Statement at the Conclusion of the 2012 Article IV Mission to JordanPress Release No. 12/40
February 7, 2012
An International Monetary Fund (IMF) staff mission, led by Mr. Paul Cashin, met with the Jordanian authorities in Amman during January 22-February 2, 2012 to conduct the discussions for the 2012 Article IV consultation.1 Mr. Cashin issued the following statement at the conclusion of the meetings:
“A modest increase in economic activity has taken place in 2011. Following a sharp downturn in 2010, real GDP is expected to rise by 2½ percent in 2011. 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. The unemployment rate increased to almost 13 percent in 2011, and is expected to continue to rise given the country’s muted growth prospects. The external current account deficit is expected to widen considerably to 9½ percent of GDP in 2011, 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 (FDI) flows accompanied the deterioration in the current account.
“The outlook for 2012 has become increasingly challenging, in light of growing social pressures and heightened instability in the region. Economic growth of 2¾ percent is expected in 2012 as unrest in the region, high commodity import prices, and rising sovereign financing costs will adversely affect the Jordanian economy. Average inflation is projected to pick up to 5½ percent in 2012, given the planned resumption of pass through of international oil prices. Despite regional uncertainties, the current account deficit is projected to narrow (to 7½ percent of GDP) due to a moderation of energy imports and buoyant mining exports.
“The Jordanian economy continues to face substantial downside risks. An outturn of higher commodity-import prices (particularly oil imports) would generate lower economic growth and higher fiscal and external deficits than the baseline projections. Indeed, Jordan has already experienced a 13 percent decline in its terms of trade in 2011. Regional political events with possible spillovers to Jordan—including unrest in neighboring countries—could adversely affect economic activity through lower tourism receipts and FDI, and more costly access to capital markets. In addition, a deepening of the European crisis could indirectly affect Jordan, mostly through its adverse impact on regional oil exporters (a major source of Jordanian trade, external grants, remittances, tourism and investment flows), given Jordan’s limited trade and financial market links to Europe.
“Increased social spending has intensified 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 borrowing on behalf of Jordan’s National Electric Power Company (to accommodate more costly imported fuel oil 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 draft 2012 budget envisages considerable fiscal consolidation. The authorities' intention to rein in the fiscal deficit is an appropriate and necessary step, to mitigate risks associated with Jordan’s already-high public debt and debt servicing, and given the importance of demonstrating the government’s determination to maintain fiscal sustainability. 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). Importantly, putting back in place the automatic fuel pricing mechanism removes the vulnerability of the budget to future oil price movements. To better protect the needy, universal subsidies should be replaced by well-targeted compensatory transfers—these could take the form of cash transfers to low-income households. 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. In particular, the primary deficit (excluding grants) narrows by over 3 percentage points of GDP to about 6⅔ percent of GDP. With this, and given likely borrowing for own-budget entities, the public debt-to-GDP ratio would rise slightly to 66 percent by end-2012. Failure to implement the fiscal consolidation envisaged in the 2012 budget would place upward pressure on inflation, increase external imbalances, and raise domestic borrowing costs.
“Further fiscal consolidation will be essential over the medium term to return fiscal and external balances to a sustainable level. The mission supports the authorities’ proposed three-year fiscal reform agenda to minimize vulnerabilities, reduce distortions, and help ensure that the economy achieves a higher and more inclusive growth path. In particular, the 2012 budget envisages a narrowing of the overall deficit to about 3½ percent of GDP by 2014. Nonetheless, additional policy measures will be necessary if the fiscal authorities are to successfully implement this agenda. At present the bulk of the deficit-reduction effort beyond 2012 is based on real GDP growth, which on current assumptions will not be sufficient to attain the medium-term budget goal until 2017. In order to leave some cushion for possible unforeseen demands on the budget, gearing fiscal policy toward a more ambitious medium-term target would be prudent.
“Maintaining an appropriate monetary stance is important. While the envisaged fiscal consolidation is critical to ensure debt sustainability and boost confidence in the Jordanian economy, the fiscal deficit remains sizeable in 2012, and there is scope for an offsetting tightening of the stance of monetary policy to ensure that inflationary pressures remain muted. In addition, given 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.
“Safeguarding the exchange rate peg remains the lynchpin for the maintenance of financial stability. 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. While the real effective exchange rate has experienced a modest appreciation of 2½ percent between December 2009 and November 2011—driven by rising inflation differentials with trading partners—the mission’s analysis of the real exchange rate suggests that the dinar remains broadly aligned with medium-term fundamentals.
“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 of outstanding loans at mid-2011. Bank private sector credit continues to rebound (growing by 10 percent y-o-y in December 2011). However, there is a risk that banks could be exposed to increased non-performing loans and provisioning requirements over the medium term, as Jordan’s growth path is likely to remain below trend in the period to 2015.
“The capacity of the Jordanian banking system to weather shocks has been strengthened by effective banking supervision. The mission welcomes measures taken by the CBJ in 2011 to further enhance its banking supervision under Basel II, including by: Supervisory Reviews on the submitted bank Internal Capital Adequacy Assessment Process (ICAAPs) to ensure appropriate risk management and corporate governance; and continued semi-annual monitoring of financial soundness indicators. Further steps have been taken toward the introduction of an automated data collection system (expected to be operational by end-2012), to be used to improve off-site monitoring of banks and allow for a statistical-based early warning system. Passage of the Credit Information Law and associated by-laws (in August 2011) will enable the establishment of a credit bureau and help promote private credit flows. The CBJ also issued a circular to licensed banks in October 2011, requiring banks to provide details (by mid-2012) on the impact of implementing Basel III.
“The mission would like to thank the Jordanian authorities for their hospitality and the candid and productive policy discussions during our stay in Amman, and wishes the government and people of Jordan every success.”
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with member countries, usually every year. The mission reviewed macroeconomic developments and changes to the economic outlook since the last consultation. This statement represents the views of the mission team, not necessarily those of the IMF. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.