## JORDAN: SECOND REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY (1jorea2019001) ## Source details **Canonical URL:** [JORDAN: SECOND REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY (1jorea2019001)](https://www.imf.org/-/media/files/publications/cr/2019/1jorea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1jorea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1jorea2019001.pdf.json) --- ### Executive Board decision and program status - Executive Board approved disbursement of SDR 120.085 million (about US$166.4 million), bringing total disbursements under the program to SDR 223.015 million (about US$309. million). - Approved authorities’ requests for: - waiver of non-observance of performance criterion on the Net International Reserves of the Central Bank of Jordan (CBJ); - extension of the arrangement to March 2020; - rephasing of access. - Program originally approved on August 24, 2016: three-year EFF equivalent to SDR 514.65 million (about US$723 million at approval, or 150 percent of Jordan’s quota). - Completion of the second review makes available SDR 120.085 million (around $167 million). - Date of Executive Summary: April 23, 2019. ### Macroeconomic developments and outlook - Growth and inflation: - Real GDP growth: 1.9 percent in 2018 (broadly the same as 2017); staff projects 2.2 percent in 2019 and medium-term convergence to 3 percent. - Inflation: peaked at 5.7 percent in July 2018; headline inflation 3.7 percent in December 2018; core inflation 1.1 percent most recently in 2019; GDP deflator inflation expected at 2.5 percent over the medium term. - Labor market: - Unemployment: 18.0 percent in Q4 2018. - Youth unemployment: 42.3 percent. - Female unemployment: 23.3 percent. - External position and reserves: - Current account deficit (excluding grants): 10¼ percent of GDP in 2018; current account deficit (including grants) 7 percent of GDP in 2018. - Gross usable reserves: $14.3 billion at end-2017 (114 percent of RAM); ended 2018 at $12.5 billion (97 percent of RAM). - Net international reserves (NIR) were about $448 million below the December 2017 performance criterion. - Reserve outflows accelerated to around $900 million in June 2018; $500 million World Bank loan disbursed July–August 2018. - London Initiative unlocked additional financing commitments of about $5 billion; commitments over 2019–23 of $5.1 billion ($3.5 billion bilateral; $1.6 billion multilateral). - Exchange rate and dollarization: - Exchange-rate peg maintained; deposit dollarization stabilized at 21 percent. - Real effective exchange rate appreciated somewhat in 2018, unwinding the 4 percent depreciation of 2017 and remains moderately overvalued. ### Fiscal outcomes, public debt, and financing - Fiscal outcomes: - Central government primary deficit (excluding grants and one-off payments of arrears): 2.9 percent of GDP in 2016; 1.1 percent of GDP in 2017; 2.4 percent of GDP by end-2018 (excluding grants and one-off payments of arrears). - Combined public deficit reached 4.3 percent of GDP in 2018, compared to a program target of 1.8 percent at time of the first review. - Public debt broadly stable at 94.4 percent of GDP in 2018. - Public debt as defined by authorities includes government securities held by the Social Security Corporation; excluding these cross-holdings, public debt around 78 percent of GDP. - Due to GDP rebasing, 2017 debt-to-GDP ratio revised from 95.9 to 94.3 percent. - Sector-specific fiscal pressures: - NEPCO operating loss: 0.3 percent of GDP in 2018 (uneven tariff adjustments); legacy debt at 17 percent of GDP or 18 percent of total public debt as of end-2018. - WAJ overall deficit: 0.2 percentage points of GDP below projections for 2018; temporary arrears of 0.1 percent of GDP cleared in February 2019. - Distribution companies accumulated arrears of 0.5 percent of GDP as of end-2018; cleared in April 2019. - External financing needs and identified financing (selected exact figures): - Financing gap: 2019 = 5,828; 2020 = 4,388; Total = 10,216 - Reserve accumulation: 2019 = 1,863; 2020 = 1,046; Total = 2,909 - Underlying BOP gap (net): 2019 = 3,965; 2020 = 3,342; Total = 7,307 - Identified public external financing: 2019 = 5,828; 2020 = 4,388; Total = 10,216 - Public sector grants: 2019 = 1,265; 2020 = 1,135; Total = 2,399 - Eurobond issuance (unguaranteed): 2019 = 1,000; 2020 = 1,250; Total = 2,250 - IMF: 2019 = 336; 2020 = 241; Total = 577 - Support for Syrian refugees: 2019 = 379; 2020 = 513; Total = 892 - Gross Financing Needs (selected exact figures): - Gross Financing Needs: 2019: US$8,877 million = 20.1 percent of GDP; 2020: US$7,941 million = 17.1 percent of GDP. - Overall deficit (after grants): 2019: US$1,500 million = 3.4 percent of GDP; 2020: US$1,464 million = 3.2 percent of GDP. - Debt amortization: 2019: US$7,377 million = 16.7 percent of GDP; 2020: US$6,478 million = 14.0 percent of GDP. - Program projections: - Baseline public debt peaks at 94.6 percent of GDP in 2019 and declines to about 84 percent of GDP by 2024. - Staff projects combined public deficit to narrow to 2.6 percent of GDP in 2019 and public debt to about 84 percent of GDP by 2024 under committed policies. - Public and publicly guaranteed debt: JD 28.3 billion = US$39.9 billion = 94.4 percent of GDP (2018 snapshot). ### Debt sustainability, risks, and stress tests - Staff assessment: public debt sustainable but risks substantial; heat map and GFNs breach high-risk benchmarks under baseline. - Key DSA projections and indicators (selected exact figures): - Nominal gross public debt (percent of GDP): 2017: 77.9; 2018: 94.3; 2019: 94.4; 2020: 94.6; 2024: 83.7. - Public gross financing needs (percent of GDP): 2018: 21.6; 2019: 21.5; 2020: 20.1; 2024: 10.3 (final listed). - Real GDP growth path (percent): 2017: 3.4; 2018: 2.1; 2019: 1.9; 2024: 3.0. - Effective interest rate (percent): 2018: 3.8; 2019: 4.2; 2024: 5.6 (final). - Stress-test outcomes (selected scenarios): - Growth shock (cumulative growth decline of 2.1 percentage points in 2020–21 with primary balance deterioration of 1 percent of GDP) raises debt-to-GDP to 96 percent in 2021. - Real exchange rate shock closing a 20 percent overvaluation pushes debt ratio to about 99 percent of GDP by 2020. - Interest-rate shock (increase of 350 basis points) would leave debt-to-GDP about 5 percentage points higher by 2024. - Combined macro-fiscal shock would push public debt above 110 percent of GDP (unsustainable path). - Overall balance of risks: tilted to the downside; projected public debt decline fragile and sensitive to lower growth, currency depreciation, and higher borrowing costs. ### Structural reforms, energy and water sector reform - Income-tax reform (approved December 2018): - Staff estimates overall yield of 0.8 percent of GDP over the medium term: PIT yield 0.2 percent of GDP; CIT yield 0.5 percent of GDP; tax administration/enforcement 0.1 percent of GDP. - PIT: exemption thresholds reduced (individuals JD 14,000 to JD 10,000; households JD 28,000 to JD 23,000); itemized deduction changes; flat 30 percent rate above JD 1 million; new JD2,000 exemption per person with permanent disability. - CIT: standard statutory rate unified to 20 percent for manufacturing and commercial sectors; NCA surtaxes ranging from 1 percent to 7 percent by sector; phased-out export deductions 2019–2024. - Energy sector (NEPCO) reforms: - NEPCO losses projected to increase from 0.2 percent of GDP in 2019 to 0.9 percent during 2021–24 under unchanged policies and tariff structure. - Legacy NEPCO debt: 17 percent of GDP as of end-2018. - Measures: strengthened quarterly automatic tariff adjustment mechanism from July 1, 2019; cost-savings and revenue measures to prevent 2019 losses; progressive rationalization of cross-subsidies starting Q4 2019 (cost of 0.1 percent of GDP offset by other measures); adoption of cost-reflective open access charges; arrears settlement and mechanism to collect payments from public agencies by MOF by Q3 2019; donor-supported reprofiling conditional on implementation. - Expected outcomes: NEPCO financial sustainability, reduction of cross-subsidies, support for growth and investment. - Water sector (WAJ and distribution companies): - Centralization of WAJ debt management within MOF from 2018; procedural reforms and action plan to reduce water-sector losses by end-June 2019 (new benchmark). - WAJ and distribution companies reached 89-percent operational cost recovery in 2017; high electricity tariffs in 2018 worsened performance. - Commitments to integrate WAJ into 2020 general budget law (mid-November 2019 benchmark) and to implement non-tariff revenue actions. ### Financial sector, banking, and inclusion - Banking system health: - Capital adequacy: 17.2 percent (well above regulatory minimum). - NPLs declined overall; one-off boost to NPL ratios due to IFRS9 provisioning transition. - Private-sector credit growth: picked up sharply over 2016–17; steadied in 2018; slowed to around 5 percent per year subsequently. - CBJ macroprudential tools: risk-weight requirements; limits on loan-to-value and debt-to-income ratios. - Basel III regulations and liquidity requirements issued; IFRS9 transition supported. - AML/CFT and supervision: - Mutual evaluation by MENAFATF to be completed in first half of 2019; authorities urged to fully implement recommendations. - Amendments to deposit insurance and insurance supervision transfer to CBJ reset to end-September 2019. - Financial inclusion and SME support: - Credit bureau operational since October 2, 2016; credit scoring expected in early 2019. - JLGC capital increased to JD 29 million; $50 million co-financed fund for SME loan guarantees; $100 million ISSF equity fund established. - Secured transactions law enacted May 2018; collateral registry launch early 2019; insolvency law approved May 2018 with bylaws enacted January 2019. - Financial Inclusion Strategy 2018–20 launched; action plan published June 2018. - Labor-market and social measures: - Measures to promote youth and female employment, flexible work, expanded NAF coverage to almost double to 185,000 households by 2021. - Social security system running annual overall surplus of about 3½ percent of GDP, suggesting scope for temporary labor-tax adjustments. - National Service and NEEP programs launched to train and subsidize employment (targets and expansion timelines noted). ### Program modalities, conditionality, and monitoring - Program modality: Extended Fund Facility (EFF) with reviews and conditionality; authorities requested extension to March 23, 2020 and rephasing of access. - Access rephasing: - Four reviews total; second and third reviews remaining at 35 percent of quota each; fourth review at 50 percent of quota. - Prior actions implemented (five): - Parliamentary approval of income tax law amendments. - Submission to parliament of 2019 budget law consistent with program. - Regulations to accelerate GST payments for large taxpayers. - Cabinet approval of consolidation of oil-derivatives taxes and fees into specific excise tax framework. - Cabinet approval of comprehensive energy-reform plan for NEPCO’s medium-term sustainability with upfront measures preventing further losses in 2019. - Monitoring and targets (selected exact entries from proposed targets): - Primary fiscal deficit of central government, excluding grants and net transfers to NEPCO and WAJ, in JD million (flow, cumulative ceiling): 255338 442 - Combined public deficit in JD million (flow, cumulative ceiling): 464679 829 - Net International Reserves of the CBJ in USD million (stock, floor): 10,21810,92013,380 - Public debt in JD million (stock, ceiling): 29,22329,719 29,625 - IMF purchases under the EFF (JD millions, flow, cumulative from end-December 2018): 119238238 - Cap for the downward adjustor on the NIR (USD millions): 300 300300 - Reporting and data: - Extensive reporting requirements detailed in the TMU, including weekly, monthly, and quarterly submissions on fiscal, monetary, and external variables; definitions and adjustors for PCs and floors specified. ### Staff appraisal, recommendations, and priorities - Findings: - Jordan preserved macroeconomic stability amid prolonged shocks but faces low growth, high unemployment, elevated public debt, and fiscal slippages in 2018. - Recent improvements in tourism and exports following Iraq border reopening. - Key policy recommendations: - Maintain gradual and steady fiscal consolidation with protection for social spending. - Implement the new income tax law resolutely and strengthen tax administration to address revenue shortfalls; staff projects ½ percent of GDP yield in 2019 from the new law and 0.8 percent of GDP over the medium term. - Swiftly implement energy-sector reforms to secure NEPCO’s sustainability, eliminate large cross-subsidies, and implement automatic tariff-adjustment mechanism; complement with well-targeted social protection. - Continue labor-market reforms to boost formal employment, especially for youth, women, and Syrian refugees. - Maintain monetary policy focus on price and financial stability; preserve adequate reserve buffer and be ready to tighten policy if needed. - Strengthen financial-sector supervision, move to Basel III and IFRS9, and enhance AML/CFT compliance. - Donor support and fulfillment of pledges under London Initiative and Jordan Compact remain critical to cover external financing needs and to mitigate refugee-related pressures. - Staff recommendation: - Staff supports completion of the second review, the seven-month extension of the arrangement, the modification of the combined public deficit PC, the re-phasing of access, and the waiver of nonobservance of the end-December 2017 NIR performance criterion given corrective actions and new donor commitments. *Source: International Monetary Fund — Jordan: Second Review under the Extended Arrangement under the EFF (1jorea2019001).* ### 120.085 million (about US$166.4 million), bringing total disbursements under the program to ### JORDAN: SECOND REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUESTS FOR A WAIVER OF NONOBSERVANCE OF PERFORMANCE CRITERION, AN EXTENSION OF THE ARRANGEMENT, AND REPHASING OF ACCESS ### Executive Board Assessment - Executive Board approved disbursement of SDR 120.085 million (about US$166.4 million), bringing total disbursements under the program to SDR 223.015 million (about US$309. million). - Approved authorities’ request for: - waiver of non-observance of performance criterion on the Net International Reserves of the Central Bank of Jordan (CBJ); - extension of the arrangement to March 2020; - rephasing of access. - Commendation for preserving macroeconomic stability, maintaining a prudent monetary policy, and ensuring a sound financial system. - Identified challenges: low economic growth, high unemployment, elevated public debt. - Emphasis on: - swift implementation of policies and reforms to lower public debt, boost investment and productivity, and enhance inclusive growth; - continued donor assistance to cope with the refugee crisis and support reforms. ### Executive Summary — Key Findings and Program Status - Program approved on August 24, 2016: three-year extended arrangement under the EFF for Jordan equivalent to SDR 514.65 million (about US$723 million at the time of approval, or 150 percent of Jordan’s quota). - Program objectives: advance fiscal consolidation, lower public debt, and implement broad structural reforms for more social-friendly inclusive growth. - Since the first review: - Jordan preserved macroeconomic stability despite severe shocks (regional conflicts, hosting Syrian refugees, disruption of export markets, rising borrowing costs). - 2018: challenging year with important progress on fiscal and structural reforms but slippages including a persistent shortfall in revenue collection. - Authorities passed a critical income-tax reform; formulated a comprehensive medium-term reform program. - International support: - London Initiative (February 28, 2019) unlocked additional financing commitments of about $5 billion. - Completion of the second review makes available SDR 120.085 million (around $167 million). - Date of Executive Summary: April 23, 2019. ### Context — Structural and External Pressures - Major shocks faced by Jordan: - disruption of critical export routes and markets from protracted regional conflicts; - hosting of 1.3 million Syrian refugees; - rising oil prices and borrowing costs. - Domestic political events: - May 2018 protests over fuel and electricity prices and submission of delayed income-tax law led to resignation of Prime Minister al-Mulki. - New government (Prime Minister Omar al-Razzaz) formed June 2018; passed income-tax law in December 2018 after broad national dialogue. - Resulting actions: - comprehensive five-year reform plan formulated in collaboration with international donors. - renewed international support via the London Initiative and subsequent financing commitments of about $5 billion. ### Recent Developments — Macroeconomic Indicators - Growth and prices: - Nominal growth softer than expected at the time of the first review (lower real growth and a lower deflator). - Exports: higher to Iraq after border reopening August 2017; exports to some key partners (GCC countries) down. - Inflation: peaked at 5.7 percent in July 2018; returned to trend later; core inflation reached 1.1 percent most recently in 2019. - Labor market: - Unemployment reached 18.0 percent in the final quarter 2018. - Youth unemployment: 42.3 percent. - Female unemployment: 23.3 percent. - Vulnerabilities noted: low growth, insufficient job creation, high unemployment and poverty, concerns about corruption and public discontent. ### Fiscal Performance and Public-Sector Balances - 2017 performance: - Fiscal consolidation progressed as programmed in 2017 despite a revenue shortfall of about 1½ percent of GDP relative to first review projections. - Central government primary deficit (excluding grants and one-off payments of arrears) declined from 2.9 percent of GDP in 2016 to 1.1 percent of GDP in 2017. - 2018 slippages: - Fiscal program aimed to reduce central government primary deficit (excluding grants and one-off payments of arrears) to 0.6 percent of GDP via rationalizing sales tax exemptions and increasing excises (combined revenue yield of 1½ of GDP). - Revenue performance stalled in second half of 2018 due to: - lower collections of sales taxes (reversal of some tax increases, softening of non-energy imports); - tax administration deficiencies; - weaker tax compliance due to anticipated tax amnesty (implemented November 2018–April 2019; overall yield of 0.3 percent of GDP). - Authorities reduced budgeted expenditures by 1½ percent of GDP to contain revenue shortfall; offset by surge in off-budget expenditures of about 1 percent of GDP. - By end-2018, central government primary deficit (excluding grants and one-off payments of arrears) reached 2.4 percent of GDP. - Health arrears and public agencies: - New medical arrears limited to 0.2 percent of GDP in 2018 (vs. about 1 percent of GDP in 2017) due to stricter regulations on medical exemptions. - Surge in off-budget pressures reflected local governments, universities, and other public agencies; 2019 budget expanded allocations to these entities with commensurate savings elsewhere. - Electricity and water entities: - NEPCO operating loss: 0.3 percent of GDP in 2018, reflecting uneven implementation of automatic tariff adjustment mechanism. - Tariff increases December 2017–September 2018 totaling 24 fils per kWh (equivalent to a 30 percent increase of wholesale tariffs). - Subsequent tariff reductions: 2 percent in October, unchanged in November, 5 percent in December, and 10 percent during first two months of 2019. - WAJ: overall deficit 0.2 percentage points of GDP below projections for 2018; temporary arrears of 0.1 percent of GDP cleared in February 2019. - Distribution companies accumulated arrears of 0.5 percent of GDP as of end-2018; cleared in April 2019. - Combined public-sector deficit (central government primary deficit plus NEPCO operational and WAJ overall deficits) worsened (continued discussion beyond provided excerpt). ### Structural Reforms and Policy Recommendations - Fiscal policy: - Continue gradual and steady fiscal consolidation with due regard to social protection needs. - Implement recent income-tax law resolutely; enhance tax administration and reduce tax evasion. - These measures seen as crucial to preserve macroeconomic and external stability, improve public finances, and lessen debt sustainability risks. - Monetary and financial policy: - Monetary policy stance appropriate; authorities should remain ready to adjust interest rates to maintain adequate reserve buffer. - Banks remain sound and well-capitalized; continued improvements in financial sector oversight and supervision are welcome. - Structural reforms to promote inclusive growth: - Encouraging enactments: secured-transactions law, bankruptcy law, business-inspections law. - Further reforms recommended: labor-market flexibility (particularly for youth and women), publication and implementation of a financial-inclusion action plan, measures to support credit to SMEs, and measures to improve labor market conditions and strengthen social safety net. - Energy sector: - Priority to reduce business costs and boost employment by restructuring the energy company to reduce high electricity costs for businesses. - Implement measures under the roadmap: elimination of large cross subsidies and implementation of the new tariff-adjustment mechanism as swiftly as possible. - Complement tariff reforms with a well-targeted social protection scheme to safeguard low-income and vulnerable households. ### Program Modalities, Missions, and Timeline - Program modality: Extended Fund Facility (EFF) with reviews and conditionality. - Missions: - Mission team for reviews: Martin Cerisola (head), Andrew Tiffin (head of advance team), Cesar Serra, Maximiliano Appendino (all MCD); Pablo Morra and Plamen Iossifov (SPR); Saji Thomas (FAD); assisted by Kyle Axberg, Jawed Sakhi, Cecilia Pineda, Laila Azoor; joined by Sami Geadah, Alternate Executive Director. - Discussions held in Amman during May 20-31, 2018, and January 27–February 7, 2019. - Staff met with senior government officials, NEPCO, WAJ, private sector, donor community, and civil society representatives. - Documentation and annexes (listed in content): Figures, Tables, Boxes (including "Income Tax Reform" and "Energy Sector Reform"), Annex I Debt Sustainability Analysis, Appendix with Letter of Intent and TMU. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1jorea2019001.pdf* ### 4.3 percent of GDP in 2018, compared to a program target of 1.8 percent at the time of the ### 1jorea2019001 - 4.3 percent of GDP in 2018, compared to a program target of 1.8 percent at the time of the ### Fiscal outcomes and public debt - Combined public deficit reached 4.3 percent of GDP in 2018, compared to a program target of 1.8 percent at the time of the first review. - Public debt remained broadly stable in 2018 at 94.4 percent of GDP, owing mostly to: - a drawdown of treasury deposits (about 1¼ percent of GDP), and - a rebasing of GDP. - Public debt, as defined by the authorities and in the program, includes government securities held by the Social Security Corporation; excluding these cross-holdings, public debt is around 78 percent of GDP. - Due to GDP rebasing, the 2017 debt-to-GDP ratio had decreased from 95.9 to 94.3 percent. ### External position and international reserves - The current account deficit (excluding grants) fell to 10¼ percent of GDP in 2018, reflecting: - buoyant tourism, - increased exports to Iraq and the United States, - significant compression of non-energy imports (partly reflecting one-off capital-goods imports in 2017). - The financial account was not sufficiently strong to cover the large current account deficit, reflecting: - a considerable decline in foreign direct investment, - sizable private-sector outflows following uncertain political and economic conditions after the mid-2018 protests. - Net international reserves (NIR) were about $448 million below the December 2017 performance criterion, with gross usable reserves at $14.3 billion at end-2017 (114 percent of the Fund’s Reserve Adequacy Metric (RAM)). - Reserve developments in 2018: - Outflows accelerated to around $900 million in June 2018 (compared to $300 million in May), with gross usable reserves dropping to less than 100 percent of RAM. - A $500 million loan from the World Bank disbursed during July–August 2018. - Announcement of a $2.5 billion aid package from Saudi Arabia, Kuwait and UAE, and an additional $0.5 billion from Qatar. - CBJ rate hikes since June 2018 helped calm local sentiment; depositor confidence remained steady and deposit dollarization stabilized at 21 percent. - In August 2018 CBJ implemented an $800 million FX swap with domestic banks. - First elements of the aid package included: a $500 million term deposit from Kuwait; two $333 million deposits from both Saudi Arabia and UAE; combined budget grants for $100 million. - Gross usable reserves ended 2018 at $12.5 billion (97 percent of RAM), and have broadly remained at that level over the past few months. - The real effective exchange rate appreciated somewhat in 2018, effectively unwinding the 4 percent depreciation of 2017, and remains moderately overvalued. ### Structural reforms and institutional progress - Reforms completed or advanced in line with the program timetable: - Submitted a new organic budget law to parliament. - Published an updated debt management strategy and finalized reorganization of the debt management directorate. - Addressed shortcomings in Jordan’s investment regulations and requirements. - Submitted to parliament a draft inspections law. - Completed consolidation of trust accounts within the fiscal recording framework in September 2017. - Financial Inclusion Strategy 2018–20 launched in December 2017. - Amendments to the deposit insurance law submitted to parliament in April 2018. - Enacted long-delayed amendments to the secured-lending law in April 2018. - Amendments to the insolvency law approved by parliament in May 2018. - Completed benchmarks pending at first review: - Submitted draft inspections law to parliament. - Consolidated trust accounts (September 2017). ### Outlook and projections - Growth: - Staff projects growth will increase to 3 percent more gradually than in the first review, supported by: - the re-opening of the border with Iraq and recently-signed trade and investment agreements, - the extension and broadening of the trade agreement with the European Union, - pledged investments in the context of the London Initiative, - continued robust tourism inflows, - envisaged reforms to reduce the cost of doing business, particularly to lower electricity costs. - Baseline assumes no significant spillovers from an improvement in Syria’s security situation. - Fiscal projections: - Fiscal consolidation expected to resume in 2019, lowering the combined public deficit to 2.6 percent of GDP. - Steady fiscal adjustment aiming to reduce public debt to about 84 percent of GDP by 2024. - Committed budget grants over the 2019–23 period would amount to $4 billion, about 1 percent of GDP per year lower than anticipated in the first review. - External sector: - Current account deficit projected to gradually narrow to around 6 percent of GDP. - Gross usable reserves projected to reach about 110 percent of RAM in the medium-term (compared to 125 percent in the first review). - External financing needs projected to be covered by increased official support (following new commitments pledged at the London Initiative). ### Risks - External risks: - Outlook remains fluid for Syria; unexpected developments could affect Jordan’s refugee presence and fiscal position. - Sizable near-term FX rollover needs and limits to further grant and concessional financing leave Jordan highly vulnerable to global market volatility. - Higher oil prices could affect the current account and place pressure on reserves, inflation, and public finances. - Upside: improved GCC outlook could support exports and remittances; an oil pipeline from southern Iraq to Aqaba would enhance export services and access to cheap energy; reconstruction in Syria and Iraq could yield sizable positive spillovers. - Domestic risks: - Sustaining the required pace of fiscal consolidation could be a challenge. - Advancing reforms to promote jobs and reduce business costs may be difficult; weak implementation could undermine donor and investor confidence, external financing, and stability. - Strong implementation of the new income tax law and efforts to tackle revenue collection weaknesses and avoid further tax concessions are critical. ### Program discussions — fiscal policy - New income tax law (approved December 2018): - Staff estimates overall yield will reach 0.8 percent of GDP over the medium term (½ percent of GDP in 2019) against a program target of 1 percent of GDP. - The law expands the tax base, protects low-income and most vulnerable households, closes distortions and loopholes (notably in industrial and development free zones), and sets the stage for stronger efforts to reduce tax evasion. - To resume an annual adjustment of 1½ percent of GDP (as agreed under the program), authorities adopted additional fiscal measures: - The 2019 budget consolidation underpinned by the new income tax law (revenue yield of ½ percent of GDP) and additional measures with combined yield of 1 percent of GDP. - This would reduce the primary deficit (excluding grants and one-off payments of arrears) to 0.8 percent of GDP, with public debt projected to broadly stabilize at 94.6 percent of GDP in 2019. - Tax-administration strengthening measures underway: - Enhancing the Pay As You Earn (PAYE) system for large taxpayers. - Increasing compliance among self-employed persons. - Introducing transfer pricing regulations. - Enhancing access to third party information. - New income tax law stiffened penalties for delays in compliance and tax evasion. - Commitment to strictly manage expenditure within budgeted allocations to arrest off-budget pressures observed in 2018, while accommodating additional space for social and capital spending: - Floor on social spending by central government incorporating expansion of National Aid Fund’s cash transfer program and the civil health insurance coverage. - More resources for health and education spending and better targeting of vulnerable groups. - Central government fiscal consolidation table highlights (in percent of GDP): - Domestic revenues: 22.2 (2016), 23.2 (2017), 23.2 (2018), 24.5 (2019 1/) - Primary expenditures, of which: 25.4 (2016), 24.9 (2017), 26.1 (2018), 25.9 (2019) - Payments of arrears (one-off): 0.3 (2016), 0.6 (2018), 0.6 (2019) - Primary balance (exc. grants): -3.2 (2016), -1.7 (2017), -3.0 (2018), -1.4 (2019) - Primary balance (exc. grants and one-off payments of arrears): -2.9 (2016), -1.1 (2017), -2.4 (2018), -0.8 (2019) - 1/ The authorities transferred 29 government units into the general budget in 2019 with neutral impact on the overall balance; reflected as an increase in non-tax revenues by 0.4 percent of GDP and commensurate increases in expenditures and offsets as noted. ### Program discussions — debt sustainability, PPPs, and fiscal risks - Achieving a primary surplus target (excluding grants) of about 2 percent of GDP by 2022 would require removing tax exemptions on income and consumption and rationalizing current expenditures. - Under prospective financing and committed policies, public debt projected to fall to about 84 percent of GDP by 2024; assessed as sustainable though risks remain high. - Authorities committed not to renew the exemption of water and energy sectors from the PPP law after its expiration in end-June 2019 (new benchmark). - Authorities to submit amendments to the PPP law by end-December 2019 (new benchmark) with World Bank support. - Authorities agreed to recruit a top tier international accounting firm by end-June 2019 (new benchmark) to complete a detailed study to identify and quantify major direct and contingent liabilities from PPPs by end-December 2019 (new benchmark). ### Electricity and water sector policies - Electricity sector: - Comprehensive reform critical to ensure NEPCO’s financial sustainability and to lower public debt, enhance competitiveness, foster investment, and boost growth. - Challenges: high legacy debt, expensive long-term power purchase agreements, asymmetric tariff adjustments. - Authorities, with World Bank support, started implementing a multi-pronged plan including rationalization of cross-subsidized tariff structure, upfront revenue and cost-savings measures, and reprofiling of NEPCO’s debt. - Efforts ongoing to implement a targeted, means-tested social protection scheme to protect low-income and vulnerable households from tariff increases. - Water sector: - Centralization of WAJ debt management underway; from 2018 centralizes WAJ’s debt-management and investment funding within the Ministry of Finance, covering WAJ’s gross financing needs through budget transfers. - Third biannual report on the “Action Plan to Reduce Water Sector Losses” finalized. - WAJ and three distribution companies reached 89-percent operational cost recovery in 2017; high electricity tariffs in 2018 worsened performance, leading to arrears. - Authorities committed to start implementing a plan on non-tariff revenue actions (such as expanded access to renewable energy) to reduce water-sector losses by end-June 2019 (new benchmark). ### Monetary and financial policy - Authorities remain fully committed to maintaining the exchange-rate peg and balancing reserve adequacy with domestic conditions. - CBJ policy actions: - Tightening of the policy rate in late 2016–early 2017 stabilized deposit dollarization and stemmed pressure on reserves. - Since then, CBJ has mirrored movements in the U.S. policy rate. - Staff judged a tighter monetary policy warranted in 2018 in light of fiscal slippages to mitigate outflows. - Authorities reaffirmed commitment to act swiftly and aggressively if needed to protect reserves (MEFP ¶19). - Improved balance of payment conditions eased pressures and allowed CBJ to build up reserves; authorities saw no immediate need for a preemptive rate increase but stood ready to tighten monetary policy if needed. - Authorities view monetary and fiscal policy as tightly linked; meeting fiscal targets in 2019 seen as critical to reduce the current account deficit and ease burden on monetary policy. - Any change in CBJ policy stance (relative to U.S. monetary policy) would need careful and clear communication to the market. *International Monetary Fund staff report content as provided.* ### 23. The banking system is well capitalized, liquid, and profitable, but faces an increasingly ### 23. The banking system is well capitalized, liquid, and profitable, but faces an increasingly ### Banking sector health and risks - Capital adequacy at 17.2 percent is well above the regulatory minimum. - Non-performing loans (NPLs) have declined, though a one-off boost to NPL ratios resulted from the switch to IFRS9 under CBJ provisioning guidelines. - Private-sector credit: - Picked up sharply over 2016–17. - Steadied over 2018. - Has since slowed to around 5 percent per year. - Authorities note recent easing of household lending reflects ongoing dialogue with banks on trends and potential risks; key prudential ratios are manageable. - CBJ tools to address rising credit risk include risk-weight requirements and concrete limits on loan-to-value and debt-to-income ratios. - Regulatory and supervisory strengthening: - Basel III regulations issued on capital adequacy, including for domestically systemically important banks (DSIB). - Basel III liquidity requirements issued. - Proactive work with banks to ensure smooth transition to IFRS9 accounting standards. - In line with IMF TA recommendations, authorities are putting in place a risk-based framework for offsite and onsite supervision of banks and money-exchange firms and for other financial and nonfinancial institutions, including non-profit organizations. - Benchmarks to move insurance supervision to the CBJ have been reset to end-September 2019 to reflect need for additional IMF TA. ### AML/CFT and supervision - With Fund assistance, authorities are improving the AML/CFT framework. - A mutual evaluation of Jordan by MENAFATF will be completed in the first half of 2019. - Authorities are encouraged to fully implement the recommendations of the evaluation report. ### Structural reforms to enhance inclusive growth and employment - Tackling high unemployment is a critical priority; authorities have taken steps to: - Improve education and vocational training and address skills mismatches. - Reform public-sector hiring practices and provide more flexible work practices. - Promote gender equality and enhance access to childcare. - Expand livelihood opportunities for Syrian refugees by extending work permits beyond agriculture and special manufacturing zones to construction and services sectors. - Labor-tax measures: - A temporary reduction in payroll taxes is discussed; current social security contributions are 21.75 percent. - The social security system is running an annual overall surplus (of about 3½ percent of GDP), suggesting scope to lower the labor-tax wedge for 3–5 years or consider more flexible contribution arrangements. - A study on options for lowering social security contributions (end-March 2018 benchmark) has been delayed but integrated into a 5-year reform matrix developed with the World Bank. - Social protection and gender: - Implementation of a three-year program to almost double coverage of the National Aid Fund’s (NAF) cash transfer program. - Amendments to bylaws that previously restricted working hours for females. - Submission to parliament of labor law amendments to allow more flexible work arrangements, remove potential discrimination between mothers and fathers regarding daycare requirements, and establish paternity leave. ### Financial inclusion, SMEs, and business environment - Authorities published a financial-inclusion strategy (benchmark) to enhance quality, access, and use of financial services; actions include: - Improve SMEs’ access to finance. - Further develop key infrastructure (credit bureau and payment system). - Enhance digital financial services and access to Microfinance. - Promote financial literacy and strengthen consumer protection. - Build a comprehensive monitoring framework. - A concrete action plan was published in mid-2018; a monitoring and evaluation framework is being developed. - Legal and institutional reforms: - Passage of the insolvency law aligns bankruptcy framework with international best practice. - Passage of the secured lending law allows SMEs to use moveable assets as collateral. - Expected payoffs include broader financial access (especially for women, the poor, and SMEs) and lower borrowing costs over time. ### Program modalities, financing, and reserves - Authorities requested an extension of the arrangement to March 23, 2020 and a re-phasing of remaining access under the program. - Staff proposes performance criteria for end-June and end-December 2019 and a new indicative target for end-September 2019. - Authorities requested modification of the combined public deficit performance criterion to expand monitoring to water distribution companies and to add an indicative target on those companies’ domestic arrears. - Access rephasing: - Program will have four reviews. - Access under the second and third reviews remaining at 35 percent of quota each. - Access under the fourth review set at 50 percent (Table 5). - Prior actions implemented (five): - Approval by parliament of amendments to the income tax law. - Submission to parliament of a budget law for 2019 broadly consistent with program commitments. - Issuance of regulations to accelerate GST payments from bi-monthly to monthly for large taxpayers. - Approval by cabinet of consolidation of taxes and fees on oil-derivatives into a specific excise tax framework. - Approval by cabinet of a comprehensive energy-reform plan ensuring NEPCO’s medium-term sustainability and gradual phase-out of cross-subsidies; initial implementation includes upfront revenue and cost-savings measures that prevent further losses in 2019. - Financing assurances and commitments: - London Initiative commitments over 2019–23 of $5.1 billion, including $3.5 billion from official bilateral donors and $1.6 billion from multilateral organizations. - Donors pledged continued support; Jordan needs sustained concessional financing and budget grants beyond the program period. - External financing needs estimated at $10.2 billion for 2019–20 are expected to be covered (including through Eurobond issuance of $2.25 billion). - Reserve targets and adjustments: - NIR targets recalibrated to bring reserve coverage back to an adequate level by end-2019 (103 percent of the RAM). - Cap on the NIR adjustor restricted to half the level set during the first review. - External Financing (In millions of U.S. dollars) — selected figures preserved exactly as presented: - Financing gap: 2019 = 5,828; 2020 = 4,388; Total = 10,216 - Reserve accumulation: 2019 = 1,863; 2020 = 1,046; Total = 2,909 - Underlying BOP gap (net): 2019 = 3,965; 2020 = 3,342; Total = 7,307 - Identified public external financing: 2019 = 5,828; 2020 = 4,388; Total = 10,216 - Public sector grants: 2019 = 1,265; 2020 = 1,135; Total = 2,399 - Budget (grants): 2019 = 903; 2020 = 792; Total = 1,695 - Off-budget (grants): 2019 = 362; 2020 = 342; Total = 705 - Public sector borrowing: 2019 = 4,377; 2020 = 3,225; Total = 7,601 - Budget borrowing: 2019 = 3,478; 2020 = 2,504; Total = 5,983 - Off-budget borrowing: 2019 = 898; 2020 = 720; Total = 1,619 - Jordan Compact off-budget grants: 2019 = 186; 2020 = 292; Total = 478 - Memorandum Items: - Multilateral, of which: 2019 = 2,316; 2020 = 1,157; Total = 3,473 - IMF: 2019 = 336; 2020 = 241; Total = 577 - Bilateral: 2019 = 2,512; 2020 = 1,981; Total = 4,493 - Eurobond issuance (unguaranteed): 2019 = 1,000; 2020 = 1,250; Total = 2,250 - GCC grants transferred from CBJ to MOF: 2019 = 159; 2020 = 162; Total = 322 - Support for Syrian refugees: 2019 = 379; 2020 = 513; Total = 892 ### Debt, Fund exposure, arrears, and safeguards - Under the program scenario, Jordan’s capacity to repay the Fund remains adequate but subject to risks from high debt and gross financing needs above high-risk benchmarks in the MAC DSA. - Fund credit and repayments: - Fund credit projected to peak in 2019 at 4.9 percent of exports of goods and non-factor services (GNFS). - Repayments expected to fall to 2.7 percent of exports of GNFS in 2019 (Table 6). - External arrears: - Jordan has outstanding arrears to an official bilateral creditor; these continue to be deemed away under the Fund’s policy on arrears to official bilateral creditors, as the underlying Paris Club agreement is adequately representative and authorities continue making best efforts to resolve the arrears. - Safeguards: - Last safeguards assessment of the CBJ completed in 2016 found continued strengthening of safeguards framework through legal amendments and improvements in governance and external audit arrangements. - The assessment made recommendations; authorities have implemented these except one currently in progress. ### Staff appraisal and policy priorities (findings and recommendations) - Findings: - Jordan preserved macroeconomic stability amid prolonged shocks (regional conflicts, hosting Syrian refugees, disrupted export markets, rising borrowing costs). - Fiscal consolidation lowered the combined public-sector deficit in 2016–17. - Monetary policy maintained financial stability and kept credit flowing; growth steady at around 2 percent but insufficient to reduce high unemployment. - 2018 saw fiscal slippages and delays in structural reforms, undermining efforts to improve economic conditions. - Recent signs of upturn in tourism and exports, aided by re-opening of the Iraq border. - Key policy recommendations and priorities: - Maintain gradual and steady fiscal consolidation to put high public debt on a steady downward path. - Implement comprehensive reforms to enhance business conditions and employment prospects. - Increase emphasis on improving social protection, expanding spending on health and education, and better targeting vulnerable groups. - Ensure unwavering implementation to avoid fiscal slippages, operational pressures in NEPCO, unfavorable refinancing conditions, and possible delays in donor financing. - Jordan will need substantial donor involvement; donors’ fulfillment of pledges is critical. - Priority for 2019: resolute implementation of the new income tax law and significant strengthening of tax administration, including measures to lessen incentives and increase penalties for tax evasion. - Decisive action to reduce business costs and boost employment: - Upfront macro-critical reforms to reduce cost of formal jobs and lower energy costs. - Swift implementation of the roadmap for restructuring NEPCO and front-loading efforts to eliminate large cross subsidies supported by consistent implementation of the tariff adjustment mechanism. - Donor support needed to lessen impact of NEPCO’s legacy debt. - Continue labor-market reforms that extend refugee work permits, promote flexible part-time employment, and enhance access to childcare. - Maintain monetary policy focus on price and financial stability and preserve an adequate reserve buffer; stand ready to increase the interest differential with the United States if needed. - Move to Basel III and IFRS9 provisioning standards will bolster banking-sector resilience; improve supervision of insurance companies and microfinance institutions to strengthen non-bank financial sector. *Source: Jordanian authorities; and Fund staff estimates and projections.* ### 42. Staff supports the completion of the second review, the seven-month extension of the ### 1jorea2019001 - 42. Staff supports the completion of the second review, the seven-month extension of the ### Staff recommendation on program review, extension, and waiver - Staff supports the completion of the second review, the seven-month extension of the arrangement, the modification of the performance criterion for the combined public deficit, and the proposed re-phasing of access. - Staff supports the waiver of nonobservance of end-December 2017 performance criterion on the NIR of the CBJ in view of: - corrective action taken by the authorities, including increases in CBJ’s policy rate; - the CBJ’s commitment to tighten further its monetary stance if pressures on reserves persist; - the envisaged fiscal consolidation in 2019; and - the new donor commitments. ### Box 1. Income Tax Reform — overall impacts and yield estimates - Staff estimates an overall yield of 0.8 percent of GDP over the medium term from the income tax reform. - Breakdown of estimated yields: - PIT reform overall yield of 0.2 percent of GDP. - CIT reform overall yield of 0.5 percent of GDP. - Tax administration and enforcement measures overall yield of 0.1 percent of GDP. ### Box 1. Income Tax Reform — Personal Income Tax (PIT) changes - Effective exemption thresholds reduced: - Individuals: from JD 14,000 to JD 10,000. - Households: from JD 28,000 to JD 23,000. - Itemized deduction allowance: changed from JD 2,000/4,000 to up to JD 3,000 for children (maximum JD 1,000 each), and starting in 2020 an additional JD 1,000 for the taxpayer and JD 1,000 for the spouse. - New income exemption of JD2,000 for each person with permanent disability (as included by Parliament). - Progressivity and rates: - Introduces higher marginal tax rates on higher-income brackets and reduces the rate for the lowest-income earners. - Introduces a flat 30 percent tax rate for income above JD 1 million. - Effectively removes the 1 percent solidarity tax originally envisaged by applying it only on income exceeding JD 200,000. - Base broadening measures: - Securities transaction tax: 0.08 percent of the value of traded shares charged both from sellers and buyers. - Presumptive income tax regime on professionals: 1 percent tax rate on revenues below a threshold of JD 150,000. ### Box 1. Income Tax Reform — Corporate Income Tax (CIT) changes - Standard statutory CIT: - Unifies the standard statutory CIT rate for the manufacturing and commercial sectors to 20 percent. - National Contribution Account (NCA) surtax (time-bound) on corporate profits: - Banks and electricity distribution and generation companies: 3 percent. - Mining companies: 7 percent. - Financial intermediary companies, financial companies, and legal persons practicing financial leasing: 4 percent. - Telecommunications companies, and insurance and re-insurance companies: 2 percent. - All other legal persons: 1 percent. - Also includes the 1 percent on individuals with income exceeding JD 200,000 (personal solidarity tax). - Withholding of such contributions shall stop once public debt reaches the acceptable ratio under the effective Public Debt Management Law; which is currently set at 80 percent of GDP. - Export subsidy replacement and phase-out: - Replaces the non-WTO compliant export income deduction with a temporary manufacturing deduction: 50 percent for pharmaceutical and textile sectors, 25 percent for other manufacturing sectors. - These exemptions will phase out over 2019-2024, with all industrial companies facing an effective CIT rate of 20 percent starting in 2024 (plus the additional 1 percent NCA contribution if applicable). - Share of export income in total income: pharmaceutical/textile sectors 90 percent; other manufacturing sectors 25 percent. ### Box 1. Income Tax Reform — Additional corporate base broadening and administration - Expands the tax base by: - Adding currently-exempted large agricultural companies (with an income exemption of JD 50,000). - Removing tax concessions for investment in special and development zones on non-manufacturing services (CIT increased from 5 to 10 percent, while preserving existing 5 percent on manufacturing activities). - Taxing corporate income generated on all activities (excluding transit) within free zones at the regular CIT statutory rates. - Introducing an annual minimum corporate tax of JD 500 for registered partnerships and limited partnerships. - Taxation on dividends received by banks, telecom companies, and financial companies. - Increase in the withholding corporate tax rate on interest income from 5 to 7 percent. - Taxation on e-commerce at regular rates. - Tax administration enhancements (overall yield 0.1 percent of GDP): - Implementing the PAYE withholding regime for large taxpayers. - Improving compliance of self-employed and professionals (registration, payment and filing). - Introducing a modern transfer pricing rule. - Enhancing access to third-party information. - Strengthening penalties to combat tax evasion. ### Box 2. Energy Sector Reform — context and financial outlook for NEPCO - Context and projections under the tariff structure prevailing as of March 2019: - NEPCO’s losses are projected to increase from 0.2 percent of GDP in 2019 to 0.9 percent during 2021–24 under unchanged policies and tariff structure. - Legacy debt burden: 17 percent of GDP or 18 percent of total public debt as of end-2018. - Positive factors that are not expected to fully offset costs: - Cheaper gas sources from Egypt since the last quarter of 2018 and the Mediterranean starting in 2020 are not expected to be enough to offset expensive long-term power purchase agreements, particularly with the coming into stream of the shale oil project in 2020–21. ### Box 2. Energy Sector Reform — reform measures and implementation timeline - Initial correction, cost-savings, revenue measures, and regular tariff adjustment: - Authorities implemented cost-savings and revenue measures to prevent losses in 2019. - Since July 1, 2019, authorities committed to a strengthened quarterly automatic tariff adjustment mechanism linked to NEPCO’s overall cost structure to secure its annual breakeven. - Rationalization of cross-subsidized tariff structure: - Authorities committed to progressively rationalize tariffs for productive sectors on a revenue-neutral basis. - First step: reduce the cross-subsidy burden on productive sectors (large industries, ports, and commercial sector) during the fourth quarter of 2019 at an overall cost of 0.1 percent of GDP (offset by the aforementioned cost-savings and revenue measures). - Adoption of cost-reflective open access charges: - Implement a fixed charge to users with self-generation capacity to reflect costs of continued access to the electric grid (capacity, storage, maintenance) and reduce cross-subsidies. - Arresting accumulation of receivables: - Authorities cleared the stock of NEPCO’s receivables in April through a one-time settlement of intra-governmental liabilities involving electricity distribution companies, NEPCO and the Ministry of Finance. - Aim to implement—by the third quarter of 2019—a new mechanism enabling NEPCO to collect electricity payments from public agencies directly from the Ministry of Finance to prevent further arrears. - Reprofiling of NEPCO’s debt: - Conditional on implementation goals, donors have provided early indications of potential financial support to reprofile NEPCO’s debt to smooth debt service and reduce interest burden. - Note: As committed financing is yet to be firmed up, NEPCO’s envisaged debt reprofiling is not yet reflected in the debt sustainability analysis and financing tables. *JORDAN — INTERNATIONAL MONETARY FUND (excerpt).* ### Box 2. Energy Sector Reform (concluded) ### Box 2. Energy Sector Reform (concluded) ### Policy measures - Full implementation of NEPCO’s restructuring. - Transparent and strengthened regulatory practices. - Gradual removal of cross-subsidies. ### Mitigation and compensation - Donor commitments would help financing compensatory measures to mitigate the impact of higher tariffs on the most vulnerable, including the implementation of targeted cash transfers and the use of renewable energy. - While mitigating the impact on vulnerable households. ### Efficiency incentives - Authorities plan to implement energy saving certificates to prize efficient electricity consumption with lower tariffs financed with savings from other programs. - And providing incentives for efficient electricity consumption. ### Expected outcomes - The full implementation of NEPCO’s restructuring, together with transparent and strengthened regulatory practices, will place NEPCO’s financial position on a sustainable path, while enhancing growth and investment prospects through the gradual removal of cross-subsidies. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1jorea2019001.pdf* ### Annex I. Debt Sustainability Analysis ### Annex I. Debt Sustainability Analysis ### Executive assessment and headline projections - Public debt is assessed as sustainable, but risks are substantial. - Baseline projection: public debt peaks at 94.6 percent of GDP in 2019 and declines to about 84 percent of GDP by 2024. - External debt: projected to reach 75 percent of GDP by 2021 (external DSA; increased external indebtedness driven by market access and concessional borrowing under the Jordan Compact and London Initiative). - The assessment depends on: fiscal adjustment and growth-enhancing reforms committed by the authorities; timely mobilization and disbursement of donor and market financing. ### A. Macroeconomic and fiscal assumptions - Growth: - GDP growth projected at 2.2 percent in 2019 (½ percentage point less than in the first review). - Medium-term growth projected to increase gradually to 3 percent. - Inflation and current account: - Inflation (GDP deflator) expected at 2.5 percent over the medium term. - Current account deficit (including grants) for the medium term about 6 percent of GDP. - Financing assumptions: - FDI inflows, continued market access, and concessional financing under the Jordan Compact and the London Initiative would help finance the current account deficit and maintain international reserves. - Fiscal consolidation: - Combined public balance swings from a deficit of 4.3 percent of GDP in 2018 to a surplus of 1.2 percent over the medium term. - A cumulative fiscal effort of 3 percent of GDP during 2020–22 is required. - Fiscal consolidation also supported by comprehensive energy reform to ensure NEPCO’s financial sustainability. - Budget grants: - Grant inflows over the past five years reached $6.5 billion, including $3.75 billion from select GCC members. - Committed budget grants over 2019–23 amount to $4 billion (about 1 percent of GDP per year lower than anticipated in the first review). - Sovereign yields and interest burden: - Jordan’s EMBIG spread averaged about 400 basis points since end-2015 (standard deviation 35 basis points). - Overall interest burden about 3 percent of GDP (lowest among countries rated B+ or below with similar debt-to-GDP ratios). - Effective interest rate projected to increase by 150 basis points over the medium term. - Maturity and rollover: - Average maturity (excluding treasury bills) increased from about three years in 2014 to six years in 2018. - External public debt maturity at issuance typically more than five years; U.S. guaranteed Eurobonds maturing over 2019–22 assumed rolled over on market terms at due dates. - Social Security Corporation’s (SSC) net income projected at no less than 2½ percent of GDP per year over the next 10 years. ### B. Realism of projections and historical context - Growth revisions reflect regional spillovers (e.g., closure of Iraq border in 2015, GCC slowdown); medium-term growth now converges to 3 percent by 2023 (compared to 4 percent by 2019 at EFF request). - Inflation forecasts show no systematic bias and align broadly with comparator median forecast errors. - Fiscal adjustment record: - Jordan’s three-year average cyclically-adjusted primary balance (CAPB) is generally in line with comparator medians. - The required maximum three-year adjustment is in the top quartile of past adjustments in high-indebted countries. - Needed fiscal consolidation: about 1 percent of GDP per year over 2020–22 (below the 1½ percent per year achieved during 2016–17). ### C. Public sector debt profile, financing needs, and baseline DSA - Coverage of public debt in DSA: - (i) central government direct debt; - (ii) government-guaranteed debt of public entities (NEPCO, WAJ, other public entities); - (iii) CBJ’s liabilities to the IMF. - Gross Financing Needs and Sources (selected figures, 2019 and 2020) - Gross Financing Needs (A1+A2): - 2019: US$8,877 million = 20.1 percent of GDP - 2020: US$7,941 million = 17.1 percent of GDP - A1. Overall deficit (after grants): - 2019: US$1,500 million = 3.4 percent of GDP - 2020: US$1,464 million = 3.2 percent of GDP - A2. Debt amortization: - 2019: US$7,377 million = 16.7 percent of GDP - 2020: US$6,478 million = 14.0 percent of GDP - B1. Issuance of domestic debt: - 2019: US$4,998 million = 11.3 percent of GDP - 2020: US$5,091 million = 11.0 percent of GDP - B2. Identified external financing: - 2019: US$2,879 million = 8.8 percent of GDP - 2020: US$1,600 million = 6.1 percent of GDP - Breakdown 2019: Bilateral US$1,019 million = 2.3 percent of GDP; Multilateral US$1,860 million = 4.2 percent of GDP; Eurobond issuance US$1,000 million = 2.3 percent of GDP. - Public debt levels and composition (2018 snapshot) - Public and publicly guaranteed debt: JD 28.3 billion = US$39.9 billion = 94.4 percent of GDP (100.0 percent of total). - Domestic debt: JD 17.9 billion = US$25.2 billion = 59.7 percent of GDP (63.2 percent of total). - Direct debt: JD 15.0 billion = US$21.2 billion = 50.1 percent of GDP (53.1 percent of total). - Guaranteed debt: JD 2.9 billion = US$4.0 billion = 9.6 percent of GDP (10.1 percent of total). - Held by commercial banks: JD 11.2 billion = US$15.8 billion = 37.4 percent of GDP (39.6 percent of total). - Held by CBJ: JD 0.3 billion = US$0.4 billion = 0.9 percent of GDP (1.0 percent of total). - Held by non-banks: JD 6.4 billion = US$9.0 billion = 21.3 percent of GDP (22.6 percent of total). - Local currency: JD 16.2 billion = US$22.9 billion = 54.1 percent of GDP (57.3 percent of total). - Foreign currency domestic debt: JD 1.7 billion = US$2.4 billion = 5.6 percent of GDP (5.9 percent of total). - External debt: JD 10.4 billion = US$14.7 billion = 34.8 percent of GDP (36.8 percent of total). - External direct debt: JD 9.9 billion = US$14.0 billion = 33.2 percent of GDP (35.1 percent of total). - Multilateral: JD 2.9 billion = US$4.0 billion = 9.5 percent of GDP (10.1 percent of total). - IMF: JD 0.5 billion = US$0.8 billion = 1.8 percent of GDP (1.9 percent of total). - World Bank: JD 1.6 billion = US$2.2 billion = 5.3 percent of GDP (5.6 percent of total). - Bilateral: JD 2.3 billion = US$3.2 billion = 7.7 percent of GDP (8.1 percent of total). - Guaranteed Eurobonds: JD 2.7 billion = US$3.8 billion = 8.9 percent of GDP (9.4 percent of total). - Non-guaranteed Eurobonds: JD 2.1 billion = US$3.0 billion = 7.1 percent of GDP (7.5 percent of total). - External guaranteed debt: JD 0.5 billion = US$0.7 billion = 1.6 percent of GDP (1.7 percent of total). - Baseline trajectory and fragility: - Public debt stable in 2018 at 94.4 percent of GDP; projected to broadly stabilize at 94.6 percent of GDP in 2019 and decline to about 84 percent of GDP by 2024 with cumulative 3 percent of GDP fiscal effort during 2020–22. - Heat map indicates debt level and gross financing needs breach high-risk benchmarks under baseline; risks acute in near term due to elevated debt and GFNs. - Fan charts show greater downside risk under asymmetric (negative fiscal shocks) scenarios. ### Stress tests and risk scenarios - Growth shock: - Cumulative growth decline of 2.1 percentage points in 2020–21 leading to cumulative primary balance deterioration of 1 percent of GDP would raise debt-to-GDP to 96 percent in 2021. - Real exchange rate shock: - A shock calibrated to close an estimated 20 percent overvaluation would push the debt ratio to about 99 percent of GDP by 2020. - Interest-rate shock: - Higher borrowing costs equivalent to 2012 (increase of 350 basis points) would leave the debt-to-GDP ratio about 5 percentage points higher than baseline by 2024. - Combined macro-fiscal shock: - Aggregating shocks to growth, interest rates, primary balance and exchange rate would send public debt above 110 percent of GDP (an unsustainable path). - Overall balance of risks: tilted to the downside; projected public debt decline is fragile and sensitive to lower growth, currency depreciation, and higher borrowing costs. ### D. External sector DSA and external debt dynamics - Coverage: - DSA covers (i) public and publicly guaranteed external debt; and (ii) external liabilities of the banking sector and private corporations. Private external debt coverage is likely underestimated due to data limitations. - Public external debt: - Public external debt expected to rise from 37.4 percent of GDP in 2018 to about 46 percent of GDP over the program period. - Composition remains relatively favorable due to concessional borrowing under the Jordan Compact and London Initiative commitments. - Private external debt: - Expected to remain moderate at about 30 percent of GDP. - As of end-2018, four-fifths of total private external debt projected owed by banks (mostly non-resident deposits), remainder by non-bank private corporations. - Over the medium term, corporates’ share of private external debt projected to increase to about one quarter of total private external debt. - Given moderate size and healthy bank balance sheets, contingent liability risks to the public sector from private external debt expected to be contained (while acknowledging underestimation risks due to limited coverage). - External financing requirements: - Sizable over the program period and gradually decline thereafter; driven by large current account deficits near term and amortizations of U.S. guaranteed Eurobonds maturing during 2019–22 (assumed rolled over on market terms). *Source: IMF staff Annex I. Debt Sustainability Analysis (Jordan).* ### 17. External debt remains vulnerable to shocks. Standardized current account and other ### 17. 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. ### Key finding on external debt vulnerability - External debt is vulnerable to shocks; standardized current account and other shocks push external debt well above baseline projections. - Under slower growth and weaker external income flows, external debt would still be around manageable levels given assumptions about: - FDI inflows picking up in the outer years on the back of structural adjustment; - gradual strengthening of international market access; and - accumulation of additional external buffers under the EFF to cushion against external shocks and anchor private sector expectations. ### Public Debt Sustainability Analysis (baseline projections and indicators) - Nominal gross public debt (in percent of GDP), projections: - 2017: 77.9 - 2018: 94.3 - 2019: 94.4 - 2020: 94.6 - 2021: 94.1 - 2022: 92.4 - 2023: 89.2 - 2024: 86.4 - 2024 (final listed value): 83.7 - Public gross financing needs (in percent of GDP): 26.9 (2017); 21.6 (2018); 21.5 (2019); 20.1 (2020); 17.1 (2021); 14.8 (2022); 15.4 (2023); 12.7 (2024); 10.3 (2024 final). - Sovereign spreads and market indicators: - EMBIG (bp): 421 (note in figure: EMBIG average over 03-Jan-19 through 03-Apr-19) - Public debt held by non-residents (percent of total): 43% (historical indicator listing) - Real GDP growth (in percent): 3.4 (2017); 2.1 (2018); 1.9 (2019); 2.2 (2020); 2.4 (2021); 2.6 (2022); 2.8 (2023); 3.0 (2024); 3.0 (final listed). - Inflation (GDP deflator, in percent): 6.2 (2017); 1.7 (2018); 1.8 (2019); 2.2 (2020); 2.5 (2021–2024 steady at 2.5). - Nominal GDP growth (in percent): 9.9 (2017); 3.9 (2018); 3.7 (2019); 4.4 (2020); 5.0 (2021); 5.2 (2022); 5.4 (2023); 5.6 (2024); 5.6 (final listed). - Effective interest rate (in percent) defined as interest payments divided by debt stock: - 2017: 4.4 - 2018: 3.8 - 2019: 4.2 - 2020: 4.1 - 2021: 4.5 - 2022: 4.9 - 2023: 5.1 - 2024: 5.4 - 2024 (final): 5.6 - Change in gross public sector debt (cumulative, percent of GDP): 2.2 (2017); 0.6 (2018); 0.1 (2019); 0.2 (2020); -0.5 (2021); -1.7 (2022); -3.2 (2023); -2.8 (2024); -2.7 (2024 final); cumulative -10.7 (through projection horizon). ### Contributions to debt dynamics (identified debt-creating flows) - Identified debt-creating flows total (percent of GDP): -0.1 (2017); 0.6 (2018); 3.2 (2019); 0.6 (2020); -0.1 (2021); -1.2 (2022); -2.8 (2023); -2.4 (2024); -2.4 (final year); cumulative -8.3. - Primary deficit (percent of GDP): 3.1 (2017); -0.8 (2018); 1.1 (2019); -1.0 (2020); -1.4 (2021); -2.0 (2022); -3.4 (2023); -3.0 (2024); -2.9 (final); cumulative -13.7. - Revenues and grants (percent of GDP): 25.7 (2017); 25.7 (2018); 26.1 (2019); 26.9 (2020); 27.0 (2021); 27.0 (2022); 27.1 (2023); 26.6 (2024); 26.3 (cumulative 161.0). - Primary expenditures (percent of GDP): 28.8 (2017); 24.9 (2018); 27.3 (2019); 25.9 (2020); 25.6 (2021); 25.0 (2022); 23.7 (2023); 23.6 (2024); 23.5 (cumulative 147.3). - Automatic debt dynamics (contribution, percent of GDP): -3.3 (2017); -0.1 (2018); 0.4 (2019); -0.3 (2020); -0.4 (2021); -0.2 (2022); -0.2 (2023); -0.2 (2024); 0.0 (final); cumulative -1.3. - Of which real interest rate contribution: -1.0 (2017); 1.8 (2018); 2.2 (2019); 1.7 (2020); 1.8 (2021); 2.1 (2022); 2.2 (2023); 2.4 (2024); 2.5 (final); cumulative 12.6. - Of which real GDP growth contribution: -2.2 (2017); -1.9 (2018); -1.8 (2019); -2.0 (2020); -2.2 (2021); -2.3 (2022); -2.5 (2023); -2.5 (2024); -2.5 (final); cumulative -13.9. - Other identified debt-creating flows (percent of GDP): 0.1 (2017); 1.5 (2018); 1.6 (2019); 1.9 (2020); 1.7 (2021); 1.0 (2022); 0.8 (2023); 0.8 (2024); 0.5 (final); cumulative 6.7. - Privatization receipts (negative, percent of GDP): -0.3 (2017); 0.0 (2018); 0.0 (2019); -0.3 (2020); 0.0 (2021); 0.0 (2022); 0.0 (2023); 0.0 (2024); -0.3 cumulative. - Off-budget liabilities (percent of GDP) including NEPCO and WAJ deficits and net IMF disbursements under the EFF: 0.4 (2017); 1.5 (2018); 1.6 (2019); 2.2 (2020); 1.7 (2021); 1.0 (2022); 0.8 (2023); 0.8 (2024); 0.5 (final); cumulative 7.0. - Residual (including asset changes, percent of GDP): 2.3 (2017); 0.0 (2018); -3.1 (2019); -0.4 (2020); -0.4 (2021); -0.4 (2022); -0.4 (2023); -0.4 (2024); -0.4 (final); cumulative -2.4. ### Baseline assumptions and alternative scenarios - Baseline underlying assumptions (selected, in percent unless noted): - Real GDP growth: 2.2 (2019); 2.4 (2020); 2.6 (2021); 2.8 (2022); 3.0 (2023); 3.0 (2024). - Inflation: 2.2 (2019); 2.5 (2020–2024 steady at 2.5). - Primary Balance: 1.0 (2019); 1.4 (2020); 2.0 (2021); 3.4 (2022); 3.0 (2023); 2.9 (2024). - Effective interest rate: 4.1 (2019); 4.6 (2020); 4.6 (2021); 5.0 (2022); 5.0 (2023); 5.1 (2024) — see Figure 4 table for scenario-specific variations. - Alternative scenarios shown include Historical Scenario and Constant Primary Balance Scenario with their own assumed paths for Real GDP growth, Inflation, Primary Balance, and Effective interest rate. ### Stress tests and scenario outcomes - Stress tests considered: - Primary Balance Shock - Real GDP Growth Shock - Real Interest Rate Shock - Real Exchange Rate Shock - Combined Macro-Fiscal Shock - Additional stress tests including a one-time real depreciation of 30 percent in 2019 - Representative stress-test outcomes (gross nominal public debt, in percent of GDP) show: - Under Primary Balance Shock, debt rises compared with baseline through 2024. - Under Real GDP Growth Shock, debt rises compared with baseline through 2024. - Under Real Interest Rate Shock and Combined Shock, debt increases materially and gross financing needs rise accordingly. - External Debt Sustainability Framework (external debt in percent of GDP), baseline and scenario box averages: - Baseline external debt: 63.2 (2013); 63.1 (2014); 65.1 (2015); 66.3 (2016); 69.6 (2017); 69.1 (2018); 72.3 (2019); 73.0 (2020); 74.8 (2021); 74.0 (2022); 75.3 (2023); 71.6 (2024); debt-stabilizing non-interest current account: -1.7 (final listed). - Of which public and publicly guaranteed external debt (percent of GDP): 28.5 (2013); 30.8 (2014); 34.8 (2015); 37.0 (2016); 39.9 (2017); 37.4 (2018); 41.3 (2019); 42.3 (2020); 44.4 (2021); 44.1 (2022); 45.6 (2023); 42.1 (2024). - Key external-account drivers (selected): - Current account deficit, excluding interest payments (percent of GDP): 7.0 (2013); 3.6 (2014); 5.9 (2015); 6.7 (2016); 7.9 (2017); 6.8 (2018); 2.6 (2019); -4.1 (2020); -3.8 (2021); -2.8 (2022); -2.2 (2023); -1.9 (2024); -1.7 (final). - Net non-debt creating capital inflows (negative, percent of GDP): -6.1 (2013); -5.7 (2014); -4.3 (2015); -4.8 (2016); -3.8 (2017); -2.4 (2018); -4.0 (2019); -4.7 (2020); -4.8 (2021); -4.8 (2022); -5.0 (2023); -5.1 (2024). - Gross external financing need (in billions of US dollars): 5.0 (2013); 4.6 (2014); 6.0 (2015); 5.6 (2016); 6.5 (2017); 5.2 (2018); 6.4 (2019); 6.1 (2020); 5.0 (2021); 6.0 (2022); 5.4 (2023); 5.7 (2024). - Gross external financing need (in percent of GDP): 14.7 (2013); 12.6 (2014); 15.9 (2015); 14.2 (2016); 15.8 (2017); 12.2 (2018); 14.5 (2019); 13.1 (2020); 10.3 (2021); 11.7 (2022); 9.9 (2023); 9.9 (2024). ### Program commitments, policy context, and requests (from Letter of Intent) - Program implementation progress and context: - Significant progress in implementing the economic program; solid fiscal outturn in 2017; efforts to offset unanticipated revenue slippages in 2018. - Passage of new income-tax legislation; enactment of laws to improve the business environment and enhance inclusive growth. - Met all end-December 2017 performance criteria except a $448 million shortfall in net international reserves at end-2017 (noted as 0.2 months of 2018 imports). - Policy stance and commitments: - Authorities committed to preserve macroeconomic stability and enhance conditions for higher and more inclusive growth. - Commitment to preserve fiscal, monetary, and financial-sector buffers to safeguard against risks. - Continued monitoring through semi-annual quantitative performance criteria, structural benchmarks, and quarterly indicative targets as described in the MEFP and TMU. - Requests to the IMF: - Completion of the second review under the extended arrangement and approval of the related purchase. - Modification of the performance criterion for the combined public deficit and a waiver of nonobservance of a performance criterion. - Short-term extension of the extended arrangement under the EFF to March 23, 2020 and re-phasing of remaining access under the program to initiate discussions for a new Fund-supported program. - Donor support appeal: - Authorities emphasized need for additional financial support from the international community, particularly through budget grants, referencing commitments under the Jordan Compact and the London Initiative conference in February 2019. *Source: IMF staff and Letter of Intent and Memorandum of Economic and Financial Policies (as included in the provided content).* ### 1. Economic conditions remain challenging. Regional conditions continue to weigh on ### 1jorea2019001 - 1. Economic conditions remain challenging. Regional conditions continue to weigh on ### Economic conditions and outlook - Growth in 2018 was subdued at 1.9 percent, broadly the same as in 2017. - Unemployment reached 18 percent in the fourth quarter of 2018. - Headline inflation eased from its July peak of 5.7 percent (y/y) to 3.7 percent in December. - Core inflation ended the year at 1.7 percent (y/y). - Exports to Iraq grew strongly (27 percent y/y), while exports to key Gulf markets softened. - Forecast: growth is expected to improve modestly to 2.2 percent in 2019. - Forecast: with limited impact from fiscal measures during 2019, headline inflation is expected to return to trend (2½ percent y/y by end-2019). ### External current account and capital flows - Current account deficit (including grants) rose to 10.6 percent of GDP in 2017. - Current account deficit declined to 7 percent of GDP in 2018 despite a 1½ percent increase in the energy-import bill. - Drivers of 2018 improvement: rebound of exports to Iraq; continued strong garment exports to the United States; marked rise in tourism; decline in non-energy imports (partly reflecting 2017 one-offs and postponement of wheat imports). - Weaknesses: exports to the GCC and workers’ remittances remained soft; inward foreign direct investment declined considerably in 2018. - Expectation: strong growth in tourism income and a recovery in remittances observed during the first quarter of 2019 would help stabilize the current account deficit in 2019, despite the resumption in FDI and associated capital imports. ### Reserves and monetary conditions - CBJ’s net international reserve (NIR) position was $448 million below the end-December 2017 adjusted performance criterion. - CBJ’s NIR was about $57 million above the indicative target for March 2018 set during the first review. - The CBJ increased its policy rate by 250 basis points since December 2016. - Domestic political events in June 2018 accelerated reserve outflows, reducing NIR to $828 million below the June indicative target set during the first review. - Deposit dollarization increased in mid-2018, but has since remained stable at around 21 percent. - Credit to the private sector (excluding the refinery) eased in 2018, with growth at around 5 percent as of end-2018. ### Fiscal performance and public debt - Central government primary deficit (excluding grants and clearance of arrears) declined from 2.9 percent of GDP in 2016 to 1.1 percent in 2017. - Fiscal program targeted an annual adjustment of 1½ percent of GDP for 2018, but consolidation could not be sustained in 2018. - Revenue shortfall in first half of 2018 of about 1 percent of GDP due to: - contraction in non-energy imports (-9 percent y/y), particularly hybrid vehicles and gold products; - challenges collecting excises on cigarettes due to increased smuggling after special sales tax increase; - continued erosion of customs duties, corporate income and real estate taxes from subdued growth. - Legislated expenditure cuts for ½ percent of GDP in June 2018 and compression of capital expenditures by another ½ percent of GDP later in 2018. - Result: revenues broadly unchanged compared to 2017 and unbudgeted expenditure pressures of 1 percent of GDP led to deterioration of the primary deficit (excluding grants and clearance of arrears) by about 1¼ percent of GDP. - Public debt stabilized at 94.4 percent of GDP by late 2018 through containment of expenditures and use of treasury deposits to reduce treasury bond issuance. ### Energy and water sector fiscal impacts - Automatic tariff adjustments following a sustained rise in oil prices facilitated tariff increases amounting to a cumulative 30 percent of NEPCO’s average bulk tariff. - NEPCO operational losses of 0.2 percent of GDP during the first three quarters of 2018. - Electricity tariffs decreased by 7 percent in the last quarter of 2018 generating additional losses of 0.1 percent of GDP, and by an additional 10 percent in the first two months of 2019. - Household protection: exclusion of households with consumption of less than 300 kWh per month from the tariff hikes during the first three quarters of 2018. - WAJ overall deficit for 2017 was 0.2 percent of GDP lower than anticipated; for 2018 it was 0.2 percent of GDP below projections owing to lower current and capital expenditure and additional revenues from access to renewable energy. - WAJ accumulated arrears of 0.1 percent of GDP in 2018 that were cleared in February 2019. - Water distribution companies accumulated an arrears stock of 0.5 percent of GDP, cleared in April 2019. - New energy arrears amounting to 0.7 percent of GDP accumulated by end-2018; half were canceled through write-off of outstanding intra-claims. ### Donor support and refugee-related financing - Estimated annual shortfall in donor financing to fully address refugee-related pressures: $1 billion. - 2017: Jordan received $1.7 billion in support under the Jordan Response Program, relative to a funding requirement of $2.7 billion (65 percent of commitments). - 2018: $1.5 billion disbursed out of estimated needs for $2.5 billion. - These shortfalls hampered economic program implementation under the Jordan Compact and added to Jordan’s debt burden. ### Policies for safeguarding macroeconomic stability - Policy objectives: reduce fiscal and external vulnerabilities in an equitable, growth-friendly and inclusive way; gradual and steady fiscal consolidation; restore NEPCO’s operational balance; stabilize WAJ’s overall deficit; place public debt on a downward path toward 84 percent of GDP by 2024; preserve space for social spending. - Monetary policy anchored by the exchange rate peg and the need to preserve an adequate buffer of foreign-exchange reserves. ### Fiscal policy program and measures (Central Government) - 2019 fiscal program committed to annual fiscal adjustment of 1½ percent of GDP. - Revenue-side measures implemented in second half of 2018 expected to yield a combined 1 percent of GDP, including: - strengthened collection of excises on cigarettes (amendments to customs law, penalties, imprisonment, limits on imports of cigarette-production machinery); - expiration of tax exemption on electric cars; - customs duties from recent cancellation of the FTA with Turkey; - efficiency gains from consolidation of different taxes and fees on oil-derivatives; - acceleration of GST payments from bi-monthly to monthly; - carry-over of oil fees implemented in the second quarter of 2018. - Additional support of 0.3 percent of GDP expected from below-the-line proceeds from sale of licenses to mobile operators. - Budget law continued to include detailed estimates of tax expenditures and capital expenditure allocations for governorates. - Envisaged improvement of the central government’s primary deficit (excluding grants and clearance of arrears) from 2.1 percent of GDP in 2018 to 0.8 percent in 2019. - Headline combined public sector deficit expected to be 2.6 percent of GDP and public debt to stabilize at 94.6 percent of GDP in 2019, contingent on NEPCO and water sector actions. ### Income tax reform (approved December 2018) - Expected revenue yield: ½ percent of GDP in 2019 and 0.8 percent over the medium term. - Personal Income Tax (PIT) changes with permanent yield of 0.2 percent of GDP: - Reduces effective exemption thresholds from JD 14,000 and 28,000 (individuals and households, inclusive of itemized deduction allowance of JD 2,000 and 4,000) to JD 10,000 and 23,000 (inclusive of an itemized deduction allowance of up to JD 3,000 for children—maximum of JD 1,000 per child and starting in 2020 an additional JD 1,000 for the taxpayer and JD 1,000 for the spouse). - Introduces a new income exemption of JD 2,000 for each person with permanent disability. - Makes the PIT system more progressive: increases marginal tax rates on higher-income brackets and reduces the rate for the lowest-income earners; introduces a flat 30 percent tax rate for income above JD 1 million; introduces a 1 percent solidarity surtax for income exceeding JD 200,000. - Expands the tax base by taxing trading in public shares and introducing a presumptive income tax regime on professionals (1 percent tax rate on revenues below a threshold of JD 150,000). - Corporate Income Tax (CIT) changes with permanent yield of 0.5 percent of GDP: - Unifies the standard statutory CIT rate for the manufacturing and commercial sectors to 20 percent. - Introduces surtaxes on corporate profits for non-manufacturing: 3 percent (banks and electricity distribution and generation companies); 7 percent (mining companies); 4 percent (financial intermediary companies, financial companies, and legal persons practicing financial leasing); 2 percent (telecommunications companies, and insurance and re-insurance companies); and 1 percent (all other legal persons). - Replaces non-WTO compliant export income deduction with a temporary manufacturing deduction: manufacturing income deduction of 50 and 25 percent applicable to the pharmaceutical and textile sectors and to other manufacturing sectors, respectively, phasing out by 2024. - Expands the tax base by: adding large agricultural companies (income exemption of JD 50,000); removing tax concessions for investment in special and development zones on non-manufacturing services (CIT rates increasing from 5 to 10 percent, preserving 5 percent for manufacturing activities); taxing corporate income generated on all activities (except transit) within free zones at regular CIT rates; introducing an annual minimum corporate tax of JD 500 for registered partnerships and limited partnerships; additional initiatives including taxation on dividends received by banks, telecom companies, and financial companies; increasing withholding corporate tax rate on interest income from 5 to 7 percent; and taxation of e-commerce at regular rates. ### Tax administration and compliance measures - Ongoing compliance improvement projects to support tax collection and combat tax evasion: - Enhancing the Pay As You Earn (PAYE) system for large taxpayers with reporting requirements, processes, and access to third party information. - Improving taxpayer registration by linking business license issuance with Taxpayer Identification Number (TIN) issuance. - Increasing compliance among self-employed persons by matching licensed professionals and businesses against ISTD registrations via an online system. - New income tax law strengthens penalties: - fines equivalent to 5 percent of the tax due in case of delays in filing (for each month of delay after the end of the fourth month following the tax period, up to a maximum of 25 percent); - compensatory penalty equal to the tax difference imposed on any person who commits, attempts, assists, or provokes others to commit tax fraud; - joint liability of directors if a legal person fails to remit the tax due; - imprisonment penalties of at least four months and up to three years. ### Medium-term fiscal consolidation and expenditure strategy - Committed annual adjustment effort of 0.7 percent of GDP (about JD 230 million) in 2020 and about 1 percent of GDP each year during 2021–22. - Revenue-side priorities: - rebalance taxation between indirect and direct taxes; - ensure tax exemptions are targeted to the most vulnerable; - adjust specific excises as needed; - strengthen framework to tackle tax evasion (including domestic transfer pricing control). - Expenditure-side priorities: - streamline non-priority current spending; - prioritize social and capital spending; - arrest accumulation of fuel, health, and water-sector arrears; - continue support for Syrian refugees. - Public-sector wage bill growth: keep nominal growth close to 1½ percent on an annual basis during the medium-term. - Social safety net expansion in collaboration with the World Bank: - three-year program to almost double coverage of National Aid Fund (NAF) cash transfer program from 100,000 beneficiary households to 185,000 by 2021. - 2019 budget allocated resources to expand coverage to 25,000 new vulnerable households. - New targeting methodology with limited human intervention, electronic portal submission, and cross-checking with a comprehensive household-level database. - Revamped National Unified Registry (NUR) expected to be operational by end-2019. - Health sector measures: - expanded civil health insurance coverage to citizens who are 60 years or older (previously 70 years or older) to reduce demand for medical exemptions. - Royal Court is sole institution authorized to provide medical exemptions within a budgeted allocation and rules; a special unit established for control and audit of medical exemptions. - Commitment to clear legacy stock of health arrears by end-2021; identified JD 118 million as claims from the Civil Health Insurance Fund that were written off. - Energy arrears: - committed to clear legacy stock of energy arrears by end-2021; - wrote off half of new arrears accumulated by end-2018 and will monitor claims monthly. ### Public financial management and transparency actions - Published a public expenditure report in June 2018 (end-June 2018 benchmark) identifying potential expenditure rationalization measures and reforms to enhance transparency. - Planned actions with partners: - integrate Civil Health Insurance Fund into the Government Financial Management Information System (GFMIS) to better control and audit health claims (end-December 2019 benchmark); - re-orient resources from the cash transfer program replacing bread subsidies to fund NAF expansion during 2020–21; - strengthen financial reporting and oversight of government units and prepare restructuring plans to address duplicative/overlapping functions. - Transferred 29 government units to the 2019 general budget law to increase financial control and yield medium-term efficiency gains. *International Monetary Fund — Jordan: Economic and Fiscal Update (excerpt).* ### 13. We have made progress toward returning utilities to cost recovery. ### 13. We have made progress toward returning utilities to cost recovery. ### Electricity — NEPCO financial sustainability - NEPCO recorded an operational profit in 2016 and small losses in 2017 due to lower oil prices and switching primary energy from fuel to LNG. - After oil prices increased, the automatic electricity tariff adjustment mechanism was continued but "fell short of what was needed to prevent operational losses of 0.3 percent of GDP in 2018." - Without action, sizable losses are projected under unchanged policies and the prevailing tariff structure. - Objective: ensure NEPCO’s financial sustainability and prevent further losses in 2019. - Cabinet-approved comprehensive road map to NEPCO’s financial sustainability includes: - Earnings and sales measures implemented upfront to prevent losses in 2019: - Savings from cheaper gas from Egypt and lower use of liquified natural gas. - Higher revenues from increase of bulk tariffs charged by NEPCO to electricity distribution companies. - Elimination of cross-subsidies to households with three-phase connections and with more than one meter. - Charges to self-generation consumers. - These measures will "close the expected gap in 2019, prevent any losses in 2019, and even allow for the adoption of a multi-year cross-subsidy reduction," expected to start in the fourth quarter of 2019. - Measures to optimize future commitments: - Moratorium on signing new generation contracts to address overcapacity. - Hiring financial and legal advisors to study options to reduce costs under the PPA portfolio. - Exploring options to export electricity to neighboring countries. - Commitment to ensure no further losses in the energy sector, including implementing a quarterly automatic tariff adjustment mechanism if needed, to ensure zero losses by end of year for NEPCO; mechanism beginning to be implemented as of July 1, 2019. - Adopt a multi-year strategy for a targeted subsidy to insulate vulnerable households from tariff increases. - Adopt fair economic charges to users of the grid with self-generation capacity to reflect costs of capacity support, network support, network losses, and electricity banking. - Continue to diversify the energy mix toward cheaper and less volatile sources, such as renewables and natural gas from the Mediterranean (expected by 2020). ### Working capital and receivables - More than 60 percent of NEPCO’s receivables (about 2 percent of GDP) owed by public sector entities and on an upward trend. - Implemented a one-time-settlement of intra-governmental liabilities across electricity distribution companies, NEPCO, and the Ministry of Finance to address existing arrears. - Plan to develop a mechanism to enable NEPCO to recover regular electricity payments from public agencies through the Ministry of Finance in a time-bound manner; expected implementation in the third quarter of 2019. ### Debt optimization - With donor support, start implementing a comprehensive debt management plan for NEPCO, linked to key reform deliverables. - Seek to replace expensive commercial debt with long-term blended finance to smooth the debt service profile and reduce interest burden. ### Regulatory governance and processes - Strengthen regulatory set-up per global best practices to transparently implement envisaged multi-year tariff reform strategy. - Develop a roadmap for unbundling NEPCO into strategic business units to strengthen utility accountability. ### Water sector actions (WAJ and water companies) - WAJ’s gross financing needs financed through advances from the central government starting in 2018. - Cash management delays caused WAJ to accumulate 0.1 percent of GDP in arrears that were cleared in February 2019. - Continue implementing the updated “Action Plan to Reduce Water Sector Losses” to seek: - i) cost savings from better energy efficiency and lower system losses; and - ii) higher revenues. - Issued three biannual reports monitoring quantitative impact and project status. - Electricity costs above plan expectations accelerated accumulation of arrears of the distribution companies (reaching 0.5 percent of GDP as of end-2018), which have been cleared per the one-time-settlement of NEPCO’s public-sector related receivables. - Plan to incorporate three water companies into the financial program to monitor that they do not accumulate new arrears, and transfer WAJ into the 2020 general budget law (new benchmark, mid-November 2019). - Implement a plan on non-tariff revenue actions to reduce water-sector losses by end-June 2019 (new benchmark). - Progress on “Water Sector Capital Investment Program 2016–2025” to improve access and quality of water and wastewater services while safeguarding water security. - Will contribute to central planning and oversight of public investment. ### Public Sector — Royal Jordanian - Continued implementation of Royal Jordanian’s medium-term restructuring plan with visible profitability results during 2017–18. - Continue to seek private sector interest in recapitalization from existing shareholders and potential new investors. ### Structural fiscal reforms — Public Investment Management (PIM) and oversight - Decree adopted in June 2016 establishing a central PIM unit at the Ministry of Planning and International Cooperation with an action plan. - In cooperation with the World Bank, the IMF, and USAID, progress toward making the PIM operational by end-December 2019 through recruitment of key staff, including personnel from other ministries, and beginning management of all investments per the new PIM framework standards. - Reforms to strengthen public financial management and fiscal transparency, managing fiscal risks from PPPs, PPAs, and SOEs. ### PPPs, PPAs, and contingent liabilities - Progress in recording trust accounts appropriately as revenue and expenditure, classifying accounts by purpose and consolidating them into fiscal tables published in the government finance bulletin starting in June 2017. - Plan to gradually integrate into the treasury single account those trust accounts whose existence is not justified. - Public Investment Management Assessments (PIMA) conducted in May 2017 and February 2018 identified needs to: - i) improve strategic planning and coordination; - ii) strengthen oversight and disclosure of PPP and PPA contracts and projects; - iii) strengthen oversight of SOE investment activities; - iv) improve project implementation, oversight, and appraisal framework. - Commit to strengthen oversight and evaluation role of the PPP unit. - Expect to implement amendments to the PPP law by end-December 2019 to: - move the PPP unit to the Prime Minister office; - ensure no further exemptions to the PPP law granted to the water and energy sectors; - establish an intra-governmental committee responsible for assessment of contingent liabilities. - Undertake a comprehensive review of PPPs and PPAs. - With USAID support, recruit a top tier international accounting firm by end-June 2019 (new benchmark) to complete a detailed study of PPPs and PPAs by end-December 2019 (new benchmark) to identify and quantify major contingent liabilities; all PPP and PPA contracts to be made available for this study. ### Organic Budget Law (OBL) - Submitted to parliament a draft OBL to support PIM framework and action plan. - OBL to include provisions for: - i) macro-fiscal policy, fiscal rules, top-down budgeting, and approval of fiscal strategy aspects of budget preparation; - ii) treasury control, cash management tasks and reporting for general government/public sector budget execution; - iii) audit provisions covering obligation to follow-up on audit queries and requirement for public entities to establish internal audit functions. ### Tax administration reforms - Following September 2016 action plan to address weaknesses identified in TADAT evaluation, ISTD strengthened organizational structure and operational requirements for effective compliance risk management. - Established a Senior Risk Committee and prepared a Compliance Risk Register. - Establishing a dedicated Risk Management Unit to identify and manage revenue risks, per METAC TA recommendations. ### Debt management improvements - Enhanced quality, planning, and effectiveness of central government and agency debt management, including NEPCO and WAJ. - Continue publishing each month the central government’s domestic borrowing plan and auction calendars. - Prepare quarterly financing plan for the following 12 months, taking into account combined financing needs of central government and agencies; will include Aqaba, Miyahuna, and Yarmouk Water Companies. - Update financing plan every quarter for subsequent four quarters. - Plan anchored by debt management strategy, coordinating issuance schedules to improve overall borrowing terms. - Achievements: lengthened average maturity of debt (excluding treasury bills, the average maturity reached six years in 2018), improved debt profile, and reduced total public debt and rollover risks over the medium-term. - Prepared and published updated debt management strategy for 2017–21 covering central government and agencies with U.S. Treasury TA. ### Monetary and financial policies — exchange rate, reserves, and dollarization - Monetary policy to remain underpinned by exchange rate peg. - Events in 2018 resulted in increase in deposit dollarization and a decline in reserves. - Deposit dollarization stabilized at about 21 percent at end-2018 and recently started to show a small decline. - CBJ will continue to monitor domestic and external developments and intervene (including through interest rates) to maintain monetary stability and reserve targets in 2019. ### Banking sector soundness and supervision - Aggregate capitalization of 17.2 percent at end-June 2018, above regulatory minimum of 12 percent. - Liquidity buffers remain comfortable, NPLs are modest, and profitability is strong. - Stress tests and sensitivity analysis in the Financial Stability Report (2017) underscore sector’s broad ability to withstand severe shocks to NPLs, equity prices, interest rates, and exchange rate. - CBJ will monitor asset quality, credit to households, quality of lending, and corporate exposure to real-estate sector; will deploy macroprudential tools if credit risks increase excessively. ### Legislative and regulatory strengthening for banks - Legislative amendments to the Deposit Insurance Corporation law submitted to parliament in April 2018 (end-June 2017 benchmark) to establish robust bank resolution framework in line with FSB Key Attributes. - Amendments incorporate: institutional arrangements and interagency coordination; recovery and resolution planning requirements; clear triggers for entry into resolution; comprehensive resolution powers; creditor and shareholder safeguards; least-cost test with systemic exception; robust deposit insurance framework. - Amendments support provisions in amended commercial banking law. - Issued new Basel III regulations on capital adequacy, domestic systemically important banks, and liquidity requirements in 2017; gradual implementation to tailor requirements to bank needs. - Smooth transition to IFRS9 in 2018 with preliminary results suggesting modest impact on capital ratios; overall bank capitalization to remain comfortable. ### AML/CFT enhancements - Completed a National Risk Assessment with Fund assistance; to be approved early in 2019. - Review of AML/CFT law and drafted amendments to align with 2012 FATF standards; expect amendments finalized and passed early in 2020. - All regulatory agencies, including CBJ, have amended regulations to ensure conformity with FATF standards; CBJ benefited from Fund TA. - Put in place risk-based framework for offsite and onsite supervision of banks, money-exchange firms, other financial and nonfinancial institutions, and Non-Profit Organizations. - Second-round mutual evaluation by MENAFATF proceeded in 2018; plenary discussion scheduled for April 2019. ### Nonbank financial sector development - Amendments to the Insurance Law to transfer supervision of the insurance sector to the CBJ were delayed; submission to parliament and completion of transfer now expected by end-September 2019 (reset benchmark). - Transfer intended to strengthen supervision, minimize spillovers to banks, and enhance financial development and inclusion. - Continued development and implementation of regulations for supervision of microfinance institutions; nine institutions granted licenses under new licensing framework. ### Structural policies to promote jobs and growth — business environment - Continue tackling impediments to growth in business environment (including access to finance), competitiveness, labor market, and governance, building on the Jordan Economic Growth Plan. - Reforms to promote physical and human capital accumulation and total factor productivity to make growth strong, sustained, and job-creating while supporting debt sustainability. - Measures to strengthen business environment to foster investment and competitiveness by reducing cost of starting and operating businesses, simplifying procedures, eliminating red tape, and strengthening investor protection. - Launched "one procedure one form" registration process and standardized business classifications to make Jordan Investment Commission (JIC) investment window fully operational (end-June 2017 benchmark). - Submission to parliament of draft inspection law (end-June 2017 benchmark) completed; law approved in August 2017. Law streamlines inspection mandates, reduces burden from overlapping inspections, introduces risk-based targeting, and emphasizes role of the Higher Committee for Inspection Reform as national umbrella for business inspections. Bylaws enacted October 2018. *Source: 1jorea2019001 - 13. We have made progress toward returning utilities to cost recovery.* ### 26. Reforms to facilitate access to finance will help broaden the reach and usage of ### 1jorea2019001 - 26. Reforms to facilitate access to finance will help broaden the reach and usage of ### Credit bureau and information infrastructure - The credit bureau started operating in January 2016 and commenced its inquiry services on October 2, 2016. - It is compiling credit reports to assess borrower creditworthiness and expediting credit risk assessment decisions for borrowers, including Small and Medium-Size Enterprises (SMEs). - The bureau’s information collection now covers all banks and is being progressively extended to cover insurance and leasing companies, microfinance institutions, public utilities, and telecommunication companies. - Having compiled three years of historical data, the bureau will shortly be in a position to assign credit scores to borrowers in early 2019, maximizing the value of information contained within the credit bureau by utilizing the predictive nature of a diverse set of variables. ### Measures to improve SME access to finance - In 2016 we increased Jordan Loan Guarantee Corporation’s (JLGC) capital from JD 10 million to JD 29 million. - The CBJ and the commercial banks have co-financed a $50 million fund, managed by the JLGC, to provide loan guarantees to SMEs start-ups with high coverage (85 percent) and reasonable cost. - With the financial assistance from the World Bank, we set up in December 2017, a $100 million equity fund, the “Innovative Startups and SMEs Fund” (ISSF), that will be managed by JLGC to provide capital to start-ups. - We have created an export guarantee fund (managed by JLGC) and provided capital in the form of a JD 100 million loan from the CBJ to help support exporters. - We have adopted a strategic plan that will allow JLGC to increase its underwriting capacity on foreign buyers; JLGC has changed the composition of its Board to include independent directors. - We 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. - We expect to continue disbursing these loans in 2019, but are committed not to contract any new loans to ensure the overall consistency of the program with public debt targets, in consultation with the IMF. ### Legal and registry reforms for movable collateral and insolvency - Passed in May 2018 (end-June 2017 benchmark), a secured transactions law which will allow SMEs to use moveable assets as collateral. - Associated bylaws were enacted October 2018, and we will launch a Collateral Registry for movable assets early in 2019. - Prepared a draft insolvency law (end-March 2017 benchmark) to align with best practice by providing adequate protection of creditors rights, unhindered access to an insolvency system, expedited liquidation of unviable companies, and mechanisms for restructuring/rescuing viable businesses. - The insolvency law was approved in May 2018 (end-June 2017 benchmark), and the associated bylaws were enacted January 2019. ### Financial inclusion and payments infrastructure - The CBJ established a new division in the payments department in charge of promoting financial inclusion and payment options in Jordan. - With the help of GIZ, the CBJ conducted a comprehensive supply and demand side study assessing the detailed level of financial inclusion in Jordan; this study was published in October 2017 (end-September benchmark). - Based on its findings, and in cooperation with stakeholders and development partners, we published a Financial Inclusion Strategy (end-December 2017 benchmark) aiming to: - enhance access and use and quality of financial services, including improving SMEs’ access to finance; - further develop necessary 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 data base at CBJ to monitor and measure development in financial inclusion. - Finalized and published an action plan for the strategy in June 2018, and are developing a framework for monitoring, evaluation, and data collection. ### Labor market reforms to promote job creation, youth and female employment - The National Committee for Human Resources Development (NCHRD) published the National Strategy for Human Resources Development (NSHRD) in September 2016 outlining a 10-year plan to improve elementary education, higher education, technical education and vocational training. - The Ministry of Labor completed revisions to the 2011 National Employment Strategy (NES) based on ILO recommendations aligned with the NSHRD, including: - addressing skills mismatches through strengthening local business community involvement in schools; - unlocking the potential of women via more flexible work arrangements and strengthening enforcement of maternity benefits; - reforming public sector hiring practices and compensation (rightsizing and restructuring over time) as noted in Vision 2025. - The Bylaw on Flexible Work was approved by the Council of Ministers, redefining the minimum wage on an hourly basis rather than a monthly basis; work is ongoing to revamp part-time employment framework to reduce costs to licensing and facilitate registration of home-based employment activities. - Working with the World Bank to reduce labor market segmentation; completed a review of the legal framework to identify causes of segmentation. ### Access to formal employment for Syrian refugees and workforce formalization - More work permits have been issued to Syrian refugees, mostly in agriculture, construction and manufacturing. - In 2016 Jordan introduced flexible work permits for Syrian refugees in agriculture (under agricultural cooperatives), and extended these permits in 2017 to refugees in construction (under Jordanian General Federation of Trade Unions); these permits allow mobility between employers and self-employment. - In November 2018, the Ministry of Labor issued a decree allowing Syrians to operate home-based businesses in food processing, handicrafts and tailoring, based on licensing regulations within Greater Amman Municipality and the Ministry of Municipal Affairs. - Policy aim: promote formalization of Jordan’s workforce and review identification and registration requirements for Jordanians and non-Jordanians to place all workers on an equal footing. - Since June 2016, largely halted the addition of new guest workers, while adopting a flexible approach to renewals, sector mobility, and providing steep discounts or waivers for permit fees. ### Gender equality and family-friendly labor provisions - Removed all references to gender in Ministry of Labor instructions that can be used to discriminate against women and amended key bylaws that had restricted female working hours. - Submitted to parliament amendments to the labor law to: - allow more flexible work arrangements; - establish part-time work as legitimate employment; - remove potential discrimination between mothers and fathers regarding daycare requirements; - establish paternity leave. - Will alter the code to apply daycare requirements (firms with more than 20 female employees provide daycare for children under five) to both parents; working with stakeholders to provide effective community daycare options for smaller firms. - NSHRD recognizes quality daycare as critical to female participation and long-term workforce skills development. ### Youth employment, TVET, and training programs - Streamlining and enhancing technical and vocational education and training (TVET); working on legislation to bring initiatives under a single umbrella and stepping up enforcement of certification regulations. - Launched in 2019 a new “National Service” program: a three-month non-mandatory course offering youth key skills and career opportunities in targeted sectors; aim to train 20,000 participants through this program over a two-year cycle. - National Empowerment and Employment Program (NEEP), launched in March 2019, promotes on-the-job training by offsetting the upfront cost of training a new hire for six months on the condition the employee is retained for three years; the program will be expanded over the next 2–3 years, potentially reaching over 30,000 job seekers. - Combined, the TVET, National Service and NEEP efforts are expected to boost job creation significantly. ### Competitiveness, export growth and quality infrastructure - Relaxation of rules of origin for exports to the EU in July 2016 provides opportunity to diversify markets and product mix. - Agreed in December 2018 to loosen requirements for employers under this framework; arrangement extended to 2030, no longer restricted to prespecified industrial and development zones. - The minimum proportion of Syrian workers involved in production will remain flat at 15 percent—if active work permits issued to Syrian refugees in Jordan reach sixty thousand, the minimum employment requirement will be lifted entirely. - Domestic measures to support exporters and firms: - conducted workshops to raise awareness among Jordanian firms about the initiative; - simplified application procedures and waived fees associated with work-permit applications; - supported Jordanian firms on marketing and certification for entry into the EU market. - Conducted trade missions to (and began free trade negotiations with) fast-growing East African countries, and to the U.S. to diversify product mix. - Will adopt a National Quality Policy and associated action plan in 2019 to: - eliminate internal conflicts of interest; - increase transparency and predictability of adopting mandatory requirements; - provide a full range of National Quality Infrastructure (NQI) services including conformity assessment, metrology, and surveillance. - Transport and logistics actions: - 2015 Long-Term National Transport Strategy and Action Plan identified concerns in the trucking industry (high fragmentation, access restrictions at Aqaba port). - In consultation with the World Bank, intend to implement measures to reduce market distortion and define an incentive mechanism to reduce, renew or consolidate the truck fleet to enhance efficiency of cargo transport for containers for the Aqaba-Amman corridor. *JORDAN — INTERNATIONAL MONETARY FUND* ### 29. Progress in the implementation of our policies, which are supported by the IMF, will ### 1jorea2019001 - 29. Progress in the implementation of our policies, which are supported by the IMF, will ### Monitoring framework and program modalities - Progress will be monitored through semi-annual reviews, quantitative performance criteria (PCs), continuous performance criteria, indicative targets, and structural benchmarks. - Definitions and data requirements are provided in the attached Technical Memorandum of Understanding. - The authorities will request an extension of the current EFF arrangement to March 23, 2020. - Quantitative targets for June 2019 and December 2019 are PCs. - IMF disbursements will be kept with the CBJ and will not be on-lent to the government. ### Quantitative performance criteria and indicative targets (selected program values) - Historical and program targets are reported in Tables 1a and 1b (exact numerical entries preserved as in source). - Selected entries from Table 1b (Proposed Quantitative Performance Criteria and Indicative Targets, June 2019–December 2019): - Primary fiscal deficit of the central government, excluding grants and net transfers to NEPCO and WAJ, in JD million (flow, cumulative ceiling): 255338 442 - Combined public deficit in JD million (flow, cumulative ceiling): 464679 829 - Net International Reserves of the Central Bank of Jordan in USD million (stock, floor): 10,21810,92013,380 - Ceiling on accumulation of external debt service arrears 2/: 00 0 - Social spending by the central government in JD million (flow, cumulative floor): 9091,322 1,755 - Public debt in JD million (stock, ceiling) 3/: 29,22329,719 29,625 - Short-term public debt in JD million (stock, ceiling) 4/: 1,0001,0001,000 - Accounts payable of the central government in JD million (stock, ceiling): 350 350350 - Domestic payment arrears of NEPCO in JD million (stock, ceiling) 5/: 0 00 - Domestic payment arrears of WAJ in JD million (stock, ceiling) 6/: 000 - Domestic payment arrears of Aqaba, Miyahuna and Yarmouk Distribution Companies in JD million (stock, ceiling) 7/: 000 - Net Domestic Assets of the Central Bank of Jordan in JD million (stock, ceiling): 575-499 -1,483 - Memo items for adjustors (selected entries as reported): - Foreign budgetary grants and loans received by the central government (JD millions, flow): 997997 2,475 - Foreign budgetary grants and loans received by the Central Bank of Jordan (USD millions, flow, cumulative from end-December 2018): 1,4071,4073,331 - Programmed stock of the combined health and energy arrears (JD millions): 625535 442 - Stock of checks issued by the central government but not yet cashed by the beneficiary (JD millions): ......200 - IMF purchases under the EFF (JD millions, flow, cumulative from end-December 2018): 119238238 - Cap for the downward adjustor on the NIR (USD millions): 300 300300 (Note: quantitative performance criteria and indicative targets are defined in the Technical Memorandum of Understanding attached to the Letter of intent. Continuous criterion on accumulation of external debt service arrears is continuous.) ### Structural benchmarks (Tables 2: 2017–19) — measures, macroeconomic rationale, and status (selected items) - I. Prior Actions / Structural Benchmarks (selected) - Approval by parliament of the amendments to the income tax law — Fiscal consolidation - Submission to parliament of a budget law for 2019 broadly consistent with program commitments — Fiscal consolidation - Issuance of supporting regulations to accelerate GST payments from a bi-monthly to a monthly basis for large taxpayers — Fiscal consolidation - Approval by cabinet of the consolidation of oil-derivatives taxes and fees into a specific excise tax framework — Fiscal consolidation and transparency - Approval by cabinet of a comprehensive energy-reform plan that ensures NEPCO’s medium-term sustainability and gradually phases out cross-subsidies; with initial implementation to include upfront revenue and cost-savings measures that prevent further losses in 2019 — Fiscal consolidation, sustainability of sector, improved energy conservation, better level-playing field for non-households while protecting the most vulnerable - II. Structural Benchmarks (time frame and status; selected items) - 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, reset for mid-June 2017 — Improved transparency — Implemented with delay. - 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, reset for end-September 2017 — Fiscal consolidation and Equity — Implemented with delay. - Submit to Parliament an Organic Budget Law end-June 2017 — Improved PFM and transparency — Implemented with delay. - Cabinet approval of the removal of GST exemptions in 2018 end-November 2017 — Fiscal consolidation — Implemented with delay. - 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 — Fiscal consolidation — Implemented with delay. - Implement new Income Tax Law (consistent with program understandings, including on the PIT thresholds, the rates structure, and transfer-pricing) — Initially end-March 2017, reset for end-November 2017 — Fiscal consolidation and Equity — Implemented with delay. - Establish the reporting requirements, processes, and access to social-security to ensure that ISTD can more adequately control and confirm PAYE compliance for large taxpayers end-March 2018 — Reduce tax evasion — Delayed, in process of implementation as part of the roll-out of the new income tax law. - Recruit a top tier international accounting firm for a detail study of PPPs and PPAs end-June 2019 — Improved PFM and transparency — New benchmark. - Cabinet approves and starts implementing a plan on non-tariff revenue actions to reduce significantly the losses in WAJ and the Water Distribution Companies end-June 2019 — Improved PFM and transparency — New benchmark. - Cabinet does not extend the exemption for the energy and water sectors from the PPP law after its expiration on end-June 2019 end-June 2019 — Improved PFM and transparency — New benchmark. - Issue of supporting regulations to implement the new tax initiatives under the new income tax law: presumptive tax regime, minimum corporate tax, tax changes to development and free zones, and tax on dividends. end-June 2019 — Fiscal consolidation and transparency — New benchmark. - Transfer the Water Authority of Jordan to the 2020 general budget law mid-November 2019 — Improved PFM and transparency — New benchmark. - Submit to Parliament the 2020 draft budget law in line with program understandings and projections for 2020, including the estimates of tax expenditures mid-November 2019 — Fiscal consolidation — New benchmark. - Complete a detail study identifying and quantifying major contingent liabilities and any payable amounts by the public sector related to PPPs and PPAs contracts end-December 2019 — Improved PFM and transparency — New benchmark. - Integration of the Civil Health Insurance Fund (CHIF) into the GFMIS system end-December 2019 — Improved PFM and transparency — New benchmark. - Publish updated public debt management strategy end-June 2017 — Enhance transparency, communication, and predictability — Met. - Finalize the reorganization of the Public Debt Directorate end-June 2017 — Strengthen the organizational framework for effective public debt management — Met. - Amend and enact the Insolvency Law — Initially end-March 2017, reset for end-June 2017 — Removal of obstacles to increase access to finance — Implemented with delay. - Amend and enact the Secured Lending Law — Initially end-March 2017, reset for end-June 2017 — Removal of obstacles to increase access to finance — Implemented with delay. - Submit to Parliament amendments to Deposit Insurance Corporation Law to align the provisions regarding the early intervention and bank resolution framework with the new commercial banking law — Initially end-March 2017, reset for end-June 2017 — Improving the resilience of the banking sector — Not met. Amendments have been submitted to Parliament with delay on April 2018 and staff is assessing them on the substance. - Publish a study assessing the key issues and challenges to promote financial inclusion — Initially end-March 2017, reset for end-September 2017 — Financial Inclusion, growth and equity — Implemented with delay. - Finalize and publish the Financial Inclusion Strategy end-December 2017 — Financial Inclusion, growth and equity — Met. - Amend the Insurance law to allow for the transfer the supervision of the insurance sector to the CBJ — Initially end-March 2017, reset for end-March 2018, proposed to be reset for end-September 2019 — Better supervision of the insurance sector — Delayed. - Transfer the supervision of the insurance sector to CBJ — Initially end-September 2017, reset for end-March 2018, proposed to be reset for end-September 2019 — Stronger supervision to minimize spill-overs — Delayed. - Submit to Parliament a draft Inspection Law streamlining inspection mandates and processes — Initially end-October 2016, reset for end-June 2017 — Improve business environment — 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, proposed to be reset for end-June 2019 — Promote formal employment and stimulate aggregate demand while protecting the social security actuarial position — Delayed. The World Bank has postponed the study and is currently planning to conduct it in 2019. ### Technical Memorandum of Understanding (TMU) — program measurement conventions and key definitions - Program performance criteria and indicative targets are reported in Table 1b attached to the MEFP dated April 18, 2019. - Exchange rates and gold price for program measurement are those that prevailed on March 31, 2016: - Exchange rate of the Jordanian dinar to the U.S. dollar is set at JD 0.709 = $1. - Gold price is set at JD 870.865 per fine troy ounce for the measurement of the program performance criterion on net international reserves. - Program exchange rates (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 staff on an appropriate policy response. - Debt for program monitoring is defined as set forth in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), adopted December 5, 2014 (definition text reproduced in TMU). *Source: 1jorea2019001 - 29. Progress in the implementation of our policies, which are supported by the IMF, will (IMF PDF).* ### 6. The performance criteria on the central government’s primary fiscal deficit and the ### 1jorea2019001 - 6. The performance criteria on the central government’s primary fiscal deficit and the ### Monitoring framework - Performance criteria on: - Central government’s primary fiscal deficit and the combined public deficit, and indicative targets on central government social spending are monitored semi-annually (with indicative targets for the other quarters) on a cumulative basis from the beginning of the calendar year. - Net International Reserves (NIR) performance criterion and indicative targets on public debt, short-term public debt, accounts payable of the central government, domestic payment arrears of NEPCO, WAJ, and Aqaba, Miyahuna, and Yarmouk Water Companies, and NDA of the CBJ are monitored semi-annually (with indicative targets for the other quarters) in terms of stock levels. - Accumulation of external debt service arrears is monitored on a continuous basis. ### Ceiling on the primary deficit of the central government excluding grants and net transfers to NEPCO and WAJ - Coverage and measurement: - Central government = budgetary central government covered by the annual General Budgetary Law (GBL); excludes budgets of the 28 government units; includes all ministries and government departments operating under central authority. - Operations measured on a cash basis. - Definition of the central government primary deficit (program monitoring): - 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 the state-owned water sector. - Component definitions: - Net external financing = cash external debt disbursements received by the central government, less external debt repayments paid by the central government; covers central government debts (excluding off-budget military debts) and foreign debts channeled through the central government to finance other public sector operations. - Privatization receipts = all transfers of monies received by the central government from sale of government assets, including sale of shares, sale of non-financial assets, leases and sale of licenses or exploration rights with duration of 10 years and longer. - Net domestic bank financing = change in the banking system’s claims in JOD and in foreign currency on the central government, net of balances on government accounts with the CBJ and commercial banks. - Net domestic nonbank financing = 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 to NEPCO and the state-owned water sector = (i) direct transfers from the central government to NEPCO and the state-owned water sector (or their creditors) on behalf of NEPCO and the state-owned water sector (including subsidies, cash advances, and payment of debt or government guarantees if called), minus (ii) transfers of cash from NEPCO and the state-owned water sector to the central government (including repayments of debt, arrears or cash advances). - Adjustors to the ceiling: - Downward by the extent to which foreign budgetary grants received by the central government (as specified in Table 1b) during the relevant period fall short of the levels specified in Table 1b of the MEFP up to a maximum of 75 percent of the shortfall. - Downward by the extent to which the combined stock of health and energy arrears by the central government falls above the projected combined stock of health and energy arrears specified in Table 1b of the MEFP, excluding any one-off settlement operation (such as the write-off of intra-governmental claims). - Downward by the extent to which the stock of checks issued by the central government but not yet cashed by the beneficiary exceeds JD 200 million (the programmed stock as specified in Table 1b of the MEFP) in case of the end-year indicative target or performance criterion. ### Ceiling on the combined public deficit - Definition for program monitoring: - Combined public deficit = sum of: - (i) the primary deficit of the central government excluding grants and net transfers to NEPCO and the state-owned water sector (as defined above); - (ii) the net loss of NEPCO; and - (iii) the overall deficit of the state-owned water sector. - NEPCO net loss definition: - Net loss = total costs minus total operating revenues for normal operations within the year as reported in the unaudited income statement. - Total operating revenues = (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 = (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. - State-owned water sector overall balance definition: - Overall balance = total revenues minus current and capital expenditures. - Total revenues = (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, Aqaba, Miyahuna or Yarmouk water companies’ obligations on their behalf. - Current and capital expenditures = (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: - Same three adjustors as for the central government primary deficit: - Downward for shortfalls in foreign budgetary grants up to a maximum of 75 percent of the shortfall. - Downward for combined health and energy arrears above projected levels (excluding one-off settlements). - Downward if uncashed checks exceed JD 200 million for end-year targets. ### Floor on the Net International Reserves (NIR) of the CBJ - NIR definition: - NIR of the CBJ in U.S. dollars = foreign assets of the CBJ minus its foreign liabilities. - Foreign assets (included): - Readily available claims on nonresidents denominated in foreign convertible currencies: foreign exchange (foreign currency cash, deposits with foreign correspondents, and holding of foreign securities), monetary gold, IMF reserve position, and SDR holdings. - Foreign assets (excluded): - Assets pledged, collateralized, or encumbered; CBJ’s claims on resident banks and nonbanks; claims 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; precious metals other than gold; assets in nonconvertible currencies; illiquid swaps. - Excluded from foreign assets is the outstanding balance of bilateral accounts with the Central Bank of Iraq of USD 1,081.67 million. - Foreign liabilities (included): - All foreign exchange liabilities to residents and nonresidents, including commitments to sell foreign exchange arising from derivatives, and Jordan’s outstanding liabilities to the IMF. - Foreign liabilities (excluded): - 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 and donor term deposits with the CBJ with remaining maturity not less than 360 days); the two technical swaps with Citibank Jordan for USD 88.5 million; and amounts received under any SDR allocations received after March 31, 2016. - Valuation and baseline: - 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 USD 13,048.2 million (at program exchange rates). - Adjustors to the NIR floors: - Floors on NIR will be adjusted upward (downward) by the extent to which the sum of foreign budgetary grants and foreign budgetary loans—excluding programmed 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. - Given uncertainty on timing of Eurobond issuance (assumed under the program in the third quarter of 2019 for $1 billion), the floor of the NIR for end-September 2018 will be adjusted downward by the programmed amount if delayed to the fourth quarter of 2019. - Floors will 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 - Definition: - External debt service arrears = 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 - Definition: - Social spending = central government spending on social protection programs as articulated in the central government budget (code 710). - Programs funded by 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 - Definition: - Public debt = sum of: (i) central government debt (including off-budget project loans); (ii) government guarantees extended to NEPCO, WAJ and other public entities; and (iii) the stock of the CBJ’s liabilities to the IMF not lent on to the central government. - Guarantee of a debt arises from any explicit legal obligation of the central government, or any other agency acting on its behalf, to service such a debt in the event of nonpayment by the recipient, 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 cumulative disbursements under the EFF during the relevant period fall 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 - Definition: - Short-term public debt = public debt (as defined in Section G) with original maturities of up to, and including, one year. ### Ceiling on accounts payable of the central government - Definition: - Accounts payable = 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 domestic payment arrears of NEPCO - Definition: - Domestic payment arrears by NEPCO = belated settlement of liabilities due under obligation (contract) for more than 60 days, or the creditor’s refusal to receive a settlement duly offered by the debtor. - Arrears 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 domestic payment arrears of WAJ, and Aqaba, Miyahuna, and Yarmouk distribution companies - Definition: - Same formulation as for NEPCO: arrears = liabilities due for more than 60 days or creditor refusal; include wages, pensions, social security, taxes, obligations to banks and suppliers; exclude obligations to the central government arising from net transfers per paragraph 12. ### Ceiling on the Net Domestic Assets (NDA) of the CBJ - Reserve money definition: - Reserve money of the CBJ = (i) currency in circulation (currency outside banks and commercial banks’ cash in vaults); and (ii) non-remunerated deposits of licensed banks with the CBJ in Jordanian dinars. - NDA definition: - NDA of the CBJ = reserve money of the CBJ minus its NIR as defined in Section D. - Adjustors to the NDA ceilings: - Upward (downward) by the extent to which the floors on the NIR 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 equals 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 (reporting requirements to IMF Division B, Middle East and Central Asia Department) - 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). - 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 amounts paid or received in connection with debt transactions, transfers to cover losses, and any amount directed to repay 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) 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 (Aqaba, Miyahuna, and Yarmouk) and WAJ’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). *Source: 1jorea2019001 - 6. The performance criteria on the central government’s primary fiscal deficit and the (IMF).* ### 39. Related to the continuous performance criteria: ### 39. Related to the continuous performance criteria: ### Data reporting and monitoring requirements - 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. - 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). - A table on the amount of central government spending on each of its social protection programs (monthly). - 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). - The IPP formula tables on white products (gasoline, diesel, kerosene, and jet fuel), and for LPG, fuel oil, and asphalt (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). ### Data submission timetables and revisions - Weekly data and data on CD auctions: sent to the Fund with a lag of no more than one week. - Monthly and quarterly data: 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: 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. ### Definitions and statistical methodology - 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 the staff on appropriate treatment based on the Fund’s standard statistical methodology and program purposes. ### Economic and social conditions (Statement by Sami Geadah, Alternate Executive Director for Jordan; May 1, 2019) - Regional conflicts and developments adversely affect the fiscal situation, investment, and growth. - Jordan continues to host over 1¼ million Syrian refugees, about one-fifth of Jordanians. - Return of refugees depends on improvements in living conditions in Syria, including rehabilitation of education and medical facilities, for which there has been little international support. - Uncertainties regarding prospects for the occupied Palestinian territories and subdued economic conditions for expatriate workers in oil exporting Gulf countries affect remittances. ### Recent developments and outlook - Some improvement in 2019, including a strong rebound in tourism and improved situation in Iraq; opening of borders is starting to benefit exports, although regaining lost market share will be difficult. ### Fiscal policy and public debt - Measures have been taken to reduce the combined public sector balance from 4.3 percent of GDP in 2018 to 2.6 percent of GDP in 2019. - The most significant measure is the revision of the income tax law, supported by strengthened tax administration. - The revised income tax law is expected to yield 0.8 percent of GDP over the medium term. - Expenditures were compressed, and steps were taken to ensure NEPCO does not incur operating losses. - Continued fiscal consolidation in subsequent years is expected to put public debt on a firm downward trajectory. ### Energy sector reforms - Strategy ensures NEPCO does not incur operating losses as of this year. - NEPCO operational results: operational profit in 2016; small operational loss in 2017; larger loss (0.3 percent of GDP) in 2018 when tariff adjustments were put on hold. - Measures implemented: additional use of gas from Egypt, increased tariffs on electricity distribution companies, elimination of subsidies to high-use households, increased charges on self-generation consumers; tariffs will be adjusted as needed. - Reduction of cross-subsidies expected to start in late 2019. - Higher tariffs on commercial and industrial users have induced companies to generate their own electricity, most through solar power. - Jordan has a very low cost for generating solar power, at US 2.4 cents per kwh, presenting an export opportunity once transmission arrangements with neighboring countries are agreed. ### Monetary policy - The Central Bank of Jordan (CBJ) maintains the peg to the US dollar and balances stability and growth objectives. - CBJ keeps interest rates as low as possible to support credit growth, subject to maintaining a comfortable level of foreign reserves. - Domestic political events in June 2018 led to increased deposit dollarization and a decline in foreign exchange reserves to below the program target for end-2018; these trends were reversed in 2019. - The CBJ has been a net buyer of foreign exchange since the beginning of this year and deposit dollarization has started to fall. - The CBJ will continue to monitor developments closely and intervene when necessary to maintain monetary stability and reserve targets. ### Structural reforms - Reforms accelerated to address anemic growth and persistently high unemployment, especially youth unemployment. - Business environment and competitiveness reforms: simplified procedures to start and operate a business; strengthened investor protection; eased business registration procedures; simplified inspection procedures with a new inspection law. - Rules of origin for exports to the EU loosened, extended to 2030 and no longer restricted to prespecified industrial and development zones. - Access to finance initiatives: increased resources for SME lending; new secured transactions law allowing movable assets as collateral. - New insolvency law enacted in January 2019: protects creditor rights, provides unhindered access to an insolvency system, expedited liquidation of unviable companies, and mechanisms to restructure viable businesses. - Expansion of credit bureau coverage to insurance and leasing companies, microfinance institutions, public utilities, and telecommunication companies. - Labor market reforms focused on youth and female employment: collaboration with ILO to improve education and address skills mismatches; eased impediments to female employment (removal of restrictions on working hours, introduction of flexible working arrangements, establishing part time as legitimate employment, removing potential discrimination between mothers and fathers regarding access to daycare, and allowing paternity leave). - Measures to promote formalization of the workforce, including for Syrian refugees and guest workers. ### Foreign assistance and refugees - The London Initiative in February 2019 helped Jordan access budget grants and concessional financing. - Despite support, there has been an annual US$1 billion shortfall in donor financing to fully address refugee-related pressures. - In 2017 and 2018, Jordan received US$1 billion less in support under the Jordan Response Program each year relative to annual funding requirement of about US$2.5-2.7 billion. - With public debt at about 95 percent of GDP, it is difficult for Jordan to borrow to host refugees; this hampers implementation of the Jordan Compact and increases macroeconomic vulnerabilities. *Source: Statement by Sami Geadah, Alternate Executive Director for Jordan; May 1, 2019* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1jorea2019001.pdf_