Public Information Notice No. 05/20

Public Information Notice: IMF Executive Board Concludes Post-Program Monitoring Discussions with Jordan

February 10, 2005

On January 24, 2005 the Executive Board of the International Monetary Fund (IMF) concluded the first Post-Program Monitoring (PPM) Discussions with Jordan on a lapse-of-time basis.¹

Background

The government's policy stance during 2004 aimed at promoting growth while consolidating the fiscal position in order to reduce the public debt-to-GDP ratio. The macroeconomic policy mix included prudent budgetary management and a credit policy supportive of economic expansion.

The economy recovered strongly during 2004, with real GDP growth estimated at over 6 percent. The unemployment rate decreased from 14.5 percent in 2003 to 12.5 percent in the first half of 2004. Reflecting the economic recovery, the Amman stock exchange index increased by 64 percent during the year. Inflation remained under control; average consumer price index inflation for 2004 was 3.4 percent compared with 2.3 percent in 2003.

The fiscal position strengthened during 2004, with tax revenues growing strongly and current expenditures being curtailed. For the year as a whole, the overall deficit is estimated at about 3.4 percent of GDP—an overperformance of about 0.5 percent of GDP compared to the original target. The debt-to-GDP ratio is estimated to have declined by almost 8 percentage points to 92 percent of GDP.

Jordan's external position remained sound. The external current account in 2004 is estimated to be broadly in balance, as higher imports were compensated by a brisk pickup in exports and sharply higher transfers. The capital account is estimated to record a small surplus for 2004, owing to significant private inflows, including foreign direct investment (FDI). The gross usable reserves of the Central Bank of Jordan (CBJ) increased to US$4.8 billion at end-December 2004—equivalent to seven months of prospective 2005 imports. The Jordanian dinar depreciated by 3.9 percent in real effective terms over the 12 months to September 2004.

Monetary developments reflected the brisk growth in credit to the private sector on account of the buoyant economic activity and government domestic financing needs related to delays in privatization. Thus, broad money growth for end-2004 is estimated at about 11 percent, somewhat above nominal GDP growth. Domestic interest rates were adjusted in line with developments in the global capital markets to support the peg with the U.S. dollar. Steps were also taken during 2004 to strengthen the capital position of banks and to improve supervision. The share of nonperforming loans declined substantially during 2004.

Further progress has been made in structural reforms, including the privatization of the management of the Aqaba container port in early 2004. Jordan has also embarked on an ambitious improvement in the health and education sectors, supported by a World Bank loan.

Jordan's medium-term outlook remains positive, with a growth rate of around 6 percent per year. Trade liberalization and increased market access have set the stage for strong export-led growth over the medium term, and exports are expected to continue growing at 6-8 percent per year. Large private sector-led infrastructure projects, including in water, gas, and electricity generation, are likely to boost investment. Structural reforms, the enhancement of health and educational standards, and poverty alleviation are likely to have a positive impact on growth over the long term. Achieving the public debt target will entail fiscal tightening over the next three years. During this period, the external current account is expected to shift to a manageable deficit, while gross usable external reserves would remain at a comfortable level.

Executive Board Assessment

Over the past few years, the Jordanian economy has made impressive progress. Spurred by rising domestic demand, global economic recovery, restoration of trade links with Iraq, and the continued implementation of prudent macroeconomic policies, economic growth has picked up sharply in 2004 while inflation remained moderate. The external position is strong, with usable gross official reserves presently comfortable at the equivalent of about seven months of prospective imports. Reflecting buoyant tax revenues and tight expenditure management, the fiscal position has strengthened and the total public debt/GDP ratio has fallen.

In the period ahead, the Jordanian economy will continue to face important challenges. Public debt is large, and the economy continues to rely on external grants and remains vulnerable to exchange rate fluctuations. Moreover, inadequate adjustments in domestic fuel prices, coupled with higher-than-expected world oil prices, could result in a significant widening of the fiscal deficit and could delay meeting the debt reduction target. Delays in privatization pose another important risk for the debt strategy.

The official strategy regarding these challenges is appropriate; it focuses on the twin objectives of reducing the public debt burden and maintaining high economic growth. A sustained reduction in the fiscal deficit—supported by structural reforms to stimulate private sector investment, including FDI—and a judicious implementation of the privatization program would help place Jordan on a higher growth path consistent with a sustainable external position.

The thrust of the official strategy for the 2005 budget is sound and its overall deficit target is consistent with the debt limits under the Public Debt Law. The authorities should take advantage of progress made in 2004 to sustain the reform momentum. In addition, it would be critical to realign the nonstandard general sales tax (GST) rates with the basic rate and to broaden the coverage of the GST. Moreover, restructuring the income tax would make it more equitable and would improve resource allocation, while generating higher revenue. There also is scope for rationalizing capital spending. In this regard, the integration of the Plan for Social and Economic Transformation with the regular budget is a critical step toward minimizing duplication and improving expenditure management.

Structural reforms continue in several areas. The privatization of electricity generation in 2005 is important, and the authorities appropriately plan to proceed carefully and link privatization to the establishment of proper regulatory agencies, which would protect against the creation of private monopolies. The authorities should also take steps to introduce an automatic petroleum product price adjustment mechanism to close the gap between domestic and international petroleum product prices by 2008. The planned Fund technical assistance should be useful to strengthen the existing social safety net so as to cushion the impact of the fuel price increases on vulnerable groups, and to facilitate ongoing reforms in tax administration and expenditure management.

Jordan's policy of pegging to the U.S. dollar, combined with prudent financial policies and continued structural reforms, has ensured competitiveness. The planned pursuit of a tighter monetary policy in 2005 and the adjustment in domestic interest rates in line with international rates should facilitate the maintenance of competitiveness. The authorities are encouraged to continue monitoring developments in external reserves, interest rates in the international capital markets, and export competitiveness to ensure the effectiveness of their exchange rate policy. In this regard, the authorities should be prepared to respond expeditiously to any significant negative impact of the elimination of textile quotas under the multifiber arrangement. The steps that are being taken to support the development of a strong banking sector are appropriate. An early merger of the one remaining bank under CBJ administration with another larger bank would send an important signal to the financial market. In addition, the authorities' intention to develop the domestic government bond market is timely. It forms part of their strategy to shift budgetary financing toward domestic debt instruments, which would also help in developing a yield curve for the domestic capital market.

The next discussions under PPM will be conducted along with the Article IV Consultation in mid-2005.