Last Updated: April 10, 2013
Current Program Status:
A 36-month Stand-By Arrangement (SBA) in the amount of SDR 1.364 billion (about $2 billion, 800 percent of quota), approved by the Executive Board of the IMF on August 3, 2012. The Board approved the first review under the SBA on April 10, 2013.
Jordan’s economy has been hit hard by exogenous shocks, starting in 2011. Repeated and extensive disruptions to the flow of natural gas from Egypt due to the damage of the Sinai Peninsula pipeline, together with high and rising oil prices, have required imports of expensive fuel products for electricity generation. At the same time, regional tensions and the global economic downturn have adversely affected tourism, worker remittances, and foreign direct investment. As a result, the current account deficit widened significantly in 2011 to 12 percent of GDP from 7 percent in 2010, and growth slowed to 2.6 percent after registering an average of 6.1 percent over the last decade.
Aided by high external grants, fiscal and energy policies in 2011 mitigated the social impact of these shocks by protecting consumers from the increase in energy prices, through measures that include higher subsidies, social spending, and targeted wage increases. These steps, though, have contributed to a higher central government deficit and rising operating losses of the electricity company NEPCO, which subsidized electricity tariffs.
Macroeconomic challenges intensified in the first half of 2012. The fiscal accounts came under further pressure, largely as a result of higher oil prices, lower-than-expected grants, and rising outlays for hosting Syrian refugees. At the same time, balance of payment pressures increased—new sabotages of the gas pipeline in February and April reduced gas inflows even more compared with 2011, further increasing imports of expensive fuel for electricity generation and, with it, NEPCO’s losses. Such pressures resulted in a decline in the central bank’s reserves, which was exacerbated in May by an increase in deposit dollarization, reflecting depositor nervousness. The large public financing needs—including for NEPCO—further pushed up public debt and also crowded out the private sector.
Role of the IMF
In response to the negative external shocks, the Jordanian government adopted a national reform program in May 2012. In this context, it took significant measures to bring back fiscal and energy policies to a sustainable path while providing targeted support to the vulnerable part of the population. But further adjustment, particularly on the energy front, is needed in 2013 and over the medium term.
To avoid sharp adjustments that could adversely affect growth and the vulnerable parts of the population, and to guard against additional shocks, the Jordanian government asked for financial assistance from the IMF under a 36-month SBA. The SBA is supporting Jordan’s agenda for a socially acceptable fiscal consolidation. It will provide liquidity over the period 2012–15 to allow the authorities to gradually implement their program. The key objectives of the authorities’ program are to correct fiscal and external imbalances while strengthening growth prospects.
Progress to Date
Despite a challenging year, economic performance was broadly positive in 2012:
- Growth is estimated to have increased slightly to 2.8 percent, driven in part by remittances and tourism.
- Reflecting lower grants and potash prices, and higher energy and food imports (the latter also induced by the increase in the number of Syrian refugees), the external current account deficit widened substantially to about 18 percent of GDP in 2012, but that was mostly offset by a stronger capital account.
- The central government budget was tightly managed and, in late 2012, the authorities eliminated the highly sensitive fuel subsidy while at the same time providing cash transfers to compensate low- and middle-income Jordanians.
- Following the full liberalization of fuel prices, inflation increased to 7.2 percent at year-end and to 7.8 percent at end-February 2013.
- The losses of NEPCO stayed within program targets—helped by increases in electricity tariffs in May and June, and a marked rise in gas inflows from Egypt in November-December—but the company did not repay its end-2011 arrears.
- The Central Bank of Jordan managed well temporary pressures on reserves in late-2012, which, since then, have been rebuilt, helped by sizeable grants from GCC countries and a successful U.S. dollar-denominated domestic bond issuance.
The Challenges Ahead
The key challenges facing the authorities are to:
- Achieve cost recovery in the energy sector in a socially acceptable way. This will require buy-in from key stakeholders, including the parliament.
- Continue fiscal consolidation in a gradual manner so as not to jeopardize growth prospects and social stability. This, together with energy sector reform, would place public debt on a downward trend.
- Maintain a reserve build-up to safeguard the economy from further unforeseen shocks.
- Sustain structural reforms aimed at addressing unemployment and enhancing access to finance. The authorities’ approaches to the former include a recent initiative (Jordan Job Compact) designed to help unskilled, semi-skilled, and skilled youths find jobs through a combination of training, stimulus packages to employers, and small and medium-sized enterprise (SME) finance. Regarding access to finance, the authorities are improving the legal framework in favor of SME financing and actively seeking international support to secure resources for such enterprises. Work is also ongoing on a new investment law, which could significantly enhance the transparency of the rules governing investments.