IMF Executive Board Concludes 2012 Article IV Consultation with JordanPublic Information Notice (PIN) No. 12/38
April 20, 2012
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 April 9, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Jordan.1
The pace of economic activity in Jordan remains subdued. Following a period of robust growth during 2000–09 (averaging about 6½ percent) supported by a favorable external environment, economic activity slowed sharply. Real GDP grew by only 2⅓ percent in 2010, and headline inflation picked up to 5 percent, in line with higher commodity prices. A modest increase in economic activity took place in 2011, as real GDP is expected to grow by 2½ percent. Inflation fell to 4½ percent in 2011, due in large part to the absence (since January 2011) of pass through of international oil prices to domestic markets. Real GDP is likely to grow by 2¾ percent in 2012, underpinned by modest growth in mining and financial services and continued growth in key trading-partner Gulf Cooperation Council countries. Average inflation should rise to almost 6 percent in 2012, given the planned resumption of pass-through of international oil prices to domestic fuel prices. As one of the most open economies in the Middle East, Jordan remains highly dependent on commodity imports (oil and grains), tourism receipts, remittances and FDI flows, and external grants. Jordan is also facing risks from a further deterioration in its terms of trade, unrest in neighboring countries, and the prospect of further disruptions to natural gas pipeline flows from Egypt.
Higher world commodity prices have adversely affected Jordan’s external position. The external current account deficit is expected to widen considerably to 9½ percent of GDP in 2011 (from 5⅔ percent of GDP in 2010), as a robust export performance is offset by increased energy imports and declining remittances and tourism receipts. International reserves fell by 14 percent in 2011 to reach $10.7 billion (equivalent to 6⅔ months of imports), as shortfalls in foreign direct investment flows accompanied the deterioration in the current account. Despite regional uncertainties, the current account deficit is projected to narrow in 2012 (reaching 8 percent of GDP), due to a moderation of energy imports and buoyant mining exports.
Increased social spending has exacerbated pressures on the fiscal position, and tighter macroeconomic policies are needed to reduce fiscal and external imbalances. The overall fiscal deficit is expected to rise to about 6 percent of GDP in 2011, mainly due to increased commodity subsidies and other social spending (costing an additional 2⅓ percent of GDP) and a cyclical weakening in domestic revenues. Budgetary grants of $1.4 billion (5 percent of GDP) were provided by Saudi Arabia during 2011, which helped fund the cost of fuel subsidies. In addition to central government borrowing, increased government borrowing on behalf of Jordan’s National Electric Power Company (to cover more costly imported fuel oil used during the extensive periods of interrupted natural gas supply) and other own-budget agencies increased the public debt-to-GDP ratio to about 64 percent at end-2011.
The 2012 budget envisages considerable fiscal consolidation. The budget focuses on raising domestic revenue (including by removing tax exemptions, revamping property transfer fees, and higher tax rates on luxury goods) and containing current spending (including by freezing public sector hiring, reductions in the operational costs of Ministries, and reform of the present system of universal subsidies for gasoline and diesel). The budget also provides for the implementation of targeted transfers to alleviate higher fuel costs associated with the phasing out of fuel subsidies. Based on the latest developments and macroeconomic assumptions, the 2012 overall deficit is expected to narrow by about 1 percent of GDP relative to the 2011 outturn, reaching 5¼ percent of GDP. With this, and given likely borrowing for own-budget entities, the public debt-to-GDP ratio would rise slightly to 65½ percent by end-2012. Further fiscal consolidation will be essential over the medium term to return fiscal and external balances to a sustainable level.
The stance of monetary policy has been tightened since mid-2011. As recent unrest in the region is likely to have engendered rising sovereign risk premia in Jordan and other Middle East countries, further tightening of monetary conditions is appropriate, to sustain the attractiveness of Jordanian dinar (JD)-denominated assets and strengthen the international reserve position. In this connection, safeguarding the exchange rate peg remains the lynchpin for the maintenance of financial stability in Jordan. The peg of the Jordanian dinar to the U.S. dollar has served the country well by anchoring inflation expectations and providing stability in a challenging regional and global environment. The Jordanian dinar real effective exchange rate has experienced a modest appreciation of 2½ percent between December 2009 and November 2011, driven largely by rising inflation differentials with trading partners.
The Jordanian banking system remains sound. The Central Bank of Jordan (CBJ) continues to exercise prudent regulation and supervision of the banking system, and banks have remained conservative in their funding practices (with the JD loan/deposit ratio near 73 percent at December 2011). The banking sector’s macro-prudential indicators remain strong—banks remain profitable and well capitalized, deposits (largely JD-denominated) continue to be the major funding base, liquidity ratios and provisioning remain high, while non-performing loans increased slightly to 8½ percent at mid-2011. Bank private sector credit continues to rebound (growing by 9½ percent y-o-y in December 2011).
Executive Board Assessment
Executive Directors commended the authorities’ track record of prudent and effective macroeconomic management, but noted that external and domestic shocks have recently dampened economic activity and heightened downside risks. Against this background, Directors agreed that, going forward, economic, financial and structural policies should focus on reducing fiscal and external imbalances as well as on promoting faster and more inclusive GDP growth.
Directors welcomed the fiscal tightening in the 2012 budget and the authorities’ three-year fiscal reform agenda. More broadly, they underscored the importance of a comprehensive medium-term strategy to restore fiscal buffers and reduce the public debt. Such a strategy should encompass enhanced tax administration, further fuel subsidy reforms, better-targeted social and capital spending, continued containment of the public sector wage bill, and improved public sector financial management.
Directors considered that the exchange rate peg has served Jordan well in anchoring inflation expectations and fostering macroeconomic stability. Director also agreed that, in the context of this exchange rate regime, there is scope for a further tightening of the monetary stance to contain inflation risks and maintain an adequate international reserve buffer.
Directors welcomed improvements in banking regulation and supervision in line with the recommendations under the Fund’s Financial Sector Assessment Program, which have helped create a liquid, well-capitalized, and profitable banking sector. They encouraged continued vigilance against financial risks, particularly from rising non-performing loans. Directors commended the progress in implementing Basel II regulations, noting that banks are already well placed to satisfy Basel III guidelines on capital adequacy and liquidity. They also welcomed the authorities’ continued efforts to fight money laundering and terrorism financing.
Directors underscored that sustained and inclusive growth is central to reducing high and chronic unemployment. They welcomed the steps taken to boost the investment climate, governance, and regional trade. Nonetheless, Directors urged further progress in strengthening the legal and regulatory frameworks, addressing labor market rigidities, resolving skill mismatches, and tackling infrastructure bottlenecks.