end-December 2023 PC on the central government primary deficit (excluding grants and transfers to NEPCO and WAJ), lowering it to ensure that overall fiscal consolidation remains on track, and the end-December 2023 PC on the CBJ’s NIR, lowering it to provide some headroom considering the uncertain external outlook. Stronger and timely development partner support is needed to continue to help Jordan cope with the global economic headwinds, address the challenges posed by climate change, and shoulder the burden of hosting a large number of refugees. Staff welcomes the authorities’ climate adaptation efforts and will proceed with the preparations for a possible successor arrangement that could be combined with support under the RST.

Figure 1.
Figure 1.

Jordan: Real Sector Developments

Citation: IMF Staff Country Reports 2023, 240; 10.5089/9798400246043.002.A001

Sources: Jordanian authorities; Haver Analytics; and IMF staff calculations.
Figure 2.
Figure 2.

Jordan: Fiscal Developments

Citation: IMF Staff Country Reports 2023, 240; 10.5089/9798400246043.002.A001

Sources: Jordanian authorities and IMF staff calculations.
Figure 3.
Figure 3.

Jordan: External Sector Developments

Citation: IMF Staff Country Reports 2023, 240; 10.5089/9798400246043.002.A001

Sources: Jordanian authorities and IMF staff calculations.
Figure 4.
Figure 4.

Jordan: Monetary and Financial Indicators

Citation: IMF Staff Country Reports 2023, 240; 10.5089/9798400246043.002.A001

Sources: Central Bank of Jordan; Jordan Department of Statistics; and IMF staff calculations.
Table 1.

Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2021-28

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

The Department of Statistics changed the methodology of the Survey of Employment and Unemployment in 2017 following ILO recommendations. The variable now reports unemployment rates for Jordanians only (excluding foreigners).

Includes other use of cash (i.e. off-budget expenditures).

Estimated amount of fiscal measures that are needed to meet the programmed fiscal adjustment over 2022-25.

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.

Government's direct and guaranteed debt (including NEPCO and WAJ debt). SSC stands for Social Security Corporation. The authorities securitized domestic arrears amounting to 2.3 and 0.3 percent of GDP in 2019 and early 2020, respectively, part of which was previously assumed to be repaid over a three-year period.

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.

Table 2a.

Jordan: Central Government: Summary of Fiscal Operations, 2021-28 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.

Includes net issuance of domestic FX bonds.

In 2021, includes drawdown of SDR allocation amount from the government's account at CBJ.

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.

In 2021, JD100 million in arrears were resolved through securitization.

Table 2b.

Jordan: Central Government: Summary of Fiscal Operations, 2021-28 1/

(In percent of GDP)

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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.

Includes net issuance of domestic FX bonds.

In 2021, includes drawdown of SDR allocation amount from the government's account at CBJ.

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.

In 2021, JD100 million in arrears will be resolved through securitization.

Table 2c.

Jordan: General Government: Summary of Fiscal Operations, 2021-28 1/

(In millions of Jordanian dinars, unless otherwise noted)

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

including NEPCO and the water sector interest expenditures

Table 2d.

Jordan: Central Government: Summary of Quarterly Fiscal Operations, 2023-24

(In millions of Jordanian dinars)

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

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.

Includes securitization of arrears to municipalities and other entities undertaken and guarantees given to Royal Jordanian.

Table 2e.

Jordan: NEPCO Operating Balance and Financing, 2021-28 1/

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

Staff’s projections assume revenues from regional electricity exports of JD 25 million per year in 2022-23 (rising to JD 40 million thereafter); the second unit of the oil shale project coming online in 2023; and full implementation of measures agreed with the authorities (if these measures do not deliver the requisite savings, the authorities will need to consider additional measures to make up the shortfall).

Interest payments exclude interest on account payables to the government.

Includes changes in accounts receivable, depreciation, project expenditures, and other items.

Payables to the government include transfers from the government to NEPCO; they are excluded from the computation of the stock of arrears.

Table 2f.

Jordan: WAJ and Distribution Companies Balance and Financing, 2021-28

(In millions of Jordanian dinars)

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Sources: Jordanian authorities; and IMF staff estimates. Projections for 2019 onwards reflect latest numbers in the 2019 draft Budget Law.

Including other expenses such as pensions.

Excluding interest payments and grants.

The sum of the overall balances of Aqaba, Miyahuna and Yarmouk Water Compare

The sum of the overall balances of the distribution companies and WAJ.

Information from the Ministry of Finance.

Including settlement of liabilities, capital and other government

Arrears owed by WAJ only, to all entities. Excludes advances from Central Government for which WAJ does not pay interest and that do not have established maturity.

Arrears owed by Aqaba, Miyahuna and Yarmouk Distribution Companies. Excludes advances from Central Government for which Aqaba, Miyahuna and Yarmouk Distribution Companies do not pay interest.

Table 3a.

Jordan: Summary Balance of Payments, 2021

(In millions of U.S. dollars, unless otherwise indicated)

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

Central bank reserve accummulation, commercial banks' NFAs, and program financing are shown below-the-line.

Includes changes in CBJ liabilities, including GCC deposits of $1.2 billion made in 2018 of which the last 833 mature in 2024

Including gold and excluding commercial banks' FX deposits at the CBJ, bilateral accounts and forward contracts.

Table 3b.

Jordan: External Financing Requirements and Sources, 2021-28

(In millions of U.S. dollars, unless otherwise indicated)

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

Includes project loans and Arab Monetary Fund and loans on the books of CBJ, and excludes IMF repurchases.

Includes loans on CBJ books.

Includes guaranteed and non-guaranteed bonds.

Includes CBJ other accounts receivable/payable (net) minus deposit flows (net), excluding GCC deposits.

Includes changes in commercial banks' NFA.

The IMF reserve metric is calculated as a weighted sum of exports, broad money, short-term debt, and other portfolio liabilities.

Table 3c.

Jordan: Foreign Exchange Needs and Sources, 2021-28

(In millions of U.S. dollars, unless otherwise indicated)

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

Includes general government and CBJ (incl. IMF repurchases and repayment of GCC deposits).

Includes project loans, Arab Monetary Fund, IMF purchases, and unidentified financing.

Includes guaranteed and non-guaranteed bonds.

Table 3d.

Jordan: External Budget Financing, 2021-28

(In millions of U.S. dollars unless otherwise indicated)

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

Grants pledged at the 2018 Mecca Summit and USD 300 million grant from UAE to be disbursed in 2020Q2 through 2021Q1.

Includes the grant component from the Concessional Financing Facility and in 2023-25 expected disbursements under new MOUs.

Table 4a.

Jordan: Monetary Survey, 2021-28

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

Includes SBA support onlent to the government by the CBJ.

Includes WAJ.

Table 4b.

Jordan: Summary Accounts of the Central Bank of Jordan, 2021-28

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

The SDR allocation has been transferred to central government in April 2022. It is reflected in CBJ's foreign assets, but is no longer a foreign liability of the CBJ but that of central government.

Includes SBA support onlent to the government by the CBJ.

Table 5.

Jordan: Access and Phasing Under the Extended Fund Facility (EFF) Arrangement

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Source: IMF staff estimates.

Jordan's quota is SDR 343.1 million.

Table 6.

Jordan: Indicators of Fund Credit, 2019-34

(In millions of SDR unless stated otherwise)

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Sources: IMF Finance Department; and IMF staff estimates and projections.

End of period.

Repayment schedule based on scheduled debt service obligations.

Using GRA rate of charge of 4.79 (as of May 25, 2023)

Using the end-2020:Q1 forecast of the SDR/USD rate in 2022-2034 forecasts.

Table 7.

Jordan: Quantitative Performance Criteria and Indicative Targets, December 2022-December 2023 1/

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1/ Proposed quantitative performance criteria and indicative targets under the new program. 2/ The end-Dec 2022 targets for primary deficit and combined public deficit already incorporate the contingency Covid spending of 110 (as the underlying criteria in TMU paragraph 40 have been triggered). The memorandum item on contingency Covid spending is only reported for information. 3/ Continuous. 4/ Public debt includes central government debt (including off-budget project loans) and government-guarantees to NEPCO, WAJ, and other public entities, net of SSC's holdings of government debt. 5/ Arrears owed by NEPCO only, to all entities. Excludes debt to the central government, which is not expected to be repaid, with central government having assumed the costs. 6/ Arrears owed by WAJ only, to all entities. Excludes advances from Central Government for which WAJ does not pay interest and that do not have established maturity. 7/ Arrears owed by Aqaba, Miyahuna and Yarmouk distribution companies only, to all entities. Excludes advances from central government for which Aqaba, Miyahuna and Yarmouk distribution companies do not pay interest and that do not have established maturity.
Table 8.

Jordan: Status of Existing and Proposed New Structural Conditionality

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Appendix I. Letter of Intent

Amman, Jordan

June 12, 2023

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C., 20431

U.S.A.

Dear Ms. Georgieva:

Substantial global economic headwinds, including tightening and volatile global financial conditions, the repercussions of a prolonged Russian war in Ukraine, risks from global economic fragmentation, and lingering effects from the pandemic, pose exogenous challenges for Jordan. At the same time, unemployment remains very high, and especially youth unemployment. Despite these headwinds, we expect Jordan's broad-based economic recovery to continue, supported by prudent policies to preserve our macroeconomic stability, and by structural reforms to boost productivity and competitiveness. These policies and reforms have helped us contain inflationary pressures, preserve market access at favorable conditions, and maintain confidence in our economy against a challenging global economic backdrop.

We remain fully committed to the objectives of our EFF-supported reform program: preserving debt sustainability and external buffers, maintaining monetary and financial stability, and advancing structural reforms to achieve higher and more inclusive growth. We are strengthening social safety nets, working to reduce unemployment, promoting labor force participation, particularly for youth and women, boosting competition through regulatory reforms, and improving governance and transparency. We have launched the Economic Modernization Vision in June 2022, which will guide our policy efforts to improve the business climate and enhance competitiveness, including to attract FDI. We require 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 us to continue shouldering the global public good burden of hosting 1.3 million Syrian refugees.

As a result of our sustained prudent and ambitious policies, despite the challenges we face, we were able to meet all end-December 2022 quantitative performance criteria (QPCs) for the central government primary deficit (excluding grants), the combined public deficit, and net international reserves; and most indicative targets (IT). Revenue growth remained strong, helped by a continued robust effort to fight tax evasion, close tax loopholes, and strengthen tax administration. We have fully aligned the prices of gasoline and diesel with international market levels, despite significant political and social pressures. The Central Bank of Jordan (CBJ) has successfully maintained monetary and financial stability, with a liquid and resilient banking system owing also to a strong and effective prudential and supervisory framework, and the CBJ has raised its policy rate fully in line with the actions of the U.S. Federal Reserve. Our commitment to the exchange rate peg to the U.S. dollar has played a crucial role in providing a credible nominal anchor for monetary and macroeconomic stability, resulting in a relatively low, and declining, inflation rate. Moreover, program performance remains strong in 2023, with the indicative targets on the central government primary deficit (excluding grants), the combined public deficit, and net international reserves met as well.

We have also met six structural benchmarks (SBs). The Cabinet has issued a decision for the joint committee between the Ministry of Finance and the Ministry of Water and Irrigation to meet on a quarterly basis with a view to clearing all water sector arrears by end-March 2024. The Department of Statistics has published 2019 annual and revised quarterly GDP data. We have applied e-auditing systems to all submitted tax returns to improve compliance, and we also launched an e-invoicing system for over half of all sales transactions by value, exceeding the target of one third. We have implemented measures needed to generate JD 50 million in revenue for NEPCO in 2023. The CBJ has developed a risk-based capital and solvency regime for the insurance sector.

Moving forward, we remain committed to implement prudent macroeconomic policies and advance reforms to underpin macroeconomic stability and support the post-pandemic recovery, aiming to achieve, strong, inclusive, and sustainable medium-term growth, create jobs, and raise people's incomes. We will continue with fiscal consolidation and improving the financial sustainability of the electricity and water sectors, aiming to reduce public debt to 80 percent of GDP over the medium term, while ensuring sufficient support for vulnerable households and creating room for higher public investment. The CBJ's monetary policy will continue to be underpinned by its firm commitment to the exchange rate peg to the U.S. dollar, and the CBJ will continue to adjust its policy rates in line with the actions of the U.S. Federal Reserve. These and other policies and reform commitments, including new proposed SBs for the remainder of 2023, are detailed in the attached Memorandum of Economic and Financial Policies (MEFP).

In view of our strong program performance and policy commitments, we request the completion of the sixth review under the extended arrangement and approval of the related purchase. We also request modification of the end-December 2023 performance criterion on the central government primary deficit (excluding grants and transfers to NEPCO and WAJ) and of the end-December 2023 performance criterion on the CBJ's net international reserves as presented in Table 1 of the attached MEFP. We believe that the policies set forth in the attached MEFP are adequate to achieve the objectives of our program, but we stand ready to take further measures that may become appropriate for this purpose. We will consult with the IMF on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the IMF's policies on such consultations. The implementation of our program will continue to be monitored through semi-annual quantitative performance criteria, structural benchmarks, and quarterly indicative targets as described in the MEFP and in the attached Technical Memorandum of Understanding (TMU). The Government and the CBJ will provide the IMF with the data and information necessary to monitor performance under the program as specified in the TMU. We expect the seventh review to be completed on or after September 30, 2023, and the last review on or after March 15, 2024.

The IMF has been a reliable partner in providing policy advice, financial support, capacity development, and an anchor for the reform momentum for Jordan through a very difficult period. We are grateful for the significant financial support that the IMF has provided as part of its quick response to the global shocks that have adversely impacted Jordan's economy; the successive recalibrations to the EFF program that have enabled us to meet vital health, social protection, job support, and capital spending needs, while maintaining macroeconomic stability and market access; and extensive technical assistance to facilitate the implementation of critical structural reforms. We hope that this partnership between Jordan and the IMF will only grow stronger going forward as we navigate the complex policy challenges generated by the global economic headwinds. In this light, we are requesting commencing discussions on a potential new program complemented with financing under the newly created Resilience and Sustainability Facility (RSF), aimed at providing affordable, long-term financing to help build resilience, including to address pressing health and climate challenges.

We authorize the IMF to publish this Letter of Intent and its attachments, as well as the accompanying staff report, upon completion of the sixth review by the IMF's Executive Board.

Sincerely,

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Attachment I. Memorandum of Economic and Financial Policies

CONTEXT

1. The economic recovery continues, supported by timely and commensurate policy responses. Real GDP growth reached 2.5 percent in 2022, buoyed by exports and tourism. The unemployment rate remains elevated, however, with only a modest decline to 22.9 percent by end 2022, from its peak of 24.1 percent in 2021. Youth and female unemployment remain worryingly high at 50 percent and 31.4 percent, respectively, in 2022. Inflation has fallen to 2.9 percent y-o-y in April 2023, due to tighter monetary policies and moderating global commodity prices.

2. The current account deficit widened in 2022, mainly due to higher fuel and food prices, as well as higher demand for imports and travel. These factors were partially offset by higher phosphate, potash, and fertilizer exports, due to higher prices and export quantities, and a strong rebound in tourism. Accordingly, the 2022 current account deficit reached 8.8 percent of GDP. Nonetheless, our international reserves have remained adequate to support the peg, at just over 100 percent of the ARA metric, supported by prudent macroeconomic policies and resilient donor inflows. Looking ahead, the current account deficit is expected to narrow to 7.5 percent of GDP, reflecting a further recovery in tourism and lower import prices that are partially offset by lower prices of key export commodities. Despite the tightening of global financial conditions, Jordan has maintained access to international capital markets, successfully issuing a 6-year US$1.25 billion bond at 7½ percent in April 2023.

3. Growth is expected to further strengthen over the medium term, spurred by the Economic Modernization Vision. We expect growth to reach 2.6 and 2.7 percent in 2023 and 2024, respectively, and then to gradually rise further to 3 percent over the medium term, supported by our structural reforms aimed at boosting potential growth. However, significant downside risks to the outlook remain from volatile and tightening global financial conditions, potentially slower-than-expected global growth, stubbornly high unemployment, geopolitical tensions, and challenging socio-economic conditions. On the upside, regional political rapprochement may help deescalate tensions and catalyze trade and investment, higher commodity prices could support mining exports, and increased remittances, tourism, and investment could also boost growth.

4. In these challenging times, declining donor support for Syrian refugees is ever more concerning as Jordan copes with the associated fiscal and social costs. The financing requirement according to the Jordan Response Plan to address the needs of refugees remains substantially underfunded. The sharp reduction in humanitarian support for refugees and host communities via UNHCR and WFP presents significant challenges. These shortfalls are increasing pressures on host and refugee vulnerable communities, with UNHCR and the World Bank reporting that nearly two-thirds of refugees live below the international poverty line, and the shortfalls are hampering Jordan's ability to continue to provide refugees with essential services while reducing macroeconomic vulnerabilities. Furthermore, accommodating refugees' health, education, water, electricity and labor market needs for over a decade has significantly constrained Jordan's fiscal space.

5. The implementation of our reform program under the EFF remains strong. Despite pressures from high fuel and food prices and tightening global financial conditions, we were able to meet the end-December 2022 quantitative performance criteria (QPCs) and end-March 2023 indicative targets (ITs) for the primary fiscal deficit of the central government, the combined public deficit, net international reserves (NIR), net domestic assets (NDA) and non-incurrence of external debt service arrears. Similarly, most other indicative targets for end-December 2022 and end-March 2023 have also been observed (MEFP Table 1). We have also met all three structural benchmarks due for this review and have additionally met three SBs ahead of time (MEFP Table 2). Jordan's strong economic performance has been recognized by markets, as reflected in the successful April 2023 $1.25 bn billion Eurobond issuance at 7.5 percent, which was six times oversubscribed. Moreover, in May 2023, Fitch affirmed Jordan's sovereign rating at BB-, with a stable outlook.

POLICIES FOR SAFEGUARDING MACROECONOMIC STABILITY AND BOOSTING GROWTH

Fiscal Policy and Structural Fiscal Reforms

6. Our fiscal program continues to be on track. The end-December 2022 PCs and endMarch 2023 ITs for the central government primary deficit and the combined public sector deficit were met. The 2022 primary deficit (excluding grants and transfers to NEPCO and WAJ) recorded JD 1,233 million, or 3.7 percent of GDP, slightly below the target, thanks to an overperformance in non-tax revenue and taxes on income and profits, given higher phosphate and potash prices, as well as delays in capital spending execution. This amounted to a fiscal consolidation of 0.8 percent of GDP. Revenue mobilization kept its momentum in the first quarter of 2023, with domestic revenues through March increasing by 9.1 percent y-o-y, mainly driven by taxes on income and profits. This more than offset the pick-up in execution rates in capital expenditure, and on balance the endMarch ITs on the central government primary and combined public balances were met.

7. We are committed to continue with fiscal consolidation in 2023. We have secured significant savings by eliminating, despite significant social and political pressures, the temporary price support on gasoline and diesel that had been introduced for part of 2022 to cushion the impact of the Russia's war on Ukraine. We remain committed to adjusting prices for gasoline and diesel in line with international market prices, while protecting vulnerable households through cash transfers. These savings together with revenue-enhancing measures create room for higher capital spending this year. Accordingly, the 2023 budget is on track to deliver a primary deficit (excluding grants and transfers to NEPCO and WAJ) of JD 1,014 million, or 2.9 percent of GDP, implying a further consolidation of 0.8 percent of GDP. Moreover, we will use any overperformance in revenue collection to pay off more expensive debt and will not shift any capital spending allocation to current spending. In case any risks to the budget materialize, we will take the necessary contingency measures to ensure that the fiscal targets will be met, including by postponing non-priority spending.

8. We are committed to continue with fiscal consolidation also in the years ahead, to ensure that public debt is placed firmly on a downward path. We aim to reduce public debt from 92 percent of GDP in 2021 to below 80 percent of GDP by 2028, thus further strengthening our debt sustainability. To achieve this, we aim to bring the general government overall balance to zero by 2027, by continuing to increase revenue collection, notably by further broadening of the revenue base in a progressive and structural fashion, as well as by streamlining current spending and enhancing spending efficiency.

9. We will further improve revenue collection. With technical assistance (TA) from the IMF's Fiscal Affairs Department (FAD), we have already made significant progress, mainly by closing tax loopholes, while ISTD has made substantial inroads into improving compliance. We will implement further revenue measures yielding 1.5 percent of GDP over 2024-28. The implementation of new legislative and administrative reforms is expected to generate an additional 0.4 percent of GDP in revenues in 2024, and an additional 1.1 percent of GDP over 2025-28. This is expected to comprise inter alia: (i) measures to broaden the income tax base by further rationalizing tax exemptions (including via the new investment law); (ii) the implementation of compliance improvement plans in the Large Taxpayer and Free Professionals Directorates; (iii) efforts to broaden the GST base by implementing place of taxation rules and rationalizing GST exemptions via the new investment law, as well as an anticipated reduction in smuggling following the recent customs reform; (iv) closure of key tax loopholes as a result of bringing ASEZA within the national tax and customs systems; and (v) fully implementing the track-and-trace system for alcohol while better tackling cigarette smuggling through stronger inter-agency border control, and better compliance enforcement efforts domestically.

10. We will also further curtail current spending. We have identified measures to improve expenditure efficiency to deliver 0.2 percent of GDP in savings in 2024, and an additional 0.7 percent of GDP over 2025-28. These reforms include: (i) containment of the growth of the public wage bill below nominal GDP growth and implementation of our public administration reform strategy; (ii) roll out of e-procurement to the broader public sector; (iii) efficiencies in the health care sector, including via improved targeting of exemptions and incentivizing more efficient use of resources in public hospitals; and (iv) improved administration of grain subsidies to reduce waste and leakage.

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11. To durably improve the efficiency of public finances, we are advancing a broad set of structural fiscal reforms:

(i) Tax policy and revenue administration.

  • We introduced a new regime for incentivizing investment giving the MOF a central role in the granting and management of all fiscal incentives for investment in Jordan. We issued bylaws to implement the new Investment Environment Law. In this context, the MOF will conduct annual cost-benefit analyses of all new fiscal incentives for that year with the view to safeguard fiscal sustainability, and report on these by the end of each year.

  • We are implementing the revenue mobilization plan developed with the support of the IMF's Fiscal Affairs Department (FAD) in 2021. The plan encompasses both tax policy and administration, including a focus on implementing recent and ongoing legislative reforms. To support smooth implementation of the recent transfer pricing and economic substance reforms, ISTD has conducted extensive awareness campaigns for taxpayers, including conducting trainings and posting online guidelines. ISTD has also prepared an FAD-supported roadmap, which translates our overarching strategic objectives as outlined in the 2021 plan to timebound intermediate and operational targets, with a mapping to concrete steps toward delivering on revenue administration reforms.

  • We will enhance ISTD capacity by upgrading its IT infrastructure, including a new Integrated Tax Administration System (ITAS). In this regard, we will issue a tender for ITAS by December 2023. At the same time, we are improving tax compliance by continuing to strengthen ISTD's audit function. In this regard, we have implemented an e-audit system covering all tax returns, to improve our audit functions (met SB for June 2023). Looking ahead, we are further developing our e-audit system to include comparative benchmarks for taxpayers by December 2023.

  • In other tax administration reforms, we are taking measures to tackle the smuggling of tobacco and alcohol and strengthen their tax administration. Notwithstanding technical challenges, we continue to work on implementing a digital track-and-trace system for alcohol with rollout planned by end-2023 (SB for June 2023, proposed to be reset to December 2023).

  • We launched the e-invoicing system (met SB for June 2023) covering 58 percent of sales transactions subject to GST by value (overperforming the program target of one-third). This is expected to strengthen the monitoring of economic activities, address under-invoicing through a random enforcement mechanism, and strengthen the audit function of the sales-tax framework. We aim to roll out this system to cover 90 percent of sales transactions by end-2023.

(ii) Social safety net. The existing program, supported by the IMF, encompasses a minimum threshold for social spending (IT), consisting of: (i) non-wage components of the education and health sectors' current expenditure envelope; (ii) National Aid Fund's (NAF) and other entities' social protection programs; and (iii) the school feeding program. The number of families covered through NAF has reached more than 220,000, although there are unmet needs for social protection, as indicated also by the high rates of poverty and unemployment. Consequently, to ensure that vulnerable households are adequately and efficiently protected:

  • We had temporarily subsidized kerosene during the winter months of 2023 by suspending excises, as it is a heating fuel mainly used by poor households.

  • We continue to make improvements to our targeting methodology used to determine eligibility for cash assistance (with World Bank technical support). Recent improvements include adjusting weights to reflect dependent adult children and ensuring adequate weights for female-headed households. To further improve efficiency in social protection programs, we are working on integrating all existing NAF programs for all Jordanian nationals into one single program by end-2024.

  • We have continued to protect the population from the impact of higher international food prices and have extended this support till end-2023. To ensure that this support reaches those who most need it, we will explore options, with the help of IMF FAD TA, to optimize the cost of this support, strengthen audits of the supply chain, and stiffen penalties for misuse.

(iii) Public sector administrative reform and efficiency. We will leverage the recently launched Public Sector Modernization Roadmap to improve the efficiency of the public sector, including by: (i) strengthening regulatory bodies, with a view to increase their independence, accountability, and transparency, starting with the Energy and Mining Regulatory Committee; (ii) revising civil service staffing practices, including by developing a system of merit-based hiring and promotions and starting its implementation in January 2024, beginning with all senior positions; and (iii) continuing with the digitalization of government services with a view to digitalize at least 40 percent of all government services by end-2023 and at least 60 percent by end-2024. We are committed to additional efforts to ensure the attractiveness of the civil service for experienced and high-skilled professionals, and to enhance efficiency, e.g., by merging or restructuring various public agencies and enhancing the institutional roles within the Government of Jordan to strengthen budgetary oversight and human resource planning.

(iv) Public financial management (PFM). The incurrence of health and energy arrears has continued, reaching JD 205 million by end-December 2022, mainly from the health sector. We will issue a Cabinet decision to establish an inter-ministerial committee responsible for determining the total amount of outstanding arrears, based on certified and confirmed audits, in the health and energy sectors (proposed benchmark for July 2023). The MOF will report on the stock of verified arrears in the first quarter of 2024. We have also requested TA from the IMF and other development partners on addressing health sector arrears and are working to improve the targeting of healthcare exemptions. We will follow up on the implementation of IMF TA recommendations on cash management, including reforms in cash forecasting and cash and debt management integration, which could help better manage cash flow volatility, reduce the incurrence of arrears, and improve the prospects for obtaining domestic market financing at competitive rates. To eliminate off-budget expenditures, we are strengthening top-down budgeting, and improving the quality of fiscal projections.

(v) Public procurement. We will continue to roll out the Jordan National E-Procurement System (JONEPS) for ministries and government entities and will implement it for all 100 government entities by end-2025. The Government Procurement Department is working closely with municipalities, including GAM, to start the implementation of JONEPS through the Ministry of Local Administration by early-2024, including by training key users that will work with various municipalities.

(vi) Fiscal transparency and fiscal risks management. Consistent with the 2021 FTE's findings and recommendations, the Macro-Fiscal Unit (MFU) at MOF will prepare and publish a Fiscal Risk Statement with the 2024 budget, outlining key macroeconomic and contingent liabilities risks (SB for December 2023). Moreover, we are hiring a dedicated expert in the Fiscal Commitments and Contingent Liabilities (FCCL) unit to build our risk assessment capacity for PPPs. This will enable us to expand FCCL coverage by end-December 2023 to three more of the largest existing PPPs, in addition to the three we already covered in 2022. Separately, we will continue publishing information on COVID related spending, including beneficial ownership of entities awarded contracts, on the MOF website.

(vii) Investment quality and predictability. We will strengthen the implementation of recommendations from the 2017 IMF Public Investment Management Assessment (PIMA) and related follow-up in 2020. We will build IT and human capacities to step up our efforts in project appraisal and sustainability assessments. In addition, we have requested a Climate PIMA to support our implementation capacity of our climate adaptation investment agenda, which is integral to our Economic Modernization Vision. We will also work to amend the PPP legislation to streamline the execution of the framework, while maintaining robust safeguards and due diligence.

(viii) Fiscal policy and debt management capacity. Building on the success of the Project Management Unit (PMU) in MOF in driving the ambitious structural fiscal reform agenda, we are strengthening the Macro Fiscal Unit (MFU) that is being tasked with producing medium-term macroeconomic forecasts and generating fiscal projections on a quarterly basis for the running budget year and on an annual basis for the medium term. Going forward, as the MFU's capacity enhances, including with FAD assistance, the unit will also aim to assess and present the dynamic and distributional impacts of revenue and expenditure measures.

Monetary and Financial Policies

12. The CBJ continues to be successful in preserving monetary and financial stability in a continued challenging environment. Monetary policy will continue to be underpinned by our firm commitment to the exchange rate peg to the US dollar. The peg has served our economy well by providing a credible nominal anchor of monetary and financial stability. We have raised the policy rates in line with the US Federal Reserve and have also issued certificates of deposit (CDs) of JD700 million since August 2022, further tightening monetary policy. While the growth of credit to private sector was robust at 6.8 percent y-o-y as of March 2023, it has come down from a high of 8 percent y-o-y in December 2022. Looking ahead, the CBJ will continue to closely monitor the state of the economy and pro-actively manage banking system liquidity. The CBJ will remain vigilant to changes in global financial conditions and stands ready to undertake the policy adjustments necessary to credibly protect monetary and financial stability. Our key operational target will continue to be to maintain international reserves above 100 percent of the IMF's Reserve Adequacy Metric.

13. The CBJ has been supporting businesses, through two subsidized lending schemes aimed at protecting employment and boosting productive economic sectors. During the pandemic, we launched the JD 700 million SME lending scheme, which was fully utilized and ended in April 2023. This scheme played a vital role in preventing layoffs and protecting jobs during a challenging period. The JD 1.4 billion scheme, which was created in 2011 to refinance bank loans for eligible projects and support productive economic sectors, has been critical in supporting Jordan's growth momentum. However, we acknowledge the necessity of aligning this scheme with our monetary policy stance and evolving economic conditions, and we will gradually reduce its concessionality. As a first step, we will raise the interest rate by 50 basis points on new loans issued under the scheme, effective from February 2024.

14. Our banking system has remained liquid and well-capitalized. The system-wide capital adequacy stood at 17.3 percent at end-December 2022, broadly unchanged from a year earlier and well above the CBJ regulatory minimum of 12 percent. Non-performing loans decreased to 4.5 percent as of end-December 2022, down from 5 percent in 2021. Meanwhile, the provisions in percent of classified loans have increased by 1.6 percentage points to 81.5 percent at end-December 2022, compared to a year earlier.

15. We will continue to closely monitor and address risks in the banking system, leveraging our strong prudential and supervisory framework. The CBJ's accounting, reporting, and provisioning practices are designed to ensure an adequate and timely monitoring of risks. The CBJ continuously conducts stress tests to ensure that all banks have sufficient buffers in case of a significant rise in NPLs and hit to profits. To ensure that asset quality problems are recognized and addressed early, we have continued to require banks to follow strict provisioning standards, 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.

16. The joint IMF-World Bank Financial Sector Assessment Program (FSAP) was completed in March 2023. The FSAP provided an important opportunity for assessing the resilience of the financial sector at a challenging time for the global economy. The FSAP's systemic risk analysis found that Jordan's banking sector appeared broadly resilient and that Jordan's financial sector had withstood a series of large external shocks—the Global Financial Crisis, the Arab Spring, the war in Syria and the resulting influx of refugees, the pandemic, and Russia's war on Ukraine—well. Moreover, banks would be able to withstand a large global stagflationary shock, if it were to occur, given high levels of systemwide regulatory capital and robust earnings. While it stressed that credit concentration risk and banks' exposures to the sovereign are large, banks have ample liquidity and can manage significant liquidity pressures, and contagion risk among banks is limited. Key recommendations included: (i) further strengthening banking supervision, by making it more risk-based and forward-looking, including by developing pillar 2 supervisory assessments for more risk-sensitive capital requirements; (ii) enhancing systemic risk analysis, including by filling data gaps to enable stress tests on a globally consolidated basis, running systemic foreign currency liquidity analyses, and performing more granular analyses of household and corporate sector vulnerabilities; and (iii) improving the crisis management and bank resolution framework. We are committed to making progress in implementing the FSAP recommendations and further strengthening the resilience of the financial sector in Jordan. In this regard, we will set up a multi-agency crisis management committee (based on an MoU) that comprises the CBJ, MoF, and JODIC, to adequately operationalize the crisis management framework (proposed SB for December 2023).

17. We have developed a risk-based capital and solvency regime for the insurance sector, bringing it in line with international best practices (met SB for June 2023). This regime aims to: (i) provide incentives for insurance companies to better manage risks; and (ii) help the CBJ get a better perspective of the risk profiles of individual insurers, as well as the market as a whole. The new framework is forward-looking and encourages insurance market development and is in line with international trends and best practices while recognizing and reflecting the realities of Jordanian market conditions. The CBJ has worked with the World Bank on developing the solvency margin instructions and the relevant instructions have been issued in June 2023.

18. We are further strengthening the regime for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT). We continue to work actively to ensure effective implementation of the items in Jordan's FATF action plan by end-October 2023 (SB for October 2023). According to Jordan's third progress report to the FATF, 17 action items out of 24 are addressed or largely addressed, while significant steps have also been taken to address the remaining 7 actions. The fourth progress report was recently discussed with the joint group and feedback on the report is expected to be received by end-May 2023. Measures have been taken to improve the effectiveness of the supervisory system on financial and designated non-financial businesses and professions (DNFBPs), including: (i) strengthening the capabilities of the AML/CFT Supervision by increasing the number of supervisors and providing them with adequate training; (ii) enhancing the implementation of AML/CFT risk-based supervision by increasing the number of on-site inspections; (iii) taking measures to ensure compliance with the implementation of Security Council resolutions related to terrorism, its financing, and proliferation financing; (iv) applying propionate and dissuasive financial sanctions on regulated Financial Institutions (FIs) for regulatory breaches; and (v) raising awareness for regulated FIs and DNFBPs on their obligations relating to Targeted Financial Sanctions by carrying out a number of training programs and workshop. Additional steps taken towards improving the AML/CFT regime include: (i) strengthening the legal and operational TF-related TFS framework; (ii) making basic and beneficial ownership information accessible by competent authorities; (iii) maintaining statistics on ML investigations and prosecution; and (iv) strengthening the legal framework with respect to confiscation and pursuing money laundering investigations and prosecutions for predicate offences in line with its risk profile. From a technical compliance perspective Jordan has carried out extensive revisions to its laws and is rated compliant or largely compliant with 32 out of 40 recommendations .

19. We continue to benefit from IMF TA to update our monetary policy, payment systems and banking supervision frameworks. We continue to receive TA from the IMF's Institute for Capacity Development (ICD) on setting up a comprehensive and state-of-the-art monetary and economic policy modeling framework, which will help us ground our policy decision-making in model-based quantitative analysis. We have also received TA from the IMF's Monetary and Capital Markets Department (MCM) on the conceptual framework and operational issues around central bank digital currency (CBDC), where we are exploring wholesale vs. retail options. In addition, as part of our effort to continuously keep abreast of international best practices, we are receiving MCM TA (including training workshops) on risk-based banking supervision. The CBJ has also received TA from the IMF's Statistics Department (STA) focusing on the redevelopment of their property price indices and in particular their residential property price indices. We have also recently received TA on monetary and financial statistics to expand the coverage to the Other Financial Corporations.

Electricity and Water Sector Reforms

20. NEPCO’s financial outlook remains challenging. While NEPCO's natural gas import prices are expected to gradually decline—thanks to lower global prices and our long-term contracts— electricity purchases from the oil shale PPA will exert significant pressures on NEPCO's costs. Lower profitability in distribution companies have also pushed NEPCO's sales down as they forced reductions in the bulk supply tariff to honor EMRC's legacy contractual profit margin commitments to these companies. Over the medium to long term, continued elevated generation costs and relatively weak electricity demand, also as customers switch to self-generation, represent major pressures on NEPCO's financial balance.

21. We have started implementing reforms to shore up NEPCO’s financial position in the face of these challenges. We adopted an action plan, developed in collaboration with World Bank and IMF staff, aiming to reduce NEPCO's losses by JD 90 million in 2023 and JD 135 million in 2024. Accordingly, we: (i) have extended the connection fee for self-generation to businesses, to compensate for use of NEPCO's grid; (ii) are enforcing annual KPIs for distribution companies to reduce technical losses and O&M expenses for 2023-2026; (iii) are transferring mining royalties from oil shale PPA to NEPCO; (iv) have introduced Time-of-Use tariffs; (v) are conducting a tariff review to identify incorrect subsidy inclusions; and (v) are optimizing the use of the Rehab and Risha power plants. Thanks to these efforts, we will generate an additional JD 50 million in revenue for NEPCO in 2023 (met SB for May 2023). We have also achieved significant savings by optimizing gas transportation costs.

22. We are determined to move forward with the reforms in the action plan to durably reduce NEPCO’s deficits. We will secure a telecom license to enable NEPCO to provide billable telecom services using its fiber optics infrastructure by December 2023. We will continue to strengthen enforcement to reduce non-technical losses due to tampering with electricity meters. Over the medium term, we will replace the Floating Storage Regasification Unit (FSRU) with cheaper substitutes by 2025. We will also establish a specialized company for LNG purchases by 2026. Moreover, we will hire an internationally renowned consulting firm to conduct a comprehensive review of the electricity system (generation, transmission, distribution) and propose actions to achieve NEPCO's financial sustainability (proposed SB for November 2023). We will also conduct a review of all renewable energy PPAs. In addition, we will strengthen electricity grid interconnections with neighboring countries, including Egypt, Syria, Iraq, and Saudi Arabia. We are committed to take additional measures as needed to ensure that NEPCO's operational losses will not exceed 1 percent of GDP in 2024 and are gradually reduced to close to 1/2 percent of GDP over the medium term.

23. We are improving the electricity sector’s governance. We are strengthening separate disclosure of financial accounts of NEPCO's four business units (bulk supply, system operator, gas supply and transmission). We continue to enhance the roles and responsibilities of the NEPCO Board, empowering the Board to review, monitor and approve NEPCO's strategy, budget and financing plan. We continue to improve NEPCO's risk management by strengthening the role of the Risk and Audit Committee (NEPCO Board Resolution of October 2020) and implementing the strategy and risk management function (NEPCO Board Resolution of August 2021). We will continue to expand NEPCO's internal audit function by introducing new methodologies, documentation and testing. We will extend and revise NEPCO's EHS (environmental, health and safety) management system to cover planning, construction and operation, to be aligned with international best practice.

24. We are committed to arresting NEPCO’s arrears to the power plants and governmental entities’ electricity arrears. NEPCO continued its effort to repay arrears in 2022, but at the same time had incurred new arrears to SAMRA and other energy companies. NEPCO plans to repay all arrears to other energy companies by end-September 2023, and we are committed to settling the cross arrears between SAMRA, NEPCO, and the government by end-2023.

25. We are scaling up reforms in the water sector to ensure a sustainable path for the supply of water, critical for both growth and macroeconomic stability. In this context, in line with the Cabinet-approved Financial Sustainability Roadmap (FSR) and supported by the Memorandum of Understanding (MoU) signed with the US, we have started to implement the National Water Strategy (NWS). We will optimize operating and maintenance costs, reduce non-revenue water (NRW), increase energy efficiency of the water sector, and ensure that revenues will be sufficient to achieve full cost recovery of water and wastewater services' operations and maintenance (including operations and maintenance of build-operate-and-transfer projects) by 2030 and also including capital costs of build-operate-and-transfer projects by 2040. Since mid-2022, we have already achieved a reduction in NRW by 2.3 percentage points, to 50 percent, and we are targeting a further reduction in NRW by 2-3 percentage points each year, to reduce NRW to 37 percent and 25 percent by 2030 and 2040, respectively. Additionally, in line with the Financial Sustainability Roadmap and the commitments undertaken in the MoU signed with the U.S., we are improving bill collection. We have already shifted from quarterly billing to monthly billing in the Aqaba area and we are rolling this out nationwide by end-2023. We are also improving the operational efficiency of water distribution companies, including by testing performance-based contracts. Moreover, we expect annual energy efficiency savings of 257 GWh. We are also developing an agricultural water reduction strategy that considers measures such as reducing unauthorized freshwater use in agriculture, highland and desert groundwater conservation, rotational fallowing in highland and desert areas, and increasing treated wastewater use.

26. We are committed to arresting the accumulation of water sector arrears. These arrears currently stand at JD 80 million. We issued a cabinet decision establishing a joint committee of the Ministry of Finance and the Ministry of Water and Irrigation that is to meet on a quarterly basis, with a view to clearing all arrears of the water sector by end-March 2024 (met SB for March 2023). We remain committed to arresting the accumulation of arrears towards water sector PPPs and electricity distribution companies, including through timely cash transfers from MOF to WAJ.

Structural Policies to Promote Jobs and Growth

27. We are committed to implementing reforms focusing on increasing labor force participation and generating jobs. The unemployment rate for Jordanians remains high at 22.9 percent in 2022 Q4, with youth unemployment at close to 50 percent. Job creation has not kept pace with population growth and skill mismatches persist. The overall labor force participation rate is 33.4 percent, with female labor force participation being one of the lowest in the world at 14 percent. In this context, we are working to:

i. Increase female labor force participation and enhance gender equality:

  • Parliament has passed Labor Law amendments enhancing protections for women from harassment and violence in the workplace and removing restrictions on female employment in certain professions and industries. We will issue instructions implementing the new amendments of the Labor law under Article 69-B by expanding protections for pregnant women and persons with disabilities to enhance decent and safe workplace conditions (proposed SB for December 2023). We will also produce guidelines for companies to adopt as part of their internal statutes in order for them to comply with the protections of workers against violence and harassment in the workplace.

  • We have issued bylaws and instructions to support higher female participation in boards of state-owned enterprises and companies where the Social Security Investment Fund has representation on the board.

ii. Address labor market segmentation:

  • With the economy fully reopened, we have repealed all Defense Orders, including Defense Order 6 which prohibited layoffs, in order to reduce the segmentation in the labor market between new entrants (youth) and established workers and support a more dynamic labor market.

  • We are making progress on the comprehensive review of labor legislation in consultation with international development partners to assess policies affecting labor-market costs and segmentation (including benchmarking to peers). The review will be shared with IMF staff by end-November 2023, and it will provide the basis for policy recommendations on how to tackle labor market segmentation, enhance the capacity of employers to hire the most productive workers, and reduce impediments to job creation.

  • In order to enhance civil service efficiency and productivity, Jordan launched a Public Sector Modernization Roadmap. As part of this, we are undertaking reforms to tie remuneration more closely to performance as part of a comprehensive HR Strategy, including by developing an evaluation system linked to individual and institutional performance by September 2023 and enabling the competitive hiring of candidates outside the existing pipeline, starting in 2024.

iii. Reduce youth unemployment:

  • To incentivize the hiring of new workers under the age of 30, parliament has passed amendments to the social security law reducing the applicable social security contribution rate by the employer from 11 percent to 5.5 percent.

  • The National Employment Scheme, which provides support for private sector employment and training of new hires, has received around 55,703 applicants since its launch, and has resulted in over 21,000 new hires as of April 30, 2023, of which almost half are female and over 1,600 are NAF beneficiaries.

  • The comprehensive review of labor legislations will also assess options to reduce the costs of hiring youth, leveraging international experience.

iv. Encourage formality:

  • The Ministry of Labor has issued 62,457 working permits for Syrian refugees in 2022 and approximately 14,000 in the first quarter of 2023, while foregoing the JD 425 fee for each permit, allowing them to work in all sectors open to non-Jordanians without being tied to a specific employer and with freedom to move between employers and geographical areas.

28. A key element of our growth strategy is enhancing the business environment, and we are committed to promoting dynamism in the private sector, improving competition, and fostering investment:

  • We continue to strengthen the new insolvency framework, including by licensing practitioners and training judges in best practices. Moreover, we have established an Insolvency Committee and Licensing and Monitoring Unit, with eight registered cases currently in the insolvency registry. We are developing the electronic registry, aiming to bring it online by end-2023.

  • To strengthen our competition regulatory and legal framework, parliament passed legislation to strengthen the competition framework, which attempts to curb the prevalence of dominant firms, including by sharpening the definition for market concentration and stiffening the penalties for violations. The Competition Directorate at the Ministry of Industry and Trade will complete studies of the state of competition in the oil derivative and transport sectors, including identifying potential unfair practices, and share these with IMF staff by February 2024.

  • We will reduce entry barriers for new businesses by abolishing the sectoral licenses for bookstores, cultural centers, and sport centers. We will also submit legislation to enable the abolishment of the five other licenses in the tourism sector identified in the 2019 cabinet decision for elimination (SB for December 2023).

  • Trade and transport facilitation. Jordan Customs is upgrading the infrastructure needed to fully leverage the National Single Window (including for all points of border entry), which will allow for single inspections at entry in coordination with regulatory bodies. We also have streamlined the pre-arrival approval process and reduced the overlap and duplication in over 2,600 permit requirements between the main seven trade-related regulatory agencies. In addition, we will establish a single border authority under Jordan Customs to improve the effectiveness and efficiency of managing international trade and reduce the burden placed on traders with regards to border control operations.

  • Strengthening governance and increasing transparency is critical for growth. We are continuing to ensure that the Integrity and Anti-Corruption Commission (IACC) is adequately resourced, including by implementing the amendments to the Illicit Gains Law passed in August 2021 and the IACC law enacted in 2022. We are exploring the scope for strengthening these further including via legislative changes and bylaws to criminalize illicit gains from public procurement. We have also established a beneficial ownership registry for companies, in accordance with the real beneficiary registry bylaw No. 62 of 2022, which came into effect in February 2023. The Companies Control Department has mandated that all registered companies comply with the disclosure of real beneficiaries and maintain a special register for partners and shareholders, to be updated within 30 days of any modification.

29. Timely and accurate economic data has become increasingly critical in calibrating policy responses as Jordan navigates an uncertain global economic environment. We are continuing our efforts to increase the quality of primary statistics derived from annual industry surveys and ensure their consistency with the data compiled from quarterly surveys. The Department of Statistics (DoS) has published the 2019 annual and revised quarterly GDP statistics in March 2023 (met SB for March 2023). DoS will adhere to a regular publication and revision schedule that includes revisions to quarterly GDP based on annual GDP estimates moving forward as well. In addition, we will establish Memoranda of Understanding (MOUs) to allow DoS to gain regular and timely access to the latest and legally permissible government (MOF, ISTD, CCD) and CBJ data sources, with a clear schedule for data dissemination (proposed SB for September 2023), as this will be essential to the accurate calculation of national accounts data, among other important indicators.

PROGRAM MONITORING

30. Progress in the implementation of our policies, which are supported by the IMF, will be monitored through semi-annual reviews, quantitative performance criteria (PCs), indicative targets (ITs), and structural benchmarks (SBs). These are detailed in Tables 1 and 2, with definitions and data requirements provided in the attached Technical Memorandum of Understanding. Quantitative targets for June 2023 and December 2023 are PCs. IMF disbursements will be on-lent to the government during the program period. We signed a Memorandum of Understanding between the CBJ and the Ministry of Finance on responsibilities for servicing financial obligations to the IMF. Timely data provision is key to the success of the program. In order to strengthen our monitoring of the cost of subsidies, MOF will also provide IMF staff with monthly data on wheat and barley purchases together with tender details and proceeds from sales to the mills (Technical Memorandum of Understanding A57). In addition, we will produce and share quarterly and annual financial results of the electricity sector (NEPCO and the three distribution companies), and water sector without delay, to allow for timely program monitoring.

Table 1.

Jordan: Proposed Quantitative Performance Criteria and Indicative Targets, December 2022-December 2023 1/

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1/ Proposed quantitative performance criteria and indicative targets under the new program. 2/ The end-Dec 2022 targets for primary deficit and combined public deficit already incorporate the contingency Covid spending of 110 (as the underlying criteria in TMU paragraph 40 have been triggered). The memorandum item on contingency Covid spending is only reported for information. 3/ Continuous. 4/ Public debt includes central government debt (including off-budget project loans) and government-guarantees to NEPCO, WAJ, and other public entities, net of SSC's holdings of government debt. 5/ Arrears owed by NEPCO only, to all entities. Excludes debt to the central government, which is not expected to be repaid, with central government having assumed the costs. 6/ Arrears owed by WAJ only, to all entities. Excludes advances from Central Government for which WAJ does not pay interest and that do not have established maturity. 7/ Arrears owed by Aqaba, Miyahuna and Yarmouk distribution companies only, to all entities. Excludes advances from central government for which Aqaba, Miyahuna and Yarmouk distribution companies do not pay interest and that do not have established maturity.
Table 2.

Jordan: Status of Existing and Proposed New Structural Conditionality

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Attachment II. Technical Memorandum of Understanding

1. This memorandum sets our understandings between the Jordanian authorities and IMF staff regarding the definitions of quantitative performance criteria and indicative targets, as well as respective reporting requirements for the arrangement under the Extended Fund Facility.

2. The program performance criteria and indicative targets are reported in Table 1 attached to the Memorandum of Economic and Financial Policies (MEFP) dated June 12, 2023. The exchange rates and gold price for the purposes of the program are shown in the table below. The exchange rate of the Jordanian dinar to the U.S. dollar is set at JD 0.709 = $1 and the gold price is set at JD 1046.52 per fine troy ounce for the measurement of the program performance criterion on net international reserves.

Program Exchange Rates

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3. Any developments that could lead to a significant deviation from quantitative program targets will prompt discussions between the authorities and staff on an appropriate policy response.

4. For program monitoring purposes, debt is defined as set forth in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), adopted December 5, 2014.1,2

QUANTITATIVE PERFORMANCE CRITERIA, INDICATIVE TARGETS, AND CONTINUOUS PERFORMANCE CRITERION: DEFINITIONS

A. Quantitative Performance Criteria and Indicative Targets

5. The quantitative performance criteria and indicative targets specified in Table 1 attached to the MEFP are:

6. A performance criterion (ceiling) on the primary fiscal deficit of the central government excluding grants and net transfers to the National Electric Power Company (NEPCO), and the Water Authority of Jordan (WAJ) and Aqaba, Miyahuna, and Yarmouk water companies (“state-owned water sector”);

7. A performance criterion (ceiling) on the combined primary deficit of the central government (as defined above), the operational loss of NEPCO, the overall deficit of WAJ, and the overall deficit of Aqaba, Miyahuna, and Yarmouk water companies (“combined public deficit”);

8. A performance criterion (floor) on the net international reserves (NIR) of the Central Bank of Jordan (CBJ);

9. A continuous performance criterion (zero ceiling) on the accumulation of external debt service arrears;

10. An indicative target (floor) on social spending by the central government;

11. An indicative target (ceiling) on public debt, net of SSC's holdings of government debt;

12. An indicative target (ceiling) on the domestic payment arrears of NEPCO;

13. An indicative target (ceiling) on the domestic payment arrears of WAJ;

14. An indicative target (ceiling) on the domestic payment arrears of Aqaba, Miyahuna, and Yarmouk Water Companies;

15. An indicative target (ceiling) on the net domestic assets (NDA) of the CBJ.

16. An indicative target (ceiling) on the Social Security Investment Fund's net financing to the central government.

17. The performance criteria on the central government's primary fiscal deficit and the combined public deficit, as well as the indicative targets on social spending by the central government are monitored semi-annually (with indicative targets for the other quarters) on a cumulative basis from the beginning of the calendar year. The performance criterion on the NIR and the indicative targets on public debt, short-term public debt, domestic payment arrears of NEPCO, WAJ, and Aqaba, Miyahuna, and Yarmouk Water Companies, and NDA of the CBJ are monitored semi-annually (with indicative targets for the other quarters) in terms of stock levels. The performance criterion on the accumulation of external debt service arrears is monitored on a continuous basis.

B. Ceiling on the Primary Deficit of the Central Government Excluding Grants and Net Transfers to NEPCO and State-Owned Water Sector

18. The central government is defined as the budgetary central government that is covered by the annual General Budget Law (GBL). It includes all ministries and government departments that operate in the context of the central authority system of the state. The operations of the central government will be measured on a cash basis.

19. For program monitoring purposes, the primary deficit of the central government excluding grants and net transfers to NEPCO and the state-owned water sector is defined as the sum of: (i) net external financing of the central government; (ii) receipts from the sale of government assets received during the relevant period; (iii) net domestic bank financing of the central government; (iv) net domestic nonbank financing of the central government; (v) grants received from abroad by the central government, including grants from the Gulf Cooperation Council; less (vi) domestic and foreign interest payments by the central government; and (vii) net transfers from the central government to NEPCO and the stated-owned water sector.

20. Net external financing of the central government is defined as cash external debt disbursements received by the central government, less external debt repayments paid by the central government. The debts covered are debts of the central government (excluding debts outside the general budget) and any foreign debts that are channeled through the central government to finance operations of the rest of the public sector.

21. Receipts from the sale of government assets consist of all transfers of monies received by the central government in connection with such operations. This includes receipts from the sale of shares, the sale of non-financial assets, as well as leases and the sale of licenses or exploration rights with duration of 10 years and longer.

22. Net domestic bank financing of the central government is defined as the change in the banking system's claims in Jordanian dinars and in foreign currency on the central government, net of the balance of the General Treasury Account with the CBJ.

23. Net domestic nonbank financing of the central government is defined as central government borrowing from, less repayments to, the non-bank sector (including the nonfinancial public sector not covered by the general budget, and, specifically, the Social Security Investment Fund). It is equivalent to the cumulative change from the level existing on December 31 of the previous year in the stocks of government debt held by nonbanks and in the float.

24. Net transfers from the central government to NEPCO and the state-owned water sector are calculated as (i) direct transfers from the central government to NEPCO and the state-owned water sector (or NEPCO and the state-owned water sector's creditors) on behalf of NEPCO and the state-owned water sector (including subsidies, cash advances, and payment of debt or government guarantees if called), minus (ii) any transfers of cash from NEPCO and the state-owned water sector to the central government (including repayments of debt, arrears or cash advances).

25. Adjustors: The ceiling on the primary deficit of the central government excluding grants and net transfers to NEPCO and the state-owned water sector will be adjusted:

26. Downward by the extent to which foreign budgetary grants received by the central government (as specified in Table 1) during the relevant period falls short of the levels specified in Table 1 of the MEFP by 50 percent of the shortfall.

27. Upward by the extent to which foreign budgetary grants received by the central government (as specified in Table 1 of the MEFP) during the relevant period exceed the levels specified in Table 1 of the MEFP, by 50 percent of the overperformance.

28. Downward by the extent to which the combined stock of health and energy arrears by the central government falls above of the projected combined stock of health and energy arrears specified in Table 1 of the MEFP, excluding any one-off settlement operation (such as the write-off of intra-governmental claims).

29. Upward by the extent to which the stock of arrears by WAJ and the distribution companies falls below the projected stock of arrears specified in Table 1 of the MEFP, excluding any one-off settlement operation (such as the write-off of intra-governmental claims).

30. Downward by the extent to which the stock of checks issued by the central government but not yet cashed by the beneficiary exceeds JD 200 million (the programmed stock as specified in Table 1 of the MEFP) in case of the end-year indicative target or performance criterion.

31. For 2022, upward by up to JD 110 (0.3 percent of GDP) should weekly cases, hospitalizations or the share on non-fully-vaccinated population exceed levels agreed in the Cabinet.

C. Ceiling on the Combined Public Deficit

32. For program monitoring purposes, the combined public deficit is defined as the sum of: (i) the primary deficit of the central government excluding grants and net transfers to NEPCO and the state-owned water sector of the central government as defined in Section B; (ii) the operational loss of NEPCO; and (iii) the overall deficit of the state-owned water sector.

33. The operational loss of NEPCO is defined as the difference between total operating revenues and total costs for normal operations conducted within the year as reported in the unaudited income statement. Total operating revenues are defined as the sum of: (i) sales of operating power; and (ii) all other revenue, excluding proceeds from central government transfers or payments of NEPCO's obligations on NEPCO's behalf. Total costs are defined as the sum of: (i) purchase of electric power, including fuel costs, capacity and energy charges, and all costs related to electricity generation to be borne by NEPCO; (ii) any fuel transportation costs; (iii) depreciation costs; (iv) all other maintenance and operating expenses, including on wages and remuneration of the board of directors, and provisions; and (v) interest expense and any other financial costs.

34. The overall balance of the state-owned water sector is defined as the difference between total revenues and current and capital expenditures. Total revenues are defined as the sum of: (i) sales of goods and services; (ii) property income; and (iii) all other revenue, excluding grants and proceeds from central government transfers or payments of WAJ, Aqaba, Miyahuna or Yarmouk water companies' obligations on WAJ, Aqaba, Miyahuna or Yarmouk water companies' behalf. Current and capital expenditures are defined as the sum of: (i) salaries, wages and allowances; (ii) social security contributions; (iii) use of goods and services, including energy costs; (iv) interest payments on domestic and foreign loans; (v) any other expenses, including pensions; and (vi) capital expenditures.

35. Adjustors: The ceiling on the combined public deficit will be adjusted:

36. Downward by the extent to which foreign budgetary grants received by the central government (as specified in Table 1) during the relevant period falls short of the levels specified in Table 1 of the MEFP by 50 percent of the shortfall.

37. Upward by the extent to which foreign budgetary grants received by the central government (as specified in Table 1 of the MEFP) during the relevant period exceed the levels specified in Table 1 of the MEFP, by 50 percent of the overperformance. Downward by the extent to which the combined stock of health and energy arrears by the central government falls above of the projected combined stock of health and energy arrears specified in Table 1 of the MEFP, excluding any one-off settlement operation (such as the write-off of intra-governmental claims).

38. Downward by the extent to which the stock of checks issued by the central government but not yet cashed by the beneficiary exceeds JD 200 million (the programmed stock as specified in Table 1 of the MEFP) in case of the end-year indicative target or performance criterion.

39. For 2022, upward by up to JD 110 (0.3 percent of GDP) should weekly cases, hospitalizations or the share on non-fully-vaccinated population exceed levels agreed in the Cabinet.

D. Floor on the Net International Reserves of the CBJ

40. For program monitoring purposes, the NIR of the CBJ in U.S. dollars are defined as foreign assets of the CBJ minus its foreign liabilities.

41. Foreign assets of the CBJ are readily available claims on nonresidents denominated in foreign convertible currencies. They include foreign exchange (foreign currency cash, deposits with foreign correspondents, and holding of foreign securities), monetary gold, IMF reserve position, and SDR holdings. Excluded from foreign assets are any assets that are pledged, collateralized, or otherwise encumbered (e.g., pledged as collateral for foreign loans or through forward contract), CBJ's claims on resident banks and nonbanks, as well as on subsidiaries or branches of Jordanian commercial banks located abroad, claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forward, swaps, and options), precious metals other than gold, assets in nonconvertible currencies, and illiquid swaps. Excluded from foreign assets is the outstanding balance of bilateral accounts with the Central Bank of Iraq of USD 1,081.67 million.

42. Foreign liabilities of the CBJ are defined as all foreign exchange liabilities to residents and nonresidents, including commitments to sell foreign exchange arising from derivatives (such as futures, forward, swaps and options, including any portion of the CBJ monetary gold that is collateralized), and Jordan's outstanding liabilities to the IMF. Excluded from reserve liabilities are government foreign exchange deposits with the CBJ, deposits from public institutions and government departments with independent budgets, commercial companies with state participation, deposits from donors (including grants received from the GCC and donor term deposits with the CBJ with an original maturity not less than 360 days), the two technical swaps with Citibank Jordan for USD 88.5 million, and amounts received under any SDR allocations received after March 31, 2016.

43. The stock of foreign assets and liabilities of the CBJ shall be valued at program exchange rates. As of March 30, 2023, the stock of NIR amounted to USD 12,883.1 million (at program exchange rates).

44. Adjustors: The floors on the NIR of the CBJ will be adjusted upward (downward) by the extent to which the sum of foreign budgetary grants and foreign budgetary loans—excluding any programmed guaranteed and non-guaranteed Eurobonds—received by the CBJ (as specified in Table 1) during the relevant period exceeds (falls short of) the levels specified in Table 1 of the MEFP within any calendar year. For the end-year floor on the NIR of the CBJ, the downward adjustment will be capped at 75 percent of the aforementioned shortfall. The floors will be adjusted upward by the amount that the outstanding balance of bilateral accounts with the Central Bank of Iraq is repaid, including both principal and interest payments.

E. Ceiling on the Accumulation of External Debt Service Arrears

45. External debt service arrears are defined as debt service payments (principal and interest) arising in respect of obligations to non-residents incurred directly or guaranteed by the central government or the CBJ, that have not been made at the time due, taking into account any contractual grace periods.

F. Floor on Social Spending by the Central Government

46. Social spending is defined as central government spending on: (i) non-wage components of the education and health sectors' current expenditure envelope, including all spending directly related to efforts to prevent, detect, control, treat and/or contain the spread of COVID-19 spending; (ii) NAF's and other entities' social protection programs; and (iii) the school feeding program.

G. Ceiling on Public Debt

47. Public debt is defined as the sum of: (i) central government direct debt (including off budget project loans); (ii) central government guarantees extended to NEPCO, WAJ and other public entities; and (iii) the stock of the CBJ's liabilities to the IMF (excluding SDR allocations) not lent on to the central government; minus the Social Security Corporation (SSC) holdings of government debt. For purpose of the program, the guarantee of a debt arises from any explicit legal obligation of the central government, or of any other agency acting on its behalf, to service such a debt in the event of nonpayment by the recipient (involving payments in cash or in kind), or from any implicit legal or contractual obligation to finance partially or in full any shortfall incurred by the debtor.

48. Adjustors: The ceiling on public debt will be adjusted:

49. Downward by the extent to which the cumulative disbursements under the EFF during the relevant period falls short of the levels specified in Table 1.

H. Ceiling on the Domestic Payment Arrears of NEPCO

50. Domestic payment arrears by NEPCO are defined as the belated settlement of a debtor's liabilities that are due under obligation (contract) for more than 60 days, or the creditor's refusal to receive a settlement duly offered by the debtor. Arrears to be covered include outstanding payments on wages and pensions; social security contributions; tax payments, and obligations to banks and other private companies and suppliers. Arrears exclude obligations to the central government arising from net transfers as specified in paragraph 12.

I. Ceiling on the Domestic Payment Arrears of WAJ, and Aqaba, Miyahuna, and Yarmouk Distribution Companies

51. Domestic payment arrears by WAJ, and Aqaba, Miyahuna, and Yarmouk Distribution Companies are defined as the belated settlement of a debtor's liabilities that are due under obligation (contract) for more than 60 days, or the creditor's refusal to receive a settlement duly offered by the debtor. Arrears to be covered include outstanding payments on wages and pensions; social security contributions; tax payments, and obligations to banks and other private companies and suppliers. Arrears exclude obligations to the central government arising from net transfers as specified in paragraph 12.

J. Ceiling on the Net Domestic Assets of the CBJ

52. Reserve money of the CBJ is defined as the sum of: (i) currency in circulation (currency outside banks and commercial banks' cash in vaults); and (ii) non-remunerated deposits of licensed banks with the CBJ in Jordanian dinars.

53. For program monitoring purposes, the net domestic assets of the CBJ are defined as the difference between the reserve money of the CBJ and its NIR as defined in Section D.

54. Adjustors: The ceilings on the NDA of the CBJ will be adjusted:

55. Upward (downward) by the extent to which the floors on the net international reserves of the CBJ are adjusted downward (upward).

56. Downward (upward) by the extent to which the CBJ decreases (increases) reserve requirements on Jordanian dinar deposits of the banking system. The adjustment will equal the change in the required reserve ratio multiplied by the stock of deposits with licensed banks at the start of the first month when the new reserve requirement ratio applies that are: (i) denominated in Jordanian dinars and; (ii) subject to reserve requirements.

DATA PROVISION

57. To permit the monitoring of developments under the program, the government will provide to the IMF (Division B of the Middle East and Central Asia Department) the information specified below.

58. Related to the ceiling on the primary deficit of the central government excluding grants and net transfers to NEPCO and the state-owned water sector:

59. The standard fiscal data tables as prepared by the ministry of finance covering detailed information on: revenue, including expanded information on revenues from oil derivatives, vehicles, and cigarettes, as agreed with IMF staff; expenditure; balances of government accounts with the banking system; foreign grants; domestic and external amortization and interest; net lending; debt swaps with official creditors; and monthly change in the stocks and the monthly value of stocks of uncashed checks and trust accounts.

60. The government financing information from the Treasury account, as agreed by both the Ministry of Finance and the Central Bank of Jordan, and any potential discrepancy between the government financial data and the monetary survey data (monthly).

61. Gross transfers to and from NEPCO and WAJ detailing the amounts paid or received in connection with debt transactions, transfers to cover losses, and any amount directed to repay any outstanding arrears of NEPCO or WAJ (monthly), including those to and from the relevant distribution companies.

62. Gross transfers to and from the trade account used by the Ministry of Industry and Trade for wheat and barley transactions including the sale price to mills (monthly).

63. Related to central government arrears:

64. The stock of all pending bills of the central government that have not been paid for more than 60 days at the end of each quarter (quarterly), including those of the health insurance fund, to distribution electricity companies, and to the Jordan Petroleum Refinery Company.

65. The value and quantity of fuel products consumed by public sector entities from the Jordan Petroleum Refinery Company (monthly).

66. Related to the combined public sector deficit:

67. All the information specified in paragraph 28.

68. Full unaudited income statement and the stock of accounts payable and payments overdue less and more than 60 days (quarterly) in order to compute the PC on NEPCO net loss, prepared by NEPCO's accounting department on a quarterly basis.

69. Latest audited income statement signed by the auditor (usually available twice yearly with a six-month delay) with full explanation of any changes made to the unaudited version transmitted to the IMF, as soon as it becomes available to NEPCO's management.

70. Full unaudited income statement and the stock of accounts payable and payments overdue less and more than 60 days (quarterly), prepared by WAJ's Directorate of Finance and Accounting on a quarterly basis.

71. Full unaudited income statements and the stocks of accounts payable and payments overdue less and more than 60 days (quarterly), prepared by each of the water distribution companies (Aqaba, Miyahuna, and Yarmouk) and WAJ's Directorates of Finance on a quarterly basis.

72. Full consolidated financial balance of WAJ and the water distribution companies (Aqaba, Miyahuna, and Yarmouk) prepared by WAJ's Directorates of Finance.

73. Breakdown of overdue payments by major creditor, and all overdue payments vis-a-vis the central government (quarterly).

74. Monthly gas flows from Egypt in million cubic meters (quarterly).

75. Monthly Liquefied Natural Gas (LNG) flows in the LNG terminal in Aqaba in million British Thermal Units and their average price, and breakdown of these flows between local use and re-exports to Egypt (quarterly).

76. Related to the floor on NIR of the CBJ and ceiling on its NDA:

77. CBJ's foreign exchange reserves and preliminary data on dollarization (weekly).

78. CBJ's monthly FX interventions in the interbank market

79. Data on CD auctions (following each auction).

80. Monetary statistics (monthly).

81. The outstanding balance of bilateral accounts with the Central Bank of Iraq (monthly).

82. Banking FSI (quarterly; starting 2021 Q1)

83. Related to the continuous performance criteria:

84. Details of official arrears accumulated on interest and principal payments to non-resident creditors. External arrears data will be provided using actual exchange rates and on a daily basis.

85. Related to the floors on public debt:

86. The fiscal tables on the central government's domestic and external debt (monthly).

87. Tables on the stock of debt guarantees extended to NEPCO, WAJ, and other public entities (monthly).

88. Data on short-term public debt (monthly).

89. Related to the floor on social spending by the central government:

90. A table on the amount of central government spending on each of the components of the social spending definition under the program (monthly).

91. Other economic data. Interest rates and consumer prices; and exports and imports; travel receipts and tourist arrivals; remittances; outstanding balance of non-resident purchases of domestic treasury bills and bonds; and GCC grants received by the CBJ and grants transferred by the CBJ to the Ministry of Finance (monthly).

92. Balance of payments (current and capital accounts) and external debt developments (quarterly).

93. List of short-, medium- and long-term public and publicly-guaranteed external loans contracted during each quarter, identifying, for each loan: the creditor, the borrower, the amount and currency, the maturity and grace period, interest rate arrangements, and the amortization profile (quarterly).

94. National accounts statistics (quarterly).

95. Weekly data and data on CD auctions should be sent to the Fund with a lag of no more than one week. Monthly and quarterly data should be sent within a period of no more than six weeks (for the monetary and fiscal variables), and within a period of no more than eight weeks for other data (three months for national accounts statistics and balance of payments and external debt statistics). Data related to the continuous performance criterion should be sent within one week after the date when the arrear was incurred. Any revisions to previously reported data should be communicated to the staff in the context of the regular updates.

DEFINITIONS OF THE PRINCIPAL CONCEPTS AND VARIABLES

96. Any variable that is mentioned herein for the purpose of monitoring a performance criterion, and that is not explicitly defined, shall be defined in accordance with the Fund's standard statistical methodology, such as the Government Financial Statistics. For variables that are omitted from the TMU but that are relevant for program targets, the authorities of Jordan shall consult with the staff on the appropriate treatment based on the Fund's standard statistical methodology and program purposes
1

A downward revision of 2019 GDP data by the Department of Statistics and lower GDP deflators in 2022 and 2023 have lowered nominal GDP by about 4 percent compared to earlier estimates, with significant implications for fiscal and external ratios.

2

See Public Debt Sustainability Analysis in IMF Country Report 23/49.

1

SM/14/304, Supplement 1.

2

(a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in this paragraph, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

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Cover IMF Staff Country Reports
Jordan: Sixth Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Performance Criteria-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2023: Issue 240
Publisher:
International Monetary Fund
ISBN:
9798400246043
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9798400246043.002

Economic Recovery and Inflation

Sovereign Spread and Exchange Rate Developments

Interest Rate and Foreign Exchange Developments
Figure 1.

Jordan: Real Sector Developments
Figure 2.

Jordan: Fiscal Developments
Figure 3.

Jordan: External Sector Developments
Figure 4.

Jordan: Monetary and Financial Indicators