Public Information Notice No. 02/51

Public Information Notice: IMF Concludes 2002 Article IV Consultation with Jordan

May 3, 2002

On April 29, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Jordan.¹

Background

Jordan's economic performance generally exceeded expectations over the last three years under the extended arrangement with the IMF, with particularly strong results in 2001. Real GDP growth accelerated throughout the arrangement period, foreign exchange reserves rose sharply, and real interest rates declined markedly. Inflation remained low. The overall fiscal deficit for 2001 was somewhat above target, partly reflecting the adverse impact of the Palestinian-Israeli conflict and September 11 events. However, it still represented a respectable fiscal adjustment over the 2000 outturn. The external current account was stronger than expected, largely as a result of robust export growth. Considerable progress was made in the last three years in trade liberalization, financial sector reform and public enterprise restructuring.

Real GDP growth grew by 4.2 percent in 2001, led by strong export growth. Although tourism has been affected negatively by the Palestinian-Israeli conflict and the September 11 events, other sectors of the economy have shown signs of robust growth, particularly construction and manufacturing. Inflation remains low (1.8 percent in 2001) despite fuel price adjustments in the middle of the year. The Amman Stock Exchange index rose by 30 percent, in part buoyed by the ratification of the Free Trade Agreement (FTA) with the United States and strong financial performance of the banking sector. Notwithstanding these achievements, the rate of unemployment remains stubbornly high at 15 percent.

The fiscal deficit of the central government (after grants) declined by 1 percentage point to 3.7 percent of GDP. The improvement in the fiscal deficit was the result of firm actions to hold budgetary expenditures substantially below budgetary levels in order to offset revenue shortfalls stemming mainly from the second half of the year. The revenue shortfalls resulted from teething problems with the extension of the general sales tax to the retail sector; the decline in tourism activity mentioned above; and low international prices for phosphate and potash, which affected transfers to the budget from the public mining corporations. The composition of expenditure improved in 2001, with capital investment increasing by 0.4 percent of GDP compared to the previous year. The lower fiscal deficit and debt-for-development operations below the line helped reduce net public debt by 2 percentage points to 94 percent of GDP.

Monetary policy continued to support the fixed exchange rate anchor. Net usable reserves of the Central Bank of Jordan (CBJ) remained comfortably high at end-2001 (US$2.6 billion), equivalent to 7 months of import cover. Reflecting a sharp decline in UN compensation payments to the Jordanian private sector, broad money growth declined to 5½ percent, in line with nominal GDP growth. Credit to the private sector picked up to 11 percent, reflecting higher export and construction activity and strong demand for consumer credit. Interest rates on three-month CBJ certificates of deposit fell to 3.9 percent, broadly in line with the decline in U.S. Treasury bill rates.

The external current account registered a small surplus in 2001. Domestic exports (i.e., exports excluding re-exports), especially from the Qualified Industrial Zones, surged by 25 percent. Non-traditional exports (manufactures, textiles, and apparel) fared particularly well. Imports grew moderately, following a sharp increase in 2000. The decline in tourism receipts was partly offset by strong inflows of remittances. As a result, the external current account registered a surplus of 0.4 percent of GDP. In line with the strengthening of the U.S. dollar against other major currencies, the real effective exchange rate appreciated by 6 percent over 2001.

Progress in structural reform has been solid. The FTA with the United States, which came into effect in December 2001, provides for the elimination of all bilateral tariff and other trade restrictions over a 10-year period. A consortium has been selected to build and operate a power plant as Jordan's first independent power producer, and consultants have been selected to advise on the privatization of the electricity generation and distribution companies. The duty free and catering subsidiaries of the Royal Jordanian airline were sold last year. In addition, the Jordan Investment Corporation sold four small companies. Preparation for the reform of the public pension system is underway; the government took an important step in this regard in early January 2002 by deciding to enroll all new military personnel in the Social Security Corporation as part of a contributory pension plan.

In November last year, the government launched the Plan for Social and Economic Transformation (PSET), which envisages deepening and accelerating the pace of structural reforms, while simultaneously fostering human resource development to promote private investment and employment generation. The human resource, health and rural development components of the PSET are to be supported by an expenditure package of JD250-275 million per year (4 percent of GDP). The authorities intend to finance the PSET through additional grants and a limited proportion of privatization proceeds to ensure consistency with their medium-term fiscal strategy of substantially reducing the public debt burden.

Notwithstanding the difficult regional situation, the outlook for 2002 remains favorable. Continued strong export performance, together with the additional stimulus from spending under the PSET, is expected to accelerate real GDP growth to more than 5 percent. CPI inflation is expected to rise moderately to 3.5 percent, reflecting administered price increases. Net usable reserves are targeted to increase by US$158 million to US$2.7 billion. The fiscal deficit would increase slightly to about 4 percent of GDP, on account of the additional spending under the PSET. However, a large portion of the deficit would be financed through nondebt creating flows. Accordingly, public debt would fall further to about 88 percent of GDP.

Executive Board Assessment

Directors welcomed Jordan's robust economic performance in 2001, despite the difficult regional environment, with improving living standards, impressive export growth, low inflation, a continued reduction in public debt, and the maintenance of a comfortable reserve position. Directors noted that these results owed much to the authorities' prudent macroeconomic policies over the last few years and to the solid implementation of structural measures aimed at transforming Jordan into a dynamic market economy.

Directors welcomed the fiscal adjustment in 2001. Although the original fiscal deficit target was missed, largely as a result of start up problems with the extension of the General Sales Tax (GST) to the retail sector and the difficult external environment following the September 11 events, they were encouraged by the authorities' actions in the second half of the year to contain the fiscal deficit through expenditure restraint. Directors also commended the authorities for the continued efforts to reduce the public debt burden, while noting that further fiscal consolidation, together with privatization proceeds, will be needed to bring the debt burden down to a more sustainable level over the medium-term.

Directors welcomed the recent strong measures to safeguard the fiscal deficit target for 2002, which represent not only a permanent improvement in tax revenues, but also an important step in the authorities' objective to eliminate all price subsidies in the near future. In this regard, they welcomed the attention the authorities are paying to mitigating the social impact of price liberalization measures. Directors supported the objectives of the authorities' PSET, which aims to raise economic growth by accelerating structural reforms and by investing in human resource development. They stressed the need for careful prioritization and for strict adherence to the stated policy of financing PSET-related expenditures with foreign grants and a limited portion of privatization proceeds to protect the goal of further public debt reduction. In this regard, Directors took comfort from the cautious approach taken so far in implementing the PSET.

Directors noted that the current peg to the U.S. dollar and the supporting monetary policy have been effective in bringing inflation down to industrial country levels and fostering confidence in the Jordanian dinar. The strong export performance in 2001 provides assurances that, despite the recent appreciation of the real effective exchange rate, competitiveness is not an immediate concern. Directors, however, underscored the importance of maintaining a comfortable level of reserves and using interest rate policy to withstand possible exchange rate pressures. Directors noted that Jordan's banking system appears to be generally sound. They commended the authorities' ongoing efforts to strengthen banking regulations and supervision, and looked forward to Jordan's participation in the FSAP. The authorities' commitment to combat money laundering and the financing of terrorism, including action to freeze the assets of terrorists, was welcome.

Directors commended the authorities for the solid progress in structural reforms. Decisive efforts in trade liberalization, along with increased market access, are contributing to strong export activity, while progress made in the privatization program is leading to increasing foreign investment, including in infrastructure. Directors encouraged the authorities to continue with their liberalization and privatization efforts. They also underscored the importance of moving expeditiously on pension reform, in order to limit the burden on the budget and put the pension system on a sound basis. There was also a call for a further permanent increase in the tax effort.

Directors welcomed the generally positive assessment of the recent Reports on the Observance of Standards and Codes data module mission. They encouraged the authorities to move rapidly to improve the identified shortcomings in statistical practices and databases, particularly in the balance of payments. It will also be important to increase resources devoted to statistics and to seek further technical assistance in order to meet the Special Data Dissemination Standard in time.