IMF Executive Board Concludes 2009 Article IV Consultation with JordanPublic Information Notice (PIN) No. 09/59
May 15, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On May 4, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the 2009 Article IV consultation with Jordan.1
Jordan’s macroeconomic performance was generally favorable in 2008. Real GDP growth averaged 5.6 percent, only slightly slower than the 2007 pace. Sharply lower world fuel and food prices brought inflation down. After rising to 20 percent year-on-year (y-o-y) in September, mainly because of the previous surge in commodity prices, headline inflation fell sharply to 1½ percent (y-o-y) by February 2009. Lower commodity prices also helped narrow the current account deficit to an estimated 12 percent of GDP in 2008 (from almost 18 percent in 2007). FDI financed about three-quarters of the external deficit, with the remainder largely coming from positive errors and omissions. Official foreign exchange reserves rose to $7.7 billion by end-2008 (equivalent to about 6 months of imports).
However, Jordan’s money and financial markets have weakened since mid-2008. Bank deposits edged down slightly in October but subsequently recovered, with the share of dinar deposits continuing to increase. Bank credit has also slowed sharply in recent months. The stock market has corrected since its June peak, although its performance between the end of 2007 and the end of the first quarter of 2009 (25 percent decline) was better than many other markets in the region
The Central Bank of Jordan (CBJ) took pre-emptive steps to maintain confidence and support the domestic money market following the onset of global turbulence. In October, the CBJ announced a full guarantee of all bank deposits until end-2009. Operations to soak up liquidity were also scaled back, and banks’ excess reserves increased sharply. In late November, policy interest rates were cut by 50 bps and the reserve requirement by 100 bps. The deeper cuts by the U.S. Federal Reserve, however, resulted in a widening of the interest rate differential against the dollar—to which the dinar is pegged. With reserves continuing to build, headline inflation moderating rapidly, and bank credit decelerating, the CBJ cut rates by a further 50 bps in mid-March 2009 and announced that the reserve requirement would be reduced by another 100 bps from end-April.
High fuel and food prices and softening domestic revenues put pressure on the fiscal position in 2008. The deficit excluding grants reached 11.2 percent of GDP, against 8.9 percent in 2007. The outcome could have been much worse—with record world oil prices for much of the year—had it not been for the bold decision in early 2008 to remove fuel subsidies and institute an automatic price adjustment mechanism. Higher grants contained the overall deficit to 6.1 percent of GDP. Rapid nominal GDP growth, together with the Paris Club debt buyback in early 2008, resulted in a substantial reduction in total public debt to around 60 percent of GDP at end-2008 (from 70 percent of GDP at end-2007).
Banking sector profitability and soundness indicators have so far remained favorable. Banks’ liquidity ratios are high and funding is predominantly from deposits. Capitalization is healthy, with the moderate decline in the capital adequacy ratio in 2008 owing mainly to the implementation of Basle II standards, especially the incorporation of operational risk. Stress tests conducted for the Financial Stability Assessment Program (FSAP) Update indicate limited exposure to interest rate, liquidity, interbank contagion, and other market risks. However, the tests also identify vulnerability to credit and concentration risks.
Executive Board Assessment
Executive Directors noted that sound macroeconomic management has enhanced Jordan’s resilience to the global crisis. Growth continues to be robust, international reserves have strengthened, and the banking sector remains healthy and profitable. Going forward, Directors emphasized that, in light of the economy’s close ties with the region and reliance on external financing, near-term policies should remain focused on guarding against vulnerabilities, while progress in structural reforms should be expedited to strengthen economic fundamentals and enhance competitiveness. They encouraged the authorities to remain vigilant if the slowdown in growth is deeper than anticipated.
Directors agreed that the fiscal stance for 2009 strikes a reasonable balance between reducing vulnerabilities and supporting domestic activity. They stressed the need to resist spending pressures and to adjust capital spending plans should grants fall below expectations. Directors welcomed the authorities’ commitment to reduce public debt further to meet the legislative requirement by 2011. This will require a credible plan to consolidate public finances over the medium term, supplemented with the public sector reform strategy, to maintain confidence in the sustainability of fiscal policy and the external position.
Directors recommended attaching top priority to completing the reform of public financial management, especially implementing fully the treasury single account, improving budget classification and control, and further strengthening the medium-term framework for budget formulation and preparation. Directors welcomed efforts to enhance public debt management, which is being supported by Fund technical assistance.
Directors welcomed pre-emptive steps taken by the CBJ in recent months. They saw room for a further cautious easing of monetary policy to support the domestic economy, as long as reserves remain stable. However, external and financial indicators should be closely monitored, with a view to tightening liquidity conditions quickly if signs of balance of payments pressure emerge. At the same time, efforts should continue to develop the domestic money market and strengthen the CBJ’s capacity to manage liquidity.
Directors agreed that the exchange rate peg, which has provided stability in the challenging global environment, remains an appropriate nominal anchor. They noted the staff’s assessments that there is no clear evidence of real exchange rate misalignment, and that the risk of external instability from the capital account is mitigated by comfortable international reserves.
Directors commended the authorities for taking prompt action in response to the FSAP Update. They considered that the weaker environment underlines the importance of enhancing consolidated supervision, increasing capital adequacy of banks, and developing contingency plans. Directors stressed that recapitalizing the CBJ remains an important medium-term objective.
Directors called on the authorities to expedite progress toward meeting the remaining requirements for the Special Data Dissemination Standard (SDDS) subscription, particularly aligning the coverage of budget revenues and expenditures with government financing flows.