Jordan--Aide-Mémoire for the Staff Visit Discussions
November 19, 2008
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
The impact of global economic and financial developments on the Jordanian economy is expected to remain manageable, and the decline in international commodity prices will ease pressures on the trade deficit, the budget, and inflation. The authorities' plans to maintain a tight macroeconomic policy stance will help reduce external and fiscal vulnerabilities.
1. The Jordanian economy maintained a strong growth performance in the first half of 2008, although sharply higher world food and fuel prices intensified macroeconomic challenges. Real GDP growth averaged about 6 percent, led by robust expansion in the finance and tourism sectors, and with continued gains in overall productivity. Buoyant FDI and portfolio equity flows, higher grants, and a large increase in as-yet unidentified inflows boosted international reserves, and the stock market index reached a new high in mid-June. However, surging food and fuel prices widened the trade deficit, caused inflation to jump, and put pressure on the budgetary position through higher food subsidies.
2. The recent turmoil in global financial markets has so far had limited impact on Jordan. Although the stock market has declined sharply, its performance this year remains better than most other markets in the region, and—in contrast with equity markets elsewhere—inflows from foreign investors have remained positive even in September and October. The banking system's excess reserves have risen since September as the Central Bank of Jordan (CBJ) has reduced liquidity operations (by decreasing CD issuance). In recent weeks, however, interbank interest rates have edged up, likely reflecting a preference by banks to maintain a high degree of liquidity in current circumstances. The announcement of a blanket bank deposit guarantee has supported depositor confidence, and the authorities have intensified monitoring of key economic and financial indicators to provide early warning of any pressures.
3. The economic outlook is generally favorable, but with a high degree of uncertainty in the near term. Growth is projected to slip slightly below 5 percent in 2009, with the correction in property prices that now appears underway dampening activity in the construction sector. There remain significant downside risks to the outlook if the global or regional downturn proves deeper or more prolonged than presently expected. At the same time, declining international commodity prices are providing welcome relief. Inflation has already started to come down and should continue to moderate to 7 percent on average in 2009. The import bill and food subsidies are also declining, but the external and fiscal deficits remain large. Thus, tight macroeconomic policies will need to be maintained to reduce the related vulnerabilities.
4. The tight monetary policy stance and the dinar's peg to the dollar have helped maintain confidence. In an effort to counter inflationary pressures and curb the external deficit earlier in the year, the CBJ appropriately allowed interest rate differentials against the U.S. to widen and raised reserve requirements. Although the outlook for inflation and the external balance has improved since that time, including on account of the slowing of bank credit growth that now appears underway, prospects for capital inflows have tightened markedly as global financial conditions have deteriorated. Thus, a premature easing of monetary policy—whether through lower interest rates or lower reserve requirements—could risk weakening the overall balance of payments position.
5. Maintaining strong supervision over the banking system will help keep risks in check. The CBJ has continued to enhance its supervisory arrangements, including the launch of Basel II implementation earlier this year. Banks' financial soundness indicators remain strong—the banking system's capitalization and liquidity ratios are high, funding is predominantly from deposits, and the nonperforming loan ratio is low. Thus, the banking system appears well positioned to withstand a moderate economic slowdown.
6. On the fiscal side, the decision to remove fuel subsidies in early 2008 and implement an automatic price adjustment mechanism was bold but necessary. In its absence, the budgetary position would have deteriorated sharply as world oil prices rose to record levels. Nevertheless, surging world food prices increased the cost of food subsidies and caused the underlying fiscal deficit (excluding grants) to widen further, even though domestic revenue collection surpassed expectations. Higher grants—presently estimated by the authorities at double the 2007 level—are expected to narrow the overall deficit to about 5 percent of GDP. Public debt, which was reduced earlier in the year via a buyback of Paris Club obligations, is estimated to decline to 56 percent of GDP by end-2008, compared to 70 percent at end-2007.
7. Tightening of the fiscal stance in 2009 is needed to mitigate risks and facilitate a decline in inflation and the external deficit. The mission cautions against the introduction of a rigid link between public sector wages and past inflation. In current circumstances, with projected disinflation over the coming year, such a step would lead to an excessive wage increase and significantly delay the anticipated decline in inflation. Based on the draft budget presently with parliament, and assuming an execution rate for budgeted capital projects that is broadly in line with past years (85 percent) and continued strong grant receipts, the mission estimates the overall deficit to narrow to just over 4 percent of GDP. While this would imply a sizable reduction in the underlying deficit—about 1½ percentage points—it would remain significantly higher than in 2006, before the recent escalation in food and fuel prices. The mission therefore recommends that if world commodity prices prove weaker than the conservative budget assumptions, any savings be used to reduce the deficit further.
8. Further fiscal adjustment will be critical over the medium term to bring the fiscal and external balances to a more comfortable level. The mission recommends a more ambitious public debt target of 50 percent of GDP in order to reduce fiscal vulnerability. This could be achieved by containing the growth of the public wage bill—which accounts for over one half of current spending—and lowering subsidies with improved targeting. Lower fiscal spending will reduce imports, thereby helping to narrow the external deficit and the associated vulnerabilities.
9. Continued structural reform will support the Jordanian economy's strong long-term growth prospects. The mission welcomes recent progress in strengthening public financial and debt management, particularly with respect to the GFMIS and resolution of the government's overdraft facility with the CBJ, and urges expeditious further steps in the implementation of the Treasury Single Account. The mission also welcomes plans to fully liberalize the petroleum sector over the medium term, and to enhance the framework for Public-Private Partnership (PPP) projects in order to boost infrastructure investment without burdening the budget, either directly or via contingent liabilities.
10. The mission urges expeditious progress in resolving data issues, especially the remaining requirements for Special Data Dissemination Standards (SDDS) subscription. These relate to improving the frequency and timeliness of wage and earnings statistics, and aligning the coverage of budget revenue and expenditure data with government financing flows. In addition, the sharp increase in errors and omissions in the balance of payments in 2007 and the first half of 2008 points to potentially serious issues in the coverage of balance of payments statistics. Early steps to address these issues will aid in the analysis of macroeconomic developments.
1 An IMF mission team visited Jordan during November 9-16, 2008. The mission reviewed economic and financial developments since the Article IV consultation discussions in March, particularly the impact of the global financial crisis. This statement represents the mission team's views, and not necessarily those of the IMF.