## _cr10297 ## Source details **Canonical URL:** [_cr10297](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10297.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10297.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10297.pdf.json) --- ### Executive summary — background and recent performance - Jordan described as "one of the most open economies in the Middle East". - Real GDP growth averaged about 6 percent between 2000–08. - Real GDP growth fell from almost 7⅓ percent in 2008 to 2⅓ percent in 2009. - Real GDP increased by 2 percent y-o-y in Q1 2010. - Unemployment rate: 13 percent at end-2009. - Headline inflation: declined through 2009 to near zero; core inflation around 3 percent y-o-y. Headline inflation picked up to 5⅓ percent y-o-y in June 2010. - Staff estimates potential output growth at about 4 percent per year for 2009–12; potential growth expected to rise to about 5½ percent per year over the medium term. - Department of Statistics revised historical GDP: nominal GDP numbers about 10 percent higher; real growth revised from 7.8 and 2.8 percent to 7.2 and 2.3 percent for 2008 and 2009 respectively. ### External sector and reserves - Current account deficit: narrowed to 5 percent of GDP in 2009 (from 9½ percent in 2008). - Official foreign reserves: - reached $11 billion (equivalent to 8 months of imports) by end-2009. - were $10.4 billion (equivalent to 7¼ months of imports) as at end-June 2010. - Staff projection: external current account deficit expected to widen in 2010 to 7 percent of GDP; projected modest widening to around 8⅓ percent of GDP by 2011 and projected narrowing to about 7 percent of GDP by 2015. - Appendix 3 conclusions: - International reserves reached $11.1 billion as of end-2009 (more than 8 months of imports). - Actual reserves exceed optimal benchmarks under Jeanne (2007) for current- and capital-account shocks and for a 40 percent banking-deposit run shock. ### Fiscal outcomes, consolidation and risks - 2009 overall fiscal deficit widened by more than 3 percentage points of GDP to reach 8½ percent of GDP; debt-to-GDP ratio rose to about 56 percent at end-2009. - 2010 Budget envisages consolidation: 2010 overall deficit expected to narrow by more than 2 percent of GDP to about 6 percent of GDP. - Staff medium-term target: overall deficit of about 3 percent of GDP to reduce vulnerabilities and keep debt-to-GDP below the legislated 60 percent limit. - Fiscal consolidation requires: - Further rationalization of public expenditures (particularly civil service wage bill). - Additional revenue-raising measures. - 2010 fiscal measures introduced in June 2010: raising indirect taxes on petroleum and other commodities; reversing the GST exemption for coffee; partially offset by additional spending on social assistance, commodity subsidies, and teachers’ remuneration. - Fiscal operations (selected lines, percent of GDP; Prel./Proj. columns labeled 2008, 2009, 2010): - Total revenue and grants: 29.1, 25.1, 23.3 - Budgetary revenue: 24.7, 23.3, 21.7 - Tax revenue: 17.1, 16.2, 14.7 - Nontax revenue: 7.5, 7.1, 7.0 - Grants: 4.5, 1.9, 1.6 - Total budgetary expenditure: 33.4, 33.6, 29.5 - Current expenditure: 27.8, 25.7, 24.3 - Fuel subsidy: 1.2, 0.2, 0.4 - Food subsidy: 1.4, 0.8, 0.5 - Capital expenditure and net lending: 5.6, 7.8, 5.2 - Financing ( = deficit including grants): 5.4, 8.5, 6.2 - Memorandum items: - Overall balance, excluding grants: -9.8, -10.3, -7.8 - Primary balance excluding grants: -7.5, -8.1, -5.5 - Structural balance excluding grants: -10.5, -10.1, -7.3 - Government and guaranteed net debt: 52.9, 55.8, 57.3 ### Monetary policy, exchange rate, and financial sector - Central Bank of Jordan (CBJ) policy actions: - Eased policy between November 2008 and February 2010: reserve requirements and policy interest rates cut gradually; liquidity-withdrawal operations ceased in October 2008; full guarantee of bank deposits extended until end-2010. - Interest rate differential against the U.S. Federal Reserve’s funds rate reduced from 450 to 200 basis points. - Excess reserves in the banking system increased to almost one quarter of 2009 GDP (maintained as overnight deposits with the CBJ). - Credit and deposits: - Deposit growth remained healthy; share of dinar-denominated deposits increased. - Bank credit growth to the private sector slowed to near-zero at end-2009; private sector credit growth turned positive at end-2009, reaching 5½ percent y-o-y in May 2010. - Exchange rate: - Maintain the pegged exchange rate regime; dinar real exchange rate broadly in line with medium-term fundamentals. - Jordanian dinar real effective exchange rate appreciated by 2½ percent between December 2008 and June 2010. - Staff view: accommodative monetary policy in 2009–10 appropriate, but little room for further monetary stimulus; CBJ should stand ready to tighten if inflation accelerates or balance-of-payments pressures emerge. Tools for tightening include increasing reserve requirements, operations to soak up liquidity (resumption of issuance of certificates of deposit), and raising the policy rate. - Financial stability and supervision: - Banking system sound and resilient; loan/deposit ratio near 75 percent. - NPL ratios increased modestly to 6⅔ percent of outstanding loans at end-2009. - Strengthening CBJ regulation and supervision: Basle II (Pillars I and III) issued in 2008, Pillar II guidelines in February 2010; semi-annual stress testing required (issued September 2009); automated data collection system introduced June 2010; enhanced cross-border regulation; improvements to the early warning system. - Law establishing a private credit bureau passed in June 2010. - AML/CFT framework strengthened: anti-money laundering law amended May 2010; FIU regulations; AML/CFT inspection manuals; cash declaration system at borders instituted March 2010. ### Structural reforms, PPPs, and statistical improvements - Priority structural reforms: - Further liberalization of water and energy sectors. - Reforms to civil service structure. - Improve business environment for the private sector. - Establish framework to control fiscal risks in public-private partnerships (PPPs). - PPPs: - Authorities have ambitious PPP-financed infrastructure program (power, water, rail). - Recommended preconditions: improved PPP regulations for risk transfer, competitive bidding, capacity-building, proper accounting and reporting of fiscal implications. Strengthening of earlier PPP framework law underway and to be submitted to Cabinet later in 2010. - Statistical improvements: - Department of Statistics revision raised nominal GDP about 10 percent; SDDS subscription in January 2010. - Recommended enhancements: follow-up TA on balance of payments, improve frequency/timeliness of expenditure-based national accounts, improve high-frequency production-based national accounts, develop regular wage, employment and real estate statistics. ### Near-term outlook and risks - Growth: - Real GDP growth projected to rebound modestly in 2010 to about 3½ percent; output remains below potential; output gap widened in 2009 and expected to remain negative in 2010. - External: - External current account deficit expected to widen in 2010 to 7 percent of GDP as imported commodity expenditure rises, partially offset by tourism and a rebound in exports. - Risks: - Near-term risks tilted to the downside: uncertainties in world commodity prices and fragile regional/global conditions. A slower-than-anticipated recovery in GCC countries could adversely affect external flows. ### Policy priorities (condensed recommendations) - Undertake fiscal consolidation in 2010, narrowing the overall deficit to about 6 percent of GDP. - Target an overall deficit of about 3 percent of GDP over the medium term and keep public debt-to-GDP below the legislated 60 percent limit. - Rationalize public expenditures (notably the civil service wage bill) and raise additional revenues; expeditiously eliminate remaining GST exemptions. - Maintain the pegged exchange rate regime. - Stand ready to tighten monetary conditions if inflation or balance-of-payments pressures emerge. - Strengthen banking supervision; implement structural reforms (water, energy, civil service, PPP fiscal-risk framework). - Improve economic statistics coverage, quality, and timeliness. ### Appendix 1 — Credit slowdown: supply or demand driven? - Purpose: determine whether post-crisis credit slowdown was supply- or demand-driven using disequilibrium econometrics (December 1998–January 2010 sample). - Key determinants and estimated coefficients (selected; t-statistics in brackets; significance: *, **, *** denote 10, 5, 1 percent): - Supply equation: - Real lending rate: 0.04** [3.01] - Differential between CBJ rediscount and Fed funds rates: -0.03* [-2.17] - Industrial production index (lagged): 2.94*** [7.69] - Lending capacity: 0.47* [2.19] - Constant: -9.15*** [-7.32] - Demand equation: - Real lending rate: -0.02*** [-7.19] - Industrial production index (smoothed, lagged): 0.51*** [8.97] - Lagged real ASE index growth: -0.01*** [-3.53] - Time trend (logs): -0.09*** [-9.98] - Time trend^2 (logs): 0.05*** [20.10] - Constant: 6.42*** [23.15] - Interpretation: - Both supply and demand respond positively to expected economic prospects. - Real lending rate raises supply and reduces demand. - Lending capacity is a major determinant of supply (0.47*). - Economic uncertainty has a negative but small and statistically insignificant effect relative to lending capacity. - Dynamics: - Slowdown in credit mainly driven by sluggish credit supply, affected by the widening differential between CBJ rediscount and Fed funds rates. - By end-January 2010 predicted supply remained about 7 percent lower than predicted demand. - Policy implication: - Policies targeting credit supply are likely to be more effective than demand-stimulating policies. Monetary easing between November 2008 and February 2010 helped narrow the policy-rate gap and assist credit supply expansion. ### Appendix 3 — Optimal level of international reserves (highlights) - Reserve history: - International reserves reached $11.1 billion as of end-2009 (more than 8 months of imports). - Reserve buildup accelerated after April 2008 when CBJ–Fed policy-rate differential exceeded 200 basis points. - A $2.1 billion Paris Club buyback in March 2008 was partially financed from reserves. - Benchmarks and findings: - Traditional measures: 2009 reserves covered more than eight months of prospective imports and 200 percent of external debt. - Jeanne (2007) optimal-reserve estimates: actual reserves exceeded optimal levels for current-account, capital-account, and severe banking-run shocks in recent years. - Regional comparison: many countries in Mashreq/Maghreb hold higher-than-optimal reserves; "excess reserve" holdings increased between 2000 and 2009. - Conclusion: - End-2009 reserve level sufficient to cover severe capital and current account shocks; provides substantial cushion and flexibility for monetary policy. ### Appendix 4 — Interest margin determinants - Net interest margin evolution: - increased from 4½ percent at start of 2000 to 6½ percent in mid-2003; - declined to 3 percent in mid-2006; - rose to 4½ percent at end-2009. - Decomposition (Randall (1998) framework) components include reserve requirement costs, operational costs, loan loss provision costs, profitability, non-interest income, and error term. - Empirical findings: - Implicit interest margin (income-statement/balance-sheet decomposition) around 1–2 percentage points — much smaller than simple lending-minus-deposit spread. - Profits constitute substantial portion of margin but have declined post-crisis. - Loan-loss provisioning share rose in 2008–09; partial pass-through to customers implied margin increases. - Operating costs broadly constant; room for margin reduction via efficiency gains. - Reserve requirement ratio reduction (10 to 7 percent in H2 2009) reduced reserve-cost share of margin. - Non-interest income declined from mid-2005 onward, reducing its margin-offsetting role. - Policy implications: - Reserve requirements can influence the interest margin. - Buildup of NPLs may be passed through to customers via higher margins. ### Appendix 5 — FSAP recommendations and banking supervision reforms (selected) - Basel II implementation: - Pillars I and III regulations issued in 2008; Pillar II guidelines issued February 2010. - CBJ requested capital plans by end-June 2010 and ICAAP by end-2010; SREP to assess ICAAPs. - Stress testing and data initiatives: - Stress-testing regulations issued September 2009; semi-annual bottom-up stress tests required. - Automated data collection system under development (possible by year-end). - Early Warning System improvements and development of a statistical model. - Cross-border supervision and credit reporting: - On-site cross-border examinations conducted; plans for further visits in 2010. - Public credit registry threshold lowered from JD 30,000 to JD 20,000 (coverage about 80 percent of credits). - Private credit bureau law approved; CBJ drafting regulations with METAC assistance. - Staffing: - Banking Supervision Department staff: 80 (end-June 2010). - Short- and medium-term recommendations summarized (capital adequacy, contingency planning, stress testing, CAMELS enhancements, debt market development, TSA adoption, legal/regulatory changes). ### Appendix 6 — Debt Sustainability Analysis (selected figures and scenarios) - Public debt (government and government-guaranteed, net) baseline trajectory (percent of GDP): - 2004: 88.7; 2005: 83.7; 2006: 69.9; 2007: 68.0; 2008: 52.9; 2009: 55.8; 2010: 57.3; 2011: 57.5; 2012: 56.5; 2013: 54.9; 2014: 53.8; 2015: 52.7 - Foreign-currency share of central government debt (percent): - 2004: 66.1; 2005: 56.5; 2006: 49.3; 2007: 43.6; 2008: 22.6; 2009: 21.7; 2010: 19.1; 2011: 16.5; 2012: 14.1; 2013: 12.0; 2014: 10.5; 2015: 9.2 - Gross financing need (percent of GDP): 2009: 10.0; 2010: 7.8; 2011: 7.0; 2012: 5.9; 2013: 5.0; 2014: 4.4; 2015: 4.1 - Scenario outcomes: - Contingent liabilities shock (one-time +10 percent of GDP in 2010) keeps debt path about 10 percentage points above baseline. - 30 percent real exchange rate depreciation raises debt-to-GDP by around 10 percentage points in 2010. - Historical-average scenario: debt ratio approaches 42 percent by 2015 (2010: 53.1; 2015: 41.8). - Constant primary balance at 2009 level (6.3 percent of GDP) in 2010–15: debt rises to 85.2 percent by 2015. - Policy implication: - Sustainability contingent on reducing primary deficit from about 4 percent of GDP in 2010 to 0.6 percent by 2015 under baseline. - External debt trajectory (percent of GDP): - 2004: 66.1; 2005: 56.5; 2006: 49.3; 2007: 43.6; 2008: 22.6; 2009: 21.7; 2010: 19.1; 2011: 16.5; 2012: 14.1; 2013: 12.0; 2014: 10.5; 2015: 9.2 - Gross external financing need (US$ billions): 2009: 1.7; 2010: 2.4; 2011: 2.9; 2012: 3.1; 2013: 3.2; 2014: 3.3; 2015: 3.4 - Bound-test results: - External debt most vulnerable to current-account shocks; a one-half standard deviation worse current account would push external debt to 23 percent of GDP by 2015. - Temporary 20 percent decline in remittances, tourism, and FDI in 2010–11 would push external debt ratio to about 28 percent by end-2011 (with caveat on import assumptions). - Policy implication: - Continue cautious external borrowing (concessional) and monitor inflows (remittances, tourism, FDI). ### Statistical issues and data adequacy (Annex III highlights) - General: data provision adequate for surveillance, but important gaps remain. - Progress and needs: - National accounts: progress made; additional resources needed; improve quarterly production-based estimates and expenditure-side annual estimates; address discrepancies between industrial production index and manufacturing GVA. - Government finance: work initiated to develop financial balance sheet per GFSM 2001. - Monetary statistics: intersectoral consistency checks not yet conducted; timely reporting to IFS satisfactory; little progress on standardized report forms. - Balance of payments: BPM5 methodology adopted; mid-2010 revision of historical BOP data (2000–08) to better account for FDI and reduce errors and omissions. - SDDS subscription: Jordan subscribed to SDDS in January 2010. - Selected data-frequency and timeliness flags (as of July 30, 2010) summarized in table form in source (exchange rates, reserves, monetary aggregates, CPI, government finance, GDP, external debt, IIP). - PIN (September 17, 2010) reiterates key developments: real GDP growth fell from almost 7⅓ percent in 2008 to 2⅓ percent in 2009; headline inflation projected to rise in 2010 with imported commodity prices; reserves record-high; fiscal consolidation plans for 2010 supported by staff. ### Staff appraisal and next steps - Growth outlook: modest pickup in 2010 and acceleration over the medium term as regional growth revives. - Fiscal stance: staff supports 2010 consolidation and medium-term objective of about 3 percent of GDP overall deficit; full implementation would materially reduce debt ratio. - Monetary stance: pause on further stimulus recommended; stand ready to tighten as appropriate. - Exchange rate: fixed peg to U.S. dollar remains important and broadly aligned with fundamentals. - Banking supervision: remain vigilant to prevent excessive risk-taking; continue regulatory enhancements and strengthen stress testing, EWS, and data systems. - Communication: clear, timely communication of debt-reduction strategy and improvements to primary/secondary debt markets emphasized. - Model and research next steps: - Planned model augmentations: calibrated fiscal policies via a fiscal rule and adding capital to firms' production functions to better capture monetary transmission mechanisms. - IMF technical assistance and Bank–Fund collaboration: ongoing TA in fiscal, monetary, debt management, Basel II implementation, SDDS, and planned joint programs (JMAP, CPS, PFM TA). *Source: IMF staff report, Executive Summary and selected sections (document _cr10297).* ### EXECUTIVE SUMMARY ### _cr10297 - EXECUTIVE SUMMARY ### Background and recent performance - Jordan is "one of the most open economies in the Middle East" and was adversely affected by the global and regional economic crisis, but "prudent fiscal and monetary management has minimized the effects of these external shocks on the domestic economy." - Real GDP growth averaged about 6 percent between 2000–08. - Real GDP growth fell from almost 7⅓ percent in 2008 to 2⅓ percent in 2009. - The unemployment rate was 13 percent at end-2009. - Headline inflation declined steadily through 2009 to near zero; core inflation remained around 3 percent y-o-y. Headline inflation picked up to 5⅓ percent y-o-y in June 2010, driven mostly by higher international fuel and food prices. - Staff estimates potential output growth at about 4 percent per year for 2009–12; potential growth is expected to rise to about 5½ percent per year over the medium term. - The Department of Statistics revised historical GDP: revised nominal GDP numbers are about 10 percent higher, while real growth was revised down from 7.8 and 2.8 percent to 7.2 and 2.3 percent, for 2008 and 2009 respectively. - Real GDP increased by 2 percent y-o-y in Q1 2010. ### External sector and reserves - The current account deficit narrowed to 5 percent of GDP in 2009 (from 9½ percent in 2008), supported by strong tourism receipts and remittances and lower oil import spending. - Foreign direct investment (FDI) and other inflows financed the current account deficit, allowing official foreign reserves to reach $11 billion (equivalent to 8 months of imports) by end-2009. - Official foreign exchange reserves were $10.4 billion (equivalent to 7¼ months of imports) as at end-June 2010; reserves had fallen slightly from the record-high levels reached in March 2010. ### Fiscal outcomes and risks - The 2009 overall fiscal deficit widened by more than 3 percentage points of GDP, reaching 8½ percent of GDP in 2009; the debt-to-GDP ratio rose to about 56 percent at end-2009. - The 2010 Budget envisages substantial fiscal consolidation: the 2010 overall deficit is expected to narrow by more than 2 percent of GDP relative to the 2009 outturn, reaching about 6 percent of GDP. - Staff recommends targeting an overall deficit of about 3 percent of GDP over the medium term to reduce vulnerabilities and to ensure a decisive further decline in the public debt-to-GDP ratio, maintaining the ratio below the legislated 60 percent limit. - Fiscal consolidation in 2010 and over the medium term will require: - Further rationalization of public expenditures (particularly the size of the civil service wage bill). - Additional revenue-raising measures. - 2010 fiscal measures: additional revenue measures introduced in June 2010 include raising indirect taxes on petroleum and other commodities, and reversing the GST exemption for coffee. These will partially offset additional spending on social assistance, commodity subsidies, and teachers’ remuneration. - Summary of Fiscal Operations (In percent of GDP) — selected lines (Prel./Proj. columns labeled 2008, 2009, 2010): - Total revenue and grants: 29.1, 25.1, 23.3 - Budgetary revenue, of which: 24.7, 23.3, 21.7 - Tax revenue: 17.1, 16.2, 14.7 - Nontax revenue: 7.5, 7.1, 7.0 - Grants: 4.5, 1.9, 1.6 - Total budgetary expenditure: 33.4, 33.6, 29.5 - Current expenditure, of which: 27.8, 25.7, 24.3 - Fuel subsidy: 1.2, 0.2, 0.4 - Food subsidy: 1.4, 0.8, 0.5 - Capital expenditure and net lending: 5.6, 7.8, 5.2 - Financing ( = deficit including grants): 5.4, 8.5, 6.2 - Memorandum items: - Overall balance, excluding grants: -9.8, -10.3, -7.8 - Primary balance excluding grants: -7.5, -8.1, -5.5 - Structural balance excluding grants: -10.5, -10.1, -7.3 - Government and guaranteed net debt: 52.9, 55.8, 57.3 ### Monetary policy, exchange rate, and financial sector - The Central Bank of Jordan eased policy between November 2008 and February 2010: reserve requirements and policy interest rates were cut gradually; liquidity-withdrawal operations ceased in October 2008; a full guarantee of bank deposits was extended until end-2010. - Interest rate differential against the U.S. Federal Reserve’s funds rate was reduced from 450 to 200 basis points. - Despite these measures, excess reserves in the banking system (maintained as overnight deposits with the CBJ) increased to almost one quarter of 2009 GDP. - Deposit growth remained healthy; the share of dinar-denominated deposits increased. Bank credit growth to the private sector slowed to near-zero at end-2009. - Staff view: an accommodative monetary policy stance in 2009–10 was appropriate, but there is likely little room for further monetary stimulus. The authorities should stand ready to tighten monetary conditions if inflation accelerates or there are pressures on the balance of payments. - Maintain the pegged exchange rate regime; the dinar real exchange rate is broadly in line with medium-term fundamentals. - Continue to strengthen banking supervision to ensure Jordanian banks remain robust to internal and external shocks. ### Structural reforms and statistical improvements - Priority structural reforms include: - Further liberalization of the water and energy sectors. - Reforms to the structure of the civil service. - Improving the business environment for the private sector. - Establishing a sound framework to control fiscal risks involved in public-private partnerships. - Further improve the coverage, quality, and timeliness of economic statistics, particularly for labor and property markets, to aid policy formation and economic monitoring. ### Near-term outlook and risks - Real GDP growth is projected to rebound modestly in 2010 to about 3½ percent, but output remains below potential; the output gap widened in 2009 and is expected to remain negative in 2010. - The external current account deficit is expected to widen in 2010 to 7 percent of GDP as imported commodity expenditure rises, partially offset by healthy tourism receipts and a rebound in exports. - Near-term risks are tilted to the downside, tied to uncertainties in world commodity prices and fragile regional/global conditions. A slower-than-anticipated recovery in GCC countries could adversely affect external flows given strong business-cycle linkages with GCC economies. ### Policy priorities (condensed recommendations) - Undertake fiscal consolidation in 2010, narrowing the overall deficit to about 6 percent of GDP. - Target an overall deficit of about 3 percent of GDP over the medium term and keep public debt-to-GDP below the legislated 60 percent limit. - Rationalize public expenditures (notably the civil service wage bill) and raise additional revenues. - Maintain the pegged exchange rate regime. - Stand ready to tighten monetary conditions if inflation or balance-of-payments pressures emerge. - Strengthen banking supervision and implement structural reforms (water, energy, civil service, PPP fiscal-risk framework). - Improve economic statistics coverage, quality, and timeliness. *Source: IMF staff report, Executive Summary (document _cr10297 - EXECUTIVE SUMMARY).* ### 11. Policy actions for 2010 which demonstrate the Government’s commitment to fiscal ### _cr10297 - 11. Policy actions for 2010 which demonstrate the Government’s commitment to fiscal ### Fiscal actions and 2010 targets - Policy actions for 2010 include: reducing operational costs (particularly transportation costs) of Ministries and autonomous public agencies; cessation of construction of new government buildings, excepting schools and hospitals; and cutting Ministerial salaries by 20 percent. - Authorities stand ready to further curtail spending to achieve their 2010 fiscal target of an overall deficit of about 6 percent of GDP. - In the first six months of 2010 the overall deficit (excluding grants) fell by almost half vis-à-vis the same period in 2009. - Mission and authorities view there is little room for further countercyclical fiscal policy given the slowdown in external financing and Jordan’s already-high public debt. - Mission argues for expeditious elimination of the remaining GST exemptions put in place in 2008. ### Medium-term fiscal consolidation (2011–15) - As output growth recovers and comes closer to potential in 2011–13, further fiscal consolidation should be undertaken. - Mission supports authorities’ proposals (beginning in 2011) to reduce the overall balance by between one-half and one percent of GDP per year (depending on the level of economic activity). - Objective: help achieve an overall deficit of about 3 percent over the medium term. - Staff view: full implementation of the authorities’ proposed policies would reduce the debt-to-GDP ratio to about 53 percent by 2015. - Priorities underpinning adjustment include: - removing remaining tax exemptions on commodities; - continuing moderation of the wage bill; - improving the efficiency of current spending; - ongoing prioritization of capital spending. - Authorities prefer consolidation weighted toward expenditure-reduction measures and cite income tax and pension reforms and proposed civil service reforms as supportive of medium-term consolidation. - Authorities’ revised approach to capital spending: a Ministerial Committee prioritizes allocation within an approved budget allocation to realize greater efficiencies over the medium term. ### Monetary policy and exchange rate stance - Private sector credit growth turned positive at end-2009, reaching 5½ percent y-o-y in May 2010. - The Jordanian dinar real effective exchange rate appreciated by 2½ percent between December 2008 and June 2010. - International reserves have stabilized at historically-high levels. - Monetary easing in 2009–10 was appropriate, but there is likely little room for further monetary stimulus because: - interest differential with U.S. rates has fallen to a low level; - inflationary pressures are emerging. - Authorities and staff agree on cautious approach given imperfect monetary transmission and uncertain transmission lags. - Staff recommendation: CBJ should stand ready to tighten monetary conditions if inflation accelerates or there are signs of pressure on the balance of payments. - Tools for tightening include: - increasing reserve requirements; - operations to soak up excess banking system liquidity (through resumption of issuance of certificates of deposit); - raising the policy rate. - Authorities plan to access substantial external financing, prospectively through a U.S. dollar-denominated Eurobond issuance; staff urged securing financing at competitive interest rates and long tenors to reduce near-term rollover needs. - Authorities plan to bolster domestic debt markets through establishment of sukuk; work is underway to resolve legal issues impeding sukuk issuance. ### Exchange rate assessment (Box 3) — key findings - Staff estimates suggest the real exchange rate of the dinar is broadly in line with medium-term fundamentals. - Trajectories of NEER and REER and tourism-based REER measures indicate further depreciation ranging from 3 percent to 6 percent relative to end-2008 values. - Estimates from IMF CGER-based methodologies indicate modest overvaluation (between 1 and 13 percent) in the medium term; average actual REER calculated as overvalued by less than 7 percent vis-à-vis the equilibrium REER. - Jordan’s goods and services export receipts are estimated to have grown by close to 17 percent on average over 2005-09. - Tourism receipts account for one quarter of exports of goods and services and were particularly dynamic in 2009 and thus far in 2010. - Using the macroeconomic balance approach, Fund staff estimate Jordan’s equilibrium current account deficit under current policies (the current account ‘norm’) at around 8 percent of GDP. - Jordan’s projected medium-term (2015) deficit of 7¼ percent of GDP is within one standard error of the estimated current account norm. ### External sector and reserves - International reserves rose from US$6.9 billion at end-2007 to US$10.4 billion at end-June 2010. - Ongoing switch from dollar-denominated to dinar-denominated bank deposits supports confidence in the peg. - Current account projections: - expected modest widening to around 8⅓ percent of GDP by 2011; - projected narrowing to about 7 percent of GDP by 2015. ### Financial sector stability and supervision - Jordanian banking system remains sound and resilient; loan/deposit ratio near 75 percent. - NPL ratios increased modestly to 6⅔ percent of outstanding loans at end-2009. - Authorities and CBJ monitor exposures and stand ready to take appropriate actions if loan quality deteriorates further. - Strengthening of CBJ regulation and supervision includes: - introduction of Basle II (Pillars I and III) regulations in 2008 and ongoing work on Pillar II guidelines (issued February 2010); - requiring semi-annual stress testing of banks (issued September 2009) with aggregated results reported in CBJ’s Financial Stability Report; - introduction of an automated data collection system (June 2010); - enhanced cross-border regulation and on-site inspections of international branches and subsidiaries; - improvements to the early warning system. - IMF technical assistance supported Basle II implementation (July 2010). - Law establishing a private credit bureau passed in June 2010; bureau to be supervised by the CBJ. - AML/CFT framework strengthened: amending the anti-money laundering law in May 2010; regulations giving the Financial Intelligence Unit greater independence; adoption of AML/CFT inspection manuals by the CBJ and Insurance Commission; cash declaration system at borders instituted in March 2010. *Source: _cr10297 - 11. Policy actions for 2010 which demonstrate the Government’s commitment to fiscal* ### 24. A key medium-term policy goal is to reduce fiscal and external vulnerabilities ### _cr10297 - 24. A key medium-term policy goal is to reduce fiscal and external vulnerabilities ### Structural reform priorities and labor market - Progress in structural reforms is a major policy goal to reduce fiscal and external vulnerabilities, while achieving higher economic growth and employment over the medium term. - Further improving the business environment for the private sector should help raise productivity and reinforce Jordan’s competitiveness. - Recent measures: - In early 2010 the Jordanian Cabinet passed legislation that lowers the average tax burden, and enhances the investment climate. - In May 2010, the authorities reformed the social security system to improve the sustainability and actuarial soundness of their pension scheme. - The revised social security law introduces unemployment insurance to social security recipients, which should enhance labor market flexibility (commencing July 2011). - Recommended additional reforms: - Further liberalization of the water and energy sectors. - Completion of civil service reforms (with technical assistance from the World Bank and USAID). ### Trade, tourism, and potential output - Greater openness to trade in goods and services, along with reduction in the cost of public services, will raise the rate of growth of potential output. - The authorities are close to completing their National Trade Strategy for 2011–15. - Jordan is negotiating with Mercosur countries in seeking to establish a free trade agreement. - Tourism performance: - The tourism sector has performed extremely well in 2009–10, with tourist arrivals and tourism receipts increasing by about 30 percent in the first half of 2010 vis-à-vis the same period in 2009. - Policy measures to attract FDI and boost tourism capacity: - Continued training of local labor. - Reductions in the cost of key inputs (power and water). ### Public-private partnerships (PPPs) and infrastructure - PPPs can provide a useful vehicle to address infrastructure bottlenecks in a tight fiscal environment. - The authorities have an ambitious program of large-scale infrastructure development—particularly in power, water, and rail transportation—to be financed by PPPs. - Risks and required preconditions: - International experience shows PPPs can generate potential fiscal liabilities. - Recommended preconditions include: - Improving existing PPP regulations to approve a legal framework that ensures adequate risk transfer to the private sector and prescribes a clear process for the evaluation and approval of PPPs. - Competitive bidding procedures. - Capacity-building at the government level. - Proper accounting and reporting of fiscal implications. - The authorities are currently in the process of strengthening an earlier framework law for PPPs, which will be submitted to Cabinet later in 2010. ### Fiscal institutions, public sector reforms, and debt management - Fiscal institutions should continue to be strengthened; progress in public sector structural reforms is critical to enhance the business environment for private sector-led growth. - Recommended public financial management reforms: - Further strengthening the medium-term framework for budget formation and implementation. - Introducing the Government Financial Management Information System across government ministries. - Improving cash management through full implementation of the Treasury Single Account. - Autonomous agencies: - The number of autonomous public agencies had increased to 61 by end-2009. - Structural reform of overall public expenditure policies will be needed to reduce the burden of government entities on the budget. - The authorities broadly agreed with the staff’s recommendation on reducing the number of autonomous agencies, and are moving to merge several agencies to reap cost savings and efficiency gains, in the context of ongoing civil service reforms. - Debt management: - Given Jordan’s large stock of public debt, formation and communication of the government’s debt reduction and debt management strategy will be critical. - Steps already taken: - Increasing the number of Treasury bill and bond auctions and reducing the size of offers. - Moving toward the establishment of a debt auction calendar. - Recommended further actions (in line with IMF technical assistance recommendations): - Formulate and communicate a medium-term debt management strategy. - Establish a robust middle-office function within the Ministry of Finance’s Public Debt Department. - Enhance the primary and secondary market for government securities. ### Data and statistical improvements - Further improvements in economic statistics will support the quality of policy formation and economic monitoring. - Recent progress: - Substantial progress in improving data quality and coverage—particularly for budget revenues and expenditures—led to Jordan’s subscription to the Fund’s Special Data Dissemination Standard (SDDS) in January 2010. - Finalization of SDDS subscription and revisions to historical balance of payments statistics better accounted for FDI flows and thereby reduced the size of errors and omissions. - Recommended statistical enhancements: - Seek follow-up technical assistance on balance of payments statistics. - Improve the frequency and timeliness of expenditure-based national accounts data. - Improve the quality of high-frequency production-based national accounts. - Develop regular and timely wage, employment and real estate statistics to enhance monitoring of labor and asset markets. ### Research cooperation - A joint CBJ-IMF research workshop was held at the conclusion of the Article IV consultation. - Main themes included: - Presentation of MCD’s Regional Economic Outlook for the Middle East. - Determinants of the Jordanian business cycle (Box 1). - Analysis of the slowdown in credit flows (Appendix 1). - Development of a financial conditions index (Figure 4) and general equilibrium model for Jordan (Appendix 7). - The authorities requested that this exercise be repeated during future Article IV consultations. ### Staff appraisal: macroeconomic and policy assessment - Growth and outlook: - Following a decade of strong growth, the Jordanian economy has slowed, largely due to the global and regional downturn. - Economic activity is expected to pick up modestly in 2010, and accelerate further over the medium-term, as growth revives in key regional trading partners, bringing Jordanian output closer to potential. - Fiscal and monetary stance: - The authorities have implemented prudent fiscal and monetary policies, which have ensured fiscal sustainability and supported the domestic financial system. - The government has proceeded with its fiscal consolidation plans for 2010 and the medium term; fully implemented, this should contribute to a significant reduction in the debt-to-GDP ratio, and provide for a major amelioration of fiscal vulnerabilities. - The monetary authorities implemented cautious monetary easing in the period between late-2008 and early-2010, to raise private sector credit flows, and used abundant capital inflows to bolster international reserves. - Fiscal consolidation and debt trajectory: - The staff supports the fiscal consolidation envisaged in the 2010 Budget. - Staff believes that the decline in the overall deficit of about 2 percent of GDP this year is both appropriate and achievable, and would leave fiscal room for an envisaged increase in social expenditures, while maintaining sizeable capital expenditures. - While implementation of these fiscal plans would result in a small rise in the public debt-to-GDP ratio in 2010, it would still remain below the 60 percent legislated debt ceiling. - The authorities’ objective of reducing the fiscal deficit to about 3 percent of GDP over the medium term is critical to achieving private sector-led growth and reducing vulnerabilities. - Reducing the overall deficit by about 3 percent of GDP over the next five years is feasible and would lead to a further 5 percentage point decline in Jordan’s debt-to-GDP ratio. - Priorities include removing remaining tax exemptions on commodities, ongoing prioritization of capital spending, and continued moderation of growth in the public sector wage bill. - Structural reform and institutions: - Significant progress has been made in advancing structural reforms, yet policy challenges remain. - Near-term priorities: further improvement in the business environment, further liberalization of important business inputs (particularly energy and water sectors), and greater public sector efficiencies via civil service reforms. - The medium-term fiscal strategy should be supported by strengthening tax administration and reenergizing implementation of public sector financial management reforms. - For PPPs: a strong framework needs to be put in place to minimize the risk of contingent liabilities. - Monetary policy recommendation: - Monetary policy has rightly focused on monetary easing in 2009–10 to stimulate domestic demand, yet there should now be a pause on further monetary stimulus. - Given growing turnaround in private sector credit flows and some evidence of emerging inflationary pressures, the staff recommends that the monetary authorities stand ready to tighten monetary conditions as appropriate. - Exchange rate and financial stability: - The fixed exchange rate regime remains important for financial stability. - The Jordanian dinar’s peg to the U.S. dollar has acted as an appropriate nominal anchor. - Analysis indicates the dinar remains broadly aligned with its medium-term fundamentals. - The risk of external instability from the capital account is lowered by the fact that most external debt consists of obligations to official creditors, and reserves far exceed short-term external liabilities. - Banking sector and supervision: - Bank regulation and supervision should continue to focus on preventing excessive risk taking. - Banks’ conservative funding and asset structures, underpinned by effective banking supervision and regulation, have limited exposures to adverse global liquidity conditions. - Macroprudential indicators remain strong, but supervision should remain vigilant given potential for higher non-performing loans and provision requirements as output growth is likely to remain below trend until 2012. - Communication and statistical systems: - Clear, timely and proactive communication of policy intentions for debt reduction and debt management will be important to build ownership for necessary fiscal reforms. - Enhancements to the primary and secondary markets for public debt are relevant. - Despite progress (including SDDS subscription in January 2010), data inadequacies persist in expenditure-side national accounts and in employment and wage statistics; the staff urges greater progress in resolving these inadequacies. *IMF staff report text.* ### 38. It is proposed that the next Article IV consultation be held on the standard ### _cr10297 - 38. It is proposed that the next Article IV consultation be held on the standard ### Real sector: developments and outlook - Output and growth - Real GDP at market prices: 8.08.97.22.33.44.25.05.55.55.5 - GDP deflator at market prices: 8.85.224.78.14.75.04.23.52.52.2 - Nominal GDP at market prices: 17.514.633.610.68.29.49.49.28.17.9 - Nominal GDP at market prices (JD millions): 10,52112,05716,10817,81619,28421,10023,08325,21127,25229,396 - Nominal GDP at market prices ($ millions): 14,83917,00522,70625,11327,17529,75232,54735,54738,42541,448 - Labor market and inflation - Unemployment rate (percent): 14.113.112.713.0.......... - Consumer price index (annual average): 6.35.414.9-0.75.75.04.23.52.52.2 - Consumer price index (end of period): 7.55.79.62.75.85.23.62.52.22.2 - Key real-sector observations (from figures) - Output growth fell in 2009 and is expected to remain below trend in 2010. - Headline inflation followed movements in world commodity prices; core inflation remained stable. - Construction activity faltered and industrial production remains below trend. - Unemployment edged up in 2009 and is expected to remain high in 2010. - Risk intervals around growth forecasts: 50 percent confidence interval and 90 percent confidence interval shown; downside risk: slower recovery; upside risk: commodity price spikes. ### Fiscal developments and outlook - Revenues, expenditures, and balances (selected series) - Total revenue and grants (JD millions): 3,4543,9204,6904,4764,4764,4864,9155,4405,9286,3826,841 - Budgetary revenue (JD millions): 3,1213,5773,9724,1434,3164,1864,6655,1705,6286,0526,500 - Tax revenue (JD millions): 2,1342,4722,7582,8802,9302,8313,1913,5673,8754,1944,515 - Grants (JD millions): 333343718333160300250270300330340 - Total budgetary expenditure (JD millions): 3,9314,5315,3835,9845,5815,6816,0756,4566,8357,2547,722 - Current expenditure (JD millions): 3,1863,7414,4814,5864,5854,6854,9865,3135,6235,9866,389 - Capital expenditure (JD millions): 6967448751,3289439431,0381,0941,1661,2251,293 - Overall fiscal balance including grants (percent of GDP): -3.6-5.8-5.4-8.5-5.7-6.2-5.5-4.4-3.6-3.2-3.0 - Overall fiscal balance excluding grants (percent of GDP): -6.7-8.6-9.8-10.3-6.6-7.8-6.7-5.6-4.8-4.4-4.2 - Primary fiscal balance excluding grants (percent of GDP): -3.7-5.6-7.5-8.1-4.2-5.5-4.3-3.2-2.6-2.1-1.7 - Public debt and interest - Government and government-guaranteed net debt (percent of GDP): 69.968.052.955.8...57.357.556.554.953.852.7 - Of which: external debt (percent of GDP): 49.343.622.621.7...19.116.514.112.010.59.2 - Interest expenditure remains sizable and is expected to increase in 2010. - Public debt is projected to remain below its medium-term ceiling (60 percent of GDP) with more risks on the upside (figure annotation). ### External sector: developments and outlook - External flows and reserves - Gross usable international reserves ($ millions): 6,1036,8657,73211,09310,70510,86011,09311,30911,57811,847 - Gross usable international reserves (months of next year's imports): 5.14.76.28.17.47.06.76.76.56.2 - Current account balance (including grants, $ millions): -1,726-2,995-2,180-1,254-1,900-2,459-2,550-2,698-2,827-2,964 - Current account (in percent of GDP): -11.6-17.6-9.6-5.0-7.0-8.3-7.8-7.6-7.4-7.2 - Current account excluding grants (percent of GDP): -17.1-19.8-15.5-8.8-9.8-9.8-9.3-9.0-8.6-8.3 - Exports of goods, f.o.b. ($ billions): 5.25.77.96.46.67.17.78.38.99.6 - Imports of goods, f.o.b. ($ billions): 10.312.215.112.513.514.315.216.417.518.7 - Tourism receipts, remittances, and grants supported inflows in 2009; remittances (net): 2,1602,5712,7462,6792,8972,9773,0563,1353,2893,401 - Financial flows and external debt - Private capital inflows (net, percent of GDP): 24.922.114.914.17.19.89.89.39.08.7 - External government debt (percent of GDP): 49.343.622.621.7...19.116.514.112.010.59.2 - External debt remains low compared to other countries in the region (figure annotation). ### Monetary and financial conditions - Monetary aggregates and banking indicators - Broad money (annual growth, percent): 17.014.110.617.39.39.9 - Credit to private sector (annual growth, percent): 30.324.515.314.80.57.9 - Broad money (JD millions): 12,36414,11015,60718,30420,01322,003 - Net foreign assets (stocks, JD millions): 6,0027,4107,8687,1038,8898,737 - Banking sector vulnerability indicators - Nonperforming loans (excluding interest in suspense, as percent of loans): 15.510.36.64.34.14.26.7 - Nonperforming loans (as percent of capital and reserves): 73.246.228.315.915.917.518.1 - Provisions against nonperforming loans (excl. interest in suspense, in percent): 51.963.878.479.667.863.451.9 - Risk-weighted capital adequacy ratio (percent): 15.917.817.621.420.818.419.6 ### Key projections and scenarios (high-level) - Growth and inflation - Real GDP growth: figures and fan charts indicate below-trend growth in 2010 with downside risk of slower recovery and upside risk from commodity price spikes (figure annotation). - Fiscal path - Structural deficit excluding grants declined in 2009 and is expected to narrow further in 2010 (figure annotation). - Public debt projected to remain below 60 percent of GDP, with upside risks to the debt ratio. - External position - Current account deficit narrowed in 2009 due to lower imports and sustained remittances and tourism. - International reserves stabilized at a high level through 2009 and into projections. ### Observations highlighted by staff - Domestic revenue softened and external grants fell in 2009 while spending remained broadly unchanged due to lower cost of subsidies. - Interest expenditure remains sizable and is expected to increase in 2010. - Exports, particularly mining exports to emerging markets, moderated in 2009. - Remittances and tourism receipts remained strong in 2009, supporting the external position. *Sources: Jordanian authorities; and Fund staff projections and estimates (figures and tables as presented in the source document).* ### Appendix 1. Credit Slowdown: Supply or Demand Driven? ### Appendix 1. Credit Slowdown: Supply or Demand Driven? ### Purpose and methodology - Purpose: analyze the slowdown in credit activity in Jordan following the global financial crisis, and determine whether it is supply- or demand-driven. - Framework: disequilibrium econometrics following Laffont and Garcia (1977) and maximum likelihood estimation (Maddala and Nelson (1974)). Identification relies on exclusion restrictions (e.g., banks’ lending capacity affects supply but not demand). - Sample and period: estimations use data for the period December 1998 to January 2010. ### Variables used - Determinants of credit supply: - Return on credit (i_l): approximated by the real lending rate (nominal loan rate minus smoothed inflation) — positive coefficient expected. - Differential between CBJ re-discount rate and the U.S. Federal Reserve’s (Fed) funds rate (im): captures relative stance of monetary policies (negative coefficient expected). - Future economic prospects (IP^e): proxied by smoothed industrial production index (lagged) — positive coefficient expected. - Lending capacity (LC): proxied by (total deposits − required reserves in the CBJ overnight facility) deflated by CPI — positive coefficient expected. - Economic uncertainty (UNC): rolling standard deviation of the log difference between the monthly Amman Stock Exchange index and its smoothed value (lagged) — negative coefficient expected. - Determinants of credit demand: - Cost of credit (i_l): real lending rate — negative coefficient expected. - Future economic prospects (IP^e): smoothed industrial production index (lagged) — positive coefficient expected. - Lagged growth of real Amman Stock Exchange index (ASE): sign uncertain. - Iraq war effect (T and Tsq): time trend (logs) and its square beginning in 2004 to capture inflow of Iraqi refugees and diminishing marginal effect over time. ### Estimation results (selected coefficients and model diagnostics) - Key estimated coefficients (t-statistics in brackets; significance: *, **, *** denote 10, 5, 1 percent): - Supply equation: - Real lending rate: 0.04** [3.01] - Differential between CBJ rediscount and Fed fund rates: -0.03* [-2.17] - Industrial production index (lagged): 2.94*** [7.69] - Standard deviation of ASE index growth (lagged): -0.02 [-1.37] - Lending capacity: 0.47* [2.19] - Constant: -9.15*** [-7.32] - Demand equation: - Real lending rate: -0.02*** [-7.19] - Industrial production index (smoothed, lagged): 0.51*** [8.97] - Lagged real ASE index growth: -0.01*** [-3.53] - Time trend (logs): -0.09*** [-9.98] - Time trend^2 (logs): 0.05*** [20.10] - Constant: 6.42*** [23.15] - Model fit and diagnostics: - Number of obs.: 134 - Log-likelihood: 306 - Akaike information criteria: -584 - Bayes-Schwartz information criteria: -544 - St. Dev. of supply equation error: 0.04*** [6.39] - St. Dev. of demand equation error: 0.02*** [12.86] ### Interpretation of results - Both supply and demand respond positively to expected economic prospects (industrial production). - Real lending rate: - Positive impact on credit supply (0.04**). - Negative impact on credit demand (-0.02***). - Differential between CBJ rediscount and Fed funds rate: - Negative coefficient (-0.03*): higher CBJ policy rate relative to the Fed increases bank returns on excess reserves and discourages lending to the real sector. - Lending capacity: - Strongly significant and positive (0.47*): availability of lendable resources is a major determinant of potential credit expansion. - Economic uncertainty: - Negative impact on willingness to lend (coefficient -0.02), but magnitude small and statistically insignificant relative to lending capacity (0.47). - Stock market activity: - Negative association between stock market activity and demand for credit (lagged real ASE index growth -0.01***), implying that sluggish stock market developments increase demand for bank credit by drying up alternative external funding. ### Dynamics and timing (observed patterns) - The plotted predicted supply and demand series (December 1998–January 2010) indicate: - The recent slowdown in credit flows is mainly driven by sluggish credit supply, affected by the widening differential between the CBJ rediscount and Fed funds rates. - Credit demand flattened in 2008 amid the slowdown in Jordanian economic activity, but rebounded since the beginning of 2009 as declining stock prices reduced alternative external funding for businesses. - From mid-2009: - Factors raising banks’ potential ability to expand credit supply included: - (i) reduction of the CBJ policy rate and its differential with the Fed funds rate; - (ii) elimination of the issuance of CBJ CDs and consequent accumulation of excess reserves by commercial banks; - (iii) potential increase in deposit inflows (including unrecorded financial flows from abroad). - By end-January 2010, predicted supply of credit remained about 7 percent lower than predicted demand, indicating continued potential for further expansion of credit supply. ### Summary findings and policy implications - Main finding: - The recent slowdown in credit activity in Jordan has been mainly driven by supply factors. These include tighter lending standards exercised by banks following the global financial crisis, and a widening of the interest differential between monetary policy rates in Jordan and the United States. - Policy implications: - Economic policies targeted towards stimulating credit supply are likely to be more effective for expanding credit flows in Jordan than demand-stimulating policies. - The monetary easing which occurred between November 2008 and February 2010, by narrowing the gap between policy rates in Jordan and the U.S., appears to have assisted in expanding the supply of bank credit. *Source: Appendix 1. Credit Slowdown: Supply or Demand Driven? (prepared by Tigran Poghosyan, MCD).* ### Appendix 3. Optimal Level of International Reserves ### Appendix 3. Optimal Level of International Reserves ### Reserve dynamics and recent history - International reserves reached $11.1 billion as of end-2009 (equivalent to more than 8 months of imports). - Jordan’s stock of reserves almost doubled in the past three years. - A $2.1 billion buyback of non-concessional Paris Club debt in March 2008 was partially financed from international reserves held by the Central Bank of Jordan (CBJ). - The buyback was financed by a land sale (about $500 million) and the proceeds from the government’s privatization accounts (about $1.6 billion). - The most rapid buildup in reserves—almost $5 billion—occurred after April 2008 when the differential between the CBJ policy rate and the U.S. Federal Reserve’s funds rate increased to above 200 basis points. ### Rationale for holding reserves - For an open economy with a pegged exchange rate (pegged since 1950), reserves are desirable to: - deal with current and capital account shocks; - support the pegged exchange rate; - insure against adverse capital movements and provide confidence to investors and market participants in an environment with heightened sovereign risk premia for emerging economies. - Jordan’s vulnerabilities that motivate precautionary reserves include a substantial current account deficit, a high import bill (particularly commodity related), and dependence on remittances, FDI, and other external flows. ### Reserve adequacy versus optimal benchmarks - Based on traditional reserve adequacy measures, Jordan’s foreign reserve coverage has been comfortable: - 2009: reserves covered more than eight months of prospective imports and 200 percent of external debt. - Using the Jeanne (2007) methodology to estimate “optimal” reserves: - Current account shocks: the optimal reserves sufficient to withstand current account shocks (expressed in months of imports or as a substantial decline in remittances, grants and other external inflows) have been consistently below the actual level of reserves for the last several years. - Capital account shocks: starting from 2005, actual international reserves became more than sufficient to cover short-term capital outflows (short-term external debt and foreign currency deposits), with the gap between actual and optimal reserve levels widening considerably in the last two years. - Financial crisis / banking runs: an optimal reserve level to withstand a shock equivalent to withdrawal of 40 percent of banking system deposits (as observed in Uruguay in 2002) is below the actual level of reserves for 2009. - Sensitivity: although results are somewhat sensitive to calibration parameters, they hold for basic sensitivity analysis, including increasing the output loss to 13 percent of GDP (equivalent to the effect of the 1989 economic crisis for Jordan). ### Regional comparison and trends - Extending the Jeanne (2007) methodology to other countries in the region indicates: - A general preference for higher reserve holdings in Mashreq/Maghreb regions. - Most countries hold higher reserves than the optimal level predicted by the model. - “Excess reserve” holdings (actual minus optimal) have generally increased between 2000 and 2009, suggesting higher demand for precautionary balances in a more open external environment. ### Conclusions and policy implications (Appendix 3) - The current level of foreign reserves (end-2009) is sufficient to cover severe potential capital and current account shocks. - Jordan ranks higher than most comparator countries in the region on traditional reserve adequacy measures and on some optimal-reserve benchmarks. - The comfortable reserve position: - provides a substantial cushion against potential risks; - makes the economy less vulnerable to future fluctuations in the level of international reserves; - allows more flexibility for the future conduct of monetary policy in a challenging global environment. *Source: Appendix 3. Optimal Level of International Reserves (IMF staff prepared material).* ### Appendix 4. Interest Margin Determinants in the Jordanian Banking System ### Interest margin dynamics - The net interest margin (difference between lending and deposit rates) evolution: - increased from 4½ percent at the beginning of 2000 to 6½ percent in mid-2003; - declined to 3 percent in mid-2006; - rose again to reach 4½ percent at the end of 2009. - The margin between lending and saving deposit rates is larger in magnitude but follows similar dynamics. - The implicit interest margin (based on income statement and balance sheet decomposition) is much smaller—about 1–2 percentage points—than the simple lending-minus-deposit rate spread. ### Decomposition methodology and components - Decomposition follows Randall (1998). From bank accounting identities, the interest margin (iL − iD) is decomposed into: - reserve requirement costs (ρ * iL); - operational costs (OC/D); - loan loss provision costs (Prov/D); - profitability (ROA * A/D); - non-interest income (NII/D, with negative sign); - error term ε from combining flow and stock data and simplifying reserve holdings. - Data: semi-annual consolidated balance sheets and income statements for Jordanian banking industry, 2003–09 (Central Bank of Jordan). ### Key empirical findings - The implicit interest margin is smaller (around 1–2 percentage points) than the simple spread shown in lending vs. deposit rates due to: - negative effect of non-interest component of bank earnings; - lower interest revenue on interbank deposits counted as interest-bearing assets in the implicit measure. - Profits constitute a substantial portion of the margin, but: - the share of profits has been declining over time, especially following the global financial crisis. - bank profitability decreased while the margin slightly rose following increased loan-loss provisioning in 2008–09, implying partial pass-through of provisioning costs to customers and partial absorption by banks as lower profitability. - Loan-loss provision costs: - the share of loan-loss provision costs in the margin has risen in the aftermath of the global financial crisis. - if banks pass through additional provisioning costs to customers, the interest margin might increase further. - Operating costs: - the share of operating costs in the margin has been broadly constant over time. - the relatively large share implies potential room for margin reduction through improved operational efficiency. - Reserve requirement costs: - reduced following decline of the reserve requirement ratio from 10 to 7 percent of deposits in the second half of 2009. - overall share is not very large given the relatively low reserve requirement ratio in Jordan. - Non-interest income: - non-interest income substantially reduces the interest margin (fees and service charges). - magnitude of non-interest income has progressively declined from mid-2005 onwards. ### Policy implications (Appendix 4) - The reserve requirement ratio can be used by Jordanian monetary authorities as a tool to influence the magnitude of the interest margin. - The recent buildup of non-performing loans may be passed through to customers via an increase in the interest margin. *Source: Appendix 4. Interest Margin Determinants in the Jordanian Banking System (IMF staff prepared material).* ### Appendix 5. FSAP Recommendations and Banking Supervision Reforms ### Appendix 5. FSAP Recommendations and Banking Supervision Reforms ### Summary of main reforms and initiatives - Ongoing efforts to ensure compliance of banks with Basel II principles. - Requiring semi-annual bottom-up stress testing of banks, examining in particular credit risk and concentration risk. - Reporting the aggregate results of stress tests in the CBJ’s annual Financial Stability Report. - Introducing an automated data collection system to improve off-site monitoring of banks. - Enhanced cross-border bank regulation through regular supervision and on-site inspections of international branches and subsidiaries of Jordanian banks. - Improvements to the Early Warning System. - Improving access to finance by expanding the public credit registry and passage of a private credit bureau law. ### Basel II implementation - The CBJ has issued all the regulations for Basel II implementation. - Pillars I and III regulations issued in 2008. - Pillar II regulations issued in February 2010. - Banks are in the process of applying these regulations. - CBJ issued Pillar II guidelines in February 2010 and requested banks to submit: - capital plans by the end of June 2010, and - the Internal Capital Adequacy Process (ICAAP) by the end of 2010. - CBJ will conduct the Supervisory Review and Evaluation Process (SREP) on submitted ICAAPs to assess adequacy of risk management systems and capital, and will take required actions to strengthen CARs of vulnerable banks where needed. - The minimum nominal amount of capital required for entry has remained constant. ### Stress testing and integration with supervision - CBJ issued stress testing regulations in September 2009. - Bottom-up stress testing (part of Pillar II) is underway; banks were requested to run stress tests based on standard scenarios (especially credit risk and concentration risk) and to identify additional scenarios per bank risk profile. - CBJ is finalizing validation of bank-conducted stress tests and will work on reflecting regular stress tests in CAMELS scoring. - CBJ has conducted training courses on stress testing for CBJ and banks' staff. - The third Financial Stability Report was published in 2009; CBJ will draw on bottom-up stress test findings and report their results in forthcoming reports. ### Automated data collection and Early Warning System (EWS) - CBJ is developing a comprehensive and automated database, possibly by year-end, to strengthen banking supervision and enhance the Early Warning System. - CBJ monitors financial soundness indicators on a semi-annual basis. - CBJ is developing a statistical model as an additional early warning tool alongside Financial Ratio Analysis, Peer Group Analysis, and CAMEL. - CBJ is working towards finalizing the development of a comprehensive and automated database to help in strengthening banking supervision and enhancing the Early Warning System and developing a risk profile report for each bank. ### Enhanced cross-border supervision - CBJ has performed on-site cross-border examinations on complex groups: - Visits included Arab Bank/London, Arab Bank/Switzerland, and branches of three Jordanian banks operating in Cyprus. - In 2010 CBJ planned visits to branches of banks operating in the Gulf area (Qatar and UAE). - CBJ plans to continue visiting Jordanian banks with a material presence abroad. - Banks with branches in Palestine provide monthly reports to the CBJ. ### Improving access to finance and credit reporting - The threshold for the public credit registry was lowered from JD 30,000 to JD 20,000. - Under the new threshold, the public credit registry covers about 80 percent of credits. - A private credit bureau law has been approved; CBJ is drafting regulations and by-laws with technical assistance from the Middle East Technical Assistance Center (METAC). ### Staffing and supervisory capacity - The Banking Supervision Department hired fresh graduates and some experienced personnel. - There are currently 80 staff in the department (end-June 2010). - CBJ is working on upgrading personnel qualifications and skills to validate advanced models and move to more advanced supervisory approaches. ### Short-term recommendations and status (as of end-June 2010) - Strengthen CARs of vulnerable banks via supervisory process rather than raising minimum entry capital. - Pillar II guidelines issued; ICAAP and SREP process to address capital adequacy. - Strengthen global consolidated supervision and perform on-site cross-border examinations. - Cross-border visits completed/planned as noted above; monthly reporting from Palestine branches ongoing. - Prepare contingency plans to deal with stress in the banking system. - CBJ has a prompt corrective action framework and legal tools; no formal contingency plan was prepared. - Continue to strengthen monitoring of FSIs and build Early Warning Systems. - Semi-annual monitoring and development of statistical EWS; automated database in progress. - Strengthen staffing of supervisory department. - Department staffing at 80 (end-June 2010). - Enhance monitoring of broker-dealers and introduce procedures for early intervention. - (Status entry present but no implementation detail provided.) - Lower threshold for public credit registry and disclose borrower history to prospective lenders. - Threshold lowered to JD 20,000; coverage about 80 percent of credits. - Streamline government cash management and publish issuance calendars. - Work in progress; government considering publishing auction calendars quarterly starting in 2011. ### Medium-term recommendations and status (as of end-June 2010) - Recapitalize the central bank. - (No implementation detail provided.) - Develop explicit exit procedures for unsound banks and to allow more open entry consistent with greater contestability. - CBJ considers existing licensing criteria and regulations sufficient to deal with entry and exit procedures. - Enhance stress testing capacity for CBJ and commercial banks, focusing on credit risk and reflecting stress tests in CAMELS scoring. - Stress testing regulations issued September 2009; validation process being finalized; plan to reflect stress tests in CAMELS scoring; training provided. - Pass draft insurance law to improve Insurance Commission governance and independence. - (No implementation detail provided.) - Introduce legislation on mutual funds; restructure motor third party liability insurance; introduce financial literacy training and household regulations. - (No implementation detail provided.) - Enhance CAMEL toward CAMELS and CAMELS2 and increase frequency of rating updates (at least once a year, ideally twice a year for systemic/risky banks). - CBJ developing a comprehensive report with quantitative and qualitative information to enhance CAMEL rating. - Offer the TSA approach for operational risk to selected banks and start data collection. - TSA approach offered to banks meeting minimum requirements; some banks working on requirements. - Define the right definition of default. - To be done through preparation for moving banks to more advanced approaches. - Select candidate banks for FIRB & TSA migration and gain consensus. - Some large banks are building required infrastructure to move to advanced approaches. - Ask banks to start collecting Basel II IRB variables compliant with the right definition of default. - CBJ will review readiness through SREP and ICAAPs. - Consider timetable for possible first implementation of Basel II Foundation IRB (FIRB Foundation IRB 2014) and prepare for AIRB. - This is under consideration. - Modify texts related to definition of default (provisioning, PCA, connected lending, large exposures). - To be addressed during preparation for advanced approaches. - Establish CBJ philosophy regarding Pillar 2: depth of SREP, ICAAP use of economic capital, and possible target ratios. - Pillar II guidelines issued; capital plans and ICAAP submissions required; SREP process to follow. - Decide on validation process and communicate agenda/road map to banking industry; train BSD personnel to validate FIRB models. - CBJ upgrading personnel qualifications and building environment for advanced approaches. - Adopt and adapt COREP and FINREP for reporting and Pillar 3 disclosure. - CBJ developing automated database and risk profile reports to support reporting and disclosure. - Prepare move towards a more risk-based approach. - Implementation of Pillar II aligns with this objective. *Prepared by Serkan Arslanalp (MCM). (As of end-June 2010).* ### Appendix 6. Debt Sustainability Analysis ### Appendix 6. Debt Sustainability Analysis ### A. Public Debt Sustainability Analysis - Summary projection: - Public debt (government and government-guaranteed, domestic component net of government deposits) is expected to decline to around 53 percent of GDP in 2015 as a result of fiscal consolidation measures in 2010 and the medium term. - After a steady decline in 2003–08, the debt ratio increased by about 3 percentage points in 2009. - Under the 2010 budget and assumed continued consolidation, the debt ratio is projected to increase slightly in 2010–11 and then decline by about one percentage point per year over the medium term. - Key baseline debt-to-GDP trajectory (central government debt including guarantees, net): - 2004: 88.7 - 2005: 83.7 - 2006: 69.9 - 2007: 68.0 - 2008: 52.9 - 2009: 55.8 - 2010: 57.3 - 2011: 57.5 - 2012: 56.5 - 2013: 54.9 - 2014: 53.8 - 2015: 52.7 - Foreign-currency denominated share (of central government debt): - 2004: 66.1 - 2005: 56.5 - 2006: 49.3 - 2007: 43.6 - 2008: 22.6 - 2009: 21.7 - 2010: 19.1 - 2011: 16.5 - 2012: 14.1 - 2013: 12.0 - 2014: 10.5 - 2015: 9.2 - Public debt dynamics and sensitivities: - Identified debt-creating flows (2004–15) and components are reported in Table A.1 (see source). For 2010 the primary deficit (including grants) is 3.9 percent of GDP; projected to decline to 0.6 percent of GDP by 2015. - Automatic debt dynamics contributions (interest rate/growth differential) for 2010–15 (selected): - 2010: -1.9 - 2011: -2.6 - 2012: -2.5 - 2013: -2.5 - 2014: -1.8 - 2015: -1.5 - Gross financing need (percent of GDP): - 2004: 6.0 - 2005: 8.6 - 2006: 6.5 - 2007: 9.0 - 2008: 6.8 - 2009: 10.0 - 2010: 7.8 - 2011: 7.0 - 2012: 5.9 - 2013: 5.0 - 2014: 4.4 - 2015: 4.1 - Gross financing need (in billions of U.S. dollars): - 2004: 0.7 - 2005: 1.1 - 2006: 1.0 - 2007: 1.5 - 2008: 1.6 - 2009: 2.5 - 2010: 2.1 - 2011: 2.1 - 2012: 1.9 - 2013: 1.8 - 2014: 1.7 - 2015: 1.7 - Bound tests and scenario outcomes (Figure A.1 results summarized): - Contingent liabilities shock: a one-time increase in the debt ratio by 10 percent of GDP in 2010 would leave the debt path about 10 percentage points above baseline throughout the projection period. - Real exchange rate shock: a 30 percent real exchange rate depreciation would increase the debt-to-GDP ratio by around 10 percentage points relative to baseline in 2010 (about one third of the debt is foreign-currency denominated). - Smaller permanent one-half standard deviation shocks to real growth, interest rates, and the primary balance would push debt-to-GDP ratios above 60 percent by the end of the projection period. - Alternative scenarios: - Scenario with key variables at their historical averages: debt ratio approaches 42 percent by 2015 (reflecting that the primary deficit including grants averaged below one percent of GDP in 2000–09). Reported series: 2010: 53.1; 2011: 50.5; 2012: 48.0; 2013: 45.7; 2014: 43.7; 2015: 41.8. - Scenario with constant primary balance at 2009 level (6.3 percent of GDP) in 2010–15: debt ratio would grow to 85.2 percent by 2015. Selected series: 2010: 59.3; 2011: 63.7; 2012: 68.6; 2013: 74.0; 2014: 79.6; 2015: 85.2. - Policy implication: - Public debt sustainability and containing vulnerabilities are contingent on appropriate adjustment policies to reduce the primary deficit from about 4 percent of GDP in 2010 to 0.6 percent by 2015 under the baseline. ### B. External Debt Sustainability Analysis - Summary projection and context: - External debt declined sharply to 25 percent of GDP following the $2.1 billion buyback of Paris club debt in 2008 and is expected to fall below 20 percent by end-2010. - Projections assume continued cautious external borrowing policies and reliance on concessional external financing from multilateral and regional development banks. - Key baseline external debt-to-GDP trajectory (selected): - 2004: 66.1 - 2005: 56.5 - 2006: 49.3 - 2007: 43.6 - 2008: 22.6 - 2009: 21.7 - 2010: 19.1 - 2011: 16.5 - 2012: 14.1 - 2013: 12.0 - 2014: 10.5 - 2015: 9.2 - External debt drivers and key flows (Table A.2 highlights): - Change in external debt (percent of GDP): - 2004: -8.4 - 2005: -9.6 - 2006: -7.2 - 2007: -5.7 - 2008: -21.0 - 2009: -0.9 - 2010: -2.6 - 2011: -2.6 - 2012: -2.5 - 2013: -2.1 - 2014: -1.5 - 2015: -1.3 - Current account deficit excluding interest payments (percent of GDP): - 2009: 4.4 - 2010: 6.5 - 2011: 7.8 - 2012: 7.4 - 2013: 7.2 - 2014: 7.1 - 2015: 6.9 - Net non-debt creating capital inflows (negative percent of GDP): - 2009: -14.1 - 2010: -7.1 - 2011: -9.8 - 2012: -9.8 - 2013: -9.3 - 2014: -9.0 - 2015: -8.7 - Automatic debt dynamics (percent of GDP) for 2010–15: - 2010: -0.2 - 2011: -0.3 - 2012: -0.3 - 2013: -0.4 - 2014: -0.3 - 2015: -0.3 - Gross external financing need: - In billions of US dollars: - 2004: 0.6 - 2005: 2.8 - 2006: 2.3 - 2007: 3.6 - 2008: 2.6 - 2009: 1.7 - 2010: 2.4 - 2011: 2.9 - 2012: 3.1 - 2013: 3.2 - 2014: 3.3 - 2015: 3.4 - As percent of GDP: - 2004: 5.6 - 2005: 22.3 - 2006: 15.4 - 2007: 21.0 - 2008: 11.6 - 2009: 6.6 - 2010: 8.4 - 2011: 9.6 - 2012: 9.1 - 2013: 8.6 - 2014: 8.2 - 2015: 7.8 - Bound tests and scenario outcomes (Figure A.2 results summarized): - External debt sustainability is most vulnerable to developments in the current account position: a one-half standard deviation worse current account than assumed would push the external debt ratio up through the projection period, reaching 23 percent of GDP by 2015. - Alternative scenario—temporary 20 percent decline in 2010–11 in remittances, tourism, and FDI relative to baseline: - Under this scenario the external debt ratio deteriorates to about 28 percent by end-2011. - Note: source cautions the total impact may be overstated because imports are assumed unaffected by the decline in inflows. - Bound tests show the debt-to-GDP ratio is robust to shocks in the external interest rate or GDP growth. A sharp depreciation would cause an immediate deterioration but limited adverse impact over time due to the relatively low projected external debt stock. - Policy implication: - Continued cautious external borrowing (predominantly concessional) and monitoring of current account inflows, remittances, tourism, and FDI are important to preserve external debt sustainability. *Prepared by Hirut Wolde (MCD) and staff estimates as reported in Appendix 6 of the source document.* ### Conclusion and next steps ### Conclusion and next steps ### Estimated model performance and key findings - The estimated model "describes well the main features of the Jordanian economy, particularly its openness to external shocks." - This assessment is evidenced by the relevant impulse response functions presented in the Appendix. ### Planned model augmentations and technical improvements - Future work will focus on augmenting the model to incorporate calibrated fiscal policies in the form of a fiscal rule. - Capital could be added to the production function of firms to better account for the monetary policy transmission mechanism working through interest rate changes. - These modifications are intended to improve the usefulness of the model to the Jordanian authorities as an input to economic analysis and policy formation. ### IMF—Jordan institutional and financial data (selected highlights) - Membership Status: Joined: August 29, 1952; Article VIII. - Quota: 170.50 (SDR million) — Percent of Quota: 100.00. - Fund holdings of currency: 175.29 (SDR million) — Percent of Quota: 102.81. - Reserve position in Fund: 0.31 (SDR million) — Percent of Quota: 0.18. - Net cumulative allocation (SDR Department): 162.07 (SDR million) — Percent of Allocation: 100.00. - Holdings (SDR Department): 146.65 (SDR million) — Percent of Allocation: 90.49. - Outstanding Purchases and Loans: Extended Arrangements: 5.07 (SDR million) — Percent of Quota: 2.98. - Latest Financial Arrangements (type, approval date, expiration date, amount approved, amount drawn): - SBA 7/03/02 7/02/04 85.28 (SDR million) 10.66 (SDR million) - EFF 4/15/99 5/31/02 127.88 (SDR million) 127.88 (SDR million) - EFF 2/09/96 2/08/99 238.04 (SDR million) 202.52 (SDR million) - Projected Obligations to Fund (Expectations Basis) (SDR million; based on existing use of resources and present holdings of SDRs): - Forthcoming Principal 2010–2014: Principal 5.07 - Charges/Interest: 0.06 0.12 0.08 0.05 0.05 - Total: 0.06 0.12 5.16 0.05 0.05 - Exchange regime: "The Jordanian dinar is fully convertible and is officially pegged to the SDR. In practice, the authorities have an exchange rate regime which is pegged to the U.S. dollar since October 1995 at JD 1 = $1.41044." - Article IV Consultation: "The 2009 Article IV consultation was concluded by the Executive Board on May 4, 2009." ### IMF technical assistance to Jordan (selected chronology and topics) - Fiscal technical assistance highlights (dates and focus): - January–June 2002: Pension reform - January–September 2002: GST reform - November 2002: Macrofiscal capacity and treasury single account - February, October 2003: Revenue administration reform - August 2004–June 2005: Resident expert in macrofiscal management - February 2005: Distributional effects of replacing oil subsidies - February–March 2005: Revenue administration reform - April 2005: Fiscal ROSC - July–August 2009: Public financial management reform (with World Bank) - March 2010: Tax policy review - March–April 2010: Commitment control system (METAC) - Monetary and financial technical assistance highlights: - August–September 2003: Financial Sector Assessment Program (FSAP) - April–May 2008: Debt management strategy - November 2008: FSAP update - June 2010: Strengthening public debt management - July 2010: Implementation of BASEL II - Statistical technical assistance highlights: - January–February 2002: Report on the observation of standards and codes—data module - December 2006: National accounts statistics - October–November 2006: SDDS assessment mission - February 2009: National accounts statistics (METAC) - December 2009: Special data dissemination standard assessment - Other engagements: - March 2008: Financial programming workshop - April 2010: Outreach mission—Visit of Managing Director and IMF Middle East Youth Dialog (EXR) - July 2010: Central Bank of Jordan–IMF research workshop (MCD) ### World Bank Group engagement and strategy (selected points) - As of July 8, 2010: The World Bank has approved 66 loans, 15 credits and five grants for a total of US$3,007.2 million. - Of the 66 loans, nine are budget support operations (Development Policy Loans (DPLs)). The most recent DPL for US$300 million was approved on November 19, 2009. - Current portfolio at that date: seven active investment projects and one guarantee operation for a total net commitment of US$288.5 million with an undisbursed balance of US$164.9 million. - CAS FY 2006–10 organized in four cross-sectoral clusters: - Strengthening the investment environment and building human resources for value-added, skill-intensive, and knowledge-based economy. - Supporting local development through increased access to services and economic opportunities. - Reforming social assistance and expanding inclusion. - Restructuring public expenditures and supporting public sector reform. - CPS FY 2011–14 overarching goal: "strengthening resilience for sustainable growth." - Proposed CPS strategic clusters: - Cluster 1: Greater efficiency and capacity of public sector. - Cluster 2: Enabling environment for private sector development. - Cluster 3: Enhanced human development and social stability. - World Bank FY2006–10 approvals: six investment loans, one supplemental, and one development policy loan for a total commitment amount of US$505.5 million. ### IMF—World Bank collaboration (JMAP implementation, FY2011–12) (selected schedule and items) - Main IMF work program entries: - Staff visit (budget discussion): December 2010 - Article IV consultation: May 2011 - Main World Bank program entries and timing: - Country Partnership Strategy (CPS) — Main Mission: September 2010; Board Discussion: March 2011 - Development Poverty Review – Growth and Competitiveness — Initiation mission in Summer 2011; Implementation throughout FY2011–12 - PFM TA (MTEF and budget preparation) — Initiation mission in Summer 2011; Implementation throughout FY2011–12 - Public Sector Reform TA — Fall 2011; Implementation throughout FY2011–12 - Sector work on the social safety net, energy, and PPP framework — Implementation throughout FY2012 - Bank and Fund bilateral requests and missions: - Fund request to Bank: Information sharing (ongoing) - Bank request to Fund: Development Policy Loan (will require input from Fund) — Scoping mission August 1, 2010; Additional missions Fall 2010 *Prepared by the Middle East and Central Asia Department (In consultation with other departments), August 27, 2010.* ### Annex III. Jordan: Statistical Issues ### Annex III. Jordan: Statistical Issues (As of July 30, 2010) ### I. Assessment of Data Adequacy for Surveillance - General: Data provision is adequate for surveillance purposes. - National Accounts: - Progress made toward enhancing the quality of national accounts statistics during the past few years. - Continued improvement requires a strong commitment and allocation of additional resources. - Additional efforts needed to improve quarterly estimates of the national accounts from the production approach and the annual estimates from the expenditure approach, as well as the coverage of informal activities. - Discrepancies between the industrial production index and the gross value added estimates for the manufacturing sector need to be addressed. - New surveys have been implemented to improve the compilation and timeliness of wages and earnings data. - Government finance: - Authorities have initiated work aimed at developing a financial balance sheet in accordance with the classification and sectorization systems recommended by the GFSM 2001. - Objective: further strengthen the stock and flow data that serve as a source for compiling government finance statistics and for verification of internal and intersectoral consistency. - Monetary statistics: - The Central Bank of Jordan (CBJ) Research Department proposed establishment of an interagency group to monitor intersectoral consistency of macroeconomic statistics (informed to the 2003 data ROSC Update mission). - Consistency checks between government finance statistics and monetary statistics are not yet conducted. - Timeliness of reporting monetary data for publication in International Financial Statistics is satisfactory. - Little progress achieved in implementing the Standardized Report Forms for reporting monetary data to the Fund. - Balance of payments: - CBJ has adopted the methodology of the fifth edition of the Balance of Payments Manual (BPM5) for compilation of the BOP statistics and the international investment position (IIP), and has disseminated data in the BPM5 format. - Implementation of surveys in the area of services is important for further improving the quality of the BOP statistics. - In mid-2010 the CBJ revised the historical BOP data (2000–08) to address the sharp increase in errors and omissions. ### II. Data Standards and Quality - Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since January 2010. - Uses SDDS flexibility option on the periodicity and timeliness of the labor market wages/earnings data. - Data ROSC update was published in February 2004. - Common Indicators Required For Surveillance (as of July 30, 2010) — selected entries (date of latest observation / date received / frequency of data / frequency of reporting / data quality—methodological soundness / data quality—accuracy and reliability): - Exchange rates: July 2010 / July 2010 / W / M / W / [no methodological/accuracy flags shown] - International reserve assets and reserve liabilities of the monetary authorities 1/: June 210 / June 2010 / W / M / M - Reserve/base money: May 2010 / May 2010 / M / M / M - Broad money: May 2010 / May 2010 / M / M / M - Central bank balance sheet: May 2010 / May 2010 / M / M / M - Consolidated balance sheet of the banking system: May 2010 / May 2010 / M / M / M - Interest rates 2/: July 2010 / July 2010 / W / M / W - Consumer price index: June 2010 / July 2010 / M / M / M — methodological soundness: O, LO, O, O ; accuracy and reliability: O, LO, O, O, O - Revenue, expenditure, balance and composition of financing 3/—general government 4/: 2008 / July 2010 / A / A / A - Revenue, expenditure, balance and composition of financing 3/—central government: May 2010 / July 2010 / M / M / M — methodological soundness: O, LO, LNO, O ; accuracy and reliability: O, O, O, O, O, NA - Stocks of central government and central government-guaranteed debt 5/: May 2008 / July 2010 / M / M / M - External current account balance: Q1 2010 / June 2010 / Q / Q / Q - Exports and imports of goods and services: May 2010 / July 2010 / M / M / Q — methodological soundness: LNO, LNO, LNO, LO ; accuracy and reliability: LNO, LO, LO, LO, LO - GDP/GNP: Q1 2010 / July 2010 / Q / Q / Q — methodological soundness: O, LO, O, O ; accuracy and reliability: O, LO, O, LO, LO - Gross external debt: May 2010 / July 2010 / M / M / M - International Investment Position 6/: 2008 / June 2010 / A / A / M (Footnotes from the table retained in source: 1/–6/, definitions of frequencies, and data quality flags O, LO, LNO, NO, NA.) ### IMF Public Information Notice (PIN) — Executive Board Concludes 2010 Article IV Consultation with Jordan (September 17, 2010) - Background economic developments and staff observations: - Real GDP growth fell from almost 7⅓ percent in 2008 to 2⅓ percent in 2009, mainly due to weaker activity in the finance, manufacturing, and trade sectors. - Headline inflation declined steadily through 2009 to near zero; core inflation remained stable at around 3 percent year on year by December 2009. - For 2010 headline inflation is projected to increase in line with imported commodity (energy and food) prices. - Current account deficit narrowed to 5 percent of GDP in 2009 (from 9½ percent in 2008), supported by strong tourism receipts and remittances and lower oil imports. - Official foreign reserves reached a record high of US$11 billion (equivalent to eight months of imports) by end-2009. - 2009 overall fiscal deficit widened by more than 3 percentage points of GDP, reaching 8½ percent of GDP in 2009; debt-to-GDP ratio rose to about 56 percent at end-2009. - Policy responses and outcomes: - Government fiscal consolidation measures for 2010 expected to narrow the overall deficit by more than 2 percent of GDP relative to 2009, reaching about 6 percent of GDP. - Consolidation to come mainly from the spending side: prioritization of capital spending and savings in current expenditures, including containment of the public sector wage bill and reductions in operating costs of public institutions and independent agencies. - Implementation of fiscal plans would result in a modest uptick in the public debt-to-GDP ratio but remain below the 60-percent legislated debt ceiling. - CBJ measures since 2008: full guarantee of bank deposits (extended until end-2010), cessation of liquidity-withdrawal operations in October 2008, and gradual reduction of reserve requirements and policy interest rates between November 2008 and February 2010. - Interest rate differential against the U.S. Federal Reserve’s funds rate reduced from 450 to 200 basis points. - Private sector credit growth turned positive at end-2009, reaching 5½ percent year on year in May 2010. - Accumulation of excess liquidity in the overnight window of the CBJ reversed following February 2010 cuts in the policy rate. - Jordanian dinar real effective exchange rate appreciated by 2½ percent between December 2008 and June 2010, mainly due to strengthening of the U.S. dollar against major currencies. - Banking sector soundness: - Loan/deposit ratio near 75 percent. - NPL ratios increased modestly to 6⅔ percent of outstanding loans at end-2009. - CBJ actions to enhance regulation and supervision include: - Introduction of Basle II (Pillars I and III) regulations in 2008 and ongoing efforts to ensure compliance with Pillar II guidelines for risk management. - Requiring semi-annual stress testing of banks, focusing on credit risk and concentration risk. - Introduction of an automated data collection system to improve off-site monitoring. - Enhanced cross-border bank regulation through supervision and on-site inspections of international branches and subsidiaries. - Improvements to its early warning system. - Executive Board Assessment and staff recommendations: - Economic activity expected to pick up modestly in 2010 and accelerate over the medium term as growth revives in key regional trading partners. - Staff supports fiscal consolidation envisaged in the 2010 Budget; decline in the overall deficit of about 2 percent of GDP in 2010 is judged appropriate and achievable. - Authorities’ medium-term objective: reduce the fiscal deficit to about 3 percent of GDP over the medium term; staff notes that reducing the overall deficit by about 3 percent of GDP over the next five years is feasible and would lead to a further 5 percentage point decline in Jordan’s debt-to-GDP ratio. - Recommended fiscal priorities: removing remaining tax exemptions on commodities, ongoing prioritization of capital spending, continued moderation of growth in the public sector wage bill, and efficiency gains in revenue-raising and expenditure. - Structural reform priorities: further improvement in the business environment, additional liberalization of energy and water sectors, implementation of civil service reforms, strengthening tax administration, reenergizing public sector financial management reforms. - For planned medium-term large-scale infrastructure development financed largely by PPPs, staff recommends putting in place a strong framework to minimize the risk of contingent liabilities stemming from PPPs. - Monetary policy: given growing turnaround in private sector credit flows and some evidence of emerging inflationary pressures, staff recommends a pause on further monetary stimulus and readiness to tighten monetary conditions as appropriate. - Fixed exchange rate regime: the dinar’s peg to the U.S. dollar remains important for financial stability; staff analysis indicates the dinar remains broadly aligned with medium-term fundamentals. - Bank regulation and supervision should remain vigilant to prevent excessive risk taking given potential for higher NPLs and provisioning as output growth likely to remain below trend until 2012. - Importance of clear, timely and proactive communication of policy intentions for debt reduction and debt management; communication of the government’s medium-term debt management strategy and enhancements to primary and secondary markets for public debt emphasized. - Statistical system: progress noted, including January 2010 subscription to the SDDS, but data inadequacies persist—particularly in the areas of the expenditure side of the national accounts, and in employment and wage statistics; staff urges greater progress in resolving these inadequacies. ### Jordan: Selected Economic Indicators (Prel. 2007–2008; 2009; Proj. 2010) — key series - Real sector (Annual percentage changes) - Real GDP at market prices: 8.9 7.2 (2008) | 2.3 (2009) | 3.4 (2010) - Consumer price index (average): 5.4 14.9 (2008) | -0.7 (2009) | 5.7 (2010) - Unemployment rate (percent): 13.1 12.7 (2008) | 13.0 (2009) | ... - Gross domestic investment (in percent of GDP): 30.6 24.9 (2008) | 23.0 (2009) | 21.4 (2010) - Gross national savings (in percent of GDP): 13.0 15.3 (2008) | 18.0 (2009) | 14.4 (2010) - Public finance (In percent of GDP) - Central government revenue and grants: 32.5 29.1 (2008) | 25.1 (2009) | 23.3 (2010) - Of which: grants: 2.8 4.5 (2008) | 1.9 (2009) | 1.6 (2010) - Central government expenditure and net lending1: 38.3 34.5 (2008) | 33.6 (2009) | 29.5 (2010) - Central government overall fiscal balance including grants: -5.8 -5.4 (2008) | -8.5 (2009) | -6.2 (2010) - Government and government-guaranteed net debt: 68.0 52.9 (2008) | 55.8 (2009) | 57.3 (2010) - Balance of payments (In percent of GDP) - Current account balance (after grants), of which: -17.6 -9.6 (2008) | -5.0 (2009) | -7.0 (2010) - Exports, f.o.b. ($ billions): 5.7 7.9 (2008) | 6.4 (2009) | 6.6 (2010) - Imports, f.o.b. ($ billions): 12.2 15.1 (2008) | 12.5 (2009) | 13.5 (2010) - Gross usable international reserves ($ millions)2: 6,865 7,732 (2008) | 11,093 (2009) | 10,705 (2010) - In months of prospective import cover: 4.7 6.2 (2008) | 8.1 (2009) | 7.4 (2010) - Relative to short-term debt by remaining maturity: 7.9 11.6 (2008) | 18.4 (2009) | 15.7 (2010) - Money and credit (Annual percentage changes) - Broad money: 10.6 17.3 (2008) | 9.3 (2009) | 9.9 (2010) - Credit to private sector: 15.3 14.8 (2008) | 0.5 (2009) | 7.9 (2010) - Exchange rates - U.S. dollar per Jordanian dinar (end-period): 1.4 1.4 (2008) | 1.4 (2009) | 1.4 (2010) - Real effective exchange rate (percent change)3: -3.8 12.2 (2008) | -4.4 (2009) | ... Sources: Jordanian authorities; and IMF staff estimates and projections. *Annex III. Jordan: Statistical Issues (As of July 30, 2010) — IMF staff document excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10297.pdf_