Press Release: IMF Approves US$113 Million Stand-by Credit for Jordan
Jordan and the IMF
Country's Policy Intentions Documents
Free Email Notification
of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Mr. Horst Köhler
2. We believe that the policies set forth in the attached MEFP are appropriate to meet the objectives of our economic program, but we stand ready to take additional measures to meet these goals, should the need arise. During the period of the arrangement, we will consult with the Fund on the adoption of any such measures that may be necessary in accordance with the Fund's rules on such consultations. Following the expiration of the arrangement, we will consult with the Fund on our balance of payments policies, in line with the Fund's policies on such consultations, if we have outstanding purchases in the upper-credit tranches.
3. The program will be evaluated on the basis of quarterly quantitative performance criteria and structural performance criteria and benchmarks (enumerated in the attached tables and annex of the MEFP). We will also conduct with the Fund three reviews of economic developments under the program, the first by mid-February 2003. In addition to a comprehensive evaluation of economic performance, the first review will focus on the 2003 budget and the structural reforms necessary to support it.
Very truly yours,
1. This memorandum sets out the government's economic program for the period 2002–04 in the context of a medium-term macroeconomic framework and describes the government's economic policies for the remainder of 2002.
2. Jordan's economic performance under the recently completed extended arrangement with the Fund generally exceeded program objectives. It was characterized by stronger-than-expected growth, low inflation, a substantial increase in the level of official international reserves, and a significant reduction in net public debt in relation to GDP. The pace of economic activity started to recover during the arrangement, following a period of stagnation. In the final year of the arrangement (2001), real GDP grew by 4.2 percent, despite the adverse effects of the September 11 events and the worsening conflict in West Bank and Gaza. Jordan's balance of payments position strengthened markedly, supported by a surge in exports, and the external current account was in surplus throughout the arrangement. Official international reserves more than doubled over the life of the extended arrangement to about US$2.6 billion, equivalent to seven months of import cover, and over 100 percent of reserve money. Jordan's external debt declined by 13 percentage points to 81 percent of GDP. The Amman Stock Exchange index rose by 30 percent in 2001, buoyed by strong performance of the financial sector and U.S. ratification of the bilateral Free Trade Agreement (FTA).
3. Progress in fiscal consolidation and reduction of public debt under the extended arrangement was respectable despite shortfalls in revenue, partly due to revenue losses resulting from customs tariff reforms. The overall fiscal deficit (including grants) was reduced during the program period by 2.2 percentage points to 3.7 percent of GDP in 2001, despite additional outlays from privatization proceeds and expenditures related to debt for development swaps. The primary balance was also in surplus throughout the program period compared with a primary deficit of 1.7 percent of GDP in 1998. The strengthening of the fiscal position, coupled with the pickup in economic growth, helped reduce government and government-guaranteed debt by 10 percentage points over the last three years to 94 percent of GDP in 2001, a cumulative reduction of 65 percentage points over the last decade. The prudent stance of monetary policy supported the exchange rate peg and contributed to price stability by reducing inflation to the levels of industrial countries. Interest rates declined substantially, contributing to a surge in credit to the private sector.
4. Solid progress was made during the last extended arrangement in the area of trade liberalization, financial sector reform, and public enterprise restructuring/privatization. In the trade area, the maximum import tariff was reduced from 40 percent to 30 percent, and the unweighted average tariff rate reduced from 23.1 percent to 14.9 percent.1 Jordan acceded to the World Trade Organization in 2000, and the FTA with the United States came into effect at end-2001. Jordan has also been implementing trade liberalization in the context of the Greater Arab Free Trade Area and bilateral trade agreements. In the financial sector, government securities were introduced in 2000 through a regular series of auctions. In addition, a new public debt law was enacted in 2001 that bars the government from obtaining direct credit from the central bank and sets strict goals for the reduction of government debt by 2006. As for public enterprise restructuring/privatization, Royal Jordanian was substantially restructured and its main subsidiaries were sold off in 2000 and 2001. A minority share (40 percent) of Jordan Telecom was sold, along with the transfer of management control, to a consortium led by France Telecom in 2000; an additional 9 percent was sold to other parties. A consortium was also chosen in 2001 to build and operate the first independent power producer, while consultants were selected to advise on the privatization of the electricity generation and distribution systems.
5. Data for the first quarter of 2002 point to continued strong macroeconomic performance. GDP growth continued to expand at the rate of 4.2 percent. Industrial production during January–March of 2002 grew by 15 percent (year-on-year). Inflation remained moderate through April (2.6 percent average annual increase). Continued strong export growth in the first quarter of the year (23 percent over the corresponding period last year), coupled with moderate import growth (about 3 percent), led to a significant improvement in the external trade balance. As a result, net usable reserves of the Central Bank of Jordan (CBJ) rose by US$411 million from the beginning of the year and stood at US$2.99 billion (8 months of imports) at end-May. Monetary expansion picked up somewhat (compared with the slow pace in 2001), reflecting higher Jordanian dinar deposits. The three small banks that experienced difficulties in early February 2002 as a result of a fraud case have been required by the CBJ to increase their paid-up capital by end-September 2002. In addition, the central bank has required other corrective measures that, together with the increase in paid-up capital, are designed to ensure that capital adequacy ratios of these banks are met.
Medium-Term Macroeconomic Framework
6. The government's central objective for the period ahead is to raise further economic growth and living standards through the deepening of structural reforms and continued implementation of sound macroeconomic policies, including further fiscal consolidation. These objectives—as encapsulated in the Plan for Social and Economic Transformation (PSET) launched by His Majesty King Abdullah in November 2001—will be achieved by increasing the capacity of the economy to absorb more private sector investment, human resource development, employment generation, increased quality of basic government services, and through the implementation of fiscal, administrative, regulatory, and judicial reforms. The macroeconomic framework will be underpinned by a medium-term fiscal strategy entailing a steady decline in the public debt ratio, and improvements in the composition of expenditures. As discussed below, key elements of the fiscal strategy are pension reforms and steps to broaden the GST and income tax bases.
7. The cost of the initiatives envisaged under the PSET is projected to be up to JD 275 million (about 4 percent of GDP) per year for the next four years, mostly for health, education, vocational training and poverty alleviation, on top of the existing allocations for social sector programs in the budget. The outlays under the PSET are crucial both for addressing pressing social needs, and also for developing the human capital needed to underpin a sustained increase in economic growth over the long term. In order to integrate the PSET into the medium-term macroeconomic framework, the government intends to finance outlays under the PSET exclusively through additional grants and a limited use of future privatization proceeds. The remaining privatization proceeds will be used to help reduce public debt. Creating additional room in the budget through the steady reduction of the public debt burden and related interest payments will be essential for absorbing the recurrent costs associated with the PSET. The PSET will be fully integrated into the budget as of 2003. The budget document will distinguish between PSET projects for which financing in the form of grants and limited privatization proceeds has been secured, and those for which financing has not been secured. The unfinanced PSET projects, whose implementation will be subject to availability of additional resources, will be included in Chapter II of the budget. The objectives and the strategy underpinning the PSET have been endorsed by bilateral donors and the World Bank.
8. Spending on social sector initiatives associated with the PSET is likely to boost domestic demand and output in the near term. Excluding this temporary boost to output, the medium-term macroeconomic framework envisages: real GDP growth increasing to about 5½ percent on a sustainable basis by 2007; continued moderate inflation (about 2 percent); a moderate deficit in the external current account; a reduction in external debt in relation to GDP to about 52 percent of GDP by 2007; and maintenance of external official reserves, although declining, at levels averaging about 25 percent of broad money during 2002–07. Private sector investments that will materialize as a result of privatization and accelerated implementation of major projects will enhance prospects for growth. The major projects to be undertaken by the private sector on build, operate, and transfer (BOT) basis worth about JD 1 billion (15 percent of GDP) include: a gas pipeline between Egypt and Jordan; the Disi water project; and independent power projects for electricity generation.
9. The overall fiscal deficit will be reduced to less than 3 percent of GDP by 2007 from the targeted 4.1 percent of GDP in 2002, despite an assumed reduction in grants (by about 2½ percentage points of GDP). The steady reduction in the fiscal deficit, together with the use of a sizable proportion of privatization proceeds for debt-reduction purposes, would reduce total government and government-guaranteed net debt by about 30 percentage points to about 65 percent of GDP by 2007. We are aware that achieving these ambitious targets will not be easy and will require determined efforts, given the structural rigidities in the budget: large debt-service payments; rapidly growing pension liabilities; high dependence on nontax revenues; continued trade liberalization and tariff reforms; and spending pressures to meet the needs of our still rapidly growing population.
10. The medium-term outlook for the balance of payments projects only a modest external current account deficit, even after taking into account the ending of UN compensation payments and allowing for higher imports associated with stronger growth. Export growth is expected to remain robust (projected to be about 8 percent) during 2002–07, reflecting continued growth in manufacturing exports and additional market access through the FTA with the United States and the Association Agreement with the European Union. Import growth is expected to pick up, particularly during 2002–03, as the PSET is implemented and a number of large-scale water and energy projects are undertaken by the private sector. The moderate current account deficit would be partly offset, however, by increased capital flows associated with new FDI and privatization-related inflows. Given the expected shift of the current account into deficit, the expiration of the current Paris Club rescheduling agreement, and the need to maintain a comfortable reserve position—especially given the difficult and uncertain external environment—financing gaps are expected to appear over the medium term. We intend to approach the Paris Club for a comprehensive restructuring of the stock of debt owed to bilateral official creditors in order not only to help close our financing gaps, but also to provide a lasting solution to our debt-servicing problem, allowing Jordan to avoid further recourse to exceptional financing.
Macroeconomic Program for 2002
11. Macroeconomic policies for the remainder of the year are designed to sustain economic growth in the face of a difficult regional situation, maintain price stability, increase foreign exchange reserves by a moderate amount, and achieve a further reduction in net public debt consistent with our medium-term fiscal strategy. We expect the strong performance of the export sector to continue this year, which, together with the positive growth impact of the PSET, is expected to accelerate real GDP growth to about 5.1 percent. PSET expenditures would contribute about 1 percentage point to the growth rate. Inflation for 2002 is likely to increase somewhat to about 3 percent, mainly as a result of the fiscal measures and market-oriented reforms outlined below; underlying core inflation will remain at around 2 percent. As regards the external sector, the current account is expected to move into small deficit, and a financing gap of about US$200 million is projected to emerge.
12. Consistent with our macroeconomic objectives, the 2002 fiscal plan aims at limiting the fiscal deficit (including grants, spending from privatization and outlays related to debt for development swaps) to 4.1 percent of GDP. In order to realize the fiscal target, the government implemented a set of measures in April 2002 yielding JD 94 million (1.4 percent of GDP) on an annualized basis. The new measures included: (a) increasing the prices of fuel oil, diesel, kerosene, and LPG by a weighted average of 10 percent; (b) extending the GST at a rate of 2 percent to previously exempted or zero-rated products; (c) raising the prices of animal feeds (chaff and barley) to market levels; and (d) raising the price of bread by 10–20 fils to 160 fils. In order to ameliorate the adverse impact of these measures on the poor, the government increased cash transfers to the poor by broadening the coverage of the income transfer program and introducing a supplementary cash transfer program, costing JD 28 million (0.4 percent of GDP) on an annualized basis. In addition, the government increased the monthly allowances for civil servants and pensioners by JD 5.
13. Although PSET-related expenditure was envisaged to be JD 275 million (4 percent of GDP) in the budget, it is now expected to be up to JD 200 million (3 percent of GDP) in 2002, because of delays in securing financing from donors. Projects are now being prioritized with the help of the World Bank in line with available financing and various social and economic criteria. These criteria include: the share of domestic and foreign inputs; the current and capital composition of each project; the sequencing of implementation; the implementation capacity of the institutions undertaking the project; and the unemployment rate and poverty incidence in each governorate. We expect to finance the PSET outlays through additional foreign grants of JD 160 million and privatization proceeds of up to JD 40 million (30 percent of the total expected privatization proceeds of JD 135 million). With the balance of the privatization proceeds used for debt reduction, the fiscal stance would allow for a further significant decline in the debt-to-GDP ratio. The proportion of privatization proceeds to be spent, however, would be kept under review, and adjusted downward if receipts from privatization or progress in reducing public debt were less than expected.
14. Fiscal performance through April 2002 was broadly consistent with the program. However, after taking into account the higher revised crude oil price projection, a shortfall in GST and customs revenue, and a somewhat higher level of grants, a combined shortfall of about JD 70 million (1 percent of GDP) is envisaged for the year as a whole. While some revenue gains may not be ruled out in other areas, the government will limit budget expenditure in line with the developments in revenue collection with a view to achieving the deficit target under the program. Operationally, this would entail cuts in capital and recurrent outlays from the budgeted levels but still allow for increases in real terms. The stipulated expenditure cuts will be implemented by the ministry of finance through limits on expenditure authorizations throughout the year. We will increase electricity prices by the amount warranted by the recent increase in the price of fuel oil for electricity to generate additional revenues of JD 16 million (annualized). The aviation fuel price is also being adjusted every month based on prices prevailing in regional and European airports. Reform of the GST administration mentioned below will also contribute to the achievement of the revenue target under the program.
15. As regards spending under the PSET, the government has decided to start implementation of the vocational training program with an initial allocation of JD 10 million. An additional JD 40 million will shortly be released for executing certain prioritized projects in education, water, and rural development. Execution of other projects will be initiated when financing has been reasonably secured. Also, at the request of the government, the World Bank has agreed to help in preparing terms of references to select four technical experts to assist the government in the areas of education, health, energy and public sector reform, and in capacity building of the relevant implementation agencies. PSET spending is being executed through the normal budget procedures within the treasury system.
Monetary and exchange rate policy
16. Monetary policy will continue to support price stability. We believe that the current peg to the U.S. dollar has served Jordan well, bringing inflation down to industrial country levels and fostering confidence in the Jordanian dinar. The strong export growth in 2001 and the first quarter of 2002 provides assurance that competitiveness is adequate. We will continue to maintain a comfortable international reserve position, and stand ready to protect reserves and monetary stability through an active interest rate policy. The monetary program for 2002 is consistent with the objective of continued price stability and will also allow for healthy growth in private sector credit. We expect broad money to grow by 9 percent in 2002, slightly more than the projected nominal GDP growth, as a result of ongoing financial deepening. Reserve money is likely to grow at the same pace. However, consistent with our approach to interest rate policy, we will limit the growth in NDA to achieve the targeted international reserve position.
17. We believe that our banking system is sound. Banking supervision has recently been strengthened through a set of new regulations and guidelines: (a) strengthening the penalties for violations of central bank regulations; (b) limiting the total holding of shares by banks to no more than 50 percent of subscribed capital (the previous limit was 75 percent of owners' equity), with a subceiling of 10 percent of the subscribed capital of a nonfinancial company; and (c) strengthening guidelines on banks' internal control systems. We will continue to update our banking supervision regulations. We are fine-tuning our estimation of banks' risk-weighted assets for the purpose of improving the assessment of the ratio of banks' capital to risk-weighted assets. Also, we are updating regulations for the opening of branches by banks. In reference to the recommendations of the transitional safeguards assessment by IMF staff in May 2001, the CBJ accounting framework is now in full compliance with International Accounting Standards. The external auditor for the CBJ will be rotated periodically, and at least every five years. In addition, we are in the process of providing all the necessary information to conduct a full safeguards assessment. We look forward to receiving the recommendations once the assessment is completed.
Structural Policies for 2002–04
18. To support the macroeconomic objectives under the program, the government will implement a package of structural reforms during the program period. In particular, the reforms will focus on: containing expenditure pressures; broadening the tax base and strengthening tax administration; improving financial intermediation and strengthening of the financial system; and accelerating the privatization program.
19. Outlays on pensions represent a sizable and growing share of government expenditure. We have carefully analyzed the actuarial implications of the current benefit structure, given the projected rapid growth in the number of pensioners in the coming years, and have come to the conclusion that a fundamental reform of pension benefits and contributions would be critical for sustainable fiscal consolidation. The recent Cabinet decision that beginning in 2002 all new military recruits will be enrolled in the Social Security Corporation (SSC) under a contributory pension plan should go a considerable way in addressing the problem over the longer term. Beyond this, the government has adopted a pension reform strategy aimed at substantially reducing the fiscal burden of public sector pensions. For the military pension system, the present strategy comprises: (a) enrolling all new military recruits in the pension plan administered by the SSC; (b) establishing individual retirement accounts for new recruits to supplement the SSC plan to provide transitional support after retirement; (c) implementing criteria for disability pensions financed by the central government budget that are consistent with those applied by the SSC for its members; (d) increasing the length of service requirement by four years, phasing in the increase over eight years; (e) rationalizing benefit formulas, addressing the current "four-year" rule, the use of the final salary as the basis for benefits, the formulas for disability and survivor benefits and the rate of accrual of benefits; and (f) substituting systematic indexation by the consumer price inflation for ad hoc benefit adjustments. For the civil service pension system, the strategy comprises: (a) increasing the length of service requirement and establishing minimum retirement ages, which will both be phased in over time; and (b) substituting systemic indexation by the consumer price index for ad hoc benefit adjustments.
20. The SSC is expected to be in a net surplus position over the foreseeable future, partly as a result of the increase in SSC contributions implemented in 2001. The Cabinet approved in December 2001 a new by-law to establish an independent investment unit to manage SSC assets under the supervision of the SSC board of directors. In addition, a new actuarial review will be completed this year to assess the long-term viability of the SSC. On the basis of this assessment, the SSC will review its benefits policy and may consider actions to align benefits with contributions, issues related to early retirement, and the adoption of a transparent mechanism to link increases in benefits to inflation or the increase in contributions per participant due to wages, if this is lower, to protect the financial viability of the SSC. Moreover, the SSC is formulating an independent and diversified investment strategy for its assets to maximize the rate of return while ensuring adequate safety and intends to prepare medium-term financial reviews on an annual basis and undertake actuarial reviews of its financial sustainability every three years.
21. Maintaining the buoyancy of budgetary revenues in the face of continued trade reform will require increased reliance on the GST and direct taxes. Consistent with this strategy, the government has already broadened the GST base by extending GST to exempt and zero-rated products at a lower rate of 2 percent. We will consider raising the lower GST rate and broadening the base during the program period in light of fiscal developments. As regards the income tax, the current revenue to GDP ratio at 3 percent of GDP is relatively low mainly because of widespread exemptions, and we will seek to raise this ratio through broadening the tax base. We also intend to unify over time the corporate and the maximum personal income tax rates in a revenue neutral manner. In order to safeguard budgetary revenues, any future rationalization of taxes or tax rates would only be considered in a manner to augment or at least protect tax revenues.
22. We will also continue our efforts to strengthen and modernize tax administration with a view to enhancing tax compliance and developing institutional capacity for formulating tax policy. The GST Department will implement a registration control system to limit the number of nonfilers to 10 percent of the active taxpayer population by end-2002. In addition, a comprehensive risk-based audit plan using different audit techniques will be developed by end-September 2002. The taxpayer data in the computer system will be kept up to date, and its capabilities will be extended to record and control refund requests. Administration of refunds will also be refocused to ensure that all first-time refund claims above a minimum amount are subject to audit. We are also considering combining the income tax, GST, and customs departments into an integrated revenue department to improve tax policy formulation and administration, and will work toward this objective during the program period. Technical assistance from the Fund to help establish this integrated revenue department will be requested shortly. In order to improve reporting on fiscal operations and expenditure management, we intend to develop and publish general government fiscal statistics, develop and implement a single treasury account system at the central bank and prepare a report on tax expenditures (showing the amount of exemptions in the areas of customs duties and GST in particular) and contingent liabilities as part of the annual budget document.
Petroleum sector reforms
23. Recent developments in petroleum prices in the world market have underscored the need for establishing a closer link between the domestic prices of petroleum products and the associated import cost, so as to promote efficient energy use and insulate the budget from large fluctuations in petroleum-related revenue. Significant progress has been made in recent years as we moved from a system of extensive subsidies on petroleum products to a structure under which most petroleum products are subject to significant positive taxation. Consistent with this approach, all remaining subsidies on energy products (diesel, fuel oil, kerosene, and LPG) will be phased out. The government will also continue to review quarterly the domestic prices of petroleum products to protect the level of petroleum-related revenues assumed in the program. In addition, we will impose the GST at 2 percent on petroleum products.
Privatization and legislative reforms
24. Accelerating and broadening the ongoing privatization program is a key element of our reform agenda, crucial for the implementation of the PSET and for the success of the debt-reduction strategy. The privatization program incorporates almost all commercial entities in the public sector or government shares in privatized entities. We intend to relinquish majority ownership of Jordan Telecom with a public offering of 10–15 percent of shares through the Amman Stock Exchange in 2002, followed by additional public offerings in later years. The Jordan Investment Corporation is expected to sell most of its remaining holdings, including part of the Jordan Potash Company and of the Jordan Phosphate Mining Company. Management of the Jordan Postal Service is to be contracted out to the private sector. The government is also planning to privatize the electricity generation and distribution companies beginning in 2003, following the establishment of the appropriate legal and regulatory frameworks in late 2002. Our expectation, based on feedback received from market participants, is that privatization will raise perhaps about JD 1 billion (15 percent of 2002 GDP) over the next four years.
25. Under the PSET, strong progress will be made in 2002 in enacting the legislative and administrative reforms to place Jordan on an equal footing with its business partners. These reforms aim at modernizing economic legislation, improving the judicial process, and establishing/strengthening regulatory agencies. Laws are being amended or introduced to encourage and regulate: leasing activities; electronic commerce; e-government; issuance of convertible bonds; streamlining the procedures of procurement and investment agencies; improving the efficiency of government agencies; establishment of mutual funds; operations of cross-border stock exchanges; and strengthening disclosure requirements and enforcement.
26. Poverty reduction, improving social and health services for the poor, and rural development are important elements of the program and will also be critical for sustaining support for the reform program. Under the PSET, health care programs will focus on improving the quality of services through training and upgrading of primary health care facilities. In the area of general education, the focus will be on skill development through vocational training programs, and class room computerization. As regards poverty alleviation, the emphasis will be on expanding the number of beneficiaries of the cash benefit scheme administered by the National Aid Fund and raising the level of the cash benefits for families. In the area of rural development, the PSET envisages the provision of start up loans to small and medium enterprises and construction of rural roads.
27. We are continuing to strengthen further Jordan's statistical base, and intend to meet the Fund's Special Data Dissemination Standard in due course. This will involve improving statistics in several areas including the balance of payments and coverage of the general government. We intend to request a long-term technical advisor to help with the ongoing work.
V. External Financing and Program Monitoring
28. The government believes that the policies described in this memorandum will contribute to improving efficiency, raising economic growth, and strengthening the external position. However, given the regional environment and Jordan's heavy external debt and debt-service burden, the achievement of our growth objectives will require substantial external financing support on appropriate terms. On the basis of the external current account projections and the targeted reserve buildup, gross external financing requirements (net of private inflows) are currently estimated at US$1.1 billion in 2002 and an additional US$2 billion during 2003–04, part of which will be covered through a combination of bilateral loans and grants and multilateral credits, leaving a financing gap of about US$215 million. After taking into account the amount requested from the IMF as noted above to close the remaining financing gap, we intend to request an exit restructuring of our bilateral debt from Paris Club creditors.
29. Consistent with the discussion above, implementation of the measures listed in Table 1 will be prior actions for the Executive Board consideration of the Stand-By Arrangement (SBA). Purchases under the SBA will be subject to observance of prior actions, benchmarks, and performance criteria, completion of program reviews, and a continuous performance criterion on the nonaccumulation of new external payment arrears (excluding arrears on debt service to official bilateral creditors, which are the subject of debt rescheduling negotiations). In addition, the government will not impose or intensify restrictions on the making of payments and transfers for current international transactions, introduce or modify multiple currency practices, conclude bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement, or impose or intensify import restrictions for balance of payments reasons. We will conduct with the Fund three reviews of economic developments under the program, the first by mid-February 2003, followed by the second review scheduled in mid-August 2003, and the third review scheduled in mid-February 2004.
30. Quantitative performance criteria have been established for end-September and end-December 2002 (Table 2). The performance criteria will apply to changes in net international reserves and net domestic assets of the CBJ; the overall fiscal deficit after grants; the stock of government and government-guaranteed short-term external debt (including CBJ); and the contracting or guaranteeing of new nonconcessional medium- and long-term external debt by the government and the CBJ. The quantitative performance criteria are defined in the annexed Technical Memorandum of Understanding. Consistent with the discussion in Section IV, the structural performance criteria and benchmarks are specified in the attached Table 3. We will consult with Fund staff regarding developments that may affect external financing and grants, and any significant deviation from programmed levels will be a subject of program reviews. In particular, the first review under the program will cover the budget for 2003 and specify the structural program for 2003 in more detail.
International Monetary Fund
1. Under the stand-by arrangement, the government of Jordan is committed to implementing a financial program and a set of structural reforms. Progress in implementing the financial program will be monitored on the basis of quantitative performance criteria and indicative targets as set out in this memorandum, which is organized as follows: Section I specifies the quantitative performance criteria, indicative targets, and applicable adjusters. Section II specifies the content and frequency of the data to be provided for monitoring the program. Definitions of the principal concepts and financial variables are provided in Section III.
2. The quantitative performance criteria will consist of quarterly ceilings or floors on the following variables: (a) cumulative change (from December 31, 2001) in the net international reserves (NIR) of the Central Bank of Jordan (CBJ); (b) cumulative change (from December 31, 2001) in the net domestic assets (NDA) of the CBJ; (c) overall fiscal deficit after grants of the central government (as defined in Section III); (d) outstanding stock of government and government-guaranteed short-term external debt; and (e) the contracting (from January 1, 2002) of new nonconcessional medium- and long-term government and government-guaranteed external debt with an original maturity of more than one year, with a subceiling on debt with an initial maturity of up to and including five years. The floors and the ceilings applicable to the preceding variables will be monitored on the basis of the magnitudes specified in Table 2 of the Memorandum on Economic and Financial Policies (MEFP).
Adjusters to the performance criteria
3. The performance criteria specified above will be adjusted as follows:
4. To permit the monitoring of developments under the program, the government will provide to Division B of the Middle Eastern Department the information specified below:
5. 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). 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
6. The net international reserves of the CBJ consist of foreign exchange (foreign currency cash, deposits with foreign correspondents, and holding of foreign securities, excluding any assets that are pledged or used as collateral), gold, IMF reserve position, and SDRs, less the foreign liabilities of the CBJ (including to the Fund), less commercial banks' foreign currency deposits with the CBJ, and less any change in the CBJ's net foreign currency swap and forward position from December 31, 2001. In addition, deposits received from foreign central banks or governments will be treated as liabilities in NIR, irrespective of maturity. Alternatively, the NIR is equivalent to the NFA of the CBJ adjusted for outstanding purchases from the Fund and the bilateral accounts (net).3 Gold will be valued at the average price of JD 215.67 per fine troy ounce. The U.S. dollar value of foreign assets and liabilities will be converted into Jordanian dinars at the exchange rate of JD 1 = US$1.4104.
7. Reserve money 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 in Jordanian dinars.
8. The net domestic assets of the CBJ are defined as reserve money less the sum of net international reserves and bilateral accounts. They include: (i) net claims on the central government; (ii) net claims on autonomous agencies with their own budgets; (iii) net claims on the social security corporation; (iv) net claims on municipalities and local governments; (v) net claims on nonfinancial public enterprises; (vi) claims on licensed banks; (vii) claims on other financial institutions net of deposits; and (viii) other items (net); less: (ix) JD-denominated CDs; and (x) remunerated deposits of licensed banks in Jordanian dinars; and (xi) other remunerated deposits with the CBJ.
9. The central government is defined as the budgetary central government that is covered by the annual General Budgetary Law (GBL). It excludes the budgets of the 31 autonomous agencies but includes all ministries and government departments which operate in the context of the central authority system of the state.
10. Net external financing of the central government is defined as cash external debt disbursements, less scheduled external debt repayments; less the gross cash payment made in relation to buy-backs of debt and/or swaps of debt to official creditors net of: (i) accrued interest paid and (ii) the market value of any collateral released, excluding accrued interest receipts; plus exceptional external financing (rescheduled principal, interest, and accumulated external arrears, if any). The debts covered are debts of the central government (excluding off-budget military debts) and any foreign debts that are channeled through the central government to finance operations of the rest of the public sector (excluding off-budget onlending on loans that were contracted before January 1, 2002).
11. Net 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 (excluding holdings of Brady bonds), and net of the balances on government accounts with the CBJ and commercial banks (including balances reflecting privatization receipts, but excluding deposits of UN compensation funds relating to damages incurred in the context of the Gulf war). Foreign currency claims will be converted into Jordanian dinars at the exchange rate of JD 1 = US$1.4104.
12. Net domestic nonbank financing of the central government is defined as central government borrowing from, less repayments to, the nonbank sector (including the nonfinancial public sector not covered by the general budget, and, specifically, the Social Security Corporation), and the cumulative change (from December 31, 2001) in the stocks of government securities held by nonbanks and in the float. Float consists of the value of checks issued by the government but not yet cashed by the beneficiaries.
13. The overall deficit after grants of the central government is defined as the sum of: (i) net external financing of the central government (including exceptional financing, i.e., rescheduled principal and interest payments); (ii) privatization receipts (net of identified direct costs of privatization) transferred during the relevant period to the central government accounts; (iii) net domestic bank financing of the central government; and (iv) net domestic nonbank financing of the central government.
14. Government and government-guaranteed external debt covers all external debts incurred or guaranteed by government. "Debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), adopted August 24, 2000) and includes loans, bonds, suppliers credits, leases, and other liabilities as further defined in the guidelines. Excluded are leases of real property by Jordanian embassies or other foreign representations, and any other lease from a nonresident for which the present value of all payments contracted during the period of the lease does not exceed JD 1 million. For program purposes, "government" includes the central government defined in paragraph 9 above, and government departments and official agencies, including the CBJ, which do not seek profit and whose budgets are issued independent of the GBL. The external debt will be expressed in U.S. dollar terms, with debts in currencies other than the U.S. dollar converted into U.S. dollars at the market rates of the respective currencies prevailing on December 31, 2001 as published in IFS.
15. Government and government-guaranteed short-term external debt covers external debt defined in paragraph 14 above with an original maturity of up to and including one year, with the exception of normal import-related financing and instruments contracted after December 31, 2001, with put dates that occur within one year of the original contracting date.
16. The performance criterion on contracting or guaranteeing of nonconcessional government and government-guaranteed external debt applies not only to debt as defined in paragraph 14 above, but also to commitments contracted or guaranteed by government for which value has not been received. The performance criterion covers the contracting or guaranteeing by government of debt as defined in paragraph 14 above with an original maturity of more than one year and a grant element of less than 35 percent, using currency-specific discount rates based on the commercial interest rates reported by the OECD (CIRRs). Discount rates for assessing the conditionality of loans with a maturity of at least 15 years will be based on the average CIRRs over the last 10 years. The assessment of conditionality for loans with maturities of less than 15 years will be based on the average CIRRs of the preceding six-month period.4 Aircraft leases contracted by Royal Jordanian airline are excluded.
17. Any variable that is mentioned herein for the purpose of monitoring a performance criterion and that is not explicitly defined, is defined in accordance with the Fund's standard statistical methodology, such as the Government Financial Statistics. For variables that are not discussed in 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.
1The weighted average tariff rate fell from 16.5 percent to 13.4 percent.
2Debt swaps entail a reduction of bilateral debt stock in exchange for government spending on specific development projects.
3The definition of NIR implies that, for program monitoring purposes, disbursements and/or purchases from the Fund are to be recorded in the monetary accounts as external liabilities of the CBJ, rather than deposits of the government. Furthermore, commercial banks' foreign currency deposits with the CBJ are treated as foreign liabilities in the calculation of NFA.
4Margins will be added to CIRRs as follows: 75 basis points for loans with maturity of less than 15 years; 100 basis points for loans with maturity of at least 15 years and less than 20 years; 115 basis points for loans with maturity of at least 20 years and less than 30 years; and 125 basis points for loans with maturity of at least 30 years.