## _cr04287

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---

### Executive summary
- Arrangement and relations with Fund:
  - IMF resources: authorities have not used Fund resources after the completion of the first review and plan to treat the remainder of the arrangement as precautionary.
  - Performance: All performance criteria were met and structural benchmarks implemented.
  - Post-Program Monitoring: Authorities welcome participation in PPM and technical assistance support.
- World Bank support:
  - Second Public Sector Reform Loan in the amount of US$120 million (Appendix II).
- Data and transparency:
  - Timeliness and coverage of macroeconomic data are generally sufficient for program monitoring (Appendix III).
- Publication:
  - Authorities will consider the publication of the report after it is issued to the Executive Board.

### Recent economic developments and outlook
- Growth and activity:
  - Real GDP grew by 6.9 percent in Q1 2004, after 3.2 percent in 2003.
  - Real GDP projected for 2004: 5½ percent.
  - Export growth surged 29.0 percent year-on-year in early 2004.
  - Industrial production index (excluding QIZ exports) increased by an annual rate of about 14.7 percent in Q1 2004.
  - Imports rose by 32.3 percent in Q1 2004.
  - Sectors driving growth: manufacturing (QIZs), construction, tourism, and transport.
- Prices and employment:
  - Inflation: 3.2 percent (12 months to April 2004); average inflation in 2004 expected about 3.5 percent.
  - Unemployment: 14.5 percent.
  - Poverty: Headcount ratio 14.2 percent (declined by about one third between 1997 and 2002).
- External outlook:
  - Current account expected to register a surplus of 5½ percent of GDP for 2004.
  - Gross usable reserves of the CBJ are expected to recover to US$4½ billion by end-2004.
  - Exports growth expected to be sustained at about 6–8 percent a year over the medium term.
  - Downside risk: failure of the textile industry to move up the value-added chain could worsen the current account by up to 2 percentage points of GDP a year over the medium term.

### Fiscal performance and policy (Q1 2004 and remainder of 2004)
- Q1 2004 outturns:
  - Central government surplus: 1.8 percent of GDP (JD 137 million).
  - Program-envisaged Q1 deficit: 1.9 percent of GDP (targeted JD 140 million deficit).
  - Overall public sector surplus: 2.6 percent of GDP in Q1 2004.
  - Net government debt declined by 8 percentage points to 93½ percent of GDP (foreign debt stock accounted for 69.7 percent of expected GDP / 68 percent of GDP external debt in other tables).
  - Public sector net debt declined by 4½ percentage points to 55 percent (55.2 percent reported in some places) of GDP.
- Revenue and expenditure measures:
  - Revenue over-performance due to strong GST and customs duty collections and higher income tax receipts from strong corporate earnings and better compliance.
  - GST rate on hotel accommodations reduced from 16 percent to 7 percent for one year (May 2004).
  - Customs duties on steel and cement reduced by 5 percentage points to 25 percent (April 2004).
  - Government held tight control on budgetary spending and collected significant repayments from onlending operations.
  - Authorities intend to limit total budgetary expenditure to the program level to achieve the program deficit target of 3.9 percent of GDP.
  - Authorities will save a large portion of revenue over-performance for further deficit and debt reduction.
- Fiscal risks and measures:
  - Additional grants secured from neighboring countries amount to 1.6 percent of GDP.
  - Somewhat higher tax revenue estimated at 0.3 percent of GDP.
  - Loss of the oil surplus and increase in petroleum subsidies amount to 1.9 percent of GDP.
  - Refinery likely to require subsidies amounting to 1.5 percent of GDP in 2004.
  - New commitments amounting to 0.7 percent of GDP to be accommodated by generating savings in other non-essential categories.
  - Ministry of finance issued a budget circular instructing ministries to achieve savings in utility bills of 20 percent.
  - Medium-term fiscal recommendations: overhaul the income tax system for equity and efficiency; contain the wage bill and unproductive spending; increase efficiency of health and education provision; eliminate remaining petroleum subsidies by end-2006 via multi-year discretionary price adjustments.

### External sector and balance of payments (Q1 2004)
- Q1 2004 balances:
  - External current account (including grants) surplus: US$107 million (1.0 percent of annual GDP).
  - Trade balance: deficit of US$613 million (5.7 percent of annual GDP).
  - Net tourism receipts increased by 31.2 percent.
  - Remittances grew by 7 percent.
  - Preliminary capital account deficit: US$283 million in Q1 2004.
  - Capital outflows of around US$250–300 million reflecting mainly settlements of official accounts (including settlement of official transfers US$250 million).
  - Gross international reserves fell by US$410 million to US$4.3 billion through end-May 2004; gross usable reserves expected to recover to US$4½ billion.
- Vulnerabilities:
  - Surge in imports partly due to higher oil prices and robust domestic activity.
  - Jordan is essentially insulated from higher international oil prices in 2004 because increases in oil import payments and budgetary subsidies are largely matched by increased oil grants.
  - Medium-term challenges: oil price vulnerability, grant dependence, and improving the direct tax system.

### Monetary policy, banking sector, and financial stability
- Monetary and liquidity indicators:
  - Broad money growth: 8.6 percent annual rate in Q1 2004 (12.3 percent in 2003).
  - Private sector credit growth: 4.9 percent.
  - Broad money expected to grow by 9.6 percent in 2004.
  - At end-March, 2004, three-month CBJ-CD rates stood at 2.2 percent.
  - Current low level of spreads against U.S. interest rates is about 100 basis points for three-month rates.
  - CBJ aims to limit expansion of net domestic assets to meet international reserve targets in a non-inflationary manner.
  - Authorities have issued JD 100 million in five-year government bonds and plan regular auctions of long-term government bonds.
- Banking sector soundness:
  - Net after-tax profits of the banking sector increased by 27 percent to 1.3 percent of GDP; JD 100 million in 2003 (JD 79 million in 2002).
  - Net profits: 0.7 percent of total assets and 2.0 percent of total loans (2003).
  - Classified loans, excluding interest in suspense, fell to 15.8 percent of total loans (17.5 percent in 2002).
  - Underlying risk-weighted capital-adequacy ratio (CAR) improved in 2003 by 1.3 percentage points to 17.9 percent; inclusion of market risk led CAR to decline marginally to 15.9 percent (16.6 percent in 2002).
  - Two banks increased capital; one bank under temporary CBJ administration was restructured in March 2004.
  - Authorities agreed a time-bound restructuring plan with the remaining undercapitalized bank; decision on the last bank under CBJ administration to be taken by September 2004 with options that are not expected to require public funds (capital injection, merger, or liquidation with depositor compensation via privately-funded Deposit Insurance Corporation).

### Structural reforms, privatization, and data/PPM
- Structural reform progress:
  - Expression of interest for privatization of electricity generation companies launched in March 2004; sale of generation companies expected completed in 2004.
  - Cabinet approved privatization of AMPCO.
  - Free trade agreement with Singapore signed to come into effect in second half of 2004.
  - Customs duties on steel and cement reduced to 25 percent (April 2004).
  - CBJ published revised balance of payments statistics in line with BPM5 and a new international reserves template (published June 2, 2004).
- Privatization and debt strategy:
  - Fiscal program estimates total privatization proceeds of about JD 300 million for 2004.
  - Staff encourages accelerating privatization and using the entire proceeds for debt reduction.
- Post-Program Monitoring (PPM):
  - Authorities established informal quarterly quantitative targets for PPM consistent with the 2004 macroeconomic framework.
  - PPM focus: public debt reduction through privatization and fiscal consolidation, revenue-enhancing tax reforms, oil-price adjustment gains, expenditure rationalization, and improvements in public expenditure management.
  - Discussions on the first review under PPM expected to be initiated in the fourth quarter of 2004.
- Data and transparency:
  - Authorities committed to meeting the Fund’s Special Data Dissemination Standard within the next two to three years.
  - Strategy adopted to compile the international investment position and commence regular publication by early 2005.
  - CBJ working with a Fund technical advisor on balance of payments statistics; ministry of finance to publish general government statistics quarterly from January 2005.

### Risks, policy recommendations, and Fund relations
- Key risks:
  - High debt burden, dependence on external grants, and vulnerability to higher oil prices.
  - Potential slowdown if textile industry fails to move up value-added chain (could worsen current account by up to 2 percentage points of GDP per year).
  - Possible pressure on reserves from part of such shocks.
- Staff and policy recommendations:
  - Maintain prudent fiscal stance to meet Public Debt Law ceilings; fiscal deficit target for 2004: 3.9 percent of GDP.
  - Resist GST-rate reductions favoring certain sectors; save a major portion of any additional revenue over performance.
  - Eliminate remaining petroleum subsidies and introduce automatic price adjustment mechanism once gaps closed; comprehensive reform of direct tax system; expenditure rationalization.
  - Resume regular long-term government bond auctions; seek Fund technical assistance to deepen debt market and lengthen debt maturity.
  - Continue reform efforts, accelerate privatization, use proceeds for debt reduction.
- Fund relations:
  - Staff recommends Executive Board approval for completion of the third and final review under the SBA.
  - Authorities do not intend to make the remaining purchase under the arrangement because of the strengthened external outlook and will treat the remainder as precautionary.
  - Fund to continue close engagement via enhanced surveillance, PPM, and technical assistance.

### Key statistics and selected indicators (preserved exactly as reported)
- Real GDP at market prices: "4.1 4.2 5.0 3.2 6.3 6.9 5.0 5.5 5.5 6.0 6.0 6.0 6.0"
- Nominal GDP at market prices (JD millions): "5,989   6,310   6,653   6,991   1,694   1,741   7,524   7,596   8,159   8,803   9,500 10,252 11,063"
- Consumer price index (annual average): "0.7 1.8 1.8 2.3 2.6 3.1 3.0 3.5 1.8 1.8 1.8 1.8 1.8"
- Gross domestic investment (percent of GDP): "22.2 22.2 22.5 22.3......23.5 23.0 24.9 26.3 27.1 27.2 27.3"
- Gross national savings (percent of GDP): "22.9 22.2 27.0 33.5......28.8 28.6 26.7 27.1 27.3 27.2 27.3"
- Revenue and grants (percent of GDP): "30.1 30.5 30.2 35.9 7.0 8.5 32.3 32.0 27.8 26.8 26.8 26.4 26.0"
- Expenditure and net lending (percent of GDP): "34.8 34.2 35.2 37.0 8.9 6.7 36.2 35.9 31.1 29.6 28.8 28.9 28.5"
- Overall fiscal balance (after grants) (percent of GDP): "-4.7 -3.7 -5.0 -1.1 -1.9 1.8 -3.9 -3.9 -3.3 -2.8 -2.5 -2.5 -2.5"
- Government and government guaranteed debt (percent of GDP): "100.0 97.0   100.5   101.5...93.5 93.0 92.0 85.7 79.0 74.1 68.3 62.4"
- Gross usable international reserves (US$ millions): "2,742   2,565   3,474   4,745   4,636   4,551   4,700   4,500   4,444   4,319   4,175   4,139   4,082"
- Current account balance (after grants) (percent of GDP): "0.7 0.0 4.5 11.2...1.0 5.3 5.5 1.8 0.7 0.1 0.0 0.0"
- Merchandise exports annual changes (percent): "3.7 20.8 20.7 11.2...29.0 8.3 14.8 5.5 6.6 7.7 7.5 7.6"
- Merchandise imports annual changes (percent): "23.7 5.6 3.5 12.3...32.9 9.7 18.2 4.0 6.1 6.8 7.2 7.4"
- Banking sector: Classified loans/total loans (percent): "11.1 14.4 18.4 19.3 21.0 19.9"
- Gross foreign currency public debt (US$ millions): "6,763 6,689 7,228 7,605 7,068"
- Selected program and projection table extracts:
  - Real GDP growth series and projections as detailed in Growth and inflation section (2002–04 Prog/Act/Proj values preserved).
  - Fiscal ratios and government debt series as reported under Fiscal performance and Public debt sections.
- IMF financial position and projected obligations (as of April 30, 2004):
  - Quota: SDR 170.50 million (100.00 percent).
  - Fund holdings of currency: SDR 427.52 million (250.74 percent).
  - Reserve position in Fund: SDR 0.07 million (0.04 percent).
  - SDR Department net cumulative allocation: SDR 16.89 million (100.00 percent); holdings SDR 3.07 million (18.17 percent).
  - Outstanding purchases and loans: Extended Arrangements: SDR 246.42 million (144.53 percent of quota); Stand-by Arrangement: SDR 10.66 million (6.25 percent of quota).
  - SBA: 7/03/02; 7/02/04; Amount Approved 85.28; Amount Drawn 10.66 (SDR million).
  - Projected Obligations to Fund (Expectations Basis; SDR million):
    - Principal forthcoming: 2004 39.6; 2005 152.1; 2006 57.6; 2007 152.2; 2008 37.5
    - Charges/Interest forthcoming: 2004 4.3; 2005 4.6; 2006 3.4; 2007 2.2; 2008 1.19
    - Total forthcoming: 2004 43.95; 2005 56.83; 2006 61.11; 2007 54.49; 2008 38.72

*Source: IMF staff report extract and appendices (IMF PDF _cr04287).*

### 150.8 percent of quota (Appendix I). In view of the strong balance of payments position, the

### _cr04287 - 150.8 percent of quota (Appendix I). In view of the strong balance of payments position, the

### Executive summary
- Arrangement and relations with Fund:
  - IMF resources: authorities have not used Fund resources after the completion of the first review and plan to treat the remainder of the arrangement as precautionary.
  - Performance: All performance criteria were met and structural benchmarks implemented.
  - Post-Program Monitoring: Authorities welcome participation in PPM and technical assistance support.
- World Bank support:
  - Second Public Sector Reform Loan in the amount of US$120 million (Appendix II).
- Data and transparency:
  - Timeliness and coverage of macroeconomic data are generally sufficient for program monitoring (Appendix III).
- Publication:
  - Authorities will consider the publication of the report after it is issued to the Executive Board.

### Recent economic developments
- Growth and activity:
  - Real GDP grew by 6.9 percent in Q1 2004, after 3.2 percent in 2003.
  - Export growth surged 29 percent year-on-year in early 2004 (Figure 1).
  - Industrial production index (excluding QIZ exports) increased by an annual rate of about 15 percent.
  - Imports rose by 32 percent.
  - Sectors driving growth: manufacturing (QIZs), construction, tourism, and transport.
- Labor and poverty:
  - Unemployment: 14.5 percent.
  - Poverty: Headcount ratio 14.2 percent (declined by about one third between 1997 and 2002).
- Prices and markets:
  - Inflation: 3.2 percent (12 months to April 2004).
  - Amman Stock Exchange index rose about 5 percent in the first four months of 2004.
- Monetary and reserves:
  - Broad money growth: 8.6 percent annual rate in Q1 2004 (12.3 percent in 2003).
  - Private sector credit growth: 4.9 percent.
  - CBJ gross international reserves fell by US$410 million to US$4.3 billion during the five months through end-May 2004.
  - CBJ gross reserves as a ratio of JD reserve money: 149 percent by end-March 2004.
  - Real effective exchange rate: depreciated by 7.8 percent in the 12 months to March 2004.
- Financial sector:
  - Banking sector health improved significantly in 2003—stronger profitability and prudent credit policies.
  - Authorities are considering options to resolve the last small bank under temporary CBJ administration and expect that no public funds would be needed.

### Fiscal performance and policy
- Q1 2004 fiscal outturn:
  - Central government surplus: 1.8 percent of GDP (Q1 2004), compared with a program-envisaged deficit of 1.9 percent of GDP and a 2003 deficit of 1.1 percent of GDP.
  - Overall public sector surplus: 2.6 percent of GDP in Q1 2004.
  - Net government debt declined by 8 percentage points to 93½ percent of GDP (68 percent of GDP external debt).
  - Public sector net debt declined by 4½ percentage points to 55 percent of GDP.
- Revenue and expenditures:
  - Revenue over-performance due to strong GST and customs duty collections and higher income tax receipts from strong corporate earnings and better compliance.
  - Government held tight control on budgetary spending and collected significant repayments from onlending operations.
- Policy actions and measures:
  - GST rate on hotel accommodations reduced from 16 percent to 7 percent for one year (May 2004) to boost tourism competitiveness.
  - Customs duties on steel and cement reduced by 5 percentage points to 25 percent (April 2004) to increase competition.
  - Authorities intend to limit total budgetary expenditure to the program level to achieve the program deficit target of 3.9 percent of GDP.
  - Authorities will save a large portion of revenue over-performance for further deficit and debt reduction.

### External sector and balance of payments
- Q1 2004 balances:
  - External current account (including grants) surplus: US$107 million (1.0 percent of annual GDP) in Q1 2004.
  - Trade balance: deficit of US$613 million (5.7 percent of annual GDP) in Q1 2004.
  - Net tourism receipts increased by 31 percent.
  - Remittances grew by 7 percent.
  - Preliminary capital account deficit: US$283 million in Q1 2004, partly reflecting large net repayment of foreign debt by the public sector.
  - Capital outflows of around US$250 million reflecting mainly settlements of official accounts (including settlement of official transfers US$250 million).
  - Gross international reserves decline and subsequent outlook: gross international reserves fell by US$410 million to US$4.3 billion through end-May 2004; gross usable reserves of the CBJ are expected to recover to US$4½ billion.
- Risks and vulnerabilities:
  - Surge in imports partly due to higher oil prices and robust domestic activity.
  - Jordan is essentially insulated from higher international oil prices in 2004 because increases in oil import payments and budgetary subsidies are largely matched by increased oil grants.
  - Medium-term challenges: oil price vulnerability, grant dependence, and improving the direct tax system.
- Program projections and adjustments:
  - Macro-framework for 2004 updated; projection for real GDP growth increased by ½ percentage point to 5½ percent.
  - External sector performance expected to remain strong with a current account surplus projected to reach 5½ percent of GDP.

### Program discussions and policy stance
- Program targets and outlook:
  - Program deficit target for 2004: 3.9 percent of GDP.
  - Authorities believe current levels of interest rates are consistent with the revised international reserves target but will manage interest rates flexibly in line with developments in the spread with U.S. interest rates.
- Structural reforms and banking sector:
  - All end-March 2004 performance criteria were met by large margins and all structural benchmarks were implemented.
  - Authorities are considering options to resolve the last small bank under temporary CBJ administration with expectation of no public funds needed.
- Fund relations:
  - Authorities do not intend to make the remaining purchase under the arrangement because of the strengthened external outlook.
  - Authorities intend to maintain close relations with the Fund via PPM and technical assistance.

*Source: IMF staff report (excerpt).*

### 2004. Interest rates on CBJ-CDs were also allowed to increase modestly, reflecting tighter

### _cr04287 - 2004. Interest rates on CBJ-CDs were also allowed to increase modestly, reflecting tighter

### Banking sector: performance and soundness
- Net after-tax profits of the banking sector increased by 27 percent to 1.3 percent of GDP.
- Classified loans, excluding interest in suspense, fell to 15.8 percent of total loans, compared to 17.5 percent in 2002.
- Underlying risk-weighted capital-adequacy ratio (CAR) improved in 2003 by 1.3 percentage points to 17.9 percent.
- Because of the inclusion of market risk in 2003 calculations, CAR declined marginally to 15.9 percent, compared to 16.6 percent in 2002.
- Two banks increased capital to meet mandated capital-adequacy requirements; one bank under temporary CBJ administration was restructured in March 2004.
- Authorities agreed a time-bound restructuring plan with the remaining undercapitalized bank; the courts recovered a large portion of a small bank’s nonperforming assets.
- Authorities will decide by September 2004 whether to restructure the last bank under CBJ administration through a capital injection, merge it, or liquidate it with depositor compensation via the privately-funded Deposit Insurance Corporation; no use of public funds is expected for these options.

### Monetary developments, interest rates, and reserves
- At end-March, 2004, three-month CBJ-CD rates stood at 2.2 percent.
- The current low level of spreads against U.S. interest rates is about 100 basis points for three-month rates.
- Broad money is expected to grow by 9.6 percent in 2004, reflecting a recovery in JD deposits.
- The CBJ aims to limit expansion of net domestic assets to meet international reserve targets in a non-inflationary manner.
- Authorities have issued JD 100 million in five-year government bonds and plan to continue auctions of long-term government bonds on a regular basis; they intend to request Fund technical assistance to deepen the long-term bond market and lengthen debt maturity.

### Fiscal performance, measures, and medium-term challenges
- Additional grants secured from neighboring countries amount to 1.6 percent of GDP; somewhat higher tax revenue is estimated at 0.3 percent of GDP; loss of the oil surplus and increase in petroleum subsidies amount to 1.9 percent of GDP.
- Government intends to limit total budgetary expenditure to program level to achieve fiscal deficit target (including grants) of 3.9 percent of GDP.
- New commitments: introduce universal health insurance for children under six; compensate low-income public-sector employees with a JD 5–JD 10 monthly salary increase; authorities will accommodate additional commitments amounting to 0.7 percent of GDP by generating savings in other non-essential categories.
- Ministry of finance issued a budget circular instructing ministries to achieve savings in utility bills of 20 percent.
- Staff reservations noted regarding a GST reduction on hotel accommodations (measure is less than 0.1 percent of GDP and time bound).
- The refinery, which historically produced an oil surplus, will likely require subsidies amounting to 1.5 percent of GDP in 2004, illustrating vulnerability to international oil price movements.
- Medium-term fiscal recommendations: overhaul the income tax system for equity and efficiency; contain the wage bill and unproductive spending; increase efficiency of health and education provision.

### Growth, external sector, and outlook
- Real GDP growth for 2004 was revised upward by ½ percentage point to 5½ percent reflecting strong Q1 growth.
- Average inflation in 2004 is expected to be 3.5 percent.
- Jordan is essentially insulated from higher international oil prices in 2004 because increases in oil import payments and budgetary subsidies are largely matched by increased in-kind oil grants.
- Current account surplus is expected to reach 5½ percent of GDP, slightly higher than projected under the program.
- Gross usable reserves of the CBJ are expected to recover to US$4½ billion.
- Export and import growth are expected to slow somewhat during the remainder of the year as trade with Iraq catches up to pre-war levels; tourism and remittances expected to remain buoyant.
- Exports growth is expected to be sustained at about 6–8 percent a year over the medium term.
- Downside risk: failure of the textile industry to move up the value-added chain could worsen the current account by up to 2 percentage points of GDP a year over the medium term and slow external debt reduction; part of such a shock could be financed from a drawdown of international reserves.

### Structural reforms, privatization, and post-program monitoring (PPM)
- Progress in structural reforms: expression of interest for privatization of electricity generation companies launched in March 2004; Cabinet approved privatization of AMPCO; free trade agreement with Singapore signed to come into effect in second half of 2004.
- CBJ implemented the final SBA benchmark by publishing revised balance of payments statistics in line with BPM5 and a new international reserves template.
- Authorities established informal quarterly quantitative targets for PPM consistent with the 2004 macroeconomic framework; PPM will focus on public debt reduction through privatization and fiscal consolidation, revenue-enhancing tax reforms, oil-price adjustment gains, expenditure rationalization, and improvements in public expenditure management.
- Discussions on the first review under PPM expected to be initiated in the fourth quarter of 2004.

### Data, transparency, and technical assistance
- Authorities committed to meeting the Fund’s Special Data Dissemination Standard within the next two to three years.
- Following publication of revised BOP statistics according to BPM5 and the international reserves template in May 2004, a strategy adopted to compile the international investment position with a view to commencing regular publication by early 2005.
- CBJ is working with a Fund technical advisor on balance of payments statistics; the ministry of finance will shortly start publishing general government statistics on a quarterly basis.

*Source: IMF staff report, _cr04287._*

### 21.      Jordan’s economic performance has strengthened and its outlook improved

### 21.      Jordan’s economic performance has strengthened and its outlook improved

### Economic recovery and outlook
- Strong recovery in real economic activity in the first quarter of 2004 driven by "surging exports, rebounding domestic demand, and a revitalized tourism sector."
- Trade liberalization, sound macroeconomic management, and reforms revived domestic investment and boosted exports.
- Strategic location and historical relations allowed Jordan to "regain its export market in Iraq and realize opportunities arising from reconstruction activities."
- Confidence is gaining momentum and "substantial progress was made in poverty reduction," but "high unemployment and poverty levels would require achieving and sustaining economic growth at full potential over the medium term."

### Fiscal position, GST reforms, and expenditure control
- Fiscal position "remarkably strengthened in the first quarter of 2004" due to revenue measures/reforms and expenditure containment despite "higher-than-programmed grants."
- GST reforms aimed at broadening the tax base and strengthening tax administration led to "a remarkable growth of GST revenue."
- Policy recommendation: "Therefore, any GST-rate reductions to favor certain sectors should be resisted."
- Higher world oil prices pose a fiscal challenge and "require firm expenditure control."
- Authorities committed "to save a major portion of any additional revenue over performance, should it materialize."

### Medium-term challenges and debt strategy
- Jordan faces medium-term challenges: "a high debt burden, dependence on external grants, and vulnerability through higher oil prices."
- Sustaining fiscal consolidation requires:
  - "elimination of the remaining subsidies on petroleum products,"
  - "undertaking a comprehensive reform of the direct tax system,"
  - "expenditure rationalization in line with the medium-term fiscal framework."
- Although government debt fell substantially in 2004, "achieving the debt limits under the Public Debt Law by 2006 could be undermined by adverse shocks, including from valuation losses."
- Staff encouragements:
  - "continue their reform efforts including through early identification of measures for next year’s budget,"
  - "accelerating privatization and using the entire proceeds for debt reduction would be essential for the success of the debt strategy."

### Financial stability, external position, and banking sector
- "Credible financial policies and a strong external reserve position have brought a high degree of financial stability and investor confidence."
- Continued strong export performance, a buoyant medium-term export outlook, and the "recent real depreciation of the dinar indicate that competitiveness is adequate."
- Authorities use "prudent liquidity management and flexible interest rate policy to protect reserves," underpinning commitment to the peg.
- Banking sector health improved: "stronger profitability, more prudent credit policies, and the effective implementation of the PCA framework."
- Progress in collecting nonperforming assets of the remaining bank under CBJ administration "has opened up options for securing a permanent solution without recourse to public funds."
- Staff advice: "resume regular long-term government bond auctions" and technical assistance is welcomed "in developing and deepening the debt market."

### IMF staff recommendations and program status
- Staff recommends Executive Board approval for completion of the "third and final review under the SBA" based on "Jordan’s solid track record on performance and policy implementation" and commitment to prudent financial policies.
- Assessment: "Steadfast implementation of policies/reforms under the program has strengthened the economy’s foundation, and Jordan is ready to graduate from Fund supported programs."
- The authorities decided to treat the remainder of the program as precautionary, consistent with an exit strategy.
- Staff recommends that the authorities "engage in PPM and welcomes their intention to maintain close relations with the Fund in the context of PPM and technical assistance provision."

### Key statistics and indicators (selected, preserved exactly as reported)
- Real GDP at market prices: "4.1 4.2 5.0 3.2 6.3 6.9 5.0 5.5 5.5 6.0 6.0 6.0 6.0" (2000–09 row as presented)
- Nominal GDP at market prices (JD millions): "5,989   6,310   6,653   6,991   1,694   1,741   7,524   7,596   8,159   8,803   9,500 10,252 11,063"
- Consumer price index (annual average): "0.7 1.8 1.8 2.3 2.6 3.1 3.0 3.5 1.8 1.8 1.8 1.8 1.8"
- Gross domestic investment (percent of GDP): "22.2 22.2 22.5 22.3......23.5 23.0 24.9 26.3 27.1 27.2 27.3"
- Gross national savings (percent of GDP): "22.9 22.2 27.0 33.5......28.8 28.6 26.7 27.1 27.3 27.2 27.3"
- Revenue and grants (percent of GDP): "30.1 30.5 30.2 35.9 7.0 8.5 32.3 32.0 27.8 26.8 26.8 26.4 26.0"
- Expenditure and net lending (percent of GDP): "34.8 34.2 35.2 37.0 8.9 6.7 36.2 35.9 31.1 29.6 28.8 28.9 28.5"
- Overall fiscal balance (after grants) (percent of GDP): "-4.7 -3.7 -5.0 -1.1 -1.9 1.8 -3.9 -3.9 -3.3 -2.8 -2.5 -2.5 -2.5"
- Government and government guaranteed debt (percent of GDP): "100.0 97.0   100.5   101.5...93.5 93.0 92.0 85.7 79.0 74.1 68.3 62.4"
- Gross usable international reserves (US$ millions): "2,742   2,565   3,474   4,745   4,636   4,551   4,700   4,500   4,444   4,319   4,175   4,139   4,082"
- Current account balance (after grants) (percent of GDP): "0.7 0.0 4.5 11.2...1.0 5.3 5.5 1.8 0.7 0.1 0.0 0.0"
- Merchandise exports annual changes (percent): "3.7 20.8 20.7 11.2...29.0 8.3 14.8 5.5 6.6 7.7 7.5 7.6"
- Merchandise imports annual changes (percent): "23.7 5.6 3.5 12.3...32.9 9.7 18.2 4.0 6.1 6.8 7.2 7.4"
- Banking sector: Classified loans/total loans (percent): "11.1 14.4 18.4 19.3 21.0 19.9" (table shows trend through 2003)
- Gross foreign currency public debt (US$ millions): "6,763 6,689 7,228 7,605 7,068"
- Fund staff recommendation: Approve completion of the "third and final review under the SBA."

*Source: IMF staff report extract (chapter titled "Jordan’s economic performance has strengthened and its outlook improved").*

### 3.2 percent exceeded expectations. Preliminary data suggest that growth in 2004 is likely to

### _cr04287 - 3.2 percent exceeded expectations. Preliminary data suggest that growth in 2004 is likely to

### Growth and inflation
- Real GDP growth:
  - 2002 Prog. 5.1; Act. 5.0; Baseline 6.0
  - 2003 Prog. 3.0; Act. 3.2; Baseline 5.8
  - 2004 Prog. 5.0; Proj. 5.5
- Preliminary data suggest that growth in 2004 is likely to reach 5.5 percent.
- Growth drivers:
  - Strong rebound in domestic demand.
  - Increased export demand fueled by Iraq and for textile products, mainly from the QIZs.
- CPI inflation (average):
  - 2002 Prog. 3.2; Act. 1.8; Baseline 2.1
  - 2003 Prog. 2.5; Act. 2.3; Baseline 1.8
  - 2004 Prog. 3.0; Proj. 3.5
- Inflation has remained subdued and in line with program projections.

### Fiscal performance and public finances
- Overall fiscal balance (in percent of GDP):
  - 2002 Prog. -4.1; Act. -5.0; Baseline -4.3
  - 2003 Prog. -2.5; Act. -1.1; Baseline -3.9
  - 2004 Prog. -3.9; Proj. -3.9
- Fiscal outcome for 2002–03:
  - Programmed cumulative overall deficit for 2002–03: 8.4 percent of GDP.
  - Actual cumulative deficit including grants contained at 6.1 percent of GDP.
- Sources of fiscal improvement:
  - Fiscal consolidation efforts and a large inflow of grants in 2003.
  - Tax system reform, particularly the GST.
  - Ambitious pension reform strategy.
  - Raising domestic petroleum product prices in the context of every budget.
  - Increasing other taxes.
- Cumulative government savings during 2002–03 surged to 9.4 percent of GDP (envisaged under original baseline: 3.3 percent).
- Budget for 2004 is consistent with original program deficit target of 3.9 percent of GDP.
- Table 2 key fiscal ratios (in percent of GDP):
  - Total revenue and grants:
    - 2002 Prog. 30.8; Act. 30.2; Baseline 31.2
    - 2003 Prog. 35.2; Act. 35.9; Baseline 30.9
    - 2004 Prog. 32.3; Proj. 32.3
  - Of which: grants:
    - 2002 Prog. 6.0; Act. 5.2; Baseline 6.0
    - 2003 Prog. 10.8; Act. 12.1; Baseline 5.6
    - 2004 Prog. 8.7; Proj. 8.7
  - Total expenditure and net lending:
    - 2002 Prog. 34.7; Act. 35.2; Baseline 35.5
    - 2003 Prog. 37.7; Act. 37.0; Baseline 34.8
    - 2004 Prog. 36.2; Proj. 36.2
  - Of which: capital outlays:
    - 2002 Prog. 5.5; Act. 6.5; Baseline 5.6
    - 2003 Prog. 6.8; Act. 8.6; Baseline 5.6
    - 2004 Prog. 7.4; Proj. 7.3
  - Government savings:
    - 2002 Prog. 2.0; Act. 1.7; Baseline 1.3
    - 2003 Prog. 4.4; Act. 7.7; Baseline 1.7
    - 2004 Prog. 3.8; Proj. 3.6

### Public debt and debt management
- Total government and government-guaranteed debt (in percent of GDP):
  - 2002 Prog. 91.6; Act. 100.5; Baseline 85.1
  - 2003 Prog. 96.5; Act. 101.5; Baseline 79.5
  - 2004 Prog. 93.0; Proj. 92.0
- Shortfall in reducing the debt ratio over 2002–03: about 16½ percent of GDP.
- Main contributors to debt shortfall:
  - Valuation changes from weakening of the U.S. dollar.
  - Weaker GDP growth from the negative impact of the war in Iraq.
  - Lower privatization receipts.
- Authorities’ mitigation measure: prepaid high-interest external debt (outstanding stock of Par Brady Bonds), expected to lower borrowing requirements by more than JD 10 million a year.
- Debt outlook:
  - Jordan’s public debt remains sustainable.
  - Public Debt Law target: 80 percent of GDP by end-2006 should be attainable.
  - Ratio projected to converge steadily to about 60 percent of GDP by 2006.
  - Debt ratio declined by 8 percentage points to 93.5 percent of GDP by end-March 2004.

### External position and reserves
- Current account balance (in percent of GDP):
  - 2002 Prog. -0.4; Act. 4.5; Baseline -0.9
  - 2003 Prog. 4.6; Act. 11.1; Baseline -1.1
  - 2004 Prog. 5.3; Proj. 5.6
- Merchandise export growth (percent):
  - 2002 Prog. 14.5; Act. 20.8; Baseline 9.2
  - 2003 Prog. 5.9; Act. 11.2; Baseline 7.6
  - 2004 Prog. 8.3; Proj. 14.8
- Merchandise import growth (percent):
  - 2002 Prog. 10.2; Act. 3.5; Baseline 7.8
  - 2003 Prog. 7.8; Act. 12.3; Baseline 6.4
  - 2004 Prog. 9.7; Proj. 18.2
- External performance highlights:
  - Current account registered large surpluses, reflecting a surge in grant receipts and underlying strength in the balance of payments.
  - Merchandise exports grew by 20.7 percent in 2002 and 11.2 percent in 2003 (text).
  - Export growth rebounded strongly in early 2004 and is envisaged to grow at twice the rate envisaged under the program in 2004.
  - Export growth largely driven by textiles and apparel (mainly to the U.S. market) and a strong rebound in exports to Iraq in 2004.
- Gross usable reserves (US$ millions):
  - 2002 Prog. 2,747; Act. 3,474; Baseline 2,835
  - 2003 Prog. 3,913; Act. 4,745; Baseline 2,909
  - 2004 Prog. 4,700; Proj. 4,500
- Import cover (in months):
  - 2002 Prog. 6.7; Act. 7.8; Baseline 6.4
  - 2003 Prog. 8.0; Act. 9.7; Baseline 6.2
  - 2004 Prog. 9.0; Proj. 7.4
- Result: large increase in gross usable reserves, far exceeding program targets, providing a sizable cushion against further external shocks.

### Structural reforms and privatization
- Fiscal and tax reforms:
  - Reformed tax system, rebalanced composition of taxes, rationalized expenditures.
  - Important GST reforms: broadening base, improving efficiency, strengthening administration.
  - GST revenue: 8.5 percent of GDP in 2003; 9.5 percent of GDP in 2004 (text).
  - Income tax legislation strengthened, albeit to a limited extent.
  - Unified revenue administration to integrate Income and Sales Tax Departments; legislation approved by lower house in May 2004.
  - Nontax revenues declined due to inherent inelasticity and ongoing privatizations.
- Expenditure and pension reform:
  - Comprehensive and ambitious government pension reform completed; will significantly reduce pension liabilities over the long term.
  - Treasury Single Account encompassing all civil agencies has been established.
- Privatization program:
  - Progressed steadily but slower than envisaged under SBA due to uncertain regional security environment.
  - Privatized: Jordan Telecom (sale of additional shares), Jordan Investment Corporation portfolios, Royal Jordanian Air Academy, Arab Potash Company.
  - Sale of majority stakes in electricity generation and distribution companies planned; sale of generation companies expected to be completed in 2004.
- Financial sector reforms:
  - Regulations to implement prompt corrective actions stipulating automatic penalties for prudential violations by banks.
  - Improvements in auditing of CBJ financial statements.
  - Begun improvement of balance of payments statistics.
  - Comprehensive Financial Sector Stability Assessment completed in 2004; authorities started implementing recommendations, including increasing the margin between interbank and CBJ overnight-deposit-window rates.
  - Jordan on track to meet the Fund’s Special Data Dissemination Standards within the next two to three years.

### Structural performance criteria and benchmarks under the SBA (2002–04)
- Structural Performance Criteria (selected):
  - Issue regulations to enroll all new military recruits in the pension plan administered by the Social Security Corporation (end-December 2002): Waived. Done in March 2003.
  - Implement criteria for disability pensions financed by the central government budget consistent with Social Security Corporation (end-December 2002): Waived. Done in February 2004.
- Structural Benchmarks (selected):
  - Develop a risk-based audit plan for GST filers (end-September 2002): Done in October 2002.
  - Reduce nonfilers to 10 percent of registered taxpayers via nonfiler enforcement in GST Department (end-December 2002): Done.
  - Implement a single treasury account system at the central bank (end-December 2003): Done.
  - External audit arrangements for CBJ financial statements (end-December 2003): Done.
  - CBJ to issue regulations for prompt corrective actions for banks (end-December 2003): Done in January 2004.
  - Government to create a single function-based revenue department by integrating Income Tax and Sales Tax Departments and create temporary integration project directorate (end-March 2004): Done.
  - CBJ to publish balance of payments statistics according to fifth edition BPM and international reserve template (end-May 2004): Done on June 2, 2004.

### IMF relations and financial position (as of April 30, 2004)
- Membership Status: Joined 8/29/52; Article VIII.
- Quota: SDR 170.50 million (100.00 percent).
- Fund holdings of currency: SDR 427.52 million (250.74 percent).
- Reserve position in Fund: SDR 0.07 million (0.04 percent).
- SDR Department net cumulative allocation: SDR 16.89 million (100.00 percent); holdings SDR 3.07 million (18.17 percent).
- Outstanding purchases and loans:
  - Extended Arrangements: SDR 246.42 million (144.53 percent of quota).
  - Stand-by Arrangement: SDR 10.66 million (6.25 percent of quota).
- Latest financial arrangements (type, approval date, expiration date, amount approved, amount drawn):
  - SBA: 7/03/02; 7/02/04; Amount Approved 85.28; Amount Drawn 10.66 (SDR million).
  - EFF: 4/15/99; 5/31/02; Amount Approved 127.88; Amount Drawn 127.88.
  - EFF: 2/09/96; 2/08/99; Amount Approved 238.04; Amount Drawn 202.52.
- Projected Obligations to Fund (Expectations Basis; SDR million; based on existing use of resources and present holdings of SDRs):
  - Principal forthcoming: 2004 39.6; 2005 152.1; 2006 57.6; 2007 152.2; 2008 37.5
  - Charges/Interest forthcoming: 2004 4.3; 2005 4.6; 2006 3.4; 2007 2.2; 2008 1.19
  - Total forthcoming: 2004 43.95; 2005 56.83; 2006 61.11; 2007 54.49; 2008 38.72

*Sources: Jordanian authorities; and Fund staff estimates.*

### APPENDIX                                                                        I

### _cr04287 - APPENDIX I

### Safeguard Assessment
- The CBJ is subject to a full safeguards assessment with respect to the SBA, which was approved on July 3, 2002 and is scheduled to expire on July 2, 2004.
- The assessment was completed on June 27, 2003 and concluded that the CBJ has made progress in strengthening its safeguards, as recommended in the previous safeguards assessment of May 2001.
- The assessment noted unresolved issues at various levels of the bank's operations, including the need for greater transparency in the CBJ's financial statements.
- The assessment proposed a set of measures which, once implemented, could further strengthen the CBJ's operations. Implementation of the recommendations is being monitored by staff.

### Exchange System
- The Jordanian dinar is fully convertible and is officially pegged to the SDR.
- In practice, the authorities have tightly linked its exchange rate to the U.S. dollar since October 1995, at JD 1 = US$1.41044.

### Article IV Consultation and FSAP/FSSA
- The 2004 Article IV consultation was concluded by the Executive Board on April 2, 2004.
- Two Financial Sector Assessment Program (FSAP) missions visited Jordan in August and September 2003.
- The Financial System Stability Assessment (FSSA) was published in January 2004.

### Technical Assistance (overview)
- Extensive technical assistance has been provided to Jordan over the years (see Table 1 in source).

### ROSCs (Standards or Codes Assessed)
- Data module: 10/7/2002
- FSSA: 1/7/2004
- Update to data module: 1/30/2004 (Country Report No. 04/32)

### Table 1 — Jordan: Technical Assistance, 1999–2004 (selected entries)
- Fiscal:
  - August 1999: Income tax reform
  - March 2000: Pension reform
  - May 2000: Framework for managing nontreasury accounts
  - September 2000: Oil pricing mechanism
  - January–April 2002: Pension reform
  - January–September 2002: General sales tax reform
  - November 2002: Macrofiscal capacity and treasury single account
  - February 2003: Revenue administration reform
  - June, August, December 2003: Peripatetic advisor on single treasury account
  - February 2004: Peripatetic advisor on revenue administration reform; Public expenditure management
  - May 2004: Public expenditure management
- Monetary and Financial:
  - August 1999: Auctions of government securities, and auditing and accounting reform
  - August 1999–August 2000: Resident expert in banking supervision
  - September 1999–September 2000: Resident expert in payment system development
  - December 1999: Development of the domestic and foreign exchange interbank market
- Statistical:
  - February 1999: Preparation of General Data Dissemination System metadata
  - April 1999: Revision of the PPI sample and PPI calculation
  - September 1999, July 2000: NA statistics
  - November 1999: PPI statistics
  - January–February 2002: Report on the Observation of Standards and Codes—Data Module
  - December 2003: Follow-up on Report on the Observation of Standards and Codes—Data Module
  - March–May 2004: Balance of payments statistics
  - April–May 2004: Government finance statistics

### Jordan — World Bank Group Strategy and Operations (Appendix II)
- As of April 30, 2004:
  - Jordan had received 63 World Bank (Bank) loans and 15 IDA credits totaling US$2,177 million net of cancellations and terminations.
  - Of the US$2,177, US$2,001 has been disbursed to-date.
  - All the credits and 57 of the loans have been fully disbursed.
  - There are seven active projects in the Bank’s portfolio for a total of US$311.7 million.
  - IFC cumulative loan and equity investment approvals of US$262 million and about US$78 million in syndications.
- Portfolio performance: Overall performance of the portfolio both from the perspective of implementation and development impact is good.
- CAS 2003–05:
  - Focus areas: (i) private sector development for sustainable growth and job creation; (ii) human development with emphasis on poverty reduction and participation in the knowledge economy; (iii) improving water resource management and the environment; and (iv) greater gender inclusion.
  - Proposed lending ranges: US$250 million in the base case to US$325 million in the high case (compared to US$300 and US$450 million respectively in the last CAS).
  - More than 80 percent of proposed lending will concentrate on human resources development (largely education) and public sector reform.
  - Emphasis on knowledge sharing and capacity building through nonlending assistance and multi-year analytical and advisory activities.
- IFC activity:
  - IFC has a current portfolio of US$109 million in 17 companies.
  - IFC plans to focus on investments in the financial sector, infrastructure development, and information technology.

### Jordan: Statistical Issues (Appendix III)
- Mission: IMF Statistics Department mission visited Amman during December 17–21, 2003 to update the Data module of the ROSC prepared by a mission that visited Amman in February 2002.
- Objectives:
  1. Review and document actions taken to address issues raised by the 2002 Data ROSC mission for national accounts, price, government finance, monetary, and balance of payments statistics.
  2. Discuss plans for further improving statistics.
  3. Review data dissemination practices against the Special Data Dissemination Standard (SDDS).

- Real sector (national accounts and prices) — actions taken since 2002 ROSC mission:
  - Compilation of price indices for imports and exports for the compilation of GDP at constant prices.
  - Estimation of household final consumption expenditure based on the 2002 Household Expenditure and Income Survey (HEIS).
  - Updating of supply and use tables for assessment and valuation of statistical output.
  - Preparation of a study on the revision to the GDP series for 1976-2002.
  - Workshops to enhance quality awareness of data providers and users and to monitor users’ needs.
  - Adoption of a comprehensive training program for national accounts statistics compilers.
  - Dissemination of national accounts data at the two-digit level of ISIC activity.
- Price statistics — short-term plans:
  - Incorporation of owner-occupied dwelling services in the CPI.
  - Updating of CPI weights based on the 2002 HEIS.
  - Dissemination of regional CPIs.
- Serviceability and accessibility plans for national accounts and price statistics:
  - Inform the public about the minister of planning’s access to data prior to public release (minister has oversight responsibilities over DOS).
  - Continue program to increase quality awareness and monitor users’ needs.
  - Disseminate a statement on revision policy and practices in DOS publications and website.
  - Disseminate an advance calendar for release of national accounts and price statistics.
  - Update GDDS metadata on a more timely basis.

- Government finance statistics — progress and plans:
  - Establishment of a statistical division in the Ministry of Finance (MOF) and adoption of the Financial Management Reform Project (FMRP).
  - Compilation of data on the operations of the general government (plan to disseminate general government data during 2004).
  - Development of a migration path to the methodology of the Government Finance Statistics 2001 (GFSM 2001).
  - Further planned actions:
    - Dissemination of data on central and general government operations based on GFSM 2001 classification and sectorization.
    - Seek feedback from users to monitor needs.
    - Establish regular procedures for verification of internal and intersectoral consistency.
    - Disseminate revision policy statement, advance release calendar, and more detailed metadata in MOF publications and website.
    - Update GDDS metadata on a more timely basis.

- Monetary statistics:
  - Monetary data for the CBJ and the commercial banks are reported and published monthly.
  - Consistency checks between government finance statistics and monetary statistics are not currently conducted.
  - CBJ Research Department proposed to establish an interagency group by June 2004 to monitor intersectoral consistency of macroeconomic statistics.
  - CBJ actions to improve quality:
    - Reviewing a new set of report forms for banking institutions to facilitate better classification and sectorization of analytical accounts.
    - Promoting adoption of international accounting standards (IAS) by commercial banks.
    - Administrative and Financial Department and Banking Supervision Department of the CBJ are in the process of adopting IAS, particularly for valuation procedures and recording of financial derivatives within the balance sheet.

- Balance of payments (BOP) statistics — actions and plans:
  - Establishment of a BOP division within the Research Department and allocation of additional resources.
  - Long-term technical assistance from IMF Statistics Department through four peripatetic missions.
  - Planned actions within the next year:
    - Adoption of the BPM5 methodology in compilation of BOP statistics and the international investment position, and dissemination in BPM5 format.
    - Dissemination of the complete Data Template on International Reserves and International Liquidity.
    - Utilize further data sources to increase coverage of international transactions of household and corporate sectors.
    - Resolve major gaps in data coverage, including gaps in the financial account statistics and data on international services.
    - Develop techniques for systematically analyzing raw data and statistical aggregates to minimize processing errors.
    - Prepare more comprehensive revision studies on a regular basis.
    - Establish procedures for routinely assessing the quality of data, including examining causes of estimation errors and revisions.
    - Disseminate provisions for confidentiality of individual respondents’ data and identify the BOP Division as the source of BOP data in the MSB.
    - Publish more detailed BOP metadata and analysis of current developments in the MSB and on the CBJ website.
    - Introduce a regular and continuing program for consultations with users and inform users of availability (on request) of more detailed data in the MSB and on the CBJ website.
    - Publish an advance calendar for release of BOP statistics in the MSB and on the CBJ website.
    - Update BOP metadata on the GDDS bulletin board on a more timely basis.

### Jordan: Reporting of Main Statistical Indicators (As of May 31, 2004) — selected metadata
- Date of latest observation (selected):
  - Exchange rates: 4/04
  - International reserves: 4/04
  - Reserve/base money: 4/04
  - Central bank balance sheet: 4/04
  - Broad money: 4/04
  - Interest rates: 4/04
  - Consumer price index: 4/04
  - Exports/imports: 3/04
  - Current account balance: Q1/04
  - Overall government balance: 4/04
  - GDP/GNP: Q4/03
  - External public debt/debt service: 1/04
- Date received: generally 5/04 for most indicators; some entries 3/04 and 2/04 as noted in source.
- Frequency of data/publication/reporting: mix of Weekly (W), Monthly (M), Quarterly (Q) as specified in the source table.
- Source of update: Central Bank of Jordan (CBJ), Ministry of Finance (MoF), Department of Statistics.
- Mode of reporting: E-mail and Monthly Statistical Bulletin and Government Finance Bulletin.
- Confidentiality: Unrestricted for the listed indicators.
- Published data: Monthly Statistical Bulletin and Government Finance Bulletin as specified.

### Appendix IV — Government Letter and MEFP (summary)
- June 15, 2004 letter to IMF Managing Director Rodrigo de Rato from the Government of Jordan:
  - Context: Discussions with Fund staff on the third review of the program supported by the two-year Stand-By Arrangement (SBA) approved in July 2002.
  - The attached Memorandum on Economic and Financial Policies (MEFP) reviews macroeconomic developments and implementation of structural policies in the first quarter of 2004 and describes government economic policies for the remainder of 2004.
  - Jordan’s economic performance in the first quarter of 2004 was strong; all end-March performance criteria were met.
  - The government requests completion of the third review under the SBA and intends to treat the remainder of the SBA as precautionary.
  - The government will consult with the Fund on any further measures and revisions to policies in the MEFP in accordance with Fund consultation policies.

*Source: _cr04287 - APPENDIX I (IMF PDF content provided)*

### 1.      This memorandum reviews economic performance in the first quarter of 2004 and

### _cr04287 - 1.      This memorandum reviews economic performance in the first quarter of 2004 and

### I. Developments under the 2004 program — key findings
- Real GDP grew by 6.9 percent in the first quarter of 2004, boosted by exports growth of 29.0 percent year-on-year.
- Industrial production index (excluding QIZ manufacturing gains) increased at an annual rate of 14.7 percent in Q1 2004.
- Imports rose by 32.3 percent in Q1 2004.
- Inflation averaged 2.8 percent in the 12 months through March 2004.
- Amman Stock Exchange index rose by 5½ percent in Q1 2004, following a 54 percent increase in 2003.
- Unemployment remained at 14.5 percent.
- All quantitative performance criteria at end-March 2004 under the program were met by large margins.

### Fiscal performance and public debt
- Central government budget registered a surplus of JD 137 million (1.8 percent of expected GDP) in Q1 2004 versus a targeted deficit of JD 140 million under the program.
- Revenue outperformance driven by strong GST and customs duty collections and higher income tax receipts from strong corporate earnings in 2003.
- Government enforced spending controls (including a March 2004 budget circular to cut utility bills by 20 percent) and mandated full payment of taxes for new projects unless donor financing requires tax exemption.
- Net government debt stock declined by 8 percentage points to 93.5 percent of expected GDP; foreign debt stock accounted for 69.7 percent of expected GDP.
- Overall public sector registered a surplus of 2.6 percent of expected GDP; net public sector debt declined by 4½ percentage points to 55.2 percent of expected GDP.

### External sector and reserves
- External current account estimated surplus of US$107 million (1.0 percent of projected annual GDP) in Q1 2004.
- Trade balance deficit of US$613 million (5.7 percent of annual GDP) in Q1 2004; merchandise exports rose by 29 percent, but imports surged more.
- Net tourism receipts increased by an annual rate of 31.2 percent in Q1 2004.
- Preliminary capital account deficit of US$283 million in Q1 2004; capital outflows around US$300 million, mainly official transfers.
- Gross international reserves declined by US$194 million during Q1 2004.

### Monetary and banking sector developments
- Broad money grew at an annual rate of 8.6 percent at end-March 2004, driven by an increase in foreign currency deposits.
- Private sector credit growth recovered to 4.9 percent.
- CBJ maintained prudent monetary policy; reserve money declined in line with lower NFA.
- Interest rates on CBJ-CDs increased modestly.
- Banking sector net after tax profits reached JD 100 million in 2003 (JD 79 million in 2002).
- Net profits: 0.7 percent of total assets and 2.0 percent of total loans.
- Classified loans excluding interest in suspense fell to 15.8 percent of total loans (17.5 percent in 2002).
- Underlying risk-weighted capital adequacy ratio (CAR) improved by 1.3 percentage points in 2003; inclusion of market risk led CAR to decline marginally to 15.9 percent (16.6 percent in 2002).

### Structural reform progress
- Strong interest from strategic investors for privatization of electricity generation companies (sale expected completed in fourth quarter of 2004).
- Cabinet approved privatization of agricultural marketing company AMPCO.
- Customs duties on steel and cement reduced by 5 percentage points to 25 percent in April 2004.
- Free trade agreement with Singapore signed; expected to come into effect in second half of 2004.
- CBJ published revised balance of payments statistics on June 2, 2004, in line with BPM5 and a new international reserves template (last structural benchmark under the SBA).

### II. Policies for the remainder of 2004 — objectives and projections
- Medium-term macroeconomic framework objectives: strengthen growth, maintain financial stability and external reserves through prudent demand management, and reduce public indebtedness via continued fiscal consolidation.
- Real GDP projected to reach 5½ percent for 2004 as a whole; medium-term potential growth cited as 6–7 percent.
- Inflation expected to be about 3½ percent in 2004.
- External current account expected to register a surplus of 5½ percent of GDP for 2004.
- Official external reserves programmed to remain at about US$4½ billion by end-2004.

### Fiscal policy for the remainder of 2004 — actions and risks
- Government intends to continue prudent fiscal stance to meet Public Debt Law ceilings.
- Fiscal deficit target of 3.9 percent of GDP at end-2004 remains the objective.
- Additional budgetary pressures: sharply higher international oil prices, universal health insurance for children under six, and civil servant and military salary increases of JD 5–10.
- Projected shortfall in nontax revenue could be at least JD 156 million; expected to be offset by additional grants from neighboring countries and somewhat higher tax revenues.
- Government will limit spending in line with the budget, keep tight control on recurrent spending, implement capital program for targeted projects, and enforce expenditure cuts in nonpriority areas as needed.
- If strong revenue performance continues, the government intends to save a large portion of the over-performance for further debt reduction.
- Operational aspects of the Plan for Social and Economic Transformation (PSET) to be fully integrated in the budget starting in 2005.

### Fiscal structural reforms underway
- Progress in merging Income Tax and Sales Tax Departments; Unified Revenue Department created December 2003; integration project directorate formed February 2004 with IMF technical assistance.
- Large- and medium-taxpayer offices and small taxpayer administration reform underway; criteria for Large Taxpayer Office finalized April 2004; LTO to be fully functional by October 2004.
- Ministry of finance adopted a financial management plan for 2004–06.
- 2004 budget law reduced limit on increasing budgetary allocations to new projects from 100 percent to 35 percent of original allocation.
- Government to review and improve fiscal transparency following recommendations of a fiscal ROSC mission planned for September 2004.
- Actuarial review of the Social Security Corporation expected to be completed in June 2004.

### Monetary and financial policy — actions for the remainder of 2004
- Monetary policy to support price stability; exchange rate peg to the U.S. dollar maintained.
- CBJ will maintain comfortable international reserve position and conduct active liquidity management.
- Monetary program aims for continued price stability and a substantial rebound in private sector credit.
- CBJ will limit expansion of net domestic assets to meet international reserve target non-inflationarily.
- Government to issue long-term bonds regularly to provide benchmarks and lengthen maturity structure; complementary measures to develop secondary bond market with IMF technical assistance.
- CBJ to improve interest rate structure by increasing spread between overnight deposit rate and CD yields to revitalize interbank market.
- Measures to boost competition and productivity in commercial banks to reduce spread between deposit and lending rates.
- CBJ addressing a small bank under temporary administration; decisive action after criminal proceedings complete; expectation that substantial portion of nonperforming assets will be recovered and no use of public funds will be required.
- Prompt corrective action framework applied to remaining undercapitalized bank with a time-bound restructuring plan.
- CBJ implementing IMF safeguards assessment recommendations; 2003 CBJ financial statements audit completed in accordance with international accounting standards with a second partner review.

### Structural reform agenda — priorities and targets
- Accelerate and broaden privatization: electricity distribution companies, majority stake and management control in Jordan Phosphate Mines Company, possible additional sale in Jordan Telecommunications Company, remaining noncore Royal Jordanian Airlines units, and sale of Jordan Post Company to strategic partner.
- Fiscal program estimates total privatization proceeds of about JD 300 million for 2004.
- Petroleum sector reforms: eliminate remaining subsidies on diesel, fuel oil, liquefied petroleum gas, and kerosene by end-2006 via multi-year discretionary price adjustments; introduce symmetric automatic price adjustment mechanism tied to international prices once gaps closed; full liberalization impeded until concession rights of Jordan Petroleum Refinery Company expire in 2008.
- Commitment to meet the Fund’s Special Data Dissemination Standard within the next two to three years; implement recommendations of the Update to the Report on the Observation of Standards and Codes—Data Module.
- Strategy adopted to compile the international investment position in accordance with BPM5 and commence regular publication by early 2005; CBJ working with IMF technical advisor on balance of payments statistics.
- Ministry of finance to set up a committee to organize and publish general government statistics on a quarterly basis starting January 2005.

### IMF Executive Board and press release highlights (Press Release No. 04/136, July 6, 2004)
- Executive Board completed the third and final review under a two-year SDR 85.28 million (about US$125.6 million) Stand-By Arrangement approved on July 3, 2002.
- Arrangement treated by Jordanian authorities as precautionary; initial disbursement SDR 10.66 million (about US$15.7 million).
- No formal Executive Board discussion for the final review in light of April 2, 2004 Board discussion and satisfactory performance.
- Jordan’s IMF quota: SDR 170.5 million (about US$251.1 million); outstanding use of IMF credit as of end-June 2004: SDR 248.98 million (about US$366.7 million).
- Statement by Anne Krueger, First Deputy Managing Director:
  - Jordan’s economic performance strengthened and outlook improved after the war in Iraq, supported by prudent macroeconomic management.
  - Recovery in Q1 2004 driven by surging exports, rebounding domestic demand, and revitalized tourism.
  - Strengthened fiscal position in Q1 2004 due to strong revenue measures and reforms; April revenue measures expected to further strengthen 2004 fiscal performance.
  - Credible financial policies and strong reserves have enhanced financial stability and investor confidence; competitiveness deemed adequate.
  - Banking sector health improved due to stronger profitability, prudent credit policies, and effective prompt corrective action framework.
  - Medium-term challenges: high debt burden, dependence on external grants, vulnerability to higher oil prices.
  - Achieving Public Debt Law limits by 2006 will require sustained fiscal consolidation, elimination of petroleum subsidies, comprehensive direct tax reform, and expenditure rationalization.
  - Given strong external position, authorities' decision not to make the purchase associated with completion of the review is appropriate; intention to graduate from Fund-supported programs after SBA completion in July 2004.
  - Fund will continue close relationship with Jordan through enhanced surveillance and technical assistance.

*Source: IMF staff memorandum and Press Release No. 04/136 (July 6, 2004).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04287.pdf_