Jordan and the IMF |
Press Release: IMF Completes First Review of Jordan's Stand-By Arrangement, Approves US$30 Million Disbursement
July 11, 2003
Country's Policy Intentions Documents
of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum
June 19, 2003
Mr. Horst Köhler
1. The Government of Jordan has held discussions with Fund staff in the context of the first review of the program supported by the two-year Stand-By Arrangement (SBA) approved in July 2002. Based on these discussions, the attached Memorandum on Economic and Financial Policies (MEFP) reviews macroeconomic developments and implementation of structural policies over the past year and describes the government's economic policies for 2003, cast in the context of a revised medium-term macroeconomic framework. The government believes that Jordan's economic performance under the 2002 program was strong, exceeding expectations in several areas, and that the policies for 2003 represent an appropriate response to the challenges emanating from the conflict in Iraq and are consistent with sound medium-term objectives. Accordingly, we hereby request completion of the first review under the SBA and waivers for the relevant performance criteria.
2. Despite Jordan's strong export-led growth in 2002, domestic demand remained subdued reflecting the wait-and-see stance of the private sector in the face of intensified conflict in West Bank and Gaza and uncertainties surrounding the looming military intervention in Iraq. Faced with lower-than-expected domestic revenue and a shortfall in external grants, we compressed expenditures to below the programmed level. In the event, however, we were not able to offset entirely the impact of these adverse factors, and the fiscal deficit target was missed.
3. The government remains fully committed to structural reforms, including civil and military pension reform. As discussed in the MEFP, the government decided to implement the shift of new military recruits to the Social Security Corporation on December 31, 2002, but the accompanying amendments to the pension law were enacted in March 2003. In addition, the government has gone beyond the program commitment by increasing the retirement age of all military personnel by four years and has eliminated the so-called "four-year rule" effective September 1, 2003, under which retirees having served four or more years at their final rank were granted an automatic promotion upon retirement. The government also endorsed changes to the eligibility criteria for military disability pensions in June 2003 to be effective September 1, 2003. On this basis, we request waivers for the two missed structural performance criteria related to pension reform.
4. The Government of Jordan appreciates the financial and technical support provided by the Fund and intends to continue its adjustment and reform efforts as envisaged under the SBA. In this regard, given Jordan's markedly improved balance of payments performance under the program and the substantial increase in its official foreign exchange reserves (to well beyond the level envisaged under the program), we do not intend to make the purchase associated with the completion of this review under the SBA, while retaining the option to do so in the event that the external outlook deteriorates. In the absence of end-March performance criteria, we propose that the purchase under the SBA that would have become available as of May 15, 2003 be rephased and distributed evenly over the remaining purchases. We also request a waiver of applicability for the end-June 2003 performance criteria. We stand ready to consult with the Fund on the adoption of any additional measures that may be required to achieve the program's objectives. We will continue to provide the Fund with any information that may be necessary for the assessment of policy implementation and performance under the program.
Very truly yours,
Memorandum on Economic and Financial Policies, 2002–03
1. This memorandum reviews economic performance during 2002, updates the government's macroeconomic objectives in the context of a medium-term framework, and describes the government's economic policies for 2003.
2. Jordan's economic performance in 2002 generally exceeded program objectives, supported by sound macroeconomic management. It was characterized by strong export-led growth, continued low inflation, a substantial strengthening of the balance of payments position, and increased confidence in the Jordanian dinar (JD). Real GDP grew by 4.9 percent, despite the adverse effects of the ongoing conflict in West Bank and Gaza and the prospect of a military intervention in Iraq. This growth was also fairly broad based, supported by strong increases in agriculture (13.4 percent), manufacturing (10.6 percent), mining and quarrying (9.8 percent), and construction (6.8 percent). Total merchandise export earnings grew by about 20 percent in 2002, maintaining the robust pace set in 2001. Inflation averaged less than 2 percent, and the Amman Stock Exchange index remained broadly stable, notwithstanding significant corrections in equity markets around the world.
3. The government persevered in its fiscal consolidation effort throughout 2002, despite an adverse external environment. On the receipts side, a shortfall in external grants of JD 63 million (1 percent of GDP), particularly related to the Plan for Social and Economic Transformation (PSET), the negative impact of higher oil prices (0.3 percent of GDP), and weaker-than-expected General Sales Tax (GST) receipts on account of the subdued domestic demand (½ percent of GDP) led to a combined shortfall of 1.2 percent of estimated GDP compared to program projections. Notwithstanding the sizable shortfall in nominal terms, domestic revenue in relation to GDP exceeded the program level, indicating that the weakness in domestic demand and the effect of a much lower GDP deflator contributed to the revenue shortfall. The government responded to this shortfall by reducing total spending by ½ percent of GDP below the program level and 2 percent of GDP below the budgeted level. However, together with increasing spending pressures related to the difficult regional security situation, the government was unable to fully compensate for the revenue shortfall, despite implementation of those measures. Under the Fund definition, the fiscal deficit for 2002 was therefore 5.0 percent of GDP, which exceeded the program limit by 0.8 percent of GDP. Under the government definition, however, the fiscal deficit including selected privatization proceeds and debt swaps was JD 260 million (3.9 percent of GDP). The debt-creating deficit of the central government (i.e., the net borrowing requirement) was about 3 percent of GDP.
4. Confidence in the JD strengthened substantially. The strength of the external sector led to the rapid accumulation of net foreign assets by the Central Bank of Jordan (CBJ) and a strong buildup of JD deposits in the banking system. The international reserves of the CBJ increased substantially, well beyond program targets, and now stand at a very comfortable level. To sterilize the reserve buildup, the CBJ actively issued certificates of deposit (CDs), restraining JD reserve money to well within program limits. Broad money grew moderately faster than nominal GDP. At the same time, the CBJ eased monetary policy to spur domestic economic activity, with two rounds of interest rate reductions yielding the lowest rates on record. Despite falling interest rates, however, credit to the domestic private sector grew by only 2.6 percent, reflecting subdued domestic demand and regional uncertainty. The banking system continued to be generally sound. As of end-2002, the average risk-weighted capital adequacy ratio stood at 17.5 percent, gross nonperforming loans at 19.8 percent of total loans (on a 90-days-past-due basis), and net nonperforming loans at 13.1 percent of total loans. A large proportion of these nonperforming loans are, however, secured against sound collateral. Two of the three banks that experienced difficulties in the first half of 2002 implemented a corrective action program mandated by the CBJ. As part of the program, the banks absorbed their net losses through required increases in paid-up capital, with no use of public funds. Furthermore, the CBJ intervened in the third bank as it failed to comply with this program. In addition, following its new supervisory methodology and policy announced in April 2002, the CBJ intervened in another small bank to ensure the safety and integrity of the banking system. The CBJ is considering further options to deal with these two troubled banks, including through the use of new private capital injections and possible mergers with stronger and larger banks.
5. The balance of payments strengthened markedly. Merchandise exports grew by about 20 percent, imports were subdued, and the Paris Club agreement, signed in July 2002, rescheduled debt service obligations falling due through end-2007 on all pre-cutoff date bilateral debt. The continued vibrancy of the export sector vindicates the government's efforts over the last several years to liberalize Jordan's trade regime and increase foreign market access, including through a Free Trade Agreement with the United States and the Association Agreement with the European Union. In contrast, the weakness of imports, particularly of capital goods, reflected the private sector's reluctance to invest in view of the worsening conflict in West Bank and Gaza and the specter of a military intervention in Iraq. Regional instability also affected tourist arrivals from the major industrialized economies, but these were more than offset by a surge in arrivals from neighboring countries. Including remittances and grants, both of which remained buoyant, the external current account moved from near balance in 2001 to a surplus equivalent to about 4½ percent of GDP in 2002. Despite valuation effects worth some 5 percent of GDP as the U.S. dollar depreciated against other major currencies, government and government-guaranteed external debt increased by only about 2 percent of GDP, to 81 percent--still a cumulative reduction of some 40 percentage points over the last decade. Including the substantial accumulation of gross reserves of the CBJ (by $916 million or 9.6 percent of GDP), the net external position of the public sector improved substantially.
6. Structural reforms were accelerated in 2002. In April 2002, the administrative pricing structure for chaff and barley was dismantled, leaving only wheat and petroleum products still subject to government price controls. Also in April, a 2 percent GST rate was introduced and applied on previously exempted or zero-rated items. In June, the coverage of the 2 percent GST rate was extended to petroleum products. At the same time, customs tariffs on industrial product imports were reduced to 3 percent from rates varying from 5 percent to 10 percent. The number of GST nonfilers, all of whom are small taxpayers, was reduced to less than 7 percent of taxpayers by end-2002, and steady progress was also made on improving the efficiency of tax collection.
7. Substantial progress was made on pension reform and privatization. In October, the government implemented a five-year increase in the pension age of civil servants, to be phased in over ten years. In December, the cabinet increased the retirement age of all military personnel by four years and approved, in principle, the transfer of all new military recruits to the pension plan administered by the Social Security Corporation (SSC) and the elimination of the "four-year rule", effective September 1, 2003, under which retirees having served four or more years at their final rank were granted an automatic promotion upon retirement. The shift of military recruits to the SSC required amendments to the military pension law that were enacted in mid-March 2003. In June 2003, the government also approved a tightening of eligibility criteria for military disability pensions, which will become effective September 1, 2003. The privatization program also maintained its momentum despite the adverse regional security environment. The program is transparent, well planned, and well managed, leading to strong market confidence. The government's remaining shares in Jordan Cement Factories were sold in April 2002, a further 10.5 percent stake in the Jordan Telecommunications Company (JTC) was divested through an initial public offering in October (raising JD 58 million), and the Royal Jordanian Aviation Academy was privatized in January 2003. The JTC transaction was Jordan's first divestment via an initial public offering on the Amman Stock Exchange, and succeeded in attracting some 10,000 domestic retail investors at a time of significant regional uncertainty. During 2002, the government also issued or amended a series of laws, regulations, and legislation with a view to improving government performance, strengthening economic and financial stability, and improving the domestic investment environment.
8. Jordan has recorded a solid increase in per capita GDP, from $1,660 in 1999 to $1,746 in 2002. Looking forward, despite the negative effects of the war in Iraq, the government's central objective is to further raise living standards over the medium term through accelerated, private sector-led growth. As outlined in the MEFP of June 2002, key elements of the medium-term strategy include a deepening of structural reforms; public investment in human capital and economic infrastructure; and continued implementation of sound macroeconomic policies, including further fiscal consolidation. The program aims to increase Jordan's real GDP growth rate to 6 percent per year over the medium term to enable the economy to create sufficient jobs to absorb the rapidly expanding labor force and reduce the unemployment rate from its current level of about 15 percent. Macroeconomic policies will preserve and consolidate monetary and fiscal stability. Microeconomic policies, supported by the PSET, will seek to bolster both the magnitude and the efficiency of private sector investment, through human resource development, improved public services provision, accelerated privatization, and the implementation of fiscal, administrative, regulatory, and judicial reforms. The total cost of projects included in the PSET is projected at about JD 770 million over the next few years, to be financed by additional grants. Because the PSET involves a large resource commitment through at least 2005 and will entail sizable recurrent outlays over a much longer period, the government is seeking multi-year grant financing from donors in order to ensure the achievement of its medium-term objectives.
9. The medium-term macroeconomic framework envisages a strong recovery in economic activity after 2003, with real GDP growth accelerating to 6 percent per year on a sustainable basis over the medium term; continued moderate inflation of about 2 percent per year; a small surplus on average in the external current account; a secular decline in public external debt as a proportion of GDP and exports; and the maintenance of official international reserves equivalent to about six months of prospective import cover. The private sector investments that will accrue as a result of privatization and the accelerated implementation of major projects will enhance prospects for growth. The macroeconomic framework will be underpinned by a medium-term fiscal strategy aimed at further reductions in public debt and unfunded future pension liabilities. A sizable further debt reduction will be crucial for improving the quality of government expenditure, lowering real interest rates, and fostering investor confidence. Key elements of the fiscal strategy will include steps to broaden the GST and income tax bases; privatization of virtually all of the remaining state-owned commercial enterprises; and pension reforms. Despite an assumed steady decline in annual grant inflows, the overall fiscal deficit, including grants, is to be narrowed to 2½ percent of GDP by 2008. On such a trajectory, the ratio of government and government-guaranteed debt to GDP could fall by about 40 percentage points in six years, to about 65 percent by end-2008. This is consistent with the 2001 Public Debt Management Law, which requires that the government reduce overall public debt to less than 80 percent of GDP by end-2006, with neither external public debt nor domestic public debt exceeding 60 percent of GDP.
10. The original 2003 budget, announced in February, was based on growth rates of real GDP and the GDP deflator of 5 percent and 3 percent, respectively, and did not factor in the effects of a war in Iraq. The subsequent outbreak of hostilities in Iraq necessitated revisions to the macroeconomic framework and the fiscal program. Prior to the war, Jordan relied almost exclusively on Iraq for its crude oil and petroleum product needs, and was receiving an implicit grant equal to half of the market cost of the oil it imported from Iraq (up to a maximum of JD 192 million per year), with the remainder of the oil provided at preferential, below-market prices. These shipments and grant inflows ceased with the onset of hostilities. The war forced a temporary halt in exports to Iraq, which in the past five years have accounted for about 15 percent of Jordan's total exports. Jordan's transport sector was particularly hard hit as a result, with transit trade to Iraq traditionally accounting for about 70 percent of all shipping tonnage passing through Aqaba port. Jordan's tourism sector was also seriously affected by the conflict in Iraq, with most major airlines canceling or reducing their flights to Amman.
11. Economic policies for 2003, supported by strong financial assistance from the international community, are designed to sustain economic growth in the face of the negative impact of the war in Iraq; maintain financial stability and a solid reserve position through prudent demand management policy; and reduce further public indebtedness through continued fiscal consolidation, while alleviating the impact of the war on certain sectors of the economy. The negative repercussions of the conflict in Iraq, principally the disruption of bilateral trade and of tourism activity, are expected to reduce the rates of growth of real GDP and the GDP deflator to about 3 percent and 1½ percent, respectively. Despite an expected slowdown in exports and a modest rebound in merchandise import growth, the external sector outlook is expected to remain comfortable as additional bilateral grants more than offset the negative impact of the war. This strong upfront financial support from the international community, together with sound monetary policy, has helped maintain confidence in the Jordanian dinar and has supported official international reserves at a very comfortable level. As a result, the current account is now expected to remain in surplus, and official reserves are programmed to increase by another $400 million, to about $3.9 billion by end-2003.
The 2003 Fiscal Program
12. The original 2003 budget aimed at limiting the fiscal deficit including grants to JD 316 million (4.4 percent of GDP). The budget also included, as Chapter II, the spending program associated with the PSET, execution of which would be subject to the availability of additional grants. The amount of additional grant financing for new PSET-related project spending, already secured at the time the budget was announced, was JD 107 million (1½ percent of GDP) in 2003. Taking into account the deposits of privatization proceeds and debt-for-development swaps, the fiscal stance would have allowed for a significant reduction in the debt-to-GDP ratio. Projects will continue to be prioritized in line with available financing.
13. The war in Iraq has had serious economic repercussions for Jordan's fiscal outlook and has necessitated the revision of certain elements of the 2003 budget. Preliminary estimates indicate that the negative impact of the war in Iraq on the central government budget, in terms of lost revenues, grants, and additional expenditures, could amount to 5½ percent of GDP in 2003. The government has sought additional bilateral support to help confront the challenging situation. Additional grant commitments secured thus far include $700 million from the United States, $100 million from Japan, and €35 million from the European Union. Out of these commitments, the sum that can be utilized in 2003 amounts to 4½ percent of GDP after the loss of the Iraqi grant.
14. Jordan's fiscal adjustment and reform efforts have continued despite the war. In order to avoid shortfalls of the type experienced in 2002, the original tax revenue projection for 2003 was based on a conservative elasticity assumption. Furthermore, in May 2003, the government implemented the following fiscal measures (with annualized yields in parentheses): (a) upward adjustments in the prices of petroleum products and liquefied petroleum gas ranging between 4-20 percent (0.8 percent of GDP); (b) the introduction of a 4 percent tax on mobile telephone bills (0.2 percent of GDP); (c) an increase in the lower GST rate by 2 percentage points to 4 percent (½ percent of GDP); (d) the introduction of a 5 percent tax on interest income (0.2 percent of GDP); and (e) the introduction of a 2 percent income withholding tax on importers (0.3 percent of GDP). The government also intends to take additional measures by July, which are expected to yield 0.7 percent of GDP on an annualized basis. In total, the measures are expected to yield about 2.6 percent of GDP on an annualized basis. Based on revised projections factoring in both the government's ongoing fiscal effort and the international community's additional grant support, the central government fiscal deficit, including grants, is now projected to fall to 2½ percent of GDP in 2003. Despite the sharp downward revision to projected nominal GDP, the revised fiscal stance continues to allow for a significant reduction in the debt-to-GDP ratio.
15. The government continues to make strong efforts to improve GST administration, supported by technical assistance from the Fund. The Sales Tax Department (STD) has substantially reduced the number of nonfilers in 2002 and plans to maintain the ratio of nonfilers to the total tax population at less than 10 percent. The administration of refunds has also been refocused to ensure that all first-time refund claims above a minimum amount are subject to audit. Moreover, the STD has prepared a new risk-based audit plan to ensure appropriate coverage of GST taxpayers, reducing excessive reliance on comprehensive audits. Implementation of the plan began in January 2003, and a specific unit has been formed to oversee its implementation. The taxpayer data in the computer system has already been brought fully up to date. The system will soon be extended to record and control all refund claims. In addition, the lower GST rate will be unified with the basic GST rate over the medium term.
16. The government is taking further steps to strengthen tax administration in 2003. In line with the recommendations of the Fund technical assistance team, the Income Tax Department (ITD) has developed enforcement and collection plans for tax arrears and is monitoring progress in this area closely. To help reduce the backlog of tax dispute claims in the courts, the ITD and STD will systematically review the status of pending cases to prioritize those that are brought before the courts. If necessary, the number of court benches dealing with tax issues will be increased and the appeal process will be streamlined. With a view to improving the long-term efficiency of overall tax administration in Jordan, the government will formulate a strategy to integrate the ITD and the STD. A subcommittee will be established at the ministry of finance to study the associated issues and develop a work program. In this context, the ministry of finance plans to request technical assistance from the Fund.
17. Regarding expenditures, the 2003 budget aims to keep current outlays (except pensions, interest payments, and extraordinary expenditures associated with the war in Iraq) constant in real terms and to further restrain budgetary expenditures in line with developments in revenue collection to ensure adherence to the fiscal deficit target under the program while protecting priority social programs. Operationally, this would entail cuts in capital and current outlays of JD 70 million from their budgeted levels, enforced by the ministry of finance through limits on expenditure authorizations throughout the year, a procedure which proved effective in recent years. In order to avoid expenditure overruns, all expenditures approved under the supplementary budget in 2002 that are of a recurrent nature have been included in the 2003 budget. To offset the impact of higher petroleum prices, the government increased the salary of civil servants by JD 3 per month--with an annual budgetary impact of JD 6 million--and raised cash transfers to the poor to JD 65 million (1 percent of GDP) by broadening the coverage of the income transfer program. In order to alleviate the hardships and financial difficulties resulting from the war in Iraq, the government plans to spend an additional JD 88 million (1.2 percent of GDP) to help the transportation and tourism sectors and the manufacturing activities severely affected by the disruption in trade with Iraq, and to cover increased spending associated with domestic security. It is expected that the steps described above, along with the planned transfers, will help protect the poor from price increases resulting from the fiscal measures mentioned above and will help alleviate the hardships of the worst-affected sectors.
18. As regards spending under the PSET, the government remains committed to the execution of projects, only when grant financing for them has been secured. Accordingly, out of the total PSET program of JD 454 million in 2003, new projects amounting JD 107 million have been authorized for implementation based on firm donor commitments. In this respect, projects will continue to be prioritized based on parameters that maximize their social and economic impact. The government will pay considerable attention to the administrative capacity in the institutions that will launch new projects to guarantee full and effective implementation at all stages. The PSET has been integrated with the budget and funded projects are being authorized through the regular treasury account system. Additional spending under the PSET will continue to be treated as contingent upon available financing.
Monetary and Financial Policy
19. Monetary policy will continue to support price stability. 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. Strong export growth in 2001-02 and in the first quarter of 2003 provides assurance that competitiveness is adequate. The CBJ will continue to maintain a very comfortable international reserve position and stands ready to protect reserves and monetary stability through active liquidity management. The monetary program for 2003 is consistent with the objective of continued price stability and will also allow for a substantial rebound in the rate of growth of bank credit to the domestic private sector. Broad money is projected to expand by 7 percent, somewhat faster than nominal GDP, in order to accommodate ongoing financial deepening. The CBJ will contract its net domestic assets to accommodate the build up of its net foreign assets, so as to meet its international reserve target in a non inflationary manner. Monetary conditions permitting, the CBJ will continue to improve on the structure of interest rates by increasing the spread between the overnight deposit rate and CD yields.
20. The CBJ is committed to strengthening the health of the banking system. The CBJ and the government are currently deliberating on possible options for dealing with the two troubled banks currently under temporary CBJ administration, which may entail capital injections, changes in management, and possible mergers with stronger banks. The CBJ also intends to implement a number of regulatory and supervisory measures to ensure the health and stability of the banking system, as described in paragraph 21 below. These strong steps notwithstanding, the final resolution of the problems related to the two troubled banks will inevitably involve losses for the original shareholders and will require sizable use of public funds.
21. To strengthen the banking system further, the CBJ has started to implement measures to broaden ownership in the banking system and make banking supervision more effective. The framework entails (a) an increase in the minimum capital requirement for commercial banks by JD 20 million, to be phased in over a four-year period; (b) the publishing of rules for prompt corrective actions that would mandate measures/penalties whenever banks fail to comply with prudential regulations; (c) the strengthening of reporting requirements of banks to ensure a more timely and systematic view of the health of the banking system; and (d) carrying through with criminal prosecution as and when required. The CBJ believes that these measures will improve corporate governance and foster prudent lending practices. It will, nevertheless, assess the need for additional measures in the context of the joint IMF-World Bank Financial Sector Assessment Program planned for the second half of 2003.
22. The government has embarked on a new fiscal funding strategy aimed at achieving a more balanced distribution between the local currency- and foreign currency-denominated components of the public debt. Sustained progress toward this goal would help absorb excess liquidity, develop a longer yield curve, facilitate bank lending to the domestic private sector (using the yield curve as a benchmark), and reduce external indebtedness. The ministry of finance issued JD 100 million of five-year bonds in December 2002 at 5.25 percent and another JD 100 million in March 2003, at 4.85 percent. The government intends to continue with this strategy by developing a quarterly program for auctions of bonds of various maturities, with gross issuance targeted at levels consistent with a deepening of the domestic debt market. The funds thus raised will be used to reduce net external borrowings and, combined with the medium-term fiscal strategy outlined above, will significantly accelerate the reduction of government and government-guaranteed external debt, reduce vulnerability to exchange rate movements, and significantly reduce the level of excess liquidity in the domestic financial system.
23. The government plans to accelerate and broaden the privatization program. It intends to sell stakes in the Arab Potash Company and the Jordan Phosphate Mines Company to strategic investors and possibly an additional portion of the government's share in the JTC. The government will continue to seek a strategic investor for Royal Jordanian Airlines. As regards the power sector, the government has created separate generation, transmission, and distribution companies and has established an effective regulatory body for the industry. A new electricity law has also been passed that paves the way for the privatization of the sector through a new regulatory and tariff regime. With the completion of these steps, the stage has been set for the privatization of the generation and distribution companies, possibly in the second half of 2003. In view of the unfavorable regional economic environment arising from the Iraq crisis, the fiscal program for 2003 excludes any proceeds from the privatization of the electricity sector and estimates total privatization proceeds at about JD 100 million. Because the PSET will be entirely grant-financed, and given the limit on the fiscal deficit, the entire amount of privatization proceeds will be saved for debt reduction purposes.
24. The loss of the Iraqi oil grant underlines the need to adopt a timetable for a comprehensive strategy to phase out the remaining petroleum subsidies and to liberalize the domestic market for petroleum products. In particular, the government intends to eliminate the remaining subsidies on diesel, fuel oil, liquefied petroleum gas, and kerosene and to reduce the vulnerability of the budget to world oil price fluctuations. The government anticipates a multi-year transition period during which discretionary price adjustments will gradually eliminate the existing gap between domestic and international prices for the subsidized products. Once the gaps between domestic and international prices have been closed, a symmetric automatic price adjustment mechanism based on international prices will be introduced. However, the full liberalization of the oil sector cannot be achieved until the exclusive concession rights of the Jordan Petroleum Refinery Company expire. In the interim, preparations will continue for the introduction of a competitive system of distribution. The government will seek technical assistance on this matter.
25. The government and the CBJ are committed to meeting the Fund's Special Data Dissemination Standard within the next two-three years, and are implementing the recommendations of the recent Report on the Observation of Standards and Codes--Data Module report in order to achieve this goal. In particular, the CBJ will shortly allocate additional positions to its balance-of-payments division and create a new unit for balance-of-payments compilation. The CBJ also plans to start publishing its statistics according to the fifth edition of the Balance of Payments Manual (BPM5) and the international reserve template by March 2004. A strategy to compile the international investment position in accordance with BPM5 will also be adopted by end-2003, with a view to commencing regular publication of these statistics within the following 12 months. To meet these targets, the CBJ has requested a technical advisor on balance of payments statistics from the Fund. In addition, the ministry of finance has requested technical assistance from the Fund to publish general government statistics by early 2004.
III. Program Monitoring
26. Purchases under the SBA will be subject to observance of 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). The second review of economic developments under the program will be conducted in mid-December 2003, and the final review in mid-June 2004.
27. Consistent with the discussion in Section II, quantitative performance criteria have been established for end-June, end-September, and end-December 2003 and are specified in Table 1. 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 that of the 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 attached Technical Memorandum of Understanding. Structural performance criteria and benchmarks are specified in Table 2. 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.
Technical Memorandum of Understanding
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. Section III provides definitions of the principal concepts and financial variables.
2. The quantitative performance criteria will consist of quarterly ceilings or floors on the following variables: (a) cumulative change (from December 31, 2002) in the net international reserves (NIR) of the Central Bank of Jordan (CBJ); (b) cumulative change (from December 31, 2002) in the net domestic assets (NDA) of the CBJ; (c) overall deficit after grants of the central government (as defined in Section III); (d) outstanding stock of government and government-guaranteed short-term external debt with an initial maturity of up to and including one year; and (e) the contracting (from January 1, 2003) of new nonconcessional medium- and long-term government and government-guaranteed external debt with an initial 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 1 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 and summarized in the list of reporting tables:
5. Weekly data and data on the central bank 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, except for external sector data, which should be sent within a period of no more than eight weeks, and quarterly national accounts statistics, which should be sent within a period of no more than three months. Any revisions to previously reported data should be communicated to the staff in the context of the regular updates.
6. The net international reserves of the CBJ consist of foreign exchange (foreign currency cash, deposits with foreign correspondents, and holdings of foreign securities, excluding any assets that are pledged or used as collateral), gold, the 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 positions from December 31, 2002. In addition, deposits received from foreign central banks or governments will be treated as liabilities in NIR, irrespective of maturity. Alternatively, the net international reserve (NIR) is equivalent to the national foreign asset (NFA) of the CBJ adjusted for outstanding purchases from the Fund and the bilateral accounts (net).2 Gold will be valued at the average price of JD 219.78 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) nonremunerated deposits of the commercial 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 SSC; (iv) net claims on municipalities and local governments; (v) net claims on nonfinancial public enterprises; (vi) gross claims on licensed commercial banks; (vii) claims on other financial institutions net of deposits; and (viii) other items (net); less: (ix) JD-denominated central bank CDs; (x) remunerated deposits of the licensed commercial 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 32 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 gross cash payments made in relation to buybacks of debt and/or swaps of debt to official creditors net of: (a) accrued interest paid; and (b) 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 cumulative change from December 31, 2002 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 the 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 SSC), and the cumulative change (from December 31, 2002) 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: (a) net external financing of the central government (including exceptional financing, i.e., rescheduled principal and interest payments); (b) privatization receipts net of identified direct costs of privatization transferred during the relevant period to the central government accounts; (c) net domestic bank financing of the central government; and (d) net domestic nonbank financing of the central government. Profit transfers from the Jordan Investment Corporation (JIC) and small sales of JIC assets (not exceeding JD 5 million) will not be included in privatization receipts.
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 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, 2002 as published in IFS.
15. Government and government-guaranteed short-term 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, 2002 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 or the CBJ 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 (CIRRs) reported by the OECD. Discount rates for assessing the conditionality of loans with a maturity of at least 15 years or more 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.3 Aircraft leases contracted by Royal Jordanian airlines 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 GFS. For variables that are omitted from the TMU but that are relevant for program targets, the Jordanian authorities shall consult with the staff on the appropriate treatment based on the Fund's standard statistical methodology and program purposes.
1Debt swaps entail a reduction of bilateral debt stock in exchange for government spending on specific development projects.
2The 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 NIR and NFA.
3Margins 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 15 years or more and less than 20 years; 115 basis points for loans with maturity of 20 years or more and less than 30 years; and 125 basis points for loans with maturity of 30 years or more.