## cr17231 ## Source details **Canonical URL:** [cr17231](https://www.imf.org/-/media/files/publications/cr/2017/cr17231.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17231.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17231.pdf.json) --- ### Executive summary — macroeconomic position and recent developments - Real GDP growth: 3.1 percent in 2014; 2.4 percent in 2015; 2.0 percent in 2016. - Nonprimary growth: 2.2 percent y-o-y in 2016Q4, from 1.9 percent in 2016Q3. - Mining production: contracted by 12 percent in 2016 owing to temporary shutdowns. - Inflation dynamics: - Inflation fell from 3.1 percent y-o-y at end-2013 to -2.2 percent y-o-y in June 2016. - Core inflation fell from 4.3 to 1.7 percent. - Inflation rebounded to 4.6 percent in February 2017 and eased to 3.5 percent in April 2017. - Labor market: - Unemployment close to 16 percent in 2015–16 (highest in at least 10 years). - Unemployment by group: women 24.8 percent; youth 36.1 percent. - Labor force participation 35.6 percent in 2016Q4; employment rate 30 percent. - External and exchange-rate indicators: - Current account deficit (excluding grants) 12.6 percent of GDP in 2016. - Real effective exchange rate appreciated by 16 percent from end-2013 to end-April 2017. - Fiscal and public enterprise state: - Combined deficit of central government and NEPCO: 9.2 percent of GDP in 2014 to 3 percent of GDP in 2016. - Central government primary deficit fell from 4.6 to 3.4 percent of GDP. - NEPCO returned to cost recovery by late 2015 and achieved an operating surplus in 2016. - Public debt: 95.1 percent of GDP at end-2016. - Monetary policy and reserves: - CBJ policy rate: reduced from 3.5 percent to 2.5 percent up to early 2016; returned to 3.5 percent by November 2016. - Deposit dollarization: 17 percent at end-June 2016 to about 19.5 percent. - CBJ NIR amounted to $12.7 billion (at program exchange rates) at end-2016, about 1.1 billion lower than the adjusted performance criterion. *International Monetary Fund — Jordan staff report excerpt.* ### Macroeconomic outlook and key projections - 2017 growth: revised down to 2.3 percent (about 1 percentage point lower than anticipated at program onset). - Medium-term growth: expected to increase gradually to 3 percent (1 percentage point less than initially envisaged). - Inflation: headline and core inflation to stabilize at a moderate level as tax exemption removals and other price shocks fade. - Current account: expected to decline gradually; medium-term deficit expected to fall to about 6 percent of GDP. - Public debt target: program aims to bring public debt down to 77 percent of GDP by 2022 (one year later than initially envisaged), requiring additional measures beyond the program period of about 1 percent of GDP in 2020. - Pace of adjustment: remain in line with about 1.5 percent of GDP a year; no scope for back-loading or easing the adjustment profile. ### Risks and donor support - Major downside risks: - Escalation of regional conflict; additional refugee inflows; spillovers from GCC corporate and financial-sector stress; surge in the U.S. dollar. - Upside channels: - Greater investment in nonrenewable energy, importation of cheaper natural gas from Mediterranean sources from 2019, reconstruction-related business opportunities, faster EU engagement, and agreement with Saudi Arabia on large investment projects. - Donor support needs: - Further budgetary grant support of at least $600 million needed in the second half of 2018; estimated annual shortfall in donor financing to fully address refugee-related pressures: $1-2 billion. - 2016: Jordan received $1.6 billion under the Jordan Response Program, relative to a funding requirement of $2.7 billion (60 percent of commitments). - 2017 (as of end-February): $134 million received out of a 2017 requirement of $2.7 billion. ### Fiscal performance, consolidation strategy, and revenue reforms - 2016 fiscal outcomes: - Authorities met end-December 2016 fiscal performance criteria; combined public deficit met by a margin of 0.9 percent of GDP. - Central government primary balance (excluding grants) was ½ percentage point of GDP better than programmed. - 2017 budget and measures: - 2017 budget incorporates 2.2 percent of GDP in fiscal measures: reduction of some GST and customs-duty exemptions; increased fuel excises and fees; additional cut in capital expenditure of JD 100 million. - Removal of exemptions in 2017: amounting to 0.4 percent of GDP. - 2017 actions: removed exemptions on categories subject to the 0, 4, and 8 percent GST rates. - Income tax reform and compliance: - Amend income tax law to broaden base and increase progressivity; timetable: submit draft to parliament by end-September 2017 (structural benchmark, reset from end-2016); enact by end-November (structural benchmark, re-set from end-March 2017); come into effect in 2018. - Expected permanent revenue increase from income tax reform: 1 percent of GDP once fully implemented in 2018-19. - Contextual figures: about 95 percent of the population not paying income taxes; USAID: only 7 percent of wage earners filed a tax return in 2015. - Tax-administration measures: action plan to address TADAT weaknesses; accelerate PAYE improvements for large taxpayers (end-March 2018 benchmark); link business license issuance with TIN by end-November 2017. - Expenditure management: - Contain wage bill growth: keep nominal growth close to 1½ percent annually from 2017 to 2019. - Continue plan to clear government energy and health arrears by 2019; combined stock of health and fuel arrears amounted to 2.4 percent of GDP as of end-2016. - Social spending: improve targeting and establish strengthened social safety net and National Unified Registry (NUR) initial scheme operational by January 1, 2018. ### Public utilities — electricity (NEPCO) and water (WAJ) - Electricity sector: - NEPCO breakeven oil price estimated at $51 to $53 per barrel. - Shift to LNG lowered NEPCO sensitivity to oil-price fluctuations; NEPCO recorded an operational profit in 2016. - Adopted automatic electricity tariff adjustment mechanism in October 2016; provides for monthly adjustments based on prior three-month costs and aims to ensure NEPCO’s operational balance over the calendar year. - EMRC began assessing monthly tariff adjustments from April 1, 2017; EMRC kept electricity tariffs unchanged in April and May based on early results. - NEPCO issued JD 75 million Sukuks in March 2017; EMRC to finalize comprehensive tariff-structure study by end-2017. - Water sector: - Updated action plan to reduce water sector losses adopted and published (April 2017). - Aim: bring WAJ and distribution companies to operational and maintenance cost recovery by 2020 through enhanced revenue collection, energy efficiency, and greater use of renewables. - Authorities expect WAJ and distribution companies to reach close to 90 percent of operational cost recovery by end-2017. - WAJ debt: 6 percent of GDP at end-December 2016; first draft of WAJ debt management strategy finalized in November 2016. ### Monetary policy, reserves, and exchange-rate peg - Exchange-rate regime: - Authorities remain fully committed to keeping the exchange rate peg as anchor for monetary and macroeconomic stability. - Peg judged preferable to greater exchange-rate flexibility given constrained export access and socio-political considerations. - Reserves and NIR: - CBJ NIR: $12.7 billion at end-2016 (program exchange rates), about $1.1 billion lower than adjusted performance criterion; NIR underperformance increased to $1.2 billion shortfall in 2017Q1. - Gross usable reserves: 2014: 14,973; 2015: 15,678; 2016: 15,888; 2017: 14,454 (selected table figures). - Gross usable reserves stood at $13.3 billion as of end-March 2017 (108 percent of the Fund’s RAM). - Monetary stance: - CBJ increased policy rates by a cumulative 75 basis points in early 2017 (and cumulative 125 bps since December 2016 per June 16 staff note), including a 25 bps increase effective June 18, 2017. - Deposit dollarization: 17.4 percent at end-June 2016; 18.9 percent at end-2016; stabilized at 19.4 percent at end-March 2017. - Authorities stand ready to increase policy rates further if needed to preserve reserves and the peg. ### Banking system resilience, stress tests, and supervision - Bank soundness and indicators: - Capital adequacy ratio: 19 percent (aggregate) at end-December 2016, well above regulatory minimum of 12 percent. - Liquidity buffers comfortable; profitability strong; NPLs have been gradually declining. - Credit gap: about -5 percent at end-2016. - Average loan-to-value (LTV) ratio on mortgages: 66 percent in 2015. - Stress-test results: - Liquidity tests: - Five-day test: four small banks become illiquid after five days of cumulative deposit withdrawals; 21 banks remain liquid. - 30-day test: all banks survive cumulative withdrawal and remain liquid owing to liquidity inflows from sale of securities. - Macroeconomic severe adverse scenario: - System capital would fall to 13.2 percent in the second year. - Four banks (representing 27.6 percent of the banking system’s assets) would fall below the Basel minimum ratio. - Capital shortfall equivalent to 0.9 percent of GDP. - Notable baseline metric: 18.1 percent, with no banks falling below the threshold. - Regulatory and supervisory reforms: - CBJ issued Basel III regulations on capital requirements in November. - Finalizing regulations on domestic systemically important banks; quantitative impact study of liquidity coverage ratios conducted. - Transfer to CBJ of insurance sector supervision expected to be finalized in early 2018 (subject to law amendments). - CBJ implementing risk-based AML/CFT offsite supervision; AML/CFT law amendments drafted; National Risk Assessment initiated and expected to be finalized by end-year. ### Debt sustainability, borrowing plan, and external financing - Public debt and medium-term projections: - Public debt: 95.1 percent of GDP at end-2016; program aims to reduce to about 77 percent of GDP by 2022. - With further fiscal consolidation, debt ratio would fall to about 77 percent of GDP by 2022; public debt near 96 percent of GDP in 2017 per DSA. - 2017–18 Borrowing Plan (selected figures): - Borrowing needs (A1+A2): US$ Million 8,956 (2017; 22.1 percent of GDP); US$ Million 6,907 (2018; 16.2 percent of GDP). - A1. Overall deficit: US$ Million 1,480 (3.7 percent of GDP) in 2017; US$ Million 668 (1.6 percent of GDP) in 2018. - A2. Debt amortization: US$ Million 7,476 (18.5 percent of GDP) in 2017; US$ Million 6,239 (14.7 percent of GDP) in 2018. - B3. Identified external financing: US$ Million 2,828 (7.0 percent of GDP) in 2017; US$ Million 1,165 (2.7 percent of GDP) in 2018. - B4. Unidentified external financing: US$ Million 0 in 2017; US$ Million 1,250 (2.9 percent of GDP) in 2018. - Note: issuance of a non-guaranteed Eurobond could be an option to cover financing gaps. - External financing gap and composition (selected rows from staff projections table in US$ million): - Financing gap (Prog., Proj. rows shown): 2,361; 1,453; 1,490; 3,210; 96; 274; 3,947; 4,858. - IMF: 288; 230; 192; 276; 96; 115; 576; 622. - Identified financing: 1,052; 1,222; 937; 1,076; 0; 159; 1,989; 2,378. - World Bank 1/: 140; 304; 447; 364; 0; 0; 587; 668. - EU and bilateral loans: 435; 520; 171; 477; 0; 80; 606; 1,076. - Jordan Compact off-budget grants: 477; 399; 319; 235; 0; 0; 796; 634. - Unidentified multilateral and bilateral financing: 1,021; 0; 361; 1,858; 0; 0; 1,382; 1,858. - Of which expected as budget grant financing: 323; 0; 361; 608; 0; 0; 684; 608. - Of which expected as debt financing 2/: 698; 0; 0; 1,250; 0; 0; 698; 1,250. - Fund access and capacity to repay: - EFF total: SDR 514.650 (150.00 percent of quota). - Due to delays, program re-phased: five instead of six reviews; access envisaged under sixth review reallocated to the four remaining reviews. - Fund credit projected in 2017 at 11.8 percent of exports of GNFS and declining to below 7 percent in 2019; repayments peak at 3.8 percent of exports of GNFS in 2017. - Jordan’s capacity to repay the Fund remains adequate; Jordan continued to meet repayment obligations. - Debt Sustainability Analysis (DSA) stress results: - Growth shock (cumulative growth decline of over 5 percentage points in 2017–18) would lead public debt to peak at over 110 percent in 2018. - Contingent liability shock (CL from banks equivalent to 10 percent of GDP in 2017) would raise debt above 100 percent of GDP for several years. ### Structural reforms for inclusive growth, jobs, and access to finance - Three-pronged strategy: (i) facilitate access to finance; (ii) active labor market policies and reforms; (iii) improve business environment and governance. - Access to finance and inclusion: - Credit bureau established; compiling credit reports and to start issuing scores in late 2017/early 2018. - Secured transactions law (end-March 2017 benchmark) expected to allow moveable assets as collateral; enactment likely by end-August 2017. - JLGC capital increased from JD10 million to JD29 million; $50-million fund co-financed by CBJ and commercial banks; forthcoming $100-million fund jointly financed by CBJ and World Bank managed by JLGC. - Financial inclusion study publication reset to end-September 2017; financial inclusion strategy to be developed by end-2017. - Labor market reforms and job creation: - National Strategy for Human Resources Development: 10-year plan. - National Employment Strategy updated; bylaw on flexible working hours issued in March; part-time employment framework revamp underway. - Active labor-market pilots: School-to-Work, Labor Market Information and Job Search Program, Job Readiness and Placement Program; plan to train an additional 2,000 beneficiaries. - Social security contributions: current level 21.75 percent; social security system running an annual primary surplus of about 1.5-2 percent of GDP. - Policy options: temporary reduction in social security contributions with parametric offsets; study by independent party by end-March 2018 (structural benchmark) on options for temporarily lowering contributions and offsetting parametric reforms. - Considering employment tax credit as alternative to promote formal jobs. - Business environment and governance: - JIC investment window to be fully operational by end-June 2017 via “one-procedure one-form”. - Draft inspection law expected to be submitted to parliament before end-August 2017 (end-October 2016 benchmark). - Export diversification strategy expected by end-June 2017; relaxation of rules of origin for EU exports (July 2016) seen as opportunity. - Reforms to reduce cost of starting and operating a business, streamline procurement, and improve PPP oversight. ### Program implementation, conditionality, and monitoring - Program framework: - Performance criteria and targets for end-June and end-December 2017; indicative targets for end-September 2017, end-March 2018, and end-June 2018 (definitions in TMU). - Quantitative performance criteria: primary fiscal deficit of central government excluding grants; combined public deficit; floor on CBJ NIR; zero ceiling on external debt service arrears. - Indicative targets: social spending floor; public debt ceiling; short-term public debt ceiling; accounts payable ceiling; domestic payment arrears ceilings; NDA of CBJ ceiling. - Select TMU operational figures and exchange rates: - As of March 31, 2016: Exchange rate JD 0.709 = $1; Gold price JD 870.865 per fine troy ounce. - Program exchange rates: British Pound 1.016955; Japanese Yen 0.006316; Euro 0.8028; Canadian dollar 0.545675; SDR 0.99728. - Reporting and data provision: - Monthly fiscal tables, government financing info, NEPCO and WAJ unaudited income statements (quarterly), CBJ foreign exchange reserves and dollarization (weekly), monetary statistics (monthly), BOP and external debt (quarterly). - Timeliness: weekly data within one week; monthly/quarterly data within six to eight weeks (with specifics in TMU). ### Program risks and policy recommendations (summary) - Risks (selected from Risk Assessment Matrix): - Intensification of regional conflicts: Likelihood High; Expected impact Medium-High. - Strengthening of the US dollar/higher rates: Likelihood High; Expected impact Medium-High. - Delays in reform implementation: Likelihood High; Expected impact High. - Donor fatigue: Likelihood Medium-High; Expected impact High. - Pressure on foreign exchange reserves: Likelihood Medium; Expected impact Medium-High. - Policy recommendations: - Maintain fiscal consolidation and implement high-quality measures to reduce public debt and improve external sustainability. - Preserve the exchange-rate peg supported by adequate reserves and continued donor grants. - Accelerate structural reforms to improve competitiveness (tax-exemptions framework, income tax amendments, access to finance, insolvency, secured transactions). - Protect vulnerable groups via targeted compensation and strengthened social safety nets; expand and modernize social safety net with World Bank assistance. - Strengthen public investment management, PPP oversight, and assessment of contingent liabilities. - Continued donor engagement and mobilization of budget grants to close financing gaps and support refugee-related costs. *International Monetary Fund — staff report material (cr17231).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### BACKGROUND—PERSISTENT HEADWINDS AND ECONOMIC CHALLENGES - Economic resilience amid severe external shocks, but performance lagged other emerging markets: - Real GDP growth declined from 3.1 percent in 2014 to 2.4 percent in 2015 and 2.0 percent in 2016. - Nonprimary growth increased to 2.2 percent y-o-y in 2016Q4, from 1.9 percent in 2016Q3. - Mining production contracted by 12 percent in 2016 owing to temporary shutdowns. - Early 2017 data show recovery in exports, tourism receipts, and remittances relative to 2016. - Inflation dynamics and recent tax measures: - Inflation fell from 3.1 percent y-o-y at end-2013 to -2.2 percent y-o-y in June 2016. - Core inflation fell from 4.3 to 1.7 percent. - Inflation rebounded to 4.6 percent in February 2017 and eased to 3.5 percent in April 2017. - Labor market deterioration: - Unemployment rose to close to 16 percent in 2015–16 (highest in at least 10 years). - Unemployment by group: women 24.8 percent; youth 36.1 percent. - Labor force participation was 35.6 percent in 2016Q4; employment rate was 30 percent. - External sector and exchange rate: - Current account deficit (excluding grants) was 12.6 percent of GDP in 2016. - Real effective exchange rate appreciated by 16 percent from end-2013 to end-April 2017. - Fiscal position and public enterprises: - Combined deficit of central government and NEPCO declined from 9.2 percent of GDP in 2014 to 3 percent of GDP in 2016. - Central government primary deficit fell from 4.6 to 3.4 percent of GDP. - NEPCO returned to cost recovery by late 2015 and achieved an operating surplus in 2016. - Public debt reached 95.1 percent of GDP at end-2016. - Monetary policy stance: - CBJ reduced policy rate from 3.5 percent to 2.5 percent up to early 2016, later returned to 3.5 percent by November 2016. - Deposit dollarization rose from 17 percent at end-June 2016 to about 19.5 percent. - Government issued $500 million in U.S. dollar-denominated domestic bonds on March 8 and re-opened its 2015 Eurobond for an additional $500 million on April 24. ### CAUSES AND STRUCTURAL CHALLENGES - Principal external shocks and impacts: - Protracted conflicts in Syria and Iraq reduced exports, tourism, transportation, and investor confidence; hosting 1.3 million Syrians (about half registered refugees) has substantial budgetary costs. - Closing of the border in 2015 deprived Jordan of its main export route and market. - Slowdown in the Gulf Cooperation Council reduced exports, tourism, remittances, and non-resident deposits. - Longer-term performance issues: - Per capita income remained relatively stable since 2008 due to weak investment and productivity growth. - Structural challenges include widespread, costly, and ineffective tax incentives that need reconsideration. ### PROGRAM IMPLEMENTATION AND DONOR SUPPORT - Overall program status: - Program implementation progressed with a reassuring fiscal outturn in 2016 and some structural reforms, but international reserves were below target. - Completion of the first review makes available SDR 51.465 million (about $71 million). - Fiscal outturn and budget implementation: - End-December performance criterion on the central government primary deficit was met; primary balance (excluding grants) was ½ percentage point of GDP better than programmed. - Achieved fiscal improvement partly through cuts in capital expenditures and lower repayments of health and fuel arrears; social spending fell short of the indicative target; military spending exceeded projections. - Utilities performance: - NEPCO operating profits were JD 107 million (0.4 percent of GDP) above program projections; breakeven oil price estimated at $51 to $53 per barrel. - WAJ overall deficit was smaller by JD 75 million (0.3 percent of GDP), mainly due to lower capital expenditures. - Reserves and net international reserves (NIR): - CBJ NIR amounted to $12.7 billion (at program exchange rates) at end-2016, about 1.1 billion lower than the adjusted performance criterion. - NIR underperformance increased slightly in 2017Q1 to $1.2 billion shortfall. - Shortfall mainly reflected commercial banks’ accumulation of net foreign assets in response to higher deposit dollarization and declines in non-resident deposits. - Donor support: - Continued donor support is critical to program success given pressures from regional conflicts and Syrian refugees; additional budgetary grants are needed to alleviate pressures and meet debt reduction and inclusive growth objectives. ### STRUCTURAL REFORMS AND BENCHMARKS - Progress and shortfalls: - Adopted an automatic electricity tariff adjustment mechanism in October and published a study on cross-subsidization and tariff reform options in December. - Met structural benchmarks on reorganizing the public debt directorate and implementing a risk-based framework for offsite AML/CFT supervision. - Adopted and published an updated action plan for the water sector (end-December 2016 benchmark). - Delays observed in: submission to parliament of draft inspection law; amendments to the income tax law; amendments to the deposit insurance law; enactment of secured lending, insolvency, and insurance law amendments. - Consolidation of trust accounts (end-February benchmark) expected by mid-June; publication of study on financial inclusion (end-March benchmark) expected by end-September 2017. - Complementary reforms needed: - Ongoing reforms to preserve financial stability, ease access to finance, and improve the business environment need to be complemented by labor market reforms. ### MACROECONOMIC POLICY PRIORITIES - Fiscal consolidation and reforms: - Fiscal consolidation and reforms are critical to place public finances on a sounder foundation and reduce public debt. - Reforms should mitigate social implications from economic slowdown and higher unemployment while providing a foundation for structural reforms to enhance inclusive and higher growth. - Monetary and financial stability: - Prudent monetary policy is essential to preserve macroeconomic stability, bolster investor confidence, and strengthen the external position. - Measures to promote lending to SMEs and targeted initiatives have helped revive credit to the private sector, particularly corporates. - Inclusive growth and structural agenda: - Policies and reforms should: enhance conditions for higher and more inclusive growth; preserve macroeconomic and financial stability; advance gradual fiscal consolidation while mitigating impacts on the poor. - Specific areas highlighted for reform include: access to finance and financial inclusion; employment through labor market reforms; improving the business climate and governance. ### STAFF AND MISSION - Mission team composition and outreach: - Mission teams included Martin Cerisola (head), Edouard Martin (head of the advance team), Andrew Tiffin, Maximiliano Appendino, Marco Rossi, Ferhan Salman (all MCD); Nelson Sobrinho and Pablo Morra (SPR); Helen Wagner (MCM); and Saji Thomas (FAD); assisted by Ramsey Andrawis and Cecilia Pineda. - Missions were joined by Sami Geadah (Alternate Executive Director) and Léa Hakim (World Bank); outreach support included Wafa Amr and Angham Al Shami (COM) for the October mission. - Staff met with Prime Minister Hani Al-Mulki and Ministers and senior officials across finance, central bank, planning, energy, industry, tourism, labor, water, municipal authorities, civil society, trade unions, academia, media, private sector, and development partners during October 25–November 8, 2016 and May 2–11, 2017. *June 6, 2017 — International Monetary Fund* ### 6. Notwithstanding past progress, Jordan continues to face high vulnerabilities and ### 6. Notwithstanding past progress, Jordan continues to face high vulnerabilities and ### Macroeconomic outlook and key projections - Real GDP growth revised down to 2.3 percent in 2017 (about 1 percentage point lower than anticipated at the onset of the program). - Over the medium term, growth is expected to increase gradually to 3 percent (1 percentage point less than initially envisaged). - Headline and core inflation will stabilize at a moderate level as removal of tax exemptions and other price shocks fade, and global food inflation eases over the medium term. - The current account deficit is expected to decline gradually; over the medium term the current account deficit is expected to fall to about 6 percent of GDP. - The program aims to bring public debt down to 77 percent of GDP by 2022 (one year later than initially envisaged), which would require additional measures beyond the program period of about 1 percent of GDP in 2020. - The pace of adjustment over the program period should remain in line with the path envisaged at the time of the EFF request (at about 1.5 percent of GDP a year), with no scope for back-loading or easing the adjustment profile. ### Risks and external environment - Major downside risks include: escalation of regional conflict (weighing on exports, tourism, investor confidence, and FDI); additional refugee inflows (increasing fiscal, infrastructure, and service pressures); spillovers from GCC corporate and financial-sector stress; and a surge in the U.S. dollar undermining competitiveness and leading to real exchange rate overvaluation. - Program implementation risks are heightened by the difficult regional, security, and socio-political environment. - On the upside, potential positive channels include greater investment in nonrenewable energy (including shale oil), importation of cheaper natural gas from Mediterranean sources from 2019, involvement of Jordanian businesses in reconstruction of Syria and Iraq, faster engagement with the EU agreement, and implementation of the agreement with Saudi Arabia on large investment projects. - Continued donor support is critical. Further budgetary grant support of at least $600 million is needed in the second half of 2018 to alleviate spending pressures and provide financing assurances; without such support, the prospects for a 2018 turnaround in the public debt-to-GDP ratio remain at risk. ### Fiscal performance and consolidation strategy - Authorities met the two end-December 2016 fiscal performance criteria; the criterion on the combined public deficit had been met by a significant margin (0.9 percent of GDP). - The 2017 budget law is more ambitious in adjustment than program targets, though composition differs from EFF expectations (reduced reliance on removal of GST and customs-duties exemptions). - A gradual pace of fiscal consolidation will continue, aiming to place public debt on a firm downward path; program remains committed to consolidation beyond the program period. - If growth exceeds projections, part of any fiscal over-performance should be saved to retire debt; the consolidation path may be revisited in 2018–19 if macroeconomic conditions warrant supporting growth. ### Revenue, equity, and tax-administration reforms - Main focus: broaden the tax base (amend income tax law in 2017 and remove additional GST and customs duties exemptions in 2018–19), supported by measures to tackle tax evasion and contain non-priority current expenditures while preserving social and capital spending. - Specific measures: - Gradual removal of tax exemptions: basic food products and medicine will remain exempt; targeted compensation measure and strengthened social safety net to be established with Fund/World Bank assistance. - Amend income tax law to broaden base and increase progressivity: aim to reduce income tax thresholds toward international standards; increase taxation of other income sources; make personal income tax schedule more progressive; unify corporate income tax rates for nonbank corporations and align with maximum personal income tax rate. Timetable: submit draft to parliament by end-September 2017 (structural benchmark, reset from end-2016); enact by end-November (structural benchmark, re-set from end-March 2017); come into effect in 2018. - Step up tax compliance: action plan to tackle tax-administration weaknesses identified by the joint IMF-USAID Tax Administration Diagnostic Assessment Tool; accelerate improvements to PAYE for large taxpayers (end-March 2018 benchmark); improve taxpayer registration; stiffen penalties for evasion; increase compliance among self-employed persons. Authorities working on creation of a Financial Crime Investigation Unit. - Contextual figures: With about 95 percent of the population not paying income taxes, and according to USAID only 7 percent of wage earners filed a tax return in 2015. ### Expenditure management, arrears, and social protection - Contain wage bill growth and better target transfers while strengthening social safety nets; manage nominal growth of public wage bill in line with inflation and program commitments. - Continue plan to clear government energy and health arrears by 2019; 2017 budget allocation for arrears clearance was increased significantly. As of end-2016, the combined stock of health and fuel arrears amounted to 2.4 percent of GDP. - Improve targeting of social safety net programs to mitigate impact of adjustment on the poor and most vulnerable; authorities adopted a more gradual approach to removing exemptions given post-Karak security and socio-economic environment, with stepped up social protection intended for 2018–19. ### Structural fiscal reforms and governance - Published medium-term public debt management strategy (MTDS, end-September structural benchmark) and prepared ahead of schedule an action plan to restructure the Public Debt Directorate (PDD, end-December benchmark) to raise average maturity of domestic debt and enhance market access. - Strengthened public financial management: implemented phase II of IPSAS roadmap (mid-November 2016 structural benchmark); prepared cash flow statements on a cash basis; will focus on phases III–VI concerning accounting and reporting of all assets and liabilities and prepare cash flow statements on an accrual basis. - Improved transparency: included detailed estimates of tax expenditures in 2017 draft budget law; reclassified and will consolidate trust accounts into fiscal tables published in the government finance bulletin starting in June 2017 (reset to mid-June benchmark). - Consideration of additional reforms: Minister of Finance sees merits in adopting some type of fiscal rule in coming years to enhance predictability and anchor fiscal policy; public expenditure review recommended to identify expenditure rationalization and support consolidation. ### Program implementation and conditionality - Macroeconomic framework is more conservative relative to the EFF request due to lower-than-expected 2016 growth, reduced reserves, and dim prospects for regional improvement; program assumes no significant change in external outlook from resolution of conflicts in Iraq and Syria. - Despite difficult environment, staff emphasized maintaining the adjustment pace (~1.5 percent of GDP per year) and high-quality measures; agreed that some measures in 2017 (fuel excises increase, rationalization of non-priority current spending) were of good quality. - Continued progress in implementing macro-critical fiscal and structural reforms is key; slippages could undermine prospects for competitiveness and economic performance in the event of an improved regional environment. *International Monetary Fund — Jordan staff report excerpt.* ### 17. The authorities emphasized the need to accelerate public investment but recognized ### 17. The authorities emphasized the need to accelerate public investment but recognized ### Public investment, PPPs, and fiscal risks - With limited fiscal space and a declining share of capital expenditure, Jordan has increased its reliance on Public Private Partnerships (PPPs) over the past several years. - An IMF technical assistance mission found a large efficiency gap relative to other emerging markets, particularly in infrastructure, with public investment being highly procyclical and volatile. - Jordan has one of the largest stocks of PPPs among emerging markets. - Staff recommendations and concerns: - Strengthen the planning, allocation, and implementation of public investment. - Emphasize improving the quality of strategic planning, oversight and disclosure practices in PPPs, and public sector companies’ governance to contain and minimize fiscal risks. - Urged authorities to better assess contingent liabilities for all projects and sectors with a consolidated view. - Staff expressed concerns about temporarily exempting critical sectors (water and electricity) from the PPP law and discouraged such exemptions. ### The sustainability of the electricity sector - Authorities view the new automatic electricity tariff adjustment mechanism as important to help preserve NEPCO’s operational cost recovery and reduce vulnerability to exogenous shocks (Box 5 and MEFP, ¶8). - Key findings and measures: - The shift to LNG had a higher-than-expected positive impact on NEPCO’s operational breakeven Brent oil price—staff estimates it at $51–53 per barrel—while lowering sensitivity to oil price fluctuations. - Based on a study on cross-subsidization and tariff adjustment options (end-September structural benchmark), the authorities: - Adopted a new automatic tariff adjustment mechanism (mid-December structural benchmark) which considers the system’s overall costs (power plants, NEPCO and distributors) and provides for monthly adjustments in tariffs based on costs over the previous three-month period to ensure NEPCO’s operational balance over the calendar year. - Reduced cross-subsidies by lowering tariffs on high-end consumers. - The Energy and Minerals Regulatory Commission (EMRC) has started implementing the mechanism and, based on NEPCO’s results and Brent oil prices in the first few months of the year, kept electricity tariffs unchanged in April and in May. - Decisions on distribution of tariff adjustments among consumer categories will be guided by scenarios in the cross-subsidization study. - Implementation of the mechanism will be monitored by the World Bank and Japan’s International Cooperation Agency for at least two years. - EMRC is preparing a comprehensive study to improve the sector’s overall tariff structure, expected to be finalized by end of 2017. ### The sustainability of the water sector - The updated action plan to reduce the water sector’s losses was adopted by Cabinet and published (MEFP, ¶8). - The updated plan: - Takes into account additional demand from Syrian refugees, past and possible future electricity-tariff increases, and substantial capital expenditure requirements. - Aims to bring WAJ and distribution companies to operational and maintenance cost recovery by 2020 through enhanced revenue collection, energy efficiency, and greater use of renewables. - Progress and expectations: - Authorities made further progress on cost-reducing and revenue-enhancing measures under initial and updated plans and expected WAJ and distribution companies to reach close to 90 percent of operational cost recovery by end-2017. - Staff noted the importance of assessing upside risks to water tariffs given risks of higher generation costs and tariffs in the electricity sector. - Ministry of Finance and WAJ are discussing a first draft of WAJ’s debt management strategy, with donor support, to centralize WAJ’s debt management and capital investment financing while covering WAJ’s operational and maintenance deficit through budget transfers from 2018 onward. - Household expenditure distribution (Average Share of Total Expenditure on Electricity and Water Across the Income Distribution): - Income Quintile — Electricity Share — Water Share 1/ — Difference to the Poorest Quintile for Electricity — Difference to the Poorest Quintile for Water - 1 (poorest) — 1.7 — 1.4 — 0 — 0 - 2 — 1.5 — 1.2 — -0.2 — -0.2 - 3 — 1.5 — 1.0 — -0.2 — -0.4 - 4 — 1.3 — 0.9 — -0.4 — -0.5 - 5 (richest) — 1.3 — 0.8 — -0.4 — -0.6 - Source: World Bank calculations based on the Household Income and Expenditure Surveys of 2010 from the Department of Statistics of Jordan. - 1/ It only includes water and wastewater services provided by WAJ and its distribution companies. ### Preserving monetary and financial stability - Authorities remain fully committed to keeping the exchange rate peg, supported by adequate reserves, as the anchor for monetary and macroeconomic stability (MEFP, ¶14). - Preserving the peg: - Staff emphasized the critical need for fiscal adjustment—along with continued donor grants and concessional financing—to facilitate external adjustment. - Authorities agreed that while absorbing large, adverse, and sequential external shocks is challenging, the peg still provides a critical anchor. - Greater exchange rate flexibility was judged not conducive to a socio-politically viable external adjustment because: (i) limited impact on exports due to constrained access to key trading partners by conflict; and (ii) would place adjustment burden on imports and heighten uncertainty, harming growth and internal stability. - Over the medium term, if the challenging external environment persisted, authorities might need to consider recalibrating policies to facilitate external adjustment. - External position assessment: - Staff assessed Jordan’s external position to be weaker than warranted by fundamentals and desirable policy settings, indicating an overvaluation of the real exchange rate of 2-22 percent—depending on the methodology used (Annex II). - Authorities viewed the overvaluation on the lower side of the estimated range. - Implementation of appropriate policies, especially continued fiscal consolidation and competitiveness-enhancing structural reforms, should help reduce external imbalances over the medium term and support the peg. ### Monetary policy stance and liquidity - Authorities view monetary policy as instrumental in reviving credit growth in 2015–16. - CBJ’s gradual reduction in policy rates and increased gap between policy and deposit window rates redirected excess liquidity toward added lending and lowered deposit and lending rates. - CBJ scaled up credit facilities to SMEs with donor support and opened subsidized medium-term funding to Islamic banks for priority sectors. - Since mid-2015, CBJ allowed the interbank rate to hover below the policy rate; the rate differential was gradually reduced from 75 bps in May 2016 to 30 basis points in May 2017. - Staff cautioned that a persistent gap between policy and interbank rates could create uncertainty about future monetary stance and undermine CBJ’s policy signaling. - In view of pressures on reserves and rising U.S. interest rates, CBJ has appropriately started tightening its monetary stance to support the peg by maintaining adequate reserves. - Reserves and dollarization have stabilized recently, but rebound in deposit dollarization and further declines in nonresident deposits cannot be ruled out. - Authorities stated readiness to increase policy rates if needed. - This stance, along with a decline in the current account deficit and greater government reliance on foreign currency borrowing than envisaged at EFF request time, will help support domestic liquidity and contribute to a gradual build-up of reserves toward 125 percent of the reserve adequacy metric over the medium term. ### Banking system resilience and supervision - The banking system remains well capitalized, profitable, and robust to shocks. - Capital adequacy ratio: 19 percent, well above the regulatory minimum of 12 percent (MEFP, ¶15-16). - Liquidity buffers remain comfortable. - Banks have healthy profitability and built-up provisions; non-performing loans have been gradually declining, partly reflecting write-offs and restructuring. - Credit gap: about -5 percent at end-2016. - Financing provided by the banking sector to the government declined from 40.7 percent of GDP at end-2015 to 37.6 percent of GDP at end-2016 and is expected to fall further with fiscal consolidation and a shift to external borrowing over the medium term. - These factors provide room for further expansion of credit over the medium term without triggering the need for increased capital requirements. - Average loan-to-value (LTV) ratio on mortgages declined to 66 percent in 2015. - Staff view: In absence of undue increases in housing prices or NPLs, no immediate action required, but CBJ should remain vigilant and monitor closely. - Stress tests and vulnerabilities: - CBJ-conducted stress tests (sensitivity analyses and macroeconomic scenarios) confirm resilience to sizeable shocks: significant drop of GDP growth, increased NPLs, fall of stock prices, depreciation of the dinar, and withdrawal of deposits. - Stress tests underline the need to monitor credit-concentration and interest-rate risks. - Severe and protracted shocks (persistently low growth and significantly higher interest rates) would markedly affect asset quality and capitalization, though current high capitalization and profitability provide an important buffer. - Strengthening supervisory framework (MEFP, ¶17): - CBJ issued Basel III regulations on capital requirements in November. - Finalizing regulations on domestic systemically important banks and has conducted a quantitative impact study of liquidity coverage ratios as a first step toward liquidity regulations. - CBJ is confident banks’ capital and liquidity buffers will allow smooth compliance with new requirements. - Supervision framework for microfinance institutions progressing; CBJ working with these institutions on licensing requirements. - Transfer to CBJ of insurance sector supervision expected to be finalized in early 2018. - Balance sheet analysis of the Jordanian economy identified issues: increasing reliance of the government on financing from the Social Security Investment Fund (SSIF); limited size of the nonbank financial sector (excluding the SSIF); need to improve sectoral balance sheet data. - AML/CFT progress (MEFP, ¶18): - CBJ started implementing a risk-based framework for offsite supervision for banks and money exchange firms and is establishing a similar framework for onsite supervision. - AML/CFT unit reviewed the AML/CFT law and drafted amendments to align it with FATF standards. - National Risk Assessment initiated with Fund technical assistance, expected to be finalized by end-year. ### Enhancing conditions for inclusive growth - Economic and labor market challenges: - Low growth and high unemployment; labor force participation declined; unemployment increased; informality rose due to large influx of Syrian refugees. - Youth and female employment rates near 10-year lows. - Female labor force participation: 13.1 percent in 2016 — one of the lowest among emerging markets and Middle East economies. - Poverty likely not abated since 2010, when an estimated 14.4 percent of population was below the poverty line and about 33 percent of households experienced “transient” poverty. - Gini coefficient: 33.7 (as of 2010). - Three-pronged strategy to strengthen inclusive growth (measures are highly complementary): - (i) Facilitating access to finance. - (ii) Active labor market policies and reforms. - (iii) Improving the business environment and governance. - Objectives and measures: - Strengthen private sector firm-level productivity, integrate firms into the economy, enhance access to credit particularly for SMEs (SMEs comprise about 95 percent of the corporate sector), facilitate insolvency resolution and collateral requirements, and promote financial literacy. - Enhance conditions for part-time employment, reduce cost of labor and the gender gap, simplify customs and trade regulations. - Reforms to enhance innovation and reduce the gender gap could significantly increase medium-term growth. - Complement reforms with Jordan Compact initiative to promote job creation for Jordanians and Syrian refugees in Special Economic Zones. ### Facilitating access to finance and financial inclusion - Authorities focused on facilitating access to finance (MEFP, ¶21). - Financial inclusion indicators suggest large potential benefits from reforms that facilitate access, promote innovation, and enhance financial literacy. - Progress and measures: - Established a credit bureau which is receiving data from all banks and some other financial institutions and has started compiling credit reports. - Bureau will expand data collection to other nonbank financial institutions and to public utilities and aims to start issuing scores in late 2017/early 2018. - Secured transactions law (end-March 2017 structural benchmark) expected to allow the use of moveable assets as collateral; enactment likely by end-August 2017. - Additional resources allocated by CBJ and commercial banks to finance Jordan Loan Guarantee Corporation (JLGC) operations. - Forthcoming creation of a $100-million fund (jointly financed by the CBJ and the World Bank and managed by the JLGC) to provide equity financing to SMEs and start-ups. ### Promoting employment through labor market reforms - Authorities recognize high unemployment risks and prioritize labor market reforms. - Measures undertaken: - Adopted a National Strategy for Human Resources Development outlining a 10-year plan to improve elementary, higher, technical education, and vocational training. - Minister of Labor updated recommendations of the 2011 National Employment Strategy to address skills mismatches, promote gender equality, and reform public sector hiring. - A decree providing more flexible working hours issued in March. - To promote female employment: - Authorities require large companies to provide childcare facilities within their premises. - Submitted to parliament amendments to the labor law to allow companies to pool resources and set up joint nurseries and to increase penalties for noncompliance. - Started establishing new nurseries in the special economic zones. - Staff suggested amendments should include allowing firms the option to subsidize childcare if onsite or joint nurseries face impediments and recommended establishing publicly funded nurseries for low-income employees working in SMEs. - Authorities are following up on the Prime Minister’s 2014 directive for establishing nurseries in all public sector institutions. *IMF staff summary based on the provided chapter content.* ### 28. Staff stressed the critical importance of promptly exploring options and advancing ### cr17231 - 28. Staff stressed the critical importance of promptly exploring options and advancing ### Labor market reforms, informality, and social security - Staff stressed the critical importance of promptly exploring options and advancing reforms to reducing costs for formal job, especially for the youth and women, and promote job creation (MEFP, ¶22). - Policy options discussed: - A cut in social security contributions rates, and a revamped business-inspection law to address informality—reducing small businesses’ costs, and lowering the burden on employees stemming from the authorities’ tax reforms. - A temporary reduction in social security contributions combined with parametric reforms to strengthen the Social Security Corporation’s (SSC) ability to meet its future obligations. - As an alternative, adopting an income tax credit targeted at promoting formal jobs. - Authorities’ stance and actions: - Authorities agreed such a reform could help promote employment and tackle informality but remained concerned about implementation risks given recent efforts to strengthen the SSC’s financial position following legislative amendments in 2014. - Authorities agreed to support a study (to be led by an independent party) by end-March 2018 (structural benchmark) on options for temporarily lowering social security contributions, and for possible offsetting parametric reforms to maintain or even strengthen the Social Security Corporation’s (SSC) actuarial position. - Authorities have taken steps to rationalize the inflow of new (non-refugee) foreign workers and have promoted vocational training to reduce skill mismatches, increase youth employment, and expand livelihood opportunities for Syrian refugees. - Relevant technical guidance referenced: - Selected Issues Paper on some international experience with payroll tax cuts and their potential benefits for Jordan’s labor market. - An actuarial review of the SCC conducted in 2015 by the ILO recommended parametric changes, including: a lengthening of the reference period for assessing average earnings; a lowering of pensions accrual rates; making early retirement pensions less generous; and gradually increasing the normal retirement age. ### Improving the business climate and governance - Focus of reforms: reducing the cost of starting and operating a business (MEFP, ¶20). - Recent and planned measures: - Make the investment window of the Jordan Investment Commission fully operational by end-June 2017 (benchmark) via the new “one-procedure one-form“ registration process and standardized business classifications. - Draft inspection law—following extensive consultations with the private sector, likely to be submitted to parliament before end-August 2017 (end-October 2016 benchmark). - Reviewing the competition framework to ensure independence of relevant agencies to monitor and enforce good market conduct. - Export opportunities and actions: - Relaxation of rules of origin for exports to the EU in July 2016 seen as an important opportunity to diversify markets and broaden the product mix (MEFP, ¶24). - Authorities conducted 25 workshops on the agreement to raise local awareness and are working towards setting an export house to assist exporters to the EU, to be followed by an export diversification strategy in advanced economies. - Study on export diversification expected to be published by end-June 2017; exports-to-GDP ratio declined from 36 percent in 2008 to 20 percent in 2015. ### Program risks, targets, and financing - Performance criteria and targets: - Performance criteria for end-June and end-December 2017, and indicative targets for end-September 2017, end-March 2018, and end-June 2018 proposed as per Table 1b of the MEFP; definition and number of targets unchanged. - Some delayed structural benchmarks were re-set, while new ones were set through mid-2018 (Table 2 of the MEFP). - Financing gap and composition: - The financing gap estimated for 2017 and the first half of 2018 is about $1.7 billion, of which $0.4 billion would be covered by the Fund, $0.9 billion would be financed by loans from the World Bank and official bilateral donors, and $0.4 billion by off-budget grants under the Jordan Compact (for resilience and programmatic support). - Financing assurances for 2017 and the first half of 2018 have been obtained from these donors. - Remaining unidentified budget grant financing needed for the second half of 2018 is critical and expected to be mobilized as part of donors’ commitments made at the London Conference in early 2016 and reiterated at the Brussels Conference in 2017. - Reserves and NIR: - Authorities did not meet the end-December 2016 performance criterion on the CBJ’s NIR and are not expected to be able to fully compensate this NIR shortfall through 2017. - Corrective actions included increasing policy rates; accumulation of NIR recalibrated to follow a more gradual pace over the program period. - Initial path for gross usable reserves remains attainable under the baseline, projected to approach 125 percent of the RAM towards the end of the program. - Re-phasing of Fund access and reviews: - Due to delays in concluding the first review, program re-phased: the program would now have five instead of six reviews, with the access envisaged under the sixth review (of 20 percent of quota) reallocated to the four remaining reviews (Tables 6, 7, and 8). - Capacity to repay and Fund exposure: - Jordan’s capacity to repay the Fund remains adequate; Jordan has continued to meet its repayments’ obligations. - Fund credit is projected in 2017 at 11.8 percent of exports of goods and non-factor services (GNFS) and declining to below 7 percent of the exports of GNFS in 2019. - Repayments will peak at 3.8 percent of exports of GNFS in 2017. - External arrears: - Jordan has outstanding arrears to an official bilateral creditor, deemed away under the Fund’s policy on arrears to official bilateral creditors; staff encourages authorities to seek a Paris Club-comparable treatment from the creditor. - External Financing Gap table highlights (in US$ million): - Financing gap (Prog., Proj. rows shown): 2,361; 1,453; 1,490; 3,210; 96; 274; 3,947; 4,858. - IMF: 288; 230; 192; 276; 96; 115; 576; 622. - Identified financing: 1,052; 1,222; 937; 1,076; 0; 159; 1,989; 2,378. - World Bank 1/: 140; 304; 447; 364; 0; 0; 587; 668. - EU and bilateral loans: 435; 520; 171; 477; 0; 80; 606; 1,076. - Jordan Compact off-budget grants: 477; 399; 319; 235; 0; 0; 796; 634. - Unidentified multilateral and bilateral financing: 1,021; 0; 361; 1,858; 0; 0; 1,382; 1,858. - Of which: expected as budget grant financing: 323; 0; 361; 608; 0; 0; 684; 608. - Of which: expected as debt financing 2/: 698; 0; 0; 1,250; 0; 0; 698; 1,250. - Source: Fund staff projections. 1/ Including the grant component under the Concessional Financing Facility. 2/ Including through issuance of Eurobonds. ### Safeguards, monetary policy, and financial sector resilience - Safeguards: - An updated safeguards assessment of the CBJ was completed in November 2016 (MEFP, ¶26); CBJ continues to strengthen its safeguards framework via amendments in the central bank Law that reinforced governance and established independent oversight of audit mechanisms and internal controls. - Financial reporting practices have a narrow deviation from the International Financial Reporting Standards with respect to the revaluation differences; staff recommended explicit disclosure of the deviation in the financial statements, including the impact on the financial position. CBJ is making good progress implementing recommendations. - Monetary policy and financial sector: - Monetary policy appropriately focused on supporting the peg; staff encouraged by ongoing reforms to preserve the financial sector’s resilience. - With a tight balance of payments and prospects for further increases in U.S. interest rates, authorities must be ready to further increase the interest differential with the United States if pressures on reserves arise. - Banking system buffers: high levels of capitalization and profitability provide important buffers. - Risks to monitor: potential impact of higher interest rates and rapid increase in household credit. - Regulatory reforms: gradual move to Basel III plus a 1.5-percent capital buffer to bolster resilience; strengthening supervision of insurance companies and microfinance institutions. - Staff encourages consideration of an update to the 2008 Financial Sector Assessment Program within the next two years. ### Staff appraisal, fiscal strategy, and structural reforms - Macroeconomic outlook and challenges: - Significant progress in preserving macroeconomic stability and external viability; exchange rate peg an important anchor; reserves at comfortable levels; financial system sound and well capitalized. - Remaining challenges: real GDP growth below potential, high and rising unemployment (particularly for youth and women), elevated public debt, and more difficult social conditions. - Regional conditions (protracted conflicts, refugee crisis) weigh on sentiment, public finances, investment, and the external current account deficit. - Jordan’s productivity and per capita income growth have lagged other emerging markets since the aftermath of the global financial crisis, necessitating policy rethinking to boost investment and productivity, put public debt on a sustainable path, and enhance fairness and socio-economic conditions. - Fiscal strategy and priorities: - Program rightly focused on gradual and steady fiscal consolidation, led by reforms to the tax-exemptions framework and income tax, to preserve macroeconomic stability, stabilize and reduce public debt, and lessen debt sustainability risks. - Fiscal strategy and adjustment critical to address exchange rate overvaluation and preserve external sustainability; will strengthen external position and bolster investor confidence. - Progress toward reducing public debt on a downward path is significant but delayed for some macro-critical reforms. - Further removal of GST and customs duties exemptions and amendments of the income tax law will help close a significant part of the fiscal gap for 2018-19. - Other reforms: tackle tax evasion, limit non-priority current expenditures, increase reliance on Public Private Partnerships to close remaining fiscal gap through 2019. - Sectoral and administrative reforms: - Measures to better target procurement of free health services need prompt implementation to avoid recurrence and to promote reduction of arrears. - Adoption of new automatic electricity tariff adjustment mechanism is key to sheltering NEPCO’s operational balance from oil price fluctuations; EMRC needs to implement promptly and explore options to optimize cross-subsidization, including replacement of price subsidies for low consumers by mean-tested credits for the poor. - Updated action plan to reduce water sector losses should be implemented promptly, along with an assessment of risks from higher electricity costs to water tariffs. - Financial inclusion and business environment: - Development of a financial inclusion strategy, initiatives to support credit to SMEs, and enactment of the secured transactions law will help broaden financial access (especially for women, the poor, and SMEs), increase synergies between financial deepening and economic development, and lower borrowing costs. - Government should expedite reforms to simplify regulatory processes, improve legal stability and predictability, and enact the inspection law. - Ambitious reforms necessary to lower the formal cost of labor; a fiscally neutral reduction in social security contributions and/or an employment tax credit could help promote formalization of jobs, particularly for youth and women. - Donor support and risks: - Continued donor support through budget grants remains critical to program success, given pressures from hosting Syrian refugees. - Risks remain sizeable and skewed to the downside: external risks from persistence or intensification of conflicts in Syria and Iraq, impact of GCC adjustment, rebound in oil price, or sharp appreciation of the U.S. dollar could put additional pressure on external accounts. - Recent agreement with the EU is an important step toward increasing exports and providing an opportunity to boost growth and employment. - Program endorsement: - Staff supports completion of the first review and the proposed re-phasing of access. - Staff supports waiver of nonobservance of end-December 2016 performance criterion on the NIR of the CBJ, given corrective actions taken by authorities, including further tightening of the fiscal stance in 2017 and increases in CBJ’s policy rate, and CBJ’s commitment to tighten further if pressures on reserves persist. - Proposed next Article IV consultation with Jordan to take place on a 24-month cycle in accordance with Decision No. 14747-(10/96), as amended. *International Monetary Fund staff summary based on the provided chapter content.* ### Box 2. Jordan: Risk Assessment Matrix ### Box 2. Jordan: Risk Assessment Matrix ### Intensification of the risks of fragmentation/security dislocation in part of the Middle East, Africa, and Europe (Short-to-Medium Term) - Likelihood of realization in the next three years: High - Expected impact on economy if risk is realized: Medium-High - Trade with Iraq and Syria has been affected strongly. - Although the influx of refugees has mostly stopped, there are over 600 thousand registered refugees in Jordan; and the authorities estimate that the total number is substantially higher (1.3 million). - Jordan’s role in the coalition against ISIS is increasing security spending. - Escalation of the regional conflicts could also lead to a sharp rise in oil prices, with negative regional and global spillovers. - Refugees continue to weigh on Jordan’s fiscal accounts, infrastructure, and social fabric. - The persistence of regional conflict could result in further disruptions in external inflows (tourism and FDI), capital outflows, a prolonged interruption in regional trade, and lower growth. - Limited progress integrating refuges into the economy, or renewed refugee inflows, would exacerbate pressures. - As Jordan remains highly dependent on energy imports, substantially higher oil prices would further increase the trade deficit, undermine reserve accumulation, and potentially weaken the finances of key public utilities. - Policy recommendations to mitigate risks: - (1) Higher grants from donors are needed to ensure that the refugees are appropriately cared for, including through complementary central government assistance; - (2) Continuing to implement a strong medium-term program to ease fiscal pressures and instill confidence in the economy; - (3) Maintaining adequate reserve buffers; - (4) Searching for alternative trade routes and markets for Jordanian products; and - (5) Continued diversification of Jordan’s energy mix and maintaining adequate reserves to buffer the impact of higher oil prices. ### Significant further strengthening of the US dollar and/or higher rates (Short-Term) - Likelihood of realization in the next three years: High - Expected impact on economy if risk is realized: Medium-High - A decompression of term premia, or a more rapid Fed normalization could amplify financial market volatility and lead to further strengthening of the dollar. - A dollar surge would put pressure on Jordan’s competitiveness. - Heightened volatility in global financial markets could negatively impact Jordan’s market access, given still sizeable external financing requirements in 2017 and a negative credit outlook for some of Jordan’s credit ratings. - Policy recommendations to mitigate risks: - (1) Maintaining appropriate monetary policy to preserve an adequate level of reserves; - (2) Implementing structural reforms to improve competitiveness; and - (3) Implementing the envisaged fiscal consolidation to reduce borrowing needs, and lower public debt, and preserve creditworthiness. ### Delays in reform implementation (Short-to-Medium Term) - Likelihood of realization in the next three years: High - Nature/source: Potential difficulties in implementing revenue reforms by the central government as well as structural reforms in key sectors. - Expected impact on economy if risk is realized: High - Any delay in consolidation would increase already high financing needs and public debt, and could undermine confidence. - Delays in structural reforms could hurt growth and jobs. - Policy recommendations to mitigate risks: - (1) Staying with reform commitments; - (2) Ensuring strong outreach to relevant (domestic and external) stakeholders; - (3) Develop target compensation mechanisms for vulnerable population segments. ### Donor fatigue (Short-to-Medium Term) - Likelihood of realization in the next three years: Medium-High - Nature/source: A shortage of grants to address the humanitarian crisis and to finance public investment. - Expected impact on economy if risk is realized: High - Lower grants would force Jordan to borrow, adding to the high public debt, and crowding out capital projects and growth. - It could also add to social pressures. - Policy recommendations to mitigate risks: - (1) Continuing to implement public sector consolidation; - (2) Accelerating structural reforms; and - (3) Engaging donors with a view to eventually reduce donor support. ### Pressure on foreign exchange reserves (Medium-Term) - Likelihood of realization in the next three years: Medium - Expected impact on economy if risk is realized: Medium-High - The reserve level could drop in the event of a weakening of confidence and deposit dollarization. - While banks’ net open positions are reportedly small, and lending in foreign exchange to un-hedged borrowers is prohibited, uncertainty could result in large capital outflows, undermining confidence in the peg. - Policy recommendations to mitigate risks: - (1) Maintaining appropriate monetary policy in the near term to preserve reserves; and - (2) Implementing a strong medium-term program with broad national buy-in to instill confidence. ### Structurally weak growth in key advanced and emerging economies (Medium-Term) - Likelihood of realization in the next three years: Medium-High - Expected impact on economy if risk is realized: Low - A medium-term growth slowdown in EMs. Weak demand in the Euro area and Japan, and persistently low inflation, leading to lower medium-term growth. - Limited exposure to other EMs, the Euro area and Japan would mitigate any adverse impact on the current account, but second-round effects from a decline in exports, and tourism from the GCC and Europe could add to current account pressures. - Policy recommendations to mitigate risks: - (1) Accelerating structural reforms to improve competitiveness. *Box 2. Jordan: Risk Assessment Matrix (IMF staff).* ### 18.1 percent, with no banks falling below the threshold. ### cr17231 - 18.1 percent, with no banks falling below the threshold. ### Liquidity risk tests - Two liquidity horizon tests were conducted: a five-day test and a 30-day test to assess banks’ ability to withstand one week or one month of persistent withdrawals. - Simulations included: - a bank run with daily deposit withdrawals for liquidity outflows; and - different haircuts on interbank assets, equities, and government bonds for liquidity inflows. - Five-day test results: - Four small banks will become illiquid after five days of cumulative withdrawal of deposits. - 21 banks remain liquid. - 30-day test results: - Under the 30-day test, all banks would survive the cumulative withdrawal of deposits and loss of wholesale funding and remain liquid owing to sufficient liquidity inflows from the sale of securities. ### Macroeconomic scenario stress tests - Scenarios and calibration: - A baseline scenario and two adverse scenarios (mild and severe) were calibrated based on historic data and IMF staff’s judgement. - Scenarios were translated into shocks to GDP growth, NPLs, interest rates, and equity prices, over a three-year horizon. - The baseline scenario is based on IMF’s World Economic Outlook (WEO) April 2016 projections. - The mild and severe adverse scenarios assume a shock equivalent to one and two standard deviations of real GDP growth from the baseline, respectively, with a (linear) positive adjustment to baseline in the third year after the shock. - Stress-test results (severe adverse scenario): - The system’s capital would fall to 13.2 percent in in the second year. - Four banks (representing 27.6 percent of the banking system’s assets) would fall below the Basel minimum ratio. - The scenario presents a capital shortfall equivalent to 0.9 percent of GDP. - The overall CAR remains above the CBJ threshold. - Notable baseline metric stated earlier in the source: - 18.1 percent, with no banks falling below the threshold. ### Banking sector indicators and related developments (selected) - Capital adequacy ratio: referenced level "18.1 percent" (as above). - Five-day liquidity-test outcome: four small banks illiquid; 21 banks liquid. - 30-day liquidity-test outcome: all banks remain liquid due to liquidity inflows from sale of securities. - Severe stress scenario impact on system capital: fall to 13.2 percent in the second year. - Banks falling below Basel minimum under severe scenario: four banks representing 27.6 percent of system assets. - Capital shortfall under severe scenario: 0.9 percent of GDP. - Overall CAR relative to CBJ threshold: remains above the CBJ threshold. *Source: cr17231 - 18.1 percent, with no banks falling below the threshold.* ### 11.3 percent ### cr17231 - 11.3 percent ### Minimum wage and labor market - Jordan increased the minimum wage by 15 percent to JD220 per month. - 11.3 percent of employees earn less than the new minimum wage of JD 220. - Jordanian minimum wage grew more rapidly than the average wage the last two times it was increased and has been persistently above OECD average. - Unemployment rate (period average, percent): 11.9, 13.1, ... , 15.3 (series shown in Table 1). ### Structural impediments to growth and competitiveness (2016–17) - Conditions for innovation lag others in the region (Global Competitiveness, Doing Business, Global Innovation Index comparisons plotted). - Key impediments identified: - Regional security conditions are a key impediment to competitiveness. - Restrictions on insolvency, collateral requirements, and access to finance are important impediments. - These constraints limit the contribution from the financial sector to growth. - Female unemployment is high for regional standards, "bringing the potential for large gains from promoting female employment." - GDP losses due to economic gender gaps are shown (losses estimated as percent of GDP for selected countries). ### Financial inclusion and access to finance - Only about 25 percent of the population has access to an account in a formal financial institution (Account at a Financial Institution (2014): approximately 25 percent). - Percent of firms with a checking or savings account (2013): majority hold one, but many firms identified access to finance as a major constraint (Percent of Firms Identifying Access to Finance as a Major Constraint (2013) shown). - Branches of commercial banks (Per 100,000 adults) have barely increased over the past decade (series shown for 2004–2014). - Use of mobile accounts for transactions (2014) is low (Used an Account to Make a Transaction Through a Mobile Phone (2014) shown as low in Jordan). - Financial innovation, including mobile banking, needs to be encouraged, and financial literacy needs to be enhanced. - Financial Literacy, 2015 (in percent) vs GDP per capita plotted; Jordan positioned relative to peers. ### Macroeconomic outlook and key projections (selected items from Table 1) - Real GDP at market prices (annual percent change): 2014: 3.1, 2015: 2.4, 2016: 2.8, 2017: 2.0, 2018: 2.3, 2019: 2.5, 2020: 2.7, 2021: 2.9, 2022: 3.0. - GDP deflator at market prices (annual percent change): 2014: 3.4, 2015: 2.3, 2016: 2.2, 2017: 1.0, 2018: 2.2, 2019: 2.5, 2020: 2.5, 2021: 2.5, 2022: 2.5. - Nominal GDP at market prices (JD millions): 2014: 25,437; 2015: 26,637; 2016: 27,972; 2017: 27,445; 2018: 28,705; 2019: 30,170; 2020: 31,759; 2021: 33,497; 2022: 35,365. - Consumer price inflation (annual average): 2014: 2.9, 2015: -0.9, 2016: -0.5, 2017: -0.8, 2018: 3.3, 2019: 1.5, 2020: 2.5, 2021: 2.5, 2022: 2.5. - Overall fiscal balance (percent of GDP): 2014: -10.3, 2015: -5.3, 2016: -3.8, 2017: -3.2, 2018: -2.5, 2019: -0.4, 2020: -0.2, 2021: 1.3, 2022: 1.4. - Government and government-guaranteed gross debt (percent of GDP): 2014: 89.0, 2015: 93.4, 2016: 94.4, 2017: 95.1, 2018: 95.6, 2019: 93.5, 2020: 90.8, 2021: 86.2, 2022: 81.6. - Current account balance (including grants, percent of GDP): 2014: -7.3, 2015: -9.1, 2016: -9.0, 2017: -9.3, 2018: -8.4, 2019: -8.3, 2020: -7.6, 2021: -7.0, 2022: -6.4. - Gross usable international reserves ($ millions): 2014: 14,973; 2015: 15,678; 2016: 15,888; 2017: 14,454; 2018: 14,778; 2019: 16,003; 2020: 17,268; 2021: 18,330; 2022: 19,501. - Gross usable reserves in months of prospective imports: 2014: 7.9, 2015: 8.7, 2016: 8.4, 2017: 7.8, 2018: 7.7, 2019: 8.1, 2020: 8.4, 2021: 8.6, 2022: 8.9. ### Fiscal accounts (high-level selected figures from Table 2a/2b) - Total revenue and grants (JD millions / percent of GDP): - 2014: 7,091 (27.9 percent) - 2015: 6,658 (25.0 percent) - 2016: 7,228 (25.8 percent) - 2017 (EFF): 7,013 (25.6 percent) - 2018 (Proj): 8,003 (27.9 percent) - Total expenditures, net lending, other use of cash (JD millions / percent of GDP): - 2014: 9,658 (38.0 percent) - 2015: 8,005 (30.1 percent) - 2016: 8,291 (29.6 percent) - 2017 (EFF): 7,937 (28.9 percent) - 2018 (Proj): 8,718 (30.4 percent) - Wages and salaries (JD millions / percent of GDP): - 2014: 1,320 (5.2 percent) - 2015: 1,345 (5.0 percent) - 2016: 1,372 (4.9 percent) - 2017 (EFF): 1,368 (5.0 percent) - 2018 (Proj): 1,395 (4.9 percent) - Military expenditure (JD millions / percent of GDP): - 2014: 1,918 (7.5 percent) - 2015: 1,986 (7.5 percent) - 2016: 2,140 (7.7 percent) - 2017 (EFF): 2,215 (8.1 percent) - 2018 (Proj): 2,326 (8.1 percent) - Combined public sector balance (percent of GDP, PC definition): 2014: -10.2, 2015: -7.1, 2016: -5.0, 2017 (EFF): -3.8, 2018 (Proj): -3.2, 2019 (Proj): -1.8, 2020 (Proj): -0.5, 2021 (Proj): 1.2, 2022 (Proj): 1.3. ### NEPCO and WAJ financial positions (selected) - NEPCO operating balance (QPC): 2014: -1,179; 2015: -233; 2016: 58; 2017 (Jul-Aug etc): series showing near zero operating balance projected for 2018–22. - NEPCO outstanding loans and bonds (stocks, end-of-period) (JD millions): 2014: 1,711; 2015: 2,342; 2016: 2,292; 2017 (Eff/Act) around 2,197–2,337; projected 2018–2022 around 2,193–2,205. - NEPCO total payables (JD millions): 2014: 3,406; 2015: 3,122; 2016: 3,030; 2017: 3,149 (series shown). - WAJ overall balance (excluding project grants) (JD millions / percent of GDP): 2014: -247; 2015: -305; 2016: -351; 2017 (EFF/Act): series shown; overall balance and financing table shows ongoing negative balances and need for grants/loans. ### External sector, balance of payments, and financing (selected) - Current account (CA) in $ millions: 2014: -2,612; 2015: -3,415; 2016: -3,566; 2017 (EFF): -3,613; 2018 (Proj): -3,723; 2019 (Proj): -3,411; 2020 (Proj): -3,515; 2021 (Proj): -3,411; 2022 (Proj): -3,311. - Trade balance ($ millions): 2014: -11,983; 2015: -10,352; 2016: -10,226; 2017: -9,536; 2018: -10,285; 2019: -9,703; 2020: -9,732; 2021: -9,899; 2022: -10,195. - Exports f.o.b. ($ billions): 2014: 8.4; 2015: 7.8; 2016: 7.5; 2017: 7.5; 2018: 7.9; 2019: 7.8; 2020: 8.2; 2021: 8.7; 2022: 9.3. - Imports f.o.b. ($ billions): 2014: 20.4; 2015: 18.2; 2016: 17.7; 2017: 17.1; 2018: 17.5; 2019: 17.9; 2020: 18.6; 2021: 19.5; 2022: 20.3. - Energy imports ($ billions): 2014: 5.5; 2015: 3.1; 2016: 2.7; 2017: 2.4; 2018: 3.1; 2019: 3.2; 2020: 3.3; 2021: 3.4; 2022: 3.6. - Remittances ($ millions): 2014: 3,368; 2015: 3,418; 2016: 3,264; 2017: 3,337; 2018: 3,421; 2019: 3,458; 2020: 3,595; 2021: 3,740; 2022: 3,896. - Gross reserves (USD millions): 2014: 16,044; 2015: 16,570; 2016: 16,701; 2017 (EFF): 15,540; 2018 (Proj): 16,648; 2019 (Proj): 15,754; 2020 (Proj): 16,998; 2021 (Proj): 18,276; 2022 (Proj): 19,349. - Gross usable reserves (USD millions): 2014: 14,973; 2015: 15,678; 2016: 15,888; 2017: 14,454; 2018: 15,829; 2019: 14,778; 2020: 16,003; 2021: 17,268; 2022: 18,330. - Current account (percent of GDP): 2014: -7.3; 2015: -9.1; 2016: -9.0; 2017: -9.3; 2018: -8.9; 2019: -8.4; 2020: -8.3; 2021: -7.6; 2022: -7.0. - Current account excluding grants (percent of GDP): 2014: -12.6; 2015: -12.3; 2016: -12.5; 2017: -12.6; 2018: -11.8; 2019: -11.7; 2020: -11.3; 2021: -10.4; 2022: -10.1. ### External financing, reserves, and financing needs - Gross financing requirements (USD millions): 2015: 6,133; 2016: 5,613; 2017: 1,966; projected quarterly and annual needs shown for 2017–22. - Gross financing sources (USD millions): 2015: 6,569; 2016: 4,330; 2017 (Est/Proj): 629; projected sources for 2018–22 shown. - Change in reserves (USD millions): 2015: 772; 2016: -1,105; 2017: -1,285 (projection), with subsequent projected increases and levels shown. ### Monetary and banking indicators (selected) - Broad money (JD millions): 2015: 31,600; 2016: 33,991; 2017 (Act/Proj): 32,860 / 34,303; 2018 (Proj): 31,959; projections through 2022 shown. - Private sector credit (year-on-year percent): 2015: 4.8; 2016: 10.2; 2017: 10.2; 2018: 10.1; 2019: 9.1; 2020: 7.8; 2021: 8.0; 2022: 7.7; 2023: 7.3; 2024: 7.8 (series shown in Table 4a memorandum). - Indicators of bank soundness (Table 5): - Risk-weighted capital adequacy ratio: 2005: 17.6; 2006: 21.4; ... ; 2014: 18.4; 2015: 19.1; 2016 (quarterly) around 18.2–19.0. - NPLs (in percent of total loans): 2005: 6.6; 2006: 4.3; ... ; 2014: 5.6; 2015: 4.9; 2016 (Q1–Q4): 4.7, 4.8, 4.6, 4.4. - Provisions (in percent of classified loans): 2005: 78.4; 2015: 74.7; 2016 (quarterly): 80.2, 76.5, 77.7, 78.2. - Liquidity ratio: 2005: 168.0; 2015: 149.0; 2016 (quarterly) around 147.5–138.1. ### IMF program access, phasing, and capacity to repay - Extended Fund Facility (EFF) access schedule (Table 6, I. EFF Request): - Board approval of EFF (August 24, 2016): SDR 51.465 (15.00 percent of quota). - First Review (November 30, 2016): SDR 51.465 (15.00 percent). - Second Review (March 31, 2017): SDR 102.930 (30.00 percent). - Third Review (September 29, 2017): SDR 102.930 (30.00 percent). - Fourth Review (March 30, 2018): SDR 68.620 (20.00 percent). - Fifth Review (September 28, 2018): SDR 68.620 (20.00 percent). - Sixth Review (March 29, 2019): SDR 68.620 (20.00 percent). - Total: SDR 514.650 (150.00 percent of quota). - Indicators of Fund credit and capacity to repay (Tables 7–8): - Stock of existing and prospective Fund credit (SDR millions, end of period): 2015: 1,332.0; 2016: 1,191.7; 2017: 1,011.6; 2018: 869.3; 2019: 656.7; 2020: 514.7; 2021: 501.8; 2022: 454.6. - Stock of Fund credit in percent of quota: 2015: 781.2; 2016: 347.3; 2017: 294.8; 2018: 253.4; 2019: 191.4; 2020: 150.0; 2021: 146.3; 2022: 132.5. - GRA credit to Jordan (SDR millions): 2015: 1,332.0; 2016: 1,191.7; 2017: 1,011.6; 2018: 869.3; 2019: 656.7; 2020: 514.7; 2021: 501.8; 2022: 454.6. - GRA debt service (SDR millions): 2015: 54.6; 2016: 219.1; 2017: 380.1; 2018: 372.1; 2019: 314.8; 2020: 150.5; 2021: 20.2; 2022: 54.3. ### Policy observations and recommendations (as stated in source) - Promote female employment to capture potential large gains from reducing gender gaps. - Encourage financial innovation, including mobile banking. - Enhance financial literacy. - Address restrictions on insolvency, collateral requirements, and access to finance to improve contribution from the financial sector to growth. - Improve institutions, infrastructure, and conditions for innovation to reduce structural impediments to competitiveness. *Content derived from cr17231 - 11.3 percent (IMF staff report tables and figures).* ### Annex I. Debt Sustainability Analyses ### Annex I. Debt Sustainability Analyses ### A. Assumptions - Macro: - Real GDP growth revised to 2.0 percent in 2016; expected 2.3 percent in 2017; converge to 3 percent over the medium term. - GDP deflator inflation projected to decelerate to 1 percent in 2016 and recover to 2.5 percent over the medium term. - Current account deficit including grants: 9.4 percent of GDP in 2016; medium-term current account deficit about 7 percent of GDP. - International reserves targeted at around 120 percent of the Fund’s reserve adequacy metric. - Fiscal: - Medium-term debt target consistent with a combined public deficit that starts at 3.8 percent of GDP in 2016 and gradually turns into a small surplus by end of the program. - Combined public deficit definition (from the Technical Memorandum of Understanding): sum of (i) primary deficit of the central government, excluding grants and net transfers to NEPCO and WAJ; (ii) net loss of NEPCO; and (iii) overall deficit of WAJ. - Sovereign yields: - External and domestic bond yields expected to remain relatively low in 2016 and gradually increase thereafter. - Maturity, rollover, and market access: - Average maturity of domestic debt increased from 1.5 years in 2015 to 2.5 years in 2016; expectation to reach 3 years in 2017. - Macroeconomic framework incorporates almost $2.2 billion in official loans on concessional terms, and about $0.8 billion in off budget grants under the Jordan Compact over the program period. - Assumes continuation of international market access and gradual recovery in participation of non-residents in local debt markets. - U.S. guaranteed international Eurobonds maturing in outer years assumed to be rolled over on market terms prevailing at respective due dates. - Jordanian banks’ profitability, liquidity and provisioning indicators remain favorable, supporting near-term rollover of domestic debt. ### B. Realism of Projections - Growth and inflation: - Past projections of growth show relatively small forecast errors. - Inflation projection track record shows positive forecast errors, with actual inflation being 2.2 percentage points higher than forecast on average. - Inflation forecast errors expected to be small in the near future due to downward revision for 2016. - Fiscal adjustment: - Jordan’s 3-year average cyclically-adjusted central government primary balance (CAPB) generally in line with other countries; maximum 3-year adjustment is in the top quartile for program countries. - Large observed adjustment reflects actual consolidation under the Stand-By Arrangement and savings from lower oil prices. - 2017–18 Borrowing Plan (as reported) - Borrowing needs (A1+A2): US$ Million 8,956; Percent of GDP 22.1 (2017); US$ Million 6,907; Percent of GDP 16.2 (2018). - A1. Overall deficit: US$ Million 1,480; Percent of GDP 3.7 (2017); US$ Million 668; Percent of GDP 1.6 (2018). - CG overall deficit after grants: US$ Million 1,009; Percent of GDP 2.5 (2017); US$ Million 159; Percent of GDP 0.4 (2018). - NEPCO deficit: US$ Million -1; Percent of GDP 0.0 (2017); US$ Million -1; Percent of GDP 0.0 (2018). - WAJ deficit: US$ Million 473; Percent of GDP 1.2 (2017); US$ Million 510; Percent of GDP 1.2 (2018). - A2. Debt amortization: US$ Million 7,476; Percent of GDP 18.5 (2017); US$ Million 6,239; Percent of GDP 14.7 (2018). - Central government amortization: US$ Million 6,376; Percent of GDP 15.7 (2017); US$ Million 5,148; Percent of GDP 12.1 (2018). - Domestic treasury bills and bonds amortization: US$ Million 5,169; Percent of GDP 12.8 (2017); US$ Million 4,097; Percent of GDP 9.6 (2018). - External debt amortization: US$ Million 1,206; Percent of GDP 3.0 (2017); US$ Million 1,050; Percent of GDP 2.5 (2018). - NEPCO amortization: US$ Million 895; Percent of GDP 2.2 (2017); US$ Million 675; Percent of GDP 1.6 (2018). - WAJ amortization: US$ Million 205; Percent of GDP 0.5 (2017); US$ Million 417; Percent of GDP 1.0 (2018). - Borrowing sources total (B1+B2+B3+B4) equal borrowing needs: US$ Million 8,956; Percent of GDP 22.1 (2017); US$ Million 6,907; Percent of GDP 16.2 (2018). - B1. Rollover of domestic debt: US$ Million 6,769; Percent of GDP 16.7 (2017); US$ Million 5,189; Percent of GDP 12.2 (2018). - Local bonds in USD issuance: US$ Million 500; Percent of GDP 1.2 (2017); US$ Million 0; Percent of GDP 0.0 (2018). - B2. New issuance of domestic debt (CG+NEPCO+WAJ): US$ Million -642; Percent of GDP -1.6 (2017); US$ Million -697; Percent of GDP -1.6 (2018). - B3. Identified external financing: US$ Million 2,828; Percent of GDP 7.0 (2017); US$ Million 1,165; Percent of GDP 2.7 (2018). - Budget loans: US$ Million 1,001; Percent of GDP 2.5 (2017); US$ Million 882; Percent of GDP 2.1 (2018). - Non-guaranteed Eurobond: US$ Million 1,500; Percent of GDP 3.7 (2017); US$ Million 0; Percent of GDP 0.0 (2018). - Guaranteed loans: US$ Million 61; Percent of GDP 0.2 (2017); US$ Million 0; Percent of GDP 0.0 (2018). - Project loans: US$ Million 266; Percent of GDP 0.7 (2017); US$ Million 284; Percent of GDP 0.7 (2018). - B4. Unidentified external financing: US$ Million 0; Percent of GDP 0.0 (2017); US$ Million 1,250; Percent of GDP 2.9 (2018). - Note: Issuance of a non-guaranteed Eurobond could be an option to cover this financing gap. ### C. Public Sector DSA - Coverage of public debt in DSA: - (i) central government direct debt; - (ii) direct and government-guaranteed debt of public agencies (NEPCO, WAJ, and other public entities); - (iii) off-budget project loans; - (iv) liabilities to the IMF. - Baseline projections and targets: - With further fiscal consolidation, debt ratio would fall to about 77 percent of GDP by 2022. - Public debt near 96 percent of GDP in 2017, reflecting lower nominal growth and carry-over of 2015 higher-than-expected debt. - Vulnerabilities and risk indicators: - Heat map and fan charts show significant vulnerabilities; debt level and gross financing needs breach high-risk DSA benchmarks in baseline and shock scenarios. - Near-term risks acute due to elevated debt level and high gross financing needs from short maturities of domestic debt. - Large rollover requirements pushed gross financing needs to about 22 percent of GDP in 2016. - Projected increase in average maturity of newly issued domestic debt to over 3 years beginning in 2017 expected to reduce GFN. - Gross financing needs projected to remain below high-risk benchmark of the MAC DSA until 2020, supported by concessional financing under the Jordan Compact. - Stress test outcomes: - Debt dynamics vulnerable to lower GDP deflator (nominal GDP growth), lower growth, and a 40-percent increase in oil prices relative to baseline. - Growth shock (cumulative growth decline of over 5 percentage points in 2017–18) would lead public debt to peak at over 110 percent in 2018. - Standardized contingent liability (CL) shock scenario (materialization of CL from banks equivalent to 10 percent of GDP in 2017) would raise debt above 100 percent of GDP for several years. - Mitigating factor: Jordan’s banks currently liquid and well capitalized. - All shock scenarios underscore risks from high debt relative to a relatively low revenue base. ### D. External Sector DSA - Coverage of external debt in DSA: - (i) public and publicly guaranteed external debt; - (ii) external liabilities of the banking sector and private corporations. - Note: Coverage of private external debt likely underestimated due to data limitations. - Public external debt: - Public external debt 37.5 percent of GDP in 2016; expected to rise to about 45 percent of GDP over the program period. - Public external debt service expected to peak in 2019-20 at about 6.5 percent of GDP as U.S. guaranteed Eurobonds come due. - Composition of public external debt remains favorable due to concessional borrowing under the Jordan Compact. - Private external debt: - Expected to remain moderate at about 26–29 percent of GDP. - As of end-2016, four fifths of total private external debt projected to be owed by banks (mostly currency and non-resident deposits); remainder by non-bank private corporations. - Over the medium term, share of corporates’ external debt expected to gradually increase to about a quarter of total private external debt. - Given moderate size and healthy balance sheets of local banks, contingent liability risks to public sector expected to be contained. - External financing requirements: - External financing requirements peak in 2016 at about 14 percent of GDP, then gradually decline thereafter. - Elevated near-term requirements reflect large current account deficits and amortizations of U.S. guaranteed Eurobonds due in 2019–20 (assumed rolled over on market terms prevailing at that time). - More gradual normalization of global interest rates (based on latest WEO assumptions) moderates pace of interest and income payments related to FDI liabilities and contains non-interest current account deficit and external financing requirements over the medium term. *Sources: Authorities and IMF Staff.* ### 16. External debt remains vulnerable to shocks. Standardized current account and other ### cr17231 - 16. External debt remains vulnerable to shocks. Standardized current account and other ### Key findings on external debt vulnerability - "External debt remains vulnerable to shocks." - Standardized current account and other shocks would bring external debt well above baseline projections, but "still around manageable levels in the case of slower growth and external income flows." - Moderate risks to external debt sustainability are predicated on the assumptions that: - "FDI inflows will pick up in the outer years on the back of structural adjustment;" - "international market access is gradually strengthened;" - "the accumulation of additional external buffers under the EFF will help to cushion against external shocks and anchor private sector expectations." - Risks stemming from the non-banking sector "may be also understated due to limited coverage." ### Baseline projections and key statistics (selected) - External debt (External debt in percent of GDP, baseline): - 2012: 56.8 - 2013: 64.0 - 2014: 64.0 - 2015: 65.8 - 2016: 66.9 - 2017: 68.4 - 2018: 70.3 - 2019: 72.5 - 2020: 72.9 - 2021: 73.0 - 2022: 72.2 - Of which: Public and Publicly Guaranteed External Debt (in percent of GDP): - 2012: 23.0 - 2013: 28.9 - 2014: 31.2 - 2015: 35.2 - 2016: 37.5 - 2017: 40.7 - 2018: 43.0 - 2019: 45.3 - 2020: 45.7 - 2021: 45.9 - 2022: 45.4 - Change in external debt (selected, in percent of GDP): - 2012: -4.6 - 2013: 7.3 - 2014: -0.1 - 2015: 1.8 - 2016: 1.1 - 2017: 68.4 (note: appears in table context) - 2018: 1.9 - 2019: 2.3 - 2020: 0.4 - 2021: 0.0 - 2022: -0.8 - Current account deficit, excluding interest payments (in percent of GDP): - 2012: 11.7 - 2013: 7.1 - 2014: 3.7 - 2015: 6.0 - 2016: 6.6 - 2017: 5.4 - 2018: 4.6 - 2019: 3.7 - 2020: 2.7 - 2021: 2.1 - 2022: 1.9 - External debt-to-exports ratio (in percent): - 2012: 122.8 - 2013: 151.2 - 2014: 147.6 - 2015: 175.0 - 2016: 190.4 - 2017: 194.8 - 2018: 201.0 - 2019: 207.1 - 2020: 207.9 - 2021: 207.7 - 2022: 205.8 - Gross external financing need (in billions of U.S. dollars): - 2012: 6.4 - 2013: 5.1 - 2014: 4.6 - 2015: 6.1 - 2016: 5.5 - 2017: 5.8 - 2018: 5.7 - 2019: 6.4 - 2020: 6.3 - 2021: 4.6 - 2022: 6.1 - Gross external financing need (in percent of GDP): - 2012: 20.5 - 2013: 15.1 - 2014: 12.9 - 2015: 16.3 - 2016: 14.2 - 2017: 14.3 - 2018: 13.4 - 2019: 14.2 - 2020: 13.4 - 2021: 9.2 - 2022: 11.6 - Baseline Real GDP growth (in percent): - 2015: 4.7 - 2016: 2.4 - 2017: 2.0 - 2018: 2.3 - 2019: 2.5 - 2020: 2.7 - 2021: 2.9 - 2022: 3.0 - Nominal gross public debt (in percent of GDP) — Baseline: - 2015: 74.4 - 2016: 93.4 - 2017: 95.1 - 2018: 95.6 - 2019: 93.5 - 2020: 90.8 - 2021: 86.2 - 2022: 81.6 - 2022 (continued in table): 77.0 (projection series extends) - Public gross financing needs (in percent of GDP): - 2015: 18.6 - 2016: 19.2 - 2017: 22.0 - 2018: 15.9 - 2019: 7.1 - 2020: 13.4 - 2021: 17.5 - 2022: 9.2 - 2022 (projection series): 15.4 ### Stress tests and alternative scenarios — selected results - Bound tests note: "Individual shocks are permanent one-half standard deviation shocks." Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance in combined tests. - Scenario with key variables at their historical averages (Alternative A1) — External debt (in percent of GDP, projections): - 2017: 68.9 - 2018: 73.3 - 2019: 79.6 - 2020: 85.2 - 2021: 91.1 - 2022: 96.3 - Gross external financing need under alternative scenarios (in percent of GDP): - A1. Key variables at historical averages: 22.4, 20.5, 22.1, 24.4, 20.9, 21.0 (years correspond to projection horizon) - Bound tests (Gross external financing need in percent of GDP, B1–B5): - B1. Nominal interest rate at baseline plus one-half standard deviations: 21.7, 19.4, 19.7, 20.4, 16.0, 15.1 - B2. Real GDP growth at baseline minus one-half standard deviations: 21.5, 19.3, 19.5, 20.4, 16.0, 15.0 - B3. Non-interest current account at baseline minus one-half standard deviations: 22.9, 21.1, 21.6, 22.7, 18.3, 17.5 - B4. Combination of B1–B3 using 1/4 standard deviation shocks: 22.5, 20.4, 20.9, 21.9, 17.5, 16.7 - B5. One-time 30 percent real depreciation in 0: 21.3, 27.9, 27.9, 28.8, 22.4, 20.9 - The bound tests indicate that shocks to interest rates, growth, current account, and a large real depreciation materially raise gross external financing needs (in percent of GDP) relative to the baseline. ### Realism of baseline assumptions and forecast track record (selected diagnostics) - Forecast track record (Jordan median forecast errors, 2007–2015): - Real GDP growth forecast error median: 0.60 (Jordan percentile rank: 75%) - Primary balance forecast error median: 1.67 (Jordan percentile rank: 93%) - Inflation (GDP deflator) forecast error median: 7.87 (Jordan percentile rank: 95%) - Assessment of projected fiscal adjustment: - 3-Year Adjustment in Cyclically-Adjusted Primary Balance (CAPB) — Jordan percentile rank: 13% (3-year CAPB adjustment greater than 3 percent of GDP is in approx. top quartile) - 3-Year Average Level of CAPB — Jordan percentile rank: 66% (3-year average CAPB level greater than 3.5 percent of GDP is in approx. top quartile) ### Risks, assumptions, and transmission channels - Key macroeconomic assumptions underlying the baseline include: - Real GDP growth (historical and projection series presented) - GDP deflator in US dollars (change in percent) - Nominal external interest rate (in percent) - Growth of exports and imports (US dollar terms, in percent) - Current account balance, excluding interest payments (in percent of GDP) - Net non-debt creating capital inflows (in percent of GDP) - Automatic debt dynamics contributions separately reported: - Contribution from nominal interest rate, contribution from real GDP growth, contribution from price and exchange rate changes. - Residuals include "change in gross foreign assets" and for projections include "purchases of domestic tbills and bonds by non-residents" after 2013. - Stress tests consider: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Contingent Liability Shock; additional tests such as Higher Oil Prices. ### Policy implications and conditionalities highlighted - The moderate risk assessment depends on policy and external developments, notably: - Strengthening FDI inflows in outer years through structural adjustment. - Gradual strengthening of international market access. - Accumulation of additional external buffers under the EFF to cushion against shocks and anchor private expectations. - Continued monitoring is implied for: - Non-banking sector risks, due to "limited coverage" possibly understating risks. - External financing requirements and gross external financing needs under adverse scenarios. *Source: IMF staff (as presented in the supplied chapter/extract).* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### Summary assessment - The Fund’s external balance assessment framework indicates Jordan’s external sector position is weaker than warranted by medium term fundamentals and desirable policy settings. - Key drivers: regional conflicts and the closure of Jordan’s main export markets have led to wider current account deficits and reduced competitiveness. - Main analytical conclusions: - The REER is estimated to be overvalued by about 2 to 22 percent, though estimates vary by methodology and are subject to significant uncertainty. - Competitiveness is weak relative to peers but expected to improve over the program period with planned reforms. - International reserves are within the Fund’s reserve adequacy metric and around import-cover thresholds reported in the analysis. ### Exchange rate, current account, and NIIP - Exchange rate movements and measurement: - NEER and REER appreciated by 4 and 6 percent, respectively, since October 2016 (reflecting U.S. dollar strength). - As of April 2017, REER stood 10 percent above its five-year average. - Using updated trade weights, REER appreciation is 5 percent since October 2016 and 6 percent above its five-year average as of April 2017. - Recent current account dynamics: - Non-oil current account balance moved from an average annual surplus of about 6 percent of GDP (between beginning of Syrian crisis and early 2015) to a deficit of about 3 percent of GPD since early 2016. - Causes: closure of borders with Syria and Iraq (notably exports to Iraq—once almost a fifth of domestic exports or $1.2 billion a year—declined by more than 50 percent), higher non-oil imports related to the influx of Syrian refugees (particularly food), and a slowdown in private transfers related to refugees. - Projections and medium-term outlook: - Under assumptions of no further escalation of regional conflicts, gradual pickup in exports (including relaxation of EU rules of origin), recovery in tourism and remittances, and successful fiscal consolidation under the EFF: - Non-oil current account is projected to narrow over the medium term and turn into a modest surplus (projected at about 1 percent of GDP). - Headline current account deficit projected to fall to about 6 percent of GDP over the medium term (noted as at the high side of staff’s current account norms). - The projected medium-term non-oil surplus is lower than the staff’s 2014 Article IV Consultation projection (over 4 percent of GDP). - External position assessment and REER overvaluation: - Current account regression model: current account balance is 4½ percentage points of GDP weaker than the estimated norm (-5 percent of GDP), implying an REER overvaluation of about 22 percent. - Real effective exchange rate regression model and external sustainability approach: point to smaller imbalances—current account gaps of ½ to 3½ percentage points of GDP—implying REER overvaluation in the range of 2 to 17½ percent. - Caveat: methodologies do not fully capture trade and current account impacts from regional conflicts; estimates should be interpreted with caution. - Policy implication: fiscal consolidation and structural reforms that enhance competitiveness would help reduce the current account gap and address overvaluation. - Net International Investment Position (NIIP): - NIIP stood at -97 percent of GDP at end-2016. - External assets: 68 percent of GDP (reserve assets 40 percent of GDP; currency and deposits held abroad 24 percent of GDP). - External liabilities: 165 percent of GDP (foreign direct investment 83 percent of GDP; other investment liabilities 54 percent of GDP—mainly external loans and nonresident currency and deposits; portfolio liabilities 27 percent of GDP). - NIIP deteriorated from -70 percent of GDP at end-2010, driven by a rise in net portfolio debt and a decline in the share of reserves to GDP. - External sustainability approach: Jordan should reduce its current account deficit by ½ to 1½ percentage points of GDP to stabilize the NIIP, though larger adjustment would be required to return to the 2010 NIIP level. ### External competitiveness - Non-price competitiveness and structural indicators: - Survey-based measures suggest competitiveness remains weak in several areas (Doing Business indicators): particularly weak on getting credit; protecting minority investors; resolving insolvency; and enforcing contracts. - Jordan ranks well on starting a business and trading across borders relative to the top performer in MENA. - The EFF’s structural benchmarks addressing the financial sector, access to finance, and the business environment are intended to improve competitiveness over the medium to long term. - Note on indicator interpretation: - Doing Business indicators should be interpreted with caution due to limited respondents, limited geographical coverage, and standardized assumptions. ### Reserve adequacy - Recent reserve developments: - International reserves improved in 2013–15 but declined in 2016 as commercial banks increased net foreign assets in response to increased deposit dollarization and further decline in loan dollarization. - Gross usable reserves stood at $13.3 billion as of end-March 2017 billion (108 percent of the Fund’s Reserve Adequacy metric (RAM)). - The government issued $500 million in U.S. dollar-denominated domestic bonds on March 8, 2017 and reopened the 2026 Eurobond for an additional $500 million on April 24, 2017, contributing to reserve replenishment. - Adequacy assessment and projections: - Reserves remain within the adequacy range of the Fund’s reserve adequacy metric. - Projections (assuming narrowing current account deficit, continued bilateral support under the EFF, and some recovery in FDI and other capital inflows) indicate international reserves will remain at levels deemed adequate to withstand a range of external shocks. - Import cover: - One part of the assessment notes reserves were slightly below 8 months of imports of goods and services. - Another projection states international reserves are projected to remain comfortable compared to import needs, at over 8 months of total imports of goods and services, providing an important buffer against shortages of import financing or adverse terms-of-trade shocks. ### Quantitative and other fiscal-monetary indicators (selected) - Current account: - Current account deficit (including grants): 9.1 percent in 2015; 9.3 percent in 2016; projected about 8.4 percent of GDP in 2017. - Central Bank of Jordan reserves and dollarization: - CBJ net international reserves were about $1.2 billion short of the end-December adjusted performance criterion (end-2016). - Deposit dollarization: 17.4 percent at end-June 2016; 18.9 percent at end-2016; stabilized at 19.4 percent at end-March 2017. - Loan dollarization declined from 13 percent to 11.9 percent (period referenced around end-2016). - The CBJ increased policy rates by a cumulative 75 basis points in early 2017 to help stabilize deposit dollarization. - Credit and growth indicators: - Credit to the private sector (excluding the refinery) grew by around 10–11 percent (y-o-y) at end-2016 and early 2017. - Growth slowed to 2.0 percent in 2016 (from 2.4 percent in 2015); projected growth 2.3 percent in 2017 under assumed regional conditions. - Inflation: headline inflation rose to 4.3 percent y-o-y in March 2017; projected to fall to 2.5 percent y-o-y by end-2017. - Public finances: - Combined budget deficit in 2016 was lower than the program target. - Public debt-to-GDP ratio was 95.1 percent of GDP at end-2016 (0.8 percent higher than envisaged at the beginning of the program). ### Policy implications and recommendations - Maintain the peg as a valuable anchor for the economy while pursuing: - Planned fiscal consolidation under the EFF to reduce imbalances and address REER overvaluation. - Structural reforms to enhance competitiveness (financial sector reforms, improving access to finance, business environment reforms). - Support measures to stabilize reserves and reduce vulnerability: - Continued bilateral and multilateral support under the EFF and mobilization of donor grants (noted as important under the Jordan Compact commitments). - Monetary measures already undertaken (policy rate increases) to stabilize deposit dollarization. - Aim for gradual external rebalancing: - Recovery of exports, tourism, and remittances, together with fiscal consolidation and structural reforms, are expected to help close the current account gap and improve the external sustainability metrics. *Source: Annex II. External Sector Assessment, IMF staff report material.* ### 5. Against this backdrop, continued donor support—including under the Jordan ### 5. Against this backdrop, continued donor support—including under the Jordan ### Donor support and refugee-related financing - Continued donor support—including under the Jordan Compact—remains instrumental in helping Jordan face the refugee crisis and its associated fiscal and social costs. - Estimated annual shortfall in donor financing to fully address refugee-related pressures: $1-2 billion. - 2016: Jordan received $1.6 billion in support under the Jordan Response Program, relative to a funding requirement of $2.7 billion, bringing disbursements to 60 percent of commitments. - So far in 2017 (as of end-February): $134 million received out of a 2017 requirement of $2.7 billion. - Shortfalls hamper implementation of the Jordan Compact (adopted February 2016; reaffirmed April 2017), crucial to helping Jordan sustainably cope with the refugee crisis and reduce macroeconomic vulnerabilities. ### Policies for safeguarding macroeconomic stability (overview) - Fiscal and monetary policies aim to safeguard macroeconomic stability by reducing fiscal and external vulnerabilities in an equitable and inclusive way. - Strategy includes a gradual, equity-enhancing budget adjustment; measures/reforms to maintain NEPCO’s operational balance; stabilize WAJ’s overall deficit. - Public debt targeted to be on a downward path (toward 77 percent of GDP over the medium term). - Monetary policy anchored by the exchange rate peg and preserving an adequate buffer of foreign-exchange reserves. ### A. Fiscal Policy — Central Government: 2017 budget and debt outlook - 2017 budget incorporates 2.2 percent of GDP in fiscal measures, including: reduction of some GST and customs-duty exemptions; increased fuel excises and fees; additional cut in capital expenditure of JD 100 million. - Budget law included, for the first time, detailed estimates of tax expenditures. - Under the EFF commitments, projected reduction in the central government’s primary deficit (excluding grants and transfers to NEPCO and WAJ): from 3.2 percent of GDP in 2016 to 2.1 percent of GDP in 2017. - Public debt containment: projected public debt at 95.7 percent of GDP in 2017, despite lower-than-projected official grants for budget support. ### Revenue-side reforms and expected yields - Removal of exemptions on GST and customs duties in 2017: amounting to 0.4 percent of GDP; continued scaling back to better target vulnerable segments. - Broadening the income tax base expected to contribute to a more progressive tax system and help close a significant part of the fiscal gap under the program. - Commitment: submit to parliament by mid-November (new benchmark) a draft budget law that includes estimates of tax expenditures. - Exhaustive review of GST and customs duty exemptions identified measures with potential to generate more than 2 percent of GDP in revenues while leaving tax rates (below 16 percent) unchanged for basic food products and health. - 2017 actions: removed exemptions on categories subject to the 0, 4, and 8 percent GST rates. - Additional 2018 measures: identify measures to raise a further ¾ percent of GDP in revenues in 2018. - Potential areas to consider for exemption removal: chemicals, electricity and water, industrial and agricultural inputs, construction, non-basic food items, transportation, real estate activities, and financial services. - Parallel framework of targeted transfers (or equivalent compensation) to protect vulnerable segments; World Bank support to expand and modernize the Social Safety Net (SSN). - National Unified Registry (NUR): aim to have an initial scheme operational by January 1, 2018. ### Income tax and compliance reforms (timelines and measures) - In consultation with USAID, options to broaden the income tax base and strengthen tax compliance; amend the income tax law by end-November, 2017. - Expected permanent revenue increase from income tax reform: 1 percent of GDP once fully implemented in 2018-19. - Personal income tax (PIT) options include: - reduce the personal income tax minimum threshold to JD 6000 for individuals and JD 12000 for families; - modify the tax rate schedule and raise the top rate to increase progressivity; - broaden the base by taxing global income of Jordanians and profits of Jordanian companies operating outside Jordan; - increase taxation of interest income; - introduce a 10% tax on dividends; - introduce a withholding tax of 10% on rental income. - Corporate income tax (CIT) proposal: dual rate — (i) one unified rate aligned with the maximum PIT rate at 24 percent; and (ii) a top rate maintained at 35 percent. - Submission timeline: submit amendments to Parliament by end-September 2017 (benchmark, reset from end-December, 2016); adoption expected by end-November 2017 (benchmark, reset from end-March, 2017). ### Tax administration and enforcement measures (benchmarks) - Improve tax collection and combat evasion through: - accelerate improvements to the Pay As You Earn (PAYE) system for large taxpayers (end-March 2018 new benchmark); - ensure by end-November 2017 the issuance of a business license is linked with the issue of a Taxpayer identification Number (TIN); - stiffen penalties to combat tax evasion; - increase compliance among self-employed persons: by end-November 2017, government records of licensed professionals and businesses to be matchable against ISTD registrations via an online system. ### Expenditure-side measures and social protection - Maintain prudent expenditure policy: (i) streamline non-priority current spending; (ii) prioritize social and capital spending; (iii) clear fuel and health arrears; (iv) accommodate continued pressures from Syrian refugees. - Public sector wage bill: keep nominal growth close to 1½ percent on an annual basis from 2017 to 2019 and better target transfers. - Health sector measures: direct eligible applicants to seek medical services at public hospitals (early 2017) to reduce servicing costs and better target applicants; reduce stock of health arrears; allocate appropriate budget to health funds; fight abuse via systematic verification of applicants’ income and insurance coverage. - Safety net targeting: establish an automated data exchange between the National Aid Fund (NAF) and select public agencies (World Bank support); demonstration with NAF to enable other agencies to connect as data providers and beneficiaries. - Commitment to protect the most vulnerable through targeted spending for illness and disability, old age, family and children, housing, and research and development in social protection. - Comprehensive review of public expenditures: aim to publish report by end-June 2018 (new benchmark) to inform the draft 2019 budget. ### Fiscal Reform Measures and Yields (In JD millions) — Original Program Commitments vs Authorities' Proposals (May 9, 2017) - Measures and yields (rows show measures; columns show 2017, 2018, 2019 yields under Original Program Commitments and Authorities' Proposals): - Goods and services tax: Original Program Commitments — 309, 135, 0; Authorities' Proposals — 102, 60, 25 - Customs duties exemptions: Original Program Commitments — 0, 210, 0; Authorities' Proposals — 100, 72, 0 - Income tax reform: Original Program Commitments — 0, 50, 80; Authorities' Proposals — 0, 50, 80 - Fuel Excise: Original Program Commitments — 120, 120, 120; Authorities' Proposals — 187, 120, 120 - Others 1/: Original Program Commitments — 21, 0, 371; Authorities' Proposals — 242, 181, 265 - Total: Original Program Commitments — 450, 515, 571; Authorities' Proposals — 631, 483, 490 - Note: 1/ Others include other taxes, fees, licenses, permits and savings from capital spending. (In JD millions) ### Public Utilities — Energy and Water - Progress toward returning utilities to cost recovery. Electricity (NEPCO) - NEPCO recorded an operational profit in 2016, mainly from switching primary energy source from fuel to LNG. - Objective: ensure NEPCO maintains operational cost recovery. - Study on cross-subsidization and tariff adjustment options published December 2016 (end-September 2016 benchmark). - Started reducing cross-subsidies: beginning November 1 2016, lowered tariffs for some large consumers by about 8 percent (on average). - Adopted a new automatic tariff adjustment mechanism in October 2016 (end-December 2016 benchmark) covering NEPCO’s and distributors’ overall costs, while protecting the most vulnerable and considering cross-subsidization risks. - From April 1, 2017, EMRC began to assess the need to adjust tariffs automatically on a monthly basis (based on past information on a three-month moving average cost) to guarantee profitability and financial soundness of the electricity system over each calendar year. - Continue diversifying energy mix toward cheaper sources, including increased reliance on renewables, gas imported from the Mediterranean, and development of shale oil resources. - Continue implementing NEPCO Debt Management Plan with World Bank support, consistent with new public debt management strategy to increase average maturity and diversify instruments — NEPCO issued JD 75 million Sukuks in March 2017. Water (WAJ) - Medium-term strategy focuses on: (i) bring WAJ and distribution companies to operational and maintenance balance; (ii) increase share of foreign grants and concessional loans to finance WAJ’s capital expenditures. - WAJ’s capital expenditures to be financed by the central government as of 2018 to better recognize sector structural challenges associated with refugees, water security, and financing needs and their impact on public debt. - Ministry of Water and Irrigation updated medium-term action plan (“Action Plan to Reduce Water losses”) to accommodate potential pressures from higher expected oil prices, additional demand from Syrian refugees, and NEPCO’s commitment to operational cost recovery; submitted to Cabinet and published in April 2017 (end-December benchmark). - Strategy centers on boosting efficiency and reducing costs: seek (i) cost savings from better energy efficiency and lower system losses; (ii) higher revenues through improved collection and some limited fee and tariff increases, while protecting vulnerable households. - Monitor implementation via biannual reports highlighting quantitative impact of measures and project status. - Sustain efforts to diversify water resources and increase renewable energy use in the sector to reduce WAJ’s energy costs and shelter finances from oil price fluctuations. - New water sources (augmentation of aquifers, dams, desalinization plants, Red Sea-Dead Sea Water Conveyance Project) to address increased costs aggravated by additional demand from Syrian refugees. - First draft of a debt strategy and borrowing plan for WAJ finalized in November 2016 (WAJ debt 6 percent of GDP at end-December 2016); shared with Ministry of Finance; next steps to include centralization of WAJ’s debt management. - Published “Water Sector Capital Investment Program 2016-2025” to improve access to and quality of water and wastewater services while safeguarding water security. ### Public Sector entities and contingent liabilities - Royal Jordanian: continued implementation of medium-term restructuring plan; expect the company to return to profitability in 2017. - Continue to seek private sector interest in recapitalization from existing shareholders and potential new investors; second phase of recapitalization to take place by end-2017 at the earliest. ### Structural fiscal reforms, public financial management, and transparency - Government Financial Management Information System reconfiguration to help monitor arrears, including in the health sector. - June 2016 decree establishing a central Public Investment Management (PIM) unit at the Ministry of Planning and International Cooperation with an action plan; moving to make PIM operational through recruitment of key staff and begin managing investments per new PIM standards. Fiscal transparency and reporting - Complied in November with all requirements of the second phase of the International Public Sector Accounting Standards (IPSAS) implementation roadmap for the 2015 government financial statements (mid-November 2016 benchmark). - October: prepared a cash flow statement for 2015 (consistent with prototype 2014 cash flow statement in Annex I of the January 2015 TA report), which is being audited. - November: audit bureau reviewed compliance of the cash flow statement with cash-based IPSAS requirements. - With IMF assistance, made progress in recording trust accounts appropriately as revenue and expenditure; able to classify accounts by purpose and use and consolidate them into fiscal tables published in the government finance bulletin starting in June 2017 (benchmark). - Actions: create separate organizational unit for fiscal reporting; transform accounting data for all budget and trust accounts into government finance statistics categories; aggregate and consolidate budget accounts with corresponding trust accounts. - Gradual integration into the treasury single account of trust accounts whose existence is not justified, based on trust accounts classification and further IMF TA. - Assessment of tax expenditures (with IMF Fiscal Affairs Department) built on 2013 USAID report findings and attached results to 2017 draft budget law. Public Investment Management and oversight - May 2017 Public Investment Management Assessment (PIMA) conducted (with IMF Fiscal Affairs Department) to evaluate Jordan’s public investment management systems. - Action plan to strengthen public investment program focusing on: - improved strategic planning and coordination; - strengthened oversight and disclosure of Public-Private Partnership (PPP) contracts and projects; - strengthened oversight of investment activities of State-Owned Enterprises (SOE); - improved framework for project implementation, oversight, and appraisal. - Draft Organic Budget Law (OBL) prepared with IMF and World Bank support; to be submitted to parliament by end-June 2017 (benchmark). OBL provisions to include: - macro-fiscal policy, fiscal rules, top-down budgeting, and approval of fiscal strategy aspects of budget preparation; - treasury control, cash management tasks and reporting details for general government/public sector budget execution; - audit provisions covering obligation to follow-up on audit queries and requirement for public entities to establish internal audit functions. *Source: cr17231 - 5. Against this backdrop, continued donor support—including under the Jordan* ### 12. Tax administration reforms will help to strengthen compliance, streamline procedures, ### 12. Tax administration reforms will help to strengthen compliance, streamline procedures, ### Tax administration reforms - To strengthen the GST compliance management framework, the income and sales tax department (ISTD), with technical assistance from METAC, is addressing issues related to the taxpayer registry, including by establishing a collaborative stakeholders’ working group to design the legislative change necessary to streamline procedures for winding up inactive entities in the taxpayer registry. - The presence of a large numbers of inactive companies in the register reflects weaknesses in the current legal and regulatory framework, including long lead times for deregistration (24 months in many cases) and requirement of obtaining court orders for formal liquidation processes. - An action plan was prepared in September 2016 to tackle other tax administration weaknesses identified in the IMF’s Tax Administration Diagnosis and Assessment Tool (TADAT) evaluation. - With METAC TA over a two-year period beginning in December 2016, the program will: - initially focus on risk management to identify risks to revenue and manage them effectively; and - move forward with addressing high rate of tax arrears, low rate of use of e-services, inefficiency of the GST refund payment system, and the lack of a formalized tax ruling system. ### Public debt and debt management - The central government indicative bond issuance plan for 2017 has been published. - To enhance transparency, communication, and predictability, regular auction calendars began being published in January 2017. - In June 2016, together with NEPCO and WAJ, a quarterly financing plan for the following 12 months was prepared, taking into account the total combined financing needs of the central government and these agencies; the financing plan will be updated every quarter for the subsequent 4 quarters. - The debt management strategy aims to ensure issuance schedules of the central government and public agencies are coordinated to improve overall borrowing terms, lengthen average maturity of debt, improve the debt profile, and reduce total public debt over the medium term. - A U.S. Treasury TA mission conducted a medium-term debt management strategy (MTDS) analysis with main findings: - (i) the maturity of public debt needs to be extended; - (ii) borrowing from private external sources should continue (given that the domestic market is not large enough to absorb additional debt); and - (iii) the yield curve should be established through issuing benchmark bonds on varying maturities. - A debt management strategy for 2016–20 covering the central government and its agencies (end-September 2016 benchmark) was prepared and published. - Commitments and timelines: - Update the strategy for the period 2017–2021 and publish it by end-June 2017 (benchmark). - An action plan to build capacity in the middle and front offices of the Public Debt Directorate (PDD) and review its structure and responsibilities was prepared (end-December 2016 benchmark); finalize implementation by end-June 2017 (benchmark). ### Monetary policy and financial sector oversight - Monetary policy will continue to be underpinned by the exchange rate peg. - Following two recent increases in the policy rates (by a cumulative 75 bps), which contributed to a stabilization of deposit dollarization, the current policy stance is viewed as appropriate. - The CBJ stands ready to further use policy instruments to ensure that reserves are maintained at an adequate level and will monitor domestic and external developments, including the pace of the U.S. monetary policy normalization, and their impact on capital flows, international reserves and deposit dollarization. - Financial sector indicators and resilience: - Aggregate capitalization of 19 percent at end-December 2016 is well above the regulatory minimum of 12 percent. - Liquidity buffers remain comfortable, non-performing loans (NPLs) are low and falling, and profitability is strong. - Stress tests and sensitivity analysis in the Financial Stability Report (2015) suggest broad ability to withstand severe negative shocks to NPLs, equity prices, interest rates, and the exchange rate. - Bank supervision and policy focus: - Continued close monitoring for deterioration in asset quality, potential uptick in credit risk from corporates and households, and structural excess liquidity when public debt starts unwinding. - Ongoing monitoring of credit to households with attention to: (i) type and quality of lending (owner occupied mortgage loans versus buy to let; serviceability ratios; Loan-to-Value (LTV) ratios); and (ii) whether lending growth reflects changes in demand and supply of credit. - Design of appropriate policy response should credit growth increase excessively. - Cross-border supervision to continue via onsite reviews and Supervisory College of Arab Bank meetings (next meeting tentatively scheduled for mid-2017). - Strengthening the legislative and regulatory framework for banks: - Amendments to the Deposit Insurance Corporation law prepared; submission to parliament delayed (end-March benchmark) but expected to be discussed by parliamentary committees and ready for approval by end June, 2017 (reset benchmark). - Amendments aim to help establish a robust bank resolution framework in line with the FSB Key Attributes, incorporating institutional arrangements, recovery and resolution planning requirements, clear triggers, comprehensive resolution powers, creditor and shareholder safeguards, a least-cost test with systemic exception, and a robust deposit insurance framework. - Parliamentary approval of amendments to the CBJ law was done in October 2016. - Basel III regulations on capital adequacy requirements have been issued. - Regulations on domestic systemically important banks expected by end-June 2017. - Substantial progress on liquidity regulations, expected to be issued by end-2017. - Gradual implementation will help tailor liquidity and capital requirements to individual banks. ### AML/CFT and supervisory framework enhancements - Reviewed the AML/CFT law and drafted amendments to align fully with 2012 FATF standards and address practical implementation issues faced by the AML/CFT Unit and other competent authorities. - Plan to submit amendments to the AML/CFT National Committee and to the council of ministers by the end of the year (note: the AML/CFT law still needs to be reviewed by the IMF under the MENA CFT Program). - Regulatory agencies, including the CBJ, have started amending regulations to conform with FATF standards. - Implementing a risk-based framework for offsite and onsite supervision of banks, money exchange firms, other financial and nonfinancial institutions, and NPOs, per IMF TA recommendations. - National Risk Assessment for MENAFATF mutual evaluation (scheduled second half of 2018) has begun with Fund assistance; expected completion late 2017/early 2018. ### Nonbank financial sector development - Insurance sector: - Hiring of personnel with insurance supervision skills has begun; a consulting firm will be hired to assess financial statements and positions of insurance firms. - Amendments to the Insurance Law to transfer supervision to the CBJ were delayed (end-March 2017 benchmark); expected to be discussed by parliamentary committees and ready for approval by end-March 2018 (reset benchmark). - Transfer completion and implementation of regulatory reforms targeted by end-March 2018 (reset benchmark). - Microfinance and other nonbank supervision: - Continued adoption and gradual implementation of regulations for supervision of microfinance institutions; four existing institutions have applied for licenses and CBJ has started reviewing applications. ### Structural policies to promote jobs and growth: business environment and access to finance - Business environment reforms: - Launch of new “one procedure one form” registration process and standardized business classifications is nearly ready; on track to make the Jordan Investment Commission (JIC) investment window fully operational by end-June 2017 (benchmark). - Submission of draft inspection law (end-October 2016 benchmark) faced extended consultations; law will streamline mandates and processes of inspectorates, introduce risk-based targeting, define inspection scope, emphasize Higher Committee for Inspection Reform, establish rights and responsibilities, and introduce tools for fairness, transparency, and accountability. - Draft inspection law to be discussed by parliamentary committees and expected to be approved by late summer (end-June 2017 reset benchmark). - Review of the competition framework to ensure independence of agencies monitoring and enforcing market conduct; establishment of an accountability framework for reform implementation. - Real Estate Ownership law currently with parliament expected to be adopted by end-December 2017 to improve transparency on land-ownership and ease foreign ownership of property. - Access to finance measures: - Credit bureau started operating in January 2016 and commenced inquiry services on October 2, 2016; compiling credit reports and expanding data coverage across banks, insurance and leasing companies, microfinance institutions, public utilities, and telecommunication companies. - After compiling 3 years of historical data, the bureau should be able to assign credit scores by early-2018. - Measures to improve SME finance and inclusion: - Increased Jordan Loan Guarantee Corporation’s (JLGC) capital from JD10 million to JD29 million. - The CBJ and commercial banks co-financed a $50-million fund, managed by JLGC, to provide loan guarantees to SMEs start-ups with high coverage (85 percent) and reasonable cost. - With World Bank assistance, set up by end-December 2017 a $100-million equity fund managed by JLGC to provide capital to start-ups. - Created an export guarantee fund (managed by JLGC) capitalized by a JD 100 million loan from the CBJ to support exporters. - Working on a secured transactions law to allow SMEs to use moveable assets as collateral; regulations to the 2012 secured-transactions law have been issued to expedite implementation of a registry; progress toward implementing the 2014 best practice secured transactions law. - Contracted two loans from the Arab Fund for Economic and Social Development and one from the World Bank, for a total of $300 million, to provide low-cost and long maturity guaranteed funding for SMEs through the banking system; disbursements expected to continue in 2017–18. Committed not to contract any new loans, in consultation with the IMF, to ensure consistency with public debt targets. - Draft insolvency law (end-March 2017 benchmark) aims to align with best practice by protecting creditor rights, ensuring access to insolvency system, expediting liquidation of unviable companies, and providing mechanisms for restructuring/rescuing viable businesses; to be discussed by parliamentary committees and may be approved by late summer (end-June 2017 reset benchmark). - CBJ pilot project with Microfund for Women on use of e-wallet for payments; potential generalization to other microcredit institutions upon completion. - CBJ established a new division in the payments department to promote financial inclusion and payment options. - With GIZ support, a comprehensive supply and demand study on financial inclusion was started; originally intended for end-March 2017 (benchmark), publication will be by end-September 2017 (reset benchmark). - Based on the study, CBJ, with stakeholders and development partners, will develop a financial inclusion strategy by end-2017 to: enhance access, use and quality of financial services; improve SMEs’ access to finance; develop infrastructure (credit bureau and payment system); enhance digital financial services; improve access to Microfinance; promote financial literacy; strengthen financial consumer protection; and build a comprehensive database at CBJ to monitor development in financial inclusion. *International Monetary Fund — content unit cr17231* ### 22. We will promote job creation through broad-based labor market reforms and targeted ### 22. We will promote job creation through broad-based labor market reforms and targeted ### National strategy and labor-market reform framework - National Committee for Human Resources Development (NCHRD) published the National Strategy for Human Resources Development (NSHRD) outlining a 10-year plan to improve elementary education, higher education, technical education and vocational training. - Ministry of Labor completed revisions to the 2011 National Employment Strategy (NES) based on recommendations from the International Labor Organization (ILO) and aligned with the NSHRD. - ILO recommendations include: - (i) addressing skills mismatches, including through strengthening the involvement of local business communities in school life; - (ii) unlocking the potential of women in the labor market including through introducing more flexible work arrangements and strengthening the enforcement of maternity benefits; - (iii) reforming public sector hiring practices and compensation by, over time, rightsizing the public service and restructuring its organization (as noted in Vision 2025). ### Flexible work, part-time employment, and vocational training consolidation - Bylaw on flexible working hours issued by Royal Decree in March; implementation guidelines being prepared by the Ministry of Labor in consultation with other stakeholders. - Ongoing revamp of the part-time employment framework to reduce costs to licensing and regulating home-based employment activities. - Legislation in progress to bring existing initiatives (covered by 7 different laws and 3 by-laws) under a single umbrella. - Plans to step up enforcement of existing certification regulations to raise the profile and demand for formal technical training and certification. - Policy aim: shift government role in the labor market from a source of employment to a source of empowerment. ### Special economic zones and satellite factories - Working to accelerate investment and activity in the special economic zones while maximizing benefits for local communities and job seekers. - Supported establishment of 16 satellite factories linked to enterprises within the zones to: - offer a flexible and conducive working environment for Jordanian job seekers; - help enterprises meet local employment goals; and - facilitate employment for youth, women, and residents of remote areas. ### Measures to improve gender equality and childcare provisions - Sent to parliament at end-2015 amendments to the labor law to allow setting up joint nurseries by companies and to increase penalties for non-compliance; under current law, large corporations are required to provide in-house child care. - Further amendments needed to allow large corporations to subsidize the cost of child care as an alternative to establishing nurseries. - Approved establishment of 6 nurseries in special economic zones and will continue to work towards further increasing this number. - Allowed some companies in industrial zones (Sahab and Adubail) to establish joint nursery houses; allowed large employers who cannot provide on-premises care to establish joint nurseries within a safe facility as a temporary measure. - For smaller firms, continued work on establishing and promoting public-private nurseries for low-income employees working in SMEs. - Will work towards a public awareness campaign and follow up on the Prime Minister’s 2014 directive on establishing nurseries in all public sector institutions. ### Active labor-market programs and pilots (in cooperation with the World Bank) - Implemented pilot projects within the Building Active Labor Market Program (BLMP): - School-to-Work Program: school-to-work transition support for youth aged 19 to 25. - Labor Market Information and Job Search Program: facilitate job matching by improving information available to employers and prospective job seekers. - Job Readiness and Placement Program: supports graduates aged 19 to 25 from universities and community colleges in Irbid, Ma’an, Zarqaa’ with: - a package of up to 75 hours of employability training; - partial reimbursement of salaries/social security contributions; and - firm-based on-the-job training (OJT) for up to nine months. - First two pilots have been successfully implemented and closed; third pilot has made good progress training beneficiaries and placing them in OJT. - To accelerate take-up rate: - five additional intermediation services/placement firms hired and started working on a bonus scheme (up to 140 JD per placed beneficiary). - Based on positive feedback, MOPIC, the E-TVET Fund, and the World Bank agreed (in December 2016) to train an additional 2,000 beneficiaries. - The next round of employability skills training started in mid-March 2017. ### Social security, payroll tax wedge, and employment incentives - Most recent actuarial study of the Social Security Corporation (conducted in cooperation with the ILO) suggested that, in light of generous retirement benefits, further reforms (parametric adjustments or increased contribution rates) were needed to ensure long-term solvency. - Current level of social security contributions: 21.75 percent. - Social security system currently running an annual primary surplus (of about 1.5-2 percent of GDP). - Given contribution level seen as a key impediment to formal employment (particularly for low-skilled job seekers, youth and women, and for formalization of Syrian refugees), there may be scope to lower this labor-tax wedge temporarily to encourage employment. - In consultation with the Fund, plan to seek an independent party to conduct a study of: - the impact of lower payroll taxes on employment; and - the longer-term actuarial needs of the Social Security Fund. - On the basis of this analysis, prepare a report (end-March 2018 new benchmark) examining different options for lowering contribution rates and identifying offsetting parametric changes in the pension system to ensure actuarial neutrality for social security finances. - Considering, in parallel, adoption of an employment tax credit for employers: - businesses would have an upfront credit against social security contributions and could deduct a certain percentage of their incremental social-security contributions as they increase demand for formal jobs. ### Minimum wage policy and anchoring future increases - Recent adjustments in the minimum wage have been well in excess of average wage growth in the economy. - Recognize need to explore better means to anchor future increases in the minimum wage. - Assessing potential for an adjustment formula to guide decisions by the Tripartite Commission and to prevent future increases from undermining formal jobs and competitiveness. - Will consider options for an automatic formula that better aligns changes in the minimum wage to inflation and to average wage growth in the economy, and will discuss with the IMF in coming months how to proceed with specific reforms under the program. ### Guest workers, formalization, and permit policy - To ease tensions in the labor market: - Acted to rationalize the flow of new guest workers while promoting increased formalization of the workforce. - Since June 2016, largely halted the addition of new guest workers while adopting a flexible approach to encourage renewal of work permits for guest workers already in Jordan. - Eased ability of guest workers to move between sectors. - Provided steep discounts or waivers for permit fees. ### Public oversight, governance, and procurement (paragraph 23) - Merged the Ombudsman Bureau and the Anti-Corruption Commission into a National Commission for Integrity and Anti-Corruption in June 2016. - New institution empowered to enforce implementation of its recommendations and monitor progress with complaint and grievance resolution, including development of a centralized grievance redress mechanism to improve integrity of the public service, service delivery, good governance and anti-corruption. - Will strengthen public procurement through ratification of the unified legal framework and establishment of regulatory and policy committee/unit by end-September 2017. - Committee/unit tasks: - develop procurement policy and oversight functions; - oversee the performance management system; - develop the complaint mechanism; - establish a single e-portal; and - manage capacity development. ### Export competitiveness and market diversification (paragraph 24) - Relaxation of rules of origin for exports to the EU in July 2016 provides significant opportunity to diversify markets and broaden product mix. - Domestic steps taken: - conducted workshops to raise awareness among Jordanian firms of benefits and requirements; - simplified application procedures; - waived fees associated with work-permit applications; and - supported Jordanian firms on marketing and certification for entry into the EU market. - Results so far: - one company granted the right to export; seven companies have applied for qualification. - International outreach: - targeting key European business fora and trade fairs to connect Jordanian firms with potential buyers. - Will develop and publish, by end-June 2017, an export diversification strategy. - Discussions on a free-trade agreement with Kenya started in April, 2017. - Will intensify efforts to reduce the cost of doing business and create a level playing field to help Jordanian entrepreneurs compete in international markets. ### Program monitoring (paragraph 25) - Progress monitored through semi-annual reviews, quantitative performance criteria (PCs), continuous performance criteria, indicative targets, and structural benchmarks (detailed in Tables 1a, 1b, and 2, with definitions and data requirements in the attached Technical Memorandum of Understanding). - Quantitative targets for June 2017 and -December 2017 are PCs. - Intend to keep IMF disbursements with the CBJ and will not be on-lent to the government. *Source: cr17231 - 22. We will promote job creation through broad-based labor market reforms and targeted* ### 26. We continue with implementation of the 2016 safeguards assessment. As recommended, the ### cr17231 - 26. We continue with implementation of the 2016 safeguards assessment. As recommended, the ### Safeguards assessment implementation and governance actions - The audit committee has started operating and is holding quarterly meetings. - Starting with the FY2016 audit: - (i) The CBJ’s financial statements will include disclosures on departures from IFRS on the treatment of unrealized revaluation differences. - (ii) An external quality assessment review of the CBJ’s internal audit function was conducted in accordance with international standards. - (iii) The internal audit charter was revised and approved by the audit committee/Board on March 26, 2017, to establish a functional reporting line to the audit committee. ### Quantitative performance criteria and indicative targets (selected figures from Table 1a: Aug 2016–Mar 2017) - Primary fiscal deficit of the central government, excluding grants and net transfers to NEPCO and WAJ, in JD million (flow, cumulative ceiling): - Aug-16: EFF PC 721; Adjusted PC 661; Act. 582 - Sep-16: EFF Indicative target 730; Adjusted Indicative target 670; Act. 726 - Dec-16: EFF PC 1,040; Adjusted PC 960; Act. 886 - Mar-17: EFF Indicative target 168; Adjusted Indicative target 148; Act. 76 - Combined public deficit in JD million (flow, cumulative ceiling): - Aug-16: EFF PC 918; Adjusted PC 858; Act. 682 - Sep-16: EFF Indicative target 984; Adjusted Indicative target 924; Act. 838 - Dec-16: EFF PC 1,386; Adjusted PC 1,306; Act. 1,051 - Mar-17: EFF Indicative target 265; Adjusted Indicative target 245; Act. 148 - Net International Reserves of the Central Bank of Jordan in USD million (stock, floor): - Aug-16: EFF PC 12,190; Adjusted PC 12,169; Act. 12,064 - Sep-16: EFF Indicative target 12,225; Adjusted Indicative target 12,208; Act. 12,031 - Dec-16: EFF PC 13,894; Adjusted PC 13,780; Act. 12,654 - Mar-17: EFF Indicative target 12,820; Adjusted Indicative target 12,640; Act. 11,436 - Ceiling on accumulation of external debt service arrears: 0 (continuous) across reported dates. - Indicative targets (examples): - Social spending by the central government in JD million (flow, cumulative floor): - Aug-16: 1,160 (EFF PC), Act. 1,041 - Sep-16: 1,305 (Indicative), Act. 1,095 - Dec-16: 1,740 (Indicative), Act. 1,575 - Mar-17: 460 (Indicative), Act. 395 - Public debt in JD million (stock, ceiling): - Aug-16: 25,709; Act. 25,625 - Sep-16: 25,856; Act. 26,046 - Dec-16: 26,398; Act. 26,093 - Mar-17: 26,733; Act. 26,452 - Short-term public debt in JD million (stock, ceiling): cap 1,500 (repeated across dates); sample Acts: Aug-16 Act. 468; Sep-16 Act. 676; Dec-16 Act. 475; Mar-17 Act. 325 - Accounts payable of the central government in JD million (stock, ceiling): ceiling 517 across dates; sample Acts: Aug-16 Act. 192; Sep-16 Act. 194; Dec-16 Act. 316; Mar-17 Act. 179 - Domestic payment arrears of NEPCO and WAJ: various zero and small ceilings/acts reported (e.g., WAJ ceiling 6 in some periods; Mar-17 Act. 0) - Net Domestic Assets of the Central Bank of Jordan in JD million (stock, ceiling): examples: - Aug-16: EFF PC -763; Adjusted PC -749; Act. -735 - Sep-16: EFF Indicative target -698; Adjusted Indicative target -687; Act. -729 - Dec-16: EFF PC -1,893; Adjusted PC -1,812; Act. -1,240 - Mar-17: EFF Indicative target -1,058; Adjusted Indicative target -930; Act. -831 - Memo items for adjustors (selected): - Foreign budgetary grants and loans received by the central government (JD millions, flow, cumulative): sample entries include 526, 358, 616, 415, 2,191, 2,107, 145, 62 (as presented). - Foreign budgetary grants and loans received by the Central Bank of Jordan (USD millions, flow, cumulative from end-December 2015): sample entries include 378, 358, 454, 437, 2,811, 2,697, 2,961, 2,781. - IMF purchases under the EFF (JD millions, flow, cumulative from end-December 2015): 51 ... 51; 102 ... 51; 204 ... 51 (as presented). - Cap for the downward adjustor on the NIR (USD millions): 600 ... 600; 900 ... 900; 1,200 ... 1,200 (as presented). - Cap for the downward fiscal adjustor (JD millions): 60 ... 60; 80 ... 80; 20 ... 20 (as presented). ### Proposed quantitative performance criteria and indicative targets (Table 1b: Jun 2017–Jun 2018) - Performance Criteria (sample entries): - Primary fiscal deficit of the central government, excluding grants and net transfers to NEPCO and WAJ, in JD million (flow, cumulative ceiling): - Jun-17 PC 201; Sep-17 PC 368; Dec-17 PC 587; Mar-18 Indicative target 76; Jun-18 Indicative target -23 - Combined public deficit in JD million (flow, cumulative ceiling): - Jun-17 PC 371; Sep-17 PC 618; Dec-17 PC 922; Mar-18 Indicative target 176; Jun-18 Indicative target 174 - Net International Reserves of the Central Bank of Jordan in USD million (stock, floor): - Jun-17 11,194; Sep-17 10,940; Dec-17 13,084; Mar-18 11,928; Jun-18 11,566 - Ceiling on accumulation of external debt service arrears: 0 (all dates) - Indicative Targets (sample entries): - Social spending by the central government in JD million (flow, cumulative floor): Jun-17 870; Sep-17 1,345; Dec-17 1,820; Mar-18 476; Jun-18 952 - Public debt in JD million (stock, ceiling): Jun-17 26,836; Sep-17 27,238; Dec-17 27,429; Mar-18 27,821; Jun-18 27,999 - Short-term public debt in JD million (stock, ceiling): 1,500 (repeated each date) - Accounts payable of the central government in JD million (stock, ceiling): 350 (repeated each date) - Net Domestic Assets of the Central Bank of Jordan in JD million (stock, ceiling): Jun-17 -568; Sep-17 -243; Dec-17 -1,415; Mar-18 -587; Jun-18 -326 - Memo items for adjustors: - Foreign budgetary grants and loans received by the central government (JD millions, flow, cumulative): Jun-17 255; Sep-17 442; Dec-17 1,488; Mar-18 89; Jun-18 267 - Foreign budgetary grants and loans received by the Central Bank of Jordan (USD millions, flow, cumulative from end-December 2016): Jun-17 271; Sep-17 429; Dec-17 1,880; Mar-18 1,949; Jun-18 2,099 - IMF purchases under the EFF (JD millions, flow, cumulative from end-December 2016): Jun-17 49; Sep-17 49; Dec-17 163; Mar-18 163; Jun-18 278 - Cap for the downward adjustor on the NIR (USD millions): 600 (all dates) - Cap for the downward fiscal adjustor (JD millions): Jun-17 40; Sep-17 60; Dec-17 80; Mar-18 20; Jun-18 40 ### Structural benchmarks, 2016–18 (selected items, measures, time frames, and status) - Fiscal Framework and Management - Record the trust accounts entries as revenue and expenditure and classify them by purpose and use and consolidate them into fiscal tables and publish in the government finance bulletin. - Initially end-February 2017, proposed to be reset for mid-June 2017. Rationale: Improved transparency. Status: Delayed. A March METAC mission provided TA to help the authorities meet the SB by June. - Comply with all requirements of Phase II of the Road Map for IPSAS implementation for the 2015 financial statements. - mid-November 2016. Rationale: Improved PFM and transparency. Status: Met. Further reforms are expected for 2018. - Submit to Parliament a new Income Tax Law (consistent with program understandings, including on the PIT thresholds, the rates structure, and transfer-pricing). - Initially end-December 2016, proposed to be reset for end-September 2017. Rationale: Fiscal consolidation and Equity. Status: Delayed. Ministry of Finance has started exploring options in consultation with Fund staff and USAID. - Submit to Parliament a draft budget law for 2017 in line with program understandings and projections for 2017-19, including the estimates of tax expenditures. - mid-November 2016. Rationale: Fiscal consolidation and Improved transparency. Status: Met. - Submit to Parliament a new tax exemptions framework to reduce GST exemptions on domestic and imported goods and services, and exemptions on customs duties. - mid-November 2016. Rationale: Fiscal consolidation and Equity. Status: Not met. The authorities removed fewer exemptions than expected and will continue the removal in 2018-19. - Rationalize the GST and customs duty systems, based on IMF TA recommendations. - end-March 2017. Rationale: Improve revenue collection by streamlining exemptions while preserving competitiveness. Status: Partially met. The authorities removed only some exemptions and will continue the removal in 2018-19. - Implement new Income Tax Law (consistent with program understandings, including on the PIT thresholds, the rates structure, and transfer-pricing). - Initially end-March 2017, proposed to be reset for end-November 2017. Rationale: Fiscal consolidation and Equity. Status: Delayed. - Submit to Parliament an Organic Budget Law. - end-June 2017. Rationale: Improved PFM and transparency. Status: On track. - Submit to Parliament the 2018 draft budget law in line with program understandings and projections for 2018-19, including the estimates of tax expenditures. - mid-November 2017. Rationale: Fiscal consolidation. Status: New benchmark. - Cabinet approval of the removal of GST exemptions in 2018. - end-November 2017. Rationale: Fiscal consolidation. Status: New benchmark. - Establish reporting requirements/processes and access to social-security to ensure ISTD can more adequately control and confirm PAYE compliance for large payers. - end-March 2018. Rationale: Reduce tax evasion. Status: New benchmark. - Publish public expenditure review. - end-June 2018. Rationale: Fiscal consolidation. Status: New benchmark. - Debt Management - Publish public debt management strategy. - end-September 2016. Status: Met. - Approve an action plan to reorganize the Public Debt Directorate. - end-December 2016. Status: Met. - Publish updated public debt management strategy. - end-June 2017. Status: On track. - Finalize reorganization of the Public Debt Directorate. - end-June 2017. Status: On track. - Water and Energy Sector - Publish studies on cross-subsidization and options for price adjustments in response to oil price changes. - end-September 2016. Status: Met. The studies were published in mid-December 2016. - Adopt an automatic electricity tariff adjustment mechanism, with effective implementation on January 1, 2017. - mid-December 2016. Status: Met. The mechanism was adopted in October 2016. - Submission to Cabinet and publication of an updated action plan on how to reduce the water sector’s losses over the medium term. - end-December 2016. Status: Met. The action plan was published in April 2017. - Financial Sector and Access to Finance - Implement a risk-based framework for offsite AML/CFT supervision for banks and money exchange firms in line with IMF TA recommendations. - end-October 2016. Status: Met. - Submit to Parliament amendments to Deposit Insurance Corporation Law to align provisions regarding early intervention and bank resolution with the new commercial banking law. - Initially end-March 2017, proposed to be reset for end-June 2017. Status: Delayed. Expected to be discussed by parliamentary committees in the coming months, and approved in early 2018. - Amend and enact the Insolvency Law. - Initially end-March 2017, proposed to be reset for end-June 2017. Status: Delayed. It was withdrawn from Parliament to be revised and resent, and is expected to be amended by end-August 2017. - Amend and enact the Secured Lending Law. - Initially end-March 2017, proposed to be reset for end-June 2017. Status: Delayed. Expected to be discussed by parliamentary committees in the coming months, and approved by end-August 2017. - Publish a study assessing key issues and challenges to promote financial inclusion. - Initially end-March 2017, proposed to be reset for end-September 2017. Status: Delayed. Publication is expected in September. - Amend the Insurance law to allow transfer of supervision of the insurance sector to the CBJ. - Initially end-March 2017, proposed to be reset for end-March 2018. Status: Delayed. Expected to be discussed by parliamentary committees in the next ordinary session. - Transfer the supervision of the insurance sector to CBJ. - Initially end-September 2017, proposed to be reset for end-March 2018. Status: Delayed. Due to delays in the amendment of the Insurance law. - Finalize and publish the Financial Inclusion Strategy. - end-December 2017. Status: New benchmark. - Business Environment and Labor Market - Submit to Parliament a draft Inspection Law streamlining inspection mandates and processes. - Initially end-October 2016, proposed to be reset for end-June 2017. Status: Delayed. It is expected to be discussed by parliamentary committees in the coming weeks, and approved by end-August 2017. - Address shortcomings in the Investment-Window procedures by automating and integrating services provided by Jordan Investment Commission. - end-June 2017. Status: Met. - Conduct a study on options for temporarily lowering payroll taxes for women and the youth and identifying offsetting parametric changes in the pension system. - end-March 2018. Rationale: Promote formal employment and stimulate aggregate demand while protecting the social security actuarial position. Status: New benchmark. ### Technical Memorandum of Understanding (TMU) — program operational details and exchange rates - The TMU defines understandings between the Jordanian authorities and IMF staff regarding definitions of quantitative performance criteria and indicative targets, and reporting requirements for the arrangement under the Extended Fund Facility. - The program performance criteria and indicative targets are reported in Table 1b attached to the MEFP dated [June xx], 2017. - Exchange rates and gold price for program measurement (values that prevailed on March 31, 2016): - Exchange rate: JD 0.709 = $1 - Gold price: JD 870.865 per fine troy ounce - Program Exchange Rates (Currency — Jordanian Dinar Per Unit of Foreign Currency): - British Pound 1.016955 - Japanese Yen 0.006316 - Euro 0.8028 - Canadian dollar 0.545675 - SDR 0.99728 - Any developments that could lead to a significant deviation from quantitative program targets will prompt discussions between the authorities and IMF staff on an appropriate policy response. ### Definitions and monitoring of program targets (selected) - The quantitative performance criteria and indicative targets specified in Table 1b are: - a performance criterion (ceiling) on the primary fiscal deficit of the central government excluding grants and net transfers to NEPCO and WAJ; - a performance criterion (ceiling) on the combined primary deficit of the central government (as defined above), the net loss of NEPCO, and the overall deficit of WAJ (“combined public deficit”); - a performance criterion (floor) on the net international reserves (NIR) of the Central Bank of Jordan (CBJ); - a continuous performance criterion (zero ceiling) on the accumulation of external debt service arrears; - an indicative target (floor) on social spending by the central government; - an indicative target (ceiling) on public debt; - an indicative target (ceiling) on short-term public debt; - an indicative target (ceiling) on the accounts payable of the central government; - an indicative target (ceiling) on the domestic payment arrears of NEPCO; - an indicative target (ceiling) on the domestic payment arrears of WAJ; - an indicative target (ceiling) on the net domestic assets (NDA) of the CBJ. - Monitoring frequency: - The performance criteria on the central government’s primary fiscal deficit and the combined public deficit, and the indicative targets on social spending by the central government are monitored semi-annually (with indicative targets for the other quarters) on a cumulative basis from the beginning of the calendar year. - The performance criterion on the NIR and the indicative targets on public debt, short-term public debt, accounts payable of the central government, domestic payment arrears of NEPCO, and NDA of the CBJ are monitored semi-annually (with indicative targets for the other quarters) in terms of stock levels. - The performance criterion on the accumulation of external debt service arrears is monitored on a continuous basis. *Italic: International Monetary Fund — Attachment II. Technical Memorandum of Understanding (TMU) and associated tables as presented in the source content.* ### 7. The central government is defined as the budgetary central government that is covered by ### cr17231 - 7. The central government is defined as the budgetary central government that is covered by ### Definition of the central government and measurement basis - 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 27 autonomous agencies but includes all ministries and government departments that operate in the context of the central authority system of the state. - The operations of the central government will be measured on a cash basis. ### Primary deficit of the central government excluding grants and net transfers to NEPCO and WAJ (program monitoring definition) - The primary deficit is defined as the sum of: - (i) net external financing of the central government; - (ii) privatization receipts received during the relevant period; - (iii) net domestic bank financing of the central government; - (iv) net domestic nonbank financing of the central government; - (v) grants received from abroad by the central government, including grants from the Gulf Cooperation Council; - less (vi) domestic and foreign interest payments by the central government; - and (vii) net transfers from the central government to NEPCO and WAJ. ### Net external financing of the central government - Defined as cash external debt disbursements received by the central government, less external debt repayments paid by the central government. - Covered debts: 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. ### Privatization receipts - Consist of all transfers of monies received by the central government in connection with the sale of government assets. - Includes receipts from the sale of shares, the sale of non-financial assets, as well as leases and the sale of licenses or exploration rights with duration of 10 years and longer. ### Net domestic bank financing of the central government - Defined as the change in the banking system’s claims in Jordanian dinars and in foreign currency on the central government, net of the balances on government accounts with the CBJ and commercial banks. ### Net domestic nonbank financing of the central government - Defined as central government borrowing from, less repayments to, the non-bank sector (including the nonfinancial public sector not covered by the central government budget, and, specifically, the Social Security Investment Fund), and the cumulative change from the level existing on December 31 of the previous year in the stocks of government securities held by nonbanks and in the float. ### Net transfers from the central government to NEPCO and WAJ - Calculated as: - (i) direct transfers from the central government to NEPCO and WAJ (or NEPCO and WAJ’s creditors) on behalf of NEPCO and WAJ (including subsidies, cash advances, and payment of debt or government guarantees if called), - minus (ii) any transfers of cash from NEPCO and WAJ to the central government (including repayments of debt, arrears or cash advances). ### Adjustors to the ceiling on the primary deficit - The ceiling will be adjusted: - Downward by the extent to which the sum of foreign budgetary grants and foreign budgetary loans—excluding non-resident purchases of domestically-issued government bonds and guaranteed and non-guaranteed Eurobonds—received by the central government (as specified in Table 1b) during the relevant period falls short of the levels specified in Table 1b of the MEFP up to a maximum as specified in Table 1b. ### Ceiling on the combined public deficit (definition for program monitoring) - Defined as the sum of: - (i) the primary deficit of the central government excluding grants and net transfers to NEPCO and WAJ of the central government as defined in Section B; - (ii) the net loss of NEPCO; and - (iii) the overall deficit of WAJ. ### Net loss of NEPCO (definition) - Defined as the difference between total operating revenues and total costs as reported in the unaudited income statement. - Total operating revenues are defined as the sum of: - (i) sales of operating power; and - (ii) all other revenue, excluding proceeds from central government transfers or payments of NEPCO’s obligations on NEPCO’s behalf. - Total costs are defined as the sum of: - (i) purchase of electric power, including fuel costs, capacity and energy charges, and all costs related to electricity generation to be borne by NEPCO; - (ii) any fuel transportation costs; - (iii) depreciation costs; - (iv) all other maintenance and operating expenses, including on wages and remuneration of the board of directors, and provisions; and - (v) interest expense and any other financial costs. ### Overall balance of WAJ (definition) - Defined as the difference between total revenues and current and capital expenditures. - Total revenues are defined as the sum of: - (i) sales of goods and services; - (ii) property income; and - (iii) all other revenue, excluding grants and proceeds from central government transfers or payments of WAJ’s obligations on WAJ’s behalf. - Current and capital expenditures are defined as the sum of: - (i) salaries, wages and allowances; - (ii) social security contributions; - (iii) use of goods and services, including energy costs; - (iv) interest payments on domestic and foreign loans; - (v) any other expenses, including pensions; and - (v) capital expenditures. ### Adjustors to the ceiling on the combined public deficit - The ceiling will be adjusted: - Downward by the extent to which the sum of foreign budgetary grants and foreign budgetary loans— excluding non-resident purchases of domestically-issued government bonds and guaranteed and non-guaranteed Eurobonds —received by the central government (as specified in Table 1b) during the relevant period falls short of the levels specified in Table 1b of the MEFP up to a maximum as specified in Table 1b. ### Floor on the Net International Reserves (NIR) of the CBJ - NIR of the CBJ in U.S. dollars are defined as foreign assets of the CBJ minus its foreign liabilities. - Foreign assets of the CBJ are readily available claims on nonresidents denominated in foreign convertible currencies and include: - foreign exchange (foreign currency cash, deposits with foreign correspondents, and holding of foreign securities), - monetary gold, - IMF reserve position, - and SDR holdings. - Excluded from foreign assets: - any assets that are pledged, collateralized, or otherwise encumbered; - CBJ’s claims on resident banks and nonbanks, as well as on subsidiaries or branches of Jordanian commercial banks located abroad; - claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forward, swaps, and options); - precious metals other than gold; - assets in nonconvertible currencies; - illiquid swaps; - and the outstanding balance of bilateral accounts with the Central Bank of Iraq of U.S. dollar 1,081.67 million. - Foreign liabilities of the CBJ are defined as all foreign exchange liabilities to residents and nonresidents, including commitments to sell foreign exchange arising from derivatives (such as futures, forward, swaps and options, including any portion of the CBJ monetary gold that is collateralized), and Jordan’s outstanding liabilities to the IMF. - Excluded from reserve liabilities: - government foreign exchange deposits with the CBJ; - deposits from public institutions and government departments with independent budgets; - commercial companies with state participation; - deposits from donors (including grants received from the GCC); - the two technical swaps with Citibank Jordan for U.S. dollar 88.5 million; - and amounts received under any SDR allocations received after March 31, 2016. - Valuation and stock: - The stock of foreign assets and liabilities of the CBJ shall be valued at program exchange rates. - As of March 31, 2016, the stock of NIR amounted to U.S. dollar 13,048.2 million (at program exchange rates). - Adjustors to the floors on the NIR of the CBJ: - Adjusted upward (downward) by the extent to which the sum of foreign budgetary grants and foreign budgetary loans—excluding guaranteed and non-guaranteed Eurobonds and non-resident purchases of domestically-issued government bonds—received by the CBJ (as specified in Table 1b) during the relevant period exceeds (falls short of) the levels specified in Table 1b of the MEFP. The downward adjustment will be capped at the maximum level specified in Table 1b of the MEFP. - The floors will also be adjusted upward by the amount that the outstanding balance of bilateral accounts with the Central Bank of Iraq is repaid, including both principal and interest payments. ### Ceiling on the accumulation of external debt service arrears - External debt service arrears are defined as debt service payments (principal and interest) arising in respect of obligations to non-residents incurred directly or guaranteed by the central government or the CBJ, that have not been made at the time due, taking into account any contractual grace periods. ### Floor on social spending by the central government - Social spending is defined as central government spending on social protection programs as articulated in the central government budget (code 710). - These programs are funded by the government of Jordan resources only and comprise transfers for: - illness and disability; - old age; - family and child; - housing; - research and development in the field of social protection; - and unclassified social protection. ### Ceiling on public debt - Public debt is defined as the sum of: - (i) central government debt (including off-budget project loans); - (ii) government guarantees extended to NEPCO, WAJ and other public entities; - (iii) the stock of the CBJ’s liabilities to the IMF not lent on to the central government. - For the program, a guarantee of a debt arises from any explicit legal obligation of the central government, or of any other agency acting on its behalf, to service such a debt in the event of nonpayment by the recipient (involving payments in cash or in kind), or from any implicit legal or contractual obligation to finance partially or in full any shortfall incurred by the debtor. - Adjustors to the ceiling on public debt: - Downward by the extent to which the cumulative disbursements under the EFF during the relevant period falls short of the levels specified in Table 1b. - Downward by the cumulative amount of privatization proceeds, net of associated costs. ### Ceiling on short-term public debt - Short-term public debt is defined as public debt, as defined in Section G, with original maturities of up to, and including, one year. ### Ceiling on the accounts payable of the central government - Accounts payable are defined as the total stock of checks issued by the central government but not yet cashed by the beneficiary and the liability of the central government’s trust accounts less deposits in the trust accounts. ### Ceiling on the domestic payment arrears of NEPCO - Defined as the belated settlement of a debtor’s liabilities that are due under obligation (contract) for more than 60 days, or the creditor’s refusal to receive a settlement duly offered by the debtor. - Arrears to be covered include outstanding payments on wages and pensions; social security contributions; tax payments, and obligations to banks and other private companies and suppliers. - Arrears exclude obligations to the central government arising from net transfers as specified in paragraph 12. ### Ceiling on the domestic payment arrears of WAJ - Defined identically to NEPCO arrears (more than 60 days) and including the same categories of payments. - Arrears exclude obligations to the central government arising from net transfers as specified in paragraph 12. ### Ceiling on the Net Domestic Assets (NDA) of the CBJ - Reserve money of the CBJ is defined as the sum of: - (i) currency in circulation (currency outside banks and commercial banks’ cash in vaults); - (ii) non-remunerated deposits of licensed banks with the CBJ in Jordanian dinars. - For program monitoring purposes, the net domestic assets of the CBJ are defined as the difference between the reserve money of the CBJ and its NIR as defined in Section D. - Adjustors to the ceilings on the NDA of the CBJ: - Upward (downward) by the extent to which the floors on the net international reserves of the CBJ are adjusted downward (upward). - Downward (upward) by the extent to which the CBJ decreases (increases) reserve requirements on Jordanian dinar deposits of the banking system. The adjustment will equal the change in the required reserve ratio multiplied by the stock of deposits with licensed banks at the start of the first month when the new reserve requirement ratio applies that are: - (i) denominated in Jordanian dinars and; - (ii) subject to reserve requirements. ### Data provision requirements (timing and content) - The government will provide to the IMF (Division B of the Middle East and Central Asia Department) the information specified below with the following frequencies and contents: - Related to the ceiling on the primary deficit of the central government excluding grants and net transfers to NEPCO and WAJ: - The nine standard fiscal data tables as prepared by the ministry of finance covering detailed information on: revenue; expenditure; balances of government accounts with the banking system; foreign grants; amortization and interest; net lending; privatization proceeds; debt swaps with official creditors; and monthly change in the stocks of uncashed checks and funds owed to donor trust accounts (monthly). - The government financing information from the Treasury account, as agreed by both the Ministry of Finance and the Central Bank of Jordan, and any potential discrepancy between the government financial data and the monetary survey data (monthly). - Gross transfers to and from NEPCO and WAJ detailing the amounts paid or received in connection with debt transactions, transfers to cover losses, and any amount directed to repay any outstanding arrears of NEPCO or WAJ (monthly). - Related to the ceiling on the accounts payable of the central government: - the stock of checks issued by the central government but not yet cashed by the beneficiary (monthly). - the stock of the liabilities of the central government in the trust accounts and the deposits in the trust accounts (monthly). - Related to central government arrears: - the stock of all pending bills of the central government that have not been paid for more than 60 days at the end of each quarter (quarterly), including those of the health insurance fund. - Related to the combined public sector deficit: - All the information specified in paragraph. 28. - Full unaudited income statement and the stock of accounts payable and payments overdue less and more than 60 days (quarterly) in order to compute the PC on NEPCO net loss, prepared by NEPCO’s accounting department on a quarterly basis. - Latest audited income statement signed by the auditor (usually available twice yearly with a six-month delay) with full explanation of any changes made to the unaudited version transmitted to the IMF, as soon as it becomes available to NEPCO’s management. - Full unaudited income statement and the stock of accounts payable and payments overdue less and more than 60 days (quarterly), prepared by WAJ’s Directorate of Finance and Accounting on a quarterly basis. - Full unaudited income statements and the stocks of accounts payable and payments overdue less and more than 60 days (quarterly), prepared by each of the water distribution companies (Al Yarmuk, Miyahuna, and Aqaba)’s Directorates of Finance on a quarterly basis. - Breakdown of overdue payments by major creditor, and all overdue payments vis-à-vis the central government (quarterly). - Monthly gas flows from Egypt in million cubic meters (quarterly). - Monthly Liquefied Natural Gas (LNG) flows in the LNG terminal in Aqaba in million British Thermal Units and their average price, and breakdown of these flows between local use and re-exports to Egypt (quarterly). - Related to the floor on NIR of the CBJ and ceiling on its NDA: - CBJ’s foreign exchange reserves and preliminary data on dollarization (weekly). - Data on CD auctions (following each auction). - Monetary statistics (monthly). - The outstanding balance of bilateral accounts with the Central Bank of Iraq (monthly). - Related to the continuous performance criteria: - Details of official arrears accumulated on interest and principal payments (both external and domestic) to creditors. External arrears data will be provided using actual exchange rates. - Related to the floors on public debt and short-term public debt: - The fiscal tables on the central government’s domestic and external debt (monthly). - Tables on the stock of debt guarantees extended to NEPCO, WAJ, and other public entities (monthly). - Data on short-term public debt (monthly). - Related to the floor on social spending by the central government: - A table on the amount of central government spending on each of its social protection programs (monthly). - Other economic data: - Interest rates and consumer prices; and exports and imports; travel receipts and tourist arrivals; remittances; outstanding balance of non-resident purchases of domestic treasury bills and bonds; and GCC grants received by the CBJ and grants transferred by the CBJ to the Ministry of Finance (monthly). - Balance of payments (current and capital accounts) and external debt developments (quarterly). - List of short-, medium- and long-term public and publicly-guaranteed external loans contracted during each quarter, identifying, for each loan: the creditor, the borrower, the amount and currency, the maturity and grace period, interest rate arrangements, and the amortization profile (quarterly). - National accounts statistics (quarterly). - Timing and lags: - Weekly data and data on 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 (for the monetary and fiscal variables), and within a period of no more than eight weeks for other data (three months for national accounts statistics and balance of payments and external debt statistics). - Data related to the continuous performance criterion should be sent within one week after the date when the arrear was incurred. - Any revisions to previously reported data should be communicated to the staff in the context of the regular updates. *JORDAN — INTERNATIONAL MONETARY FUND* ### 44. Any variable that is mentioned herein for the purpose of monitoring a performance criterion, ### 44. Any variable that is mentioned herein for the purpose of monitoring a performance criterion, ### Definitions and statistical treatment - Any variable mentioned for monitoring a performance criterion and not explicitly defined shall be defined in accordance with the Fund’s standard statistical methodology, such as the Government Financial Statistics. - For variables omitted from the TMU but relevant for program targets, the authorities of Jordan shall consult with Fund staff on appropriate treatment based on the Fund’s standard statistical methodology and program purposes. ### Fund relations — key figures (As of April 30, 2017) - Membership Status: Joined August 29, 1952; Article VIII. - General Resources Account: - Quota: 343.10 SDR Million, 100.00 percent Quota - Fund holdings: 1417.21 SDR Million, 413.06 percent Quota - Reserve position in Fund: 0.38 SDR Million, 0.11 percent Quota - SDR Department: - Net cumulative allocation: 162.07 SDR Million, 100.00 percent Allocation - Holdings: 63.44 SDR Million, 39.14 percent Allocation - Outstanding Purchases: - Extended Fund Facility: 51.47 SDR Million, 15.00 percent Quota - Stand-By Arrangements: 1023.00 SDR Million, 298.16 percent Quota - Latest Financial Arrangements (Type | Approval Date | Expiration Date | Amount Approved (SDR Million) | Amount Drawn (SDR Million)): - EFF | 8/24/16 | 8/23/19 | 514.65 | 51.47 - SBA | 8/03/12 | 8/04/15 | 1,364.00 | 1,364.00 - SBA | 7/03/02 | 7/02/04 | 85.28 | 10.66 - EFF | 4/15/99 | 5/31/02 | 127.88 | 127.88 - Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Forthcoming Principal: 2017: 234.44; 2018: 348.10; 2019: 298.38; 2020: 142.08; 2021: 8.58 - Forthcoming Charges/interest: 2017: 19.27; 2018: 13.38; 2019: 5.90; 2020: 2.22; 2021: 1.17 - Total: 2017: 253.71; 2018: 361.48; 2019: 304.28; 2020: 144.30; 2021: 9.75 ### Central bank safeguards and exchange system - Safeguards Assessment: Completed November 2016; found that the central bank continues to strengthen its safeguards framework and made a number of recommendations that the authorities are implementing. - Exchange System: - The Jordanian dinar is fully convertible and officially pegged to the SDR. - In practice, the dinar has been pegged to the U.S. dollar since October 1995 at JD 1 = $1.41044. - Jordan accepted the obligations of Article VIII, Sections 2, 3, and 4 in 1995 and maintains an exchange system free of restrictions on payments and transfers for current international transactions. - Last Article IV Consultation: 2014 Article IV consultation concluded by Executive Board on April 28, 2014. ### Technical assistance (2011–17) — areas and selected activities - Fiscal: - Public financial management (multiple missions, including Budget Preparation and Execution in December 2014 and December 2015). - Tax administration reform and VAT compliance (Jan. 2013; May 2013; Dec. 2014). - Public financial management: Trust Accounts (Jan./February 2016; December 2016; March 2017; April/May 2017). - Broaden indirect tax base and simplify customs tariff (August 2016). - Monetary and Financial: - Risk management, regulation and supervision, markets instruments and infrastructure (January 2011). - Islamic banking guidelines (January 2011). - Developing and implementing early warning systems and Basel III/Liquidity (2014–2015). - Insurance supervision and stress testing (October 2015; March 2016; May 2016; August 2016). - Statistical: - Improving BOP and IIP compilation practices (January and February 2011). - National accounts improvements across multiple missions (May 2012; September 2012; November 2013; April 2014; January 2016; July 2016; Oct./November 2016). - External debt statistics (January 2013; December 2014). - Price statistics (May 2013). - Legal and other: - AML/CFT Scoping Mission (February 2015). - Legislation, AML/CFT Supervision, and FIU (February 2015–July 2017). ### World Bank Group strategy and operations (highlights) - CPF approved July 14, 2016 for FY2017–22; objective: help Jordan renew its social contract and promote economic and social inclusion. - Concessional support to Syrian crisis response: exceptional $100million IDA allocation; establishment of the Concessional Financing Facility. - As of April 2017, World Bank active portfolio: 11 projects valued at US$759 million (loans and grants). - Development Policy Loans: two operations of US$250 million each. - Programmatic Development Policy Loan for energy and water: first $250 million operation presented July 2015; follow-on presented December 2016. - Syrian crisis-related support: - Emergency loan of US$150 million (July 2013). - Emergency Services and Social Resilience Grant of US$65.9 million (October 2013). - Program-for-Results project approved September 2016 valued at $300 million (IBRD US$149 million, IDA US$100 million, CFF US$51 million). - Second Programmatic Energy and Water DPL (December 2016): IBRD financing US$225 million and CFF support US$25 million. - A concessional Emergency Health project currently under preparation. ### IFC and MIGA engagement (selected figures) - IFC long-term finance investments (2011 to date): around US$1.804 billion. - Notable investments: Tafila Wind US$221 million debt package; “Seven Solar Sister” US$208 million financing; repeat investment ~US$94 million in Queen Alia Airport; US$11 million in Luminus; US$2 million to FINCA Jordan. - MIGA outstanding gross exposure as of April 2017: US$440 million. - MIGA-supported projects include expansion of AS Samra Wastewater Treatment Plant, expansion/operation of a bromine manufacturing plant, and two solar power plants via guarantees for Adenium Solar. ### Statistical issues and data adequacy (As of May 15, 2017) - General: Data provision is adequate for program monitoring. - National Accounts: - Progress improving quarterly national accounts (production approach), but quarterly accounts from the expenditure approach still need development. - Further efforts needed to ensure compliance with System of National Accounts 2008 (2008 SNA). - Base year for GDP at constant prices should be updated from 1994 to 2010. - Price statistics: - An urban-only CPI, based on 12 geographic areas covering all Jordan, is compiled monthly. - CPI weights should be updated more frequently than the current five-year period, using expenditure data from bi-annual household budget surveys. - Government finance: - Authorities have initiated work to develop a financial balance sheet in accordance with GFSM 2001 classification and sectorization. - Transactions above-the-line are largely aligned with GFSM 2001 recommendations. - Consolidated general government data disseminated do not follow the integrated presentation of stocks and flows as mandated under the 2010 Executive Board decision. - Monetary statistics: - Timeliness for publication in International Financial Statistics is satisfactory. - Authorities have not yet migrated to the Standardized Report Forms developed from the IMF’s Monetary and Financial Statistics Manual. - Financial sector surveillance: - Authorities do not report financial soundness indicators (FSIs) for dissemination by the IMF’s Statistics Department on the FSI website. - Balance of payments: - From 2010, CBJ has broadly adopted BPM6 methodology for BOP and IIP and has disseminated quarterly BOP and IIP data in BPM6 format. - Implementation of services and FDI surveys is important to improve BOP quality. - Technical assistance focuses on external debt statistics and fostering consistency between macroeconomic datasets. *Prepared by The Middle East and Central Asia Department (In consultation with other departments); June 6, 2017.* ### 2010. The country uses an SDDS flexibility ### cr17231 - 2010. The country uses an SDDS flexibility ### Data and statistical dissemination - The country uses an SDDS flexibility option on the periodicity and timeliness of the labor market wages/earnings data. - Data ROSC update was published in February 2004. - Common Indicators Required For Surveillance (As of May 15, 2017) — selected timeliness and data-quality notes: - Exchange rates: Latest observation Apr. 2017; Date received May 2017; Frequency D; Timeliness 1D. - International reserve assets and reserve liabilities of the monetary authorities: Latest observation Apr. 2017; Date received May 2017; Frequency M; Timeliness 1W. - Reserve/base money, Broad money, Central bank balance sheet, Consolidated balance sheet of the banking system: Latest observation Mar. 2017; Date received May 2017; Frequency M; Timeliness 1M. - Interest rates: Latest observation Mar. 2017; Date received May 2017; Frequency W; Reporting frequency M; Timeliness 1W. - Consumer price index: Latest observation Apr. 2017; Date received May 2017; Frequency M; Timeliness 1M. - Revenue, expenditure, balance and composition of financing—general government: Latest observation 2016; Date received May 2017; Frequency A; Timeliness 7M. - External current account balance: Latest observation Q4 2016; Date received Apr. 2017; Frequency Q; Timeliness 1Q. - GDP/GNP: Latest observation Q4 2016; Date received Mar. 2017; Frequency Q; Timeliness 1Q. - Gross external debt and International Investment Position: Latest observation Q4 2016; Date received Apr./Mar. 2017; Frequency M/Q; Timeliness 1M/6M. - Data quality assessments reflect ROSC substantive update (February 2004) indicators (O, LO, LNO, NO, NA) for methodological soundness and accuracy/reliability by dataset. ### Recent macroeconomic developments (Staff Representative, June 16, 2017) - Reserves and dollarization: - Gross official reserves were about $11.6 billion in early June, broadly in line with the end-March level. - Deposit dollarization stood at 19.4 percent and was stable. - The Central Bank of Jordan raised interest rates on all monetary policy instruments by 25 basis points, effective June 18. - Inflation: - Headline monthly inflation was close to zero percent in May 2017. - 12-month inflation was 3.7 percent in May 2017. - Core inflation has remained stable at about 3 percent year-on-year. - Unemployment and survey methodology: - Reflecting methodological changes, the unemployment rate stood at 18.2 percent in the first quarter of 2017. - Main methodological changes: exclusion of unpaid workers from “employed persons” and an increase in survey sample size to cover migrant workers and refugees. - Female unemployment rate was 33 percent in Q1 2017, above 24.8 percent in the previous quarter. - NEPCO and utilities: - Preliminary NEPCO operational losses in April were about JD 10 million due mainly to technical issues and low demand; cumulative losses about JD 18 million over the first four months of 2017 (about 0.1 percent of annual GDP). - The Energy and Minerals Regulatory Commission decided in June not to adjust electricity tariffs. - A Cabinet reshuffle on June 14 resulted in the resignation of three Ministers, including the Minister of Energy and Mineral Resources. ### Executive Directors’ appraisal (Statement by Hazem Beblawi and Sami Geadah, June 21, 2017) - Regional and external environment: - Conflicts in Syria and Iraq have caused a massive influx of refugees, closure of Jordan’s main land trade route, adverse effects on socioeconomic stability, depressed investment sentiment, undermined growth, and increased unemployment. - Fiscal retrenchment and tighter liquidity in neighboring oil exporting countries have weighed on remittances and capital inflows. - Resilience and reform agenda: - Authorities’ reform agenda supported by the EFF aims to maintain macroeconomic and financial stability, revive growth and employment, and undertake significant fiscal adjustment and structural reforms amid heightened regional demands. ### Fiscal policy — findings and recent measures - Fiscal consolidation outcomes and projections: - Overall fiscal deficit fell from 10.3 percent of GDP in 2014 to 3.2 percent of GDP in 2016. - The fiscal deficit is projected to fall to 2.5 percent of GDP in 2017. - The fiscal position will continue to be strengthened with the aim of having an overall surplus in 2020. - Revenue and expenditure measures: - 2017 budget measures to broaden the tax base included eliminating general sales tax and customs duty exemptions on a large number of products, providing 0.4 percent of GDP in 2017. - Remaining exemptions mostly important for low income households; further removal of exemptions planned for 2018, with better targeting of support to the most vulnerable. - Shortfall in projected revenues for 2017 relative to program targets was addressed by increases in fees and excises, most notably on fuel products. - Expenditure policy focuses on streamlining non-priority current spending, prioritizing capital and social spending, clearing arrears, and accommodating pressures from Syrian refugees. - The fiscal deficit for 2017 is projected to be substantially lower than had been targeted under the program. - Utility pricing and public enterprises: - Authorities adopted an automatic tariff adjustment mechanism to ensure electricity costs are fully covered in 2017. - Strategy to bring the water company into financial balance; water company’s financial deficit largely due to capital spending needed given water scarcity and increased demand related to Syrian refugees. - Strengthening fiscal framework: - Tax administration measures to improve compliance, facilitate procedures, and promote fairness. - Public financial management reforms including selection and management of investment projects. - An organic budget law is under preparation to strengthen macro-fiscal policy, budget preparation, fiscal strategy, treasury control, and audit functions. - Reforms to strengthen the debt management framework, with technical assistance from the Fund and other providers. ### Monetary policy and foreign reserves - Central Bank of Jordan (CBJ) policy stance: - The exchange rate peg to the US dollar remains central to monetary and macroeconomic stability; authorities fully committed to the peg. - CBJ increased its policy rate by a cumulative 125 bps since December 2016, including a 25 bps increase effective June 18, 2017. - CBJ is prepared to use monetary policy instruments as appropriate to ensure reserves remain at an adequate level. - Term of CBJ’s management team renewed for a second five-year period in early 2017. - Reserve levels: - While international reserves were lower than program targets at end-2016, they remained at a comfortable level. ### Financial sector — status and reforms - Banking sector soundness: - Banks are highly capitalized, liquid, profitable, and resilient to possible shocks. - Non-performing loans are low and well-provisioned, with limited Jordanian bank exposure to conflict countries. - CBJ conducts regular stress tests; results confirm the system’s ability to absorb a wide range of severe shocks. - Supervisory enhancements: - CBJ issued regulations on domestic systemically important banks in mid-June and is working toward issuing regulations on Basel III liquidity ratios. - CBJ is taking over responsibility for supervision of the insurance sector from the Ministry of Industry and Trade. - CBJ is working closely with microfinance institutions to help them meet new licensing requirements under the new supervision framework. ### Structural reforms for growth and employment - Strategic frameworks: - Reforms reflect Vision 2025’s focus on boosting growth, employment, and equity. - National Employment Strategy updated to improve labor market functioning, reduce skills mismatches, introduce more flexible work arrangements, and reform public sector hiring. - National Strategy for Human Resources Development aims to improve education at all levels, including vocational training. - Business environment reforms: - Measures to facilitate access to finance, including establishment of a credit bureau, implementation of a secured transactions law, and an insolvency law in line with international best practice. - Reforms aim to reduce the cost of starting and operating a business by simplifying procedures and eliminating unnecessary regulations. ### Refugees, foreign assistance, and external support needs - Refugee burden and fiscal costs: - Estimated 1¼ million Syrian refugees, compared with a population of about 6 million Jordanians. - United Nations estimated the cost of hosting Syrian refugees at US$2.9 billion in 2015. - For 2016, Jordan received about 60 percent of the funding required under the Jordan Response Plan to the Syrian crisis. - Jordan plans to create up to 200,000 jobs for Syrian refugees under the Compact, contingent on international support; 46,000 work permits have already been issued. - Policy recommendations on assistance: - A sustainable assistance framework is needed given significant indirect costs related to the Syrian refugee crisis (security, health, education, subsidies). - International assistance should be in the form of grants, given Jordan is shouldering the burden of refugees on behalf of the international community and the need to reduce Jordan’s debt burden. - Authorities seek international support in attracting new investment and providing incentives to development zones that employ Syrian refugees. *IMF staff report content (cr17231) and accompanying statements as provided in the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17231.pdf_