## _cr12343 ## Source details **Canonical URL:** [_cr12343](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12343.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12343.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12343.pdf.json) --- ### I. Background and recent economic developments - Growth averaged about 6 percent over the last decade before shocks. - External vulnerabilities increased mainly from the energy sector and dependence on cheap gas from Egypt since 2005. - 2011 shocks and impacts: - Repeated sabotage of the Arab Gas Pipeline reduced average daily flows of natural gas from Egypt. - External current account deficit (including grants) widened to 12.0 percent of GDP in 2011 from 7.1 percent in 2010. - Primary fiscal deficit (excluding grants) rose to 9.6 percent of GDP in 2011 from 5.6 percent in 2010. - NEPCO losses rose to 4.9 percent of GDP in 2011 from 0.8 percent of GDP in 2010. - Gross public and publicly guaranteed debt increased to 70.7 percent of GDP at end-2011. - Early- to mid-2012 developments: - CBJ reserves dropped to $6.5 billion at mid-July—a decline by almost 40 percent since end-2011. - CBJ raised overnight interest rates by 50 bps in February and again by 50 bps in May to 3.25 percent. - Nonperforming loans stabilized at 8½ percent of total loans in 2011. - Social context: - Unemployment averaged 13 percent in the last decade; youth unemployment over 30 percent. - Poverty estimated at about 13.3 percent (Household and Expenditure Survey of 2008). ### II. Program objectives and policy trade-offs - Program purpose: - Correct fiscal and external imbalances and support the exchange rate peg. - Provide framework for gradual fiscal consolidation without jeopardizing growth and social stability. - Fund support to maintain reserves at a safe level until alternative energy sources are in place (could take up to three years). - Policy trade-off: - Ambitious fiscal consolidation needed to reduce financing needs, lower public debt, ease reserve pressures vs. risk of recession and social unrest. - Main program objectives: - Achieve fiscal sustainability: reduce central government and NEPCO deficits; diversify energy sources; move electricity generation to cost-recovery levels. - Strengthen growth: accompany fiscal adjustment with growth-enhancing and employment-generating policies. - Mobilize additional external financing: continued high grants and official support, gradual move toward market financing. ### III. Main policy measures in the program - Fiscal and energy measures: - Reinstate pass-through of international fuel prices; convert general subsidies to targeted ones. - Comprehensive reform of electricity tariff structure for NEPCO (World Bank guided). - Diversify energy supply (including LNG terminal in Aqaba as a main option). - Mobilize revenue by reducing tax exemptions, improving tax administration, increasing taxes, and rationalizing expenditure (including subsidies). - Monetary and exchange rate policy: - Maintain peg to the U.S. dollar. - Use Fund resources and other financial support to provide time for adjustment. - Quantitative targets to address external vulnerabilities and halt reserve pressures. - Structural reforms: - Improve business environment, promote trade, improve transparency and accountability of industrial policies, and foster private sector-led innovation. ### IV. Macro framework, assumptions, and projections - Egypt gas shock assumptions: - 2012 gas inflows from Egypt assumed at about half the 2011 level. - 2013–14 gas inflows assumed to remain at low levels—only marginally higher than in 2012. - New energy source assumed by mid-2015. - Reserves kept at about four months of imports during program period, gradually increasing in outer years. - Growth and inflation: - Real GDP growth forecast at 3 percent for 2012; medium-term growth projected to reach 4.5 percent. - CPI rose by 4.1 percent year-on-year in May 2012; projected to pick up to 4.4 percent by end-year 2012. - External position: - Current account deficit (including grants) projected at 14.1 percent of GDP in 2012. - Current account deficit expected to fall to about four percent of GDP by 2017 assuming alternative energy by mid-2015 and structural reforms. - Selected medium-term projections (percent unless noted): - Real GDP growth: 2009 5.5; 2010 2.3; 2011 2.6; 2012 3.0; 2013 3.5; 2014 4.0; 2015 4.5; 2016 4.5; 2017 4.5 - Central government balance (with measures): 2009 -8.9; 2010 -5.6; 2011 -5.7; 2012 -6.5; 2013 -5.5; 2014 -4.5; 2015 -3.5; 2016 -3.0; 2017 -3.0 - Current account balance (including grants): 2009 -4.9; 2010 -7.1; 2011 -12.0; 2012 -14.1; 2013 -9.9; 2014 -7.7; 2015 -5.1; 2016 -4.2; 2017 -4.3 - Total natural gas flows from Egypt (million cubic metres): 2009 1831.2; 2010 2332.7; 2011 806.2; 2012 448.5; 2013 509.6; 2014 509.6; 2015 509.6; 2016 509.6; 2017 509.6 - Oil price ($ per barrel): 2009 61.8; 2010 79.0; 2011 104.0; 2012 101.8; 2013 94.2; 2014 91.6; 2015 90.2; 2016 88.2; 2017 87.6 ### V. Fiscal vulnerabilities, measures taken, and required reforms - Revenue-side findings: - Tax revenue declined by five percent of GDP since 2007. - Main contributors: tax policy choices and weak administration, exemptions to stimulate investment, reduced sales tax on socially important products. - Technical assistance pointed to poor taxpayer compliance, quickly growing tax arrears, and unproductive tax audits. - Policy direction: focus consolidation on property and consumption taxes rather than capital spending. - 2012 fiscal pressures and measures: - Additional spending of about 4 percent of GDP in 2012 from higher fuel subsidy (2.5 percent of GDP), higher wage bill (0.6 percent), higher pensions and health (0.3 percent), and Syrian refugee-related spending (0.5 percent). - Authorities took measures amounting to more than 3 percent of GDP in 2012 (742 JD million; 3.34 percent of GDP). - Summary of 2012 measures (In JD Million; In Percent of GDP): - Total measures taken: 742; 3.34 - Revenue measures total: 90; 0.40 - Increase resident fees for non-Jordanians: 70; 0.03 - Increase in money transfer fees: 100; 0.04 - Increase tax on cars: 200; 0.09 - Introduce sales tax on mobile phones and air conditions: 80; 0.04 - Remove exemptions on agricultural usage items: 150; 0.07 - Increase tax on air tickets: 200; 0.09 - Increase tax on alcoholic and tobacco products: 100; 0.04 - Expenditure measures total: 652; 2.93 - Capital spending cuts: 244; 1.10 - Projects by Prime Ministry: 250; 0.11 - Other capital expenditures: 169; 0.76 - Land acquisition for mega projects: 500; 0.22 - Step increases in domestic fuel prices: 188; 0.85 - Gasoline 95 (26%): 111; 0.50 - Gasoline 90 (13%): 48; 0.22 - Diesel and kerosene (6%) 1/: 29; 0.13 - Other current expenditure cuts: 220; 0.99 - Military expenditures: 150; 0.67 - Subsidies to independent institutions: 30; 0.13 - Operational expenditure (15%): 300; 0.13 - Other current expenditure: 100; 0.04 - Note: 1/ Increasing diesel and kerosene prices is the only measure that is not yet taken in 2012. - Fiscal outlook: - Authorities plan to reduce the primary deficit, excluding grants, by almost 2 percent of GDP to 6.3 percent of GDP in 2013. - Mining royalty change effective March 2013 yields annual revenue gain of 0.3 percent of GDP. - Possible 2013 revenue measures: increase excise rates on fuel products (0.4 percent of GDP); restore standard sales tax rate on specific goods (0.2 percent of GDP); raise nontax revenue from licensing agreements (0.1 percent of GDP). - Public financial management (PFM) weaknesses and actions: - Accounts payable stood at 3.3 percent of GDP at end-2011; statistical discrepancy of 0.5 percent of GDP in Q1 2012. - Program measures: monthly reports on pending checks and trust account balances; indicative target on stock of accounts payable; accelerate rollout of GFMIS and Treasury Single Account. - Structural benchmark: introduce commitment control system through GFMIS by January 2013. ### VI. NEPCO losses, energy policy, and scenarios - NEPCO operating losses and targets: - NEPCO losses: 2010 -0.8 percent of GDP; 2011 -4.9 percent of GDP; projected 2012 -5.3 percent of GDP. - NEPCO financing needs expected to rise to 7.1 percent of GDP in 2012 (including arrears repayment of 1.9 percent of GDP). - Authorities’ medium-term NEPCO operating loss targets: 2013 3.8 percent of GDP; 2014 2.7 percent of GDP; 2015 1.8 percent of GDP; reach cost recovery in mid-2016. - Box 2 energy sensitivities and scenarios: - Energy imports rose from 9 percent of GDP in 2003 to 19 percent of GDP in 2011. - Fuel price subsidy for 2012 would have been 3.7 percent of GDP without measures; with measures expected to be 2.8 percent of GDP in 2012 and 0.7 percent of GDP in 2013 (WEO prices). - Sensitivity: at international price level of 100$/barrel, a $10 per barrel increase would currently increase the subsidy by around JD 450 million (2 percent of GDP). - Gas flow / NEPCO loss scenarios (selected): - Gas flows from Egypt (million cubic feet per day): 50; 100; 150; 200; 250 - Equivalent million cubic meters per year: 517; 1,034; 1,551; 2,068; 2,585 - NEPCO losses (annualized, JD millions): 1,088; 872; 660; 451; 268 - Energy import bill (USD millions): 5,485; 5,228; 4,970; 4,713; 4,456 - Medium-term diversification plans: - Tender to build LNG terminal in Aqaba with estimated investment of $100 million (construction ~two years); LNG availability could decrease NEPCO costs by around 20 percent in the medium term. - Potential to expand gas extraction from Risha and start shale oil production. ### VII. External financing, SBA design, and IMF access - External financing needs (to maintain reserves ~ four months of imports, assuming budgetary grants 3–4 percent of GDP): - $0.8 billion in 2012 - $1.1 billion in 2013 - $1.1 billion in 2014 - $0.9 billion in 2015 - Stand-By Arrangement (SBA) request: - Duration: 36 months. - Proposed access: 800 percent of quota (SDR 1,364 million). - Frontloading phasing proposed: - 300 percent of quota (SDR 511.5 million or about $763 million) disbursed in the first year. - Additional 185 percent of quota in 2013. - 180 percent in 2014. - 135 percent in 2015. - Proposed IMF phasing (selected exact disbursements): - Board approval (August 3, 2012): 255.750 million SDR (384 million U.S. Dollar; 150 percent of quota). - First Review (December 3, 2012): 255.750 million SDR (384 million U.S. Dollar; 150 percent of quota). - Second Review (March 3, 2013): 85.250 million SDR (128 million U.S. Dollar; 50 percent of quota). - Total under Table 6: 1364 million SDR; 2046 million U.S. Dollar; 800 percent of quota. - Capacity to repay (selected metrics): - With proposed access, Fund credit outstanding would reach a maximum of 5.1 percent of GDP. - Fund credit outstanding would reach 21.5 percent of gross reserves in 2015. - Debt service to the Fund would rise to 3.4 percent of exports of goods and nonfactor services in 2017. - Moody’s and Standards & Poor’s maintained sovereign ratings of Ba2 and BB, respectively, with negative outlook. ### VIII. Debt trajectory, stress scenarios, and DSA highlights - Public debt projected to reach 83.9 percent of GDP by end-2014; decline to 78.6 percent of GDP in 2017 under program. - Annex 1 baseline external debt (percent of GDP): 2007 43.3; 2008 23.4; 2009 22.9; 2010 24.5; 2011 21.9; 2012 23.3; 2013 23.2; 2014 23.0; 2015 21.6; 2016 19.5; 2017 17.5. - Stress scenarios (selected outcomes): - Scenario 1 (tourism, remittances and FDI shock similar to 2011): financing shortfall about $4.1 billion; import coverage could fall to 0.6 month of imports in 2013 and 0.4 months in 2014 if reserves used. - Scenario 2 (typical emerging market shock): financing shortfall about $10.9 billion; if authorities borrow to preserve reserves, debt ratio could reach 78.4 percent at end-2013. - Fuel price sensitivity: 20 percent increase in fuel prices in 2012–2013 would raise peak debt ratio to 38.8 percent of GDP in 2014 (external debt context in DSA tables). ### IX. Risks, mitigation, and conditionality - Main risks: - Energy sector delays or higher-than-projected oil prices (largest risk). - Domestic political risks affecting implementation of politically sensitive measures. - Regional/global deterioration affecting tourism, remittances, FDI, and refugee-related spending. - Risk mitigation: - Strong upfront actions in 2012 (energy price increases) to restore confidence. - Technical assistance and monitoring via quarterly reviews; structural benchmarks (income tax reform submission by end-September 2012; medium-term electricity/energy strategy by end-September 2012; diesel step increase by first review; commitment control system by January 2013). - Engagement with social and political stakeholders to build consensus. - Program conditionality (selected): - Quantitative performance criteria: ceiling on primary fiscal deficit (excluding grants); ceiling on NEPCO borrowing; floor on CBJ net international reserves. - Continuous performance criterion: non-accumulation of external debt payment arrears. - Indicative targets: ceiling on stock of accounts payable (central government); ceiling on stock of NEPCO arrears; ceiling on net domestic assets of the CBJ. ### X. Tax administration, PFM, banking supervision, and structural reforms - Tax administration reforms and timelines: - Submit revised income tax law to parliament in September 2012 (structural benchmark). - Implement audit strategy by end-September 2012; update taxpayer register; increase filing compliance in Large and Medium/Small Taxpayer Offices to 100 and 80 percent, respectively, by end-2012; implement action plan to reduce tax arrears (stock estimated at JD 1.7 billion). - PFM priorities: - Improve cash management, introduce commitment control through GFMIS by January 2013, generate monthly reports on pending checks and trust account liabilities, accelerate rollout of GFMIS and TSA. - Banking supervision and financial sector: - NPL ratio stabilized at 8½ percent in 2011; provisioning 52 percent of NPLs; capital adequacy very strong. - New credit bureau expected to be licensed by end-2012. - Automated bank data collection system expected in 2013; develop early warning models; strengthen governance code, customer protection rules, and fit and proper criteria. ### XI. Staff appraisal — key recommendations - Immediate priorities: - Lower fiscal and external imbalances; safeguard the currency peg; establish pass-through of international prices while cushioning effects on the poor. - Continue commitment to adjustment and policy implementation; increase revenue via tax changes and strengthen tax administration. - Energy policies to bring NEPCO back to cost recovery via tariff increases and diversify energy sources. - Improve public financial management, notably cash management and coordination of fiscal and monetary policies. - Conditionality and monitoring to ensure program success: - Quarterly reviews, performance criteria, indicative targets, and structural benchmarks to monitor implementation and allow remedial action if slippages occur. *Source: IMF staff report (content unit _cr12343).* ### 1. Main Recommendations of the Ex Post Assessment ........................................................7 ### 1. Main Recommendations of the Ex Post Assessment ........................................................7 ### I. Background and Recent Economic Developments - External vulnerabilities increased in the last decade, stemming mainly from the energy sector; growth averaged about 6 percent during that period. - Economy became dependent on imports of cheap gas from Egypt; low regulated electricity tariffs supported by gas from Egypt since 2005 contributed to electrification but created an external vulnerability. - 2011 shocks: - Repeated sabotage of the Arab Gas Pipeline reduced average daily flows of natural gas from Egypt. - Required increase in imports of expensive fuel products for electricity generation while oil prices were high. - Regional tensions adversely affected tourism, remittances, and FDI. - Growth slowed, investor confidence weakened, and the external current account deficit (including grants) widened to 12 percent of GDP in 2011 from 7 percent in 2010. - Fiscal response in 2011: - Fiscal consolidation in 2010 reduced primary fiscal deficit (excluding grants) to 5.6 percent of GDP from 8.6 percent in 2009. - In 2011 social concerns led to increased commodity subsidies, social spending, and wages; primary fiscal deficit (excluding grants) rose to 9.6 percent of GDP in 2011. - Increase financed in large part by budgetary grants from Saudi Arabia of 5 percent of GDP. - NEPCO losses: - NEPCO losses rose to 4.9 percent of GDP in 2011 from 0.8 percent of GDP in 2010. - NEPCO financed losses via central government guaranteed bonds, borrowings from domestic banks, and arrears to suppliers of 1.9 percent of GDP. - Gross public and publicly guaranteed debt increased to 70.7 percent of GDP at end-2011. - 2012 developments: - 2012 budget envisaged adjustment in primary fiscal deficit (excluding grants) of more than 3 percent of GDP and electricity tariff increases. - Tariff increase in February reversed due to social tensions and technical billing mistakes; other measures put on hold until May. - Further sabotage of the gas pipeline in February, April, and July reduced gas inflows, increasing expensive fuel imports and pressuring reserves. - CBJ reserves dropped to $6.5 billion at mid-July—a decline by almost 40 percent since end-2011. - CBJ raised overnight interest rates by 50 bps in February and again by 50 bps in May to 3.25 percent. - Nonperforming loans stabilized at 8½ percent of total loans in 2011; private sector credit declined in percent of GDP in the first five months of 2012. - Social context: - Unemployment averaged 13 percent in the last decade, with youth unemployment over 30 percent. - Poverty estimated at about 13.3 percent (Jordan’s Poverty Analysis Report, based on the Household and Expenditure Survey of 2008). - Political reforms: constitution revised in late 2011; new election law approved July 2012; frequent changes in government since end-2010 (three new governments and two new central bank governors; prime minister resigned end-April 2012, six months after taking office). ### II. The Program: Objectives and Policy Trade-offs - Program purpose: - Correct fiscal and external imbalances and support the exchange rate peg. - Provide a framework for gradual fiscal consolidation without jeopardizing growth and social stability. - Fund support to maintain reserves at a safe level until alternative energy sources are in place (a process that could take up to three years). - Policy trade-off: - Need for ambitious fiscal consolidation to reduce public sector financing needs, lower public debt, ease reserve pressures, and secure fiscal viability versus risk of recession and social unrest. - New government from May communicated the difficult economic situation and implemented politically sensitive increases in fuel and electricity prices; further consolidation to follow over the medium term. - Staff urged a more ambitious adjustment; authorities considered the measures sufficient given political constraints and emphasized public inclusion to build consensus. - Main program objectives (in line with previous engagements): - Achieving fiscal sustainability: - Reduce deficits of the central government and NEPCO (and other loss-making public agencies) to return public debt to a sustainable path. - Diversify energy sources and move electricity generation to cost-recovery levels by establishing transparent and sustainable energy prices, pursued with World Bank assistance. - Redesign fiscal policies to reduce vulnerability to oil prices and dependence on grants, while providing targeted support to vulnerable populations. - Strengthening growth: - Large fiscal adjustment to be accompanied by growth-enhancing and employment-generating policies. - Mobilizing additional external financing: - Continued high grants and official support for investment projects, particularly from the Gulf Cooperation Council (GCC), including energy sector support. - Over the longer term, reliance on external grants expected to be reduced through more frequent market financing following November 2010 sovereign international capital markets access. ### III. Main Policy Measures in the Program - Package overview: - Fiscal and energy policies to carry the burden of adjustment: - Increase energy prices (fuel and electricity) by reinstating pass-through and converting general subsidies to targeted ones. - Comprehensive reform of electricity tariff structure for NEPCO, guided by the World Bank. - Diversify energy supply. - Medium-term consolidation supported mostly by boosting revenue through reducing tax exemptions and improving tax administration, increasing taxes, and rationalizing expenditure (including subsidies). - Objective to reduce aggregate demand, improve current account viability, lower debt burden, and reduce Jordan’s financial risk premium. - Monetary and exchange rate policy: - Continue to maintain the peg to the U.S. dollar. - Access to Fund resources and other financial support to provide time for fiscal and external adjustment. - Quantitative targets in the arrangement to address external vulnerabilities, halt reserve pressures, and create room for private sector credit. - Structural reforms: - Improve the business environment, promote trade, improve transparency and accountability of industrial policies, and foster private sector-led innovation. ### IV. Macro Framework and Assumptions - Egypt gas shock incorporated: - Framework assumes 2012 gas inflows from Egypt at about half the level realized in 2011. - Over 2013–14, gas inflows assumed to remain at low levels—only marginally higher than in 2012. - New energy source assumed to come on stream by mid-2015 (possibilities include importing liquefied natural gas from Qatar through a terminal in Aqaba, which could be completed within two years). - Framework and debt sustainability analyses assume implementation of fiscal measures and a Fund program. - Reserves would be kept at about four months of imports during the program period and gradually increase in outer years. - Growth forecasts: - Real GDP growth was 3 percent year-on-year in the first quarter of 2012 and is forecast at 3 percent for the whole year. - Over the medium term, growth projected to reach 4.5 percent, reflecting stronger investor confidence, increased FDI inflows (moderate in percent of GDP relative to 2004–11 averages), increased political certainty after end-2012 parliamentary election, improved external environment, and structural reforms. - Inflation: - CPI rose by 4.1 percent year-on-year in May 2012. - CPI inflation projected to pick up to 4.4 percent by end-year due to increases in domestic fuel prices and electricity tariffs. - Medium-term downward trend expected with sustained fiscal consolidation and moderation in international food and fuel prices. - External position: - Current account under intense pressure in first half of 2012, mostly from imports of expensive fuel for electricity generation. - For the whole year, current account deficit (including grants) projected at 14.1 percent of GDP, about 2 percent of GDP higher than in 2011. - Framework assumes a large turnaround in the current account in 2013 with easing of international fuel and food prices and strong export growth. - Emergence of alternative energy sources by mid-2015, continued growth in remittances and travel receipts, and structural reforms are expected to reduce current account deficit to about four percent of GDP by 2017. ### V. Key Recommendations and Priorities (Summary of Previous Engagements and Program Emphases) - Reduce dependence of fiscal policy on grants and energy prices; reform administered fuel prices and better target subsidies; strengthen social safety net. - Consolidate fiscal sector by: - Rationalizing the tax system, - Reducing current expenditure, - More rigorous assessment of capital expenditure plans. - Improve business environment to reduce cost of doing business. - Strengthen growth through policies that are growth-enhancing and employment-generating to accompany fiscal adjustment. - Mobilize additional external financing, particularly official support for investment projects (including energy), and move toward more frequent market financing. *Source: _cr12343 - 1. Main Recommendations of the Ex Post Assessment ........................................................7* ### 13. Staff believes that fiscal vulnerabilities are large. Over the last decade, fiscal ### 13. Staff believes that fiscal vulnerabilities are large. ### Fiscal vulnerabilities and revenue-side findings - Over the last decade, fiscal policies have been mostly procyclical and dependent on the availability of foreign financing. - Tax revenue declined by five percent of GDP since 2007. - Main contributors to lower revenue: tax policy choices and weak administration; exemptions introduced to stimulate foreign investment and subsidize specific sectors; reduced sales tax rate on socially important products. - Indirect tax cuts in 2008 and additional cuts as part of the 2009 fiscal stimulus were not reversed when prices fell. - Recent technical assistance pointed to poor taxpayer compliance and weaknesses in income tax administration core functions: low filing compliance, quickly growing tax arrears, and unproductive tax audits. - Policy direction: focus consolidation on property and consumption taxes rather than capital spending to have a less negative impact on growth. - Medium-term consideration: review taxes on capital gains and dividends, as well as property and interest income. ### Medium-Term Scenario (selected macro-fiscal projections and key statistics) - Real GDP growth (in percent): 2009 5.5; 2010 2.3; 2011 2.6; 2012 3.0; 2013 3.5; 2014 4.0; 2015 4.5; 2016 4.5; 2017 4.5 - GDP deflator (percent change): 2009 2.8; 2010 8.4; 2011 6.4; 2012 5.4; 2013 4.3; 2014 4.6; 2015 3.4; 2016 3.3; 2017 3.3 - Central government balance (with measures): 2009 -8.9; 2010 -5.6; 2011 -5.7; 2012 -6.5; 2013 -5.5; 2014 -4.5; 2015 -3.5; 2016 -3.0; 2017 -3.0 - Domestic revenue: 2009 24.5; 2010 22.7; 2011 20.5; 2012 21.0; 2013 21.9; 2014 21.9; 2015 21.9; 2016 21.9; 2017 21.9 - Tax: 2009 17.0; 2010 15.9; 2011 14.9; 2012 15.0; 2013 15.7; 2014 15.6; 2015 15.6; 2016 15.6; 2017 15.7 - Nontax: 2009 7.5; 2010 6.8; 2011 5.6; 2012 6.0; 2013 6.3; 2014 6.3; 2015 6.3; 2016 6.3; 2017 6.3 - Expenditures: 2009 35.4; 2010 30.4; 2011 33.2; 2012 31.7; 2013 31.3; 2014 31.1; 2015 31.0; 2016 30.8; 2017 30.6 - Measures to be identified: 2009 0.0; 2010 0.0; 2011 0.0; 2012 0.0; 2013 0.0; 2014 1.4; 2015 2.9; 2016 3.2; 2017 4.1 - NEPCO operational balance (percent of GDP): 2010 -0.8; 2011 -4.9; 2012 -5.3; 2013 -3.8; 2014 -2.7; 2015 -1.8; 2016 -0.7; 2017 0.0 - NEPCO cash balance (percent of GDP): 2011 -2.8; 2012 -7.1; 2013 -3.8; 2014 -2.7; 2015 -1.8; 2016 -0.7; 2017 0.0 - Central government balance (with measures) and NEPCO cash balance (combined): 2009 -8.5; 2010 -13.6; 2011 -9.2; 2012 -7.2; 2013 -5.3; 2014 -3.7; 2015 -3.0 - Current account balance (including grants): 2009 -4.9; 2010 -7.1; 2011 -12.0; 2012 -14.1; 2013 -9.9; 2014 -7.7; 2015 -5.1; 2016 -4.2; 2017 -4.3 - Grants: 2009 4.1; 2010 4.2; 2011 7.0; 2012 4.8; 2013 4.3; 2014 3.7; 2015 3.2; 2016 3.1; 2017 2.0 - of which, budgetary grants: 2009 2.0; 2010 2.1; 2011 5.9; 2012 4.2; 2013 3.8; 2014 3.3; 2015 2.7; 2016 2.7; 2017 1.5 - Memorandum items: - Total natural gas flows from Egypt (million cubic metres): 2009 1831.2; 2010 2332.7; 2011 806.2; 2012 448.5; 2013 509.6; 2014 509.6; 2015 509.6; 2016 509.6; 2017 509.6 - Total natural gas flows from other sources (million cubic metres): 2015 1627.9; 2016 3765.5; 2017 3765.5 - Oil price ($ per barrel): 2009 61.8; 2010 79.0; 2011 104.0; 2012 101.8; 2013 94.2; 2014 91.6; 2015 90.2; 2016 88.2; 2017 87.6 ### Expenditure-side findings and restructuring needs - Current spending as a ratio of GDP is broadly at the same level as in 2008, but composition shifted: wages and salaries plus transfers increased as a share of GDP. - Pensions cover about one third of the labor force at a cost of more than 4 percent of GDP; changes might be needed to increase coverage and make pensions sustainable. - Subsidies were temporarily reduced with a monthly fuel price adjustment in 2008 but increased again when pump prices were frozen. - Many small social assistance programs suffer waste and inefficiencies (only 15 percent of beneficiaries would be classified as poor under the national poverty line). - Capital spending has often been used as a residual to manage financing needs; World Bank notes capital spending on housing and social sectors has been increasing at the expense of infrastructure, health, and other growth-contributing sectors. - Staff urged restraint on mega-projects and to refrain from issuing debt guarantees for borrowing by public entities given the already high debt ratio. ### Cash management and public financial management weaknesses - Significant statistical discrepancy between above-the-line deficit and below-the-line deficit amounting to 0.5 percent of annual GDP in Q1 2012. - A large part of the discrepancy explained by expenditure being registered when checks are issued and buildup of accounts payable, which stood at 3.3 percent of GDP at end-2011. - Program measures: monthly reports on stocks of pending checks and trust account balances starting August; indicative target on stock of accounts payable; accelerate rollout of GFMIS and treasury single account. - Structural benchmark: introducing a commitment control system through GFMIS to register, report, and account for expenditure commitments against cash allocations by January 2013. ### Fiscal developments in 2012 and pressures - The 2012 budget projected a large adjustment versus 2011, but by mid-year this was no longer feasible. - Additional spending of about 4 percent of GDP in 2012 came from: - Much-higher-than-expected fuel subsidy reflecting oil price hike (2.5 percent of GDP) - Higher wage bill (0.6 percent of GDP) due to civil service reform - Higher pensions and health outlays (0.3 percent of GDP) - Spending on housing and medical assistance for Syrian refugees (0.5 percent of GDP) - Revenue projections overoptimistic by about one percent of GDP. - Without measures, the 2012 budget would have resulted in widening of the primary deficit (excluding grants) by 1.9 percent of GDP compared with 2011. ### Measures taken since May 2012 (scale and composition) - Authorities took measures amounting to more than 3 percent of GDP, mostly on the expenditure side. - Measures aim to reduce government financing needs while targeting parts of the population with higher ability to pay. - Revenue measures would keep revenue-to-GDP ratio broadly unchanged and focus on luxury goods and fees; tax amnesty (July–December 2012) not included in fiscal projections and viewed by staff as potentially undermining long-run revenue if repeated. - Expenditure measures include reinstating monthly price adjustment for gasoline 95, jet fuel, heavy fuel oil, and increasing pump price of gasoline 90 by 13 percent. - Outstanding structural benchmark: increase in price of diesel. - Summary table of measures (In JD Million; In Percent of GDP): - Total measures taken, of which: 742; 3.34 - Revenue: 90; 0.40 - Increase resident fees for non-Jordanians: 70; 0.03 - Increase in money transfer fees: 100; 0.04 - Increase tax on cars: 200; 0.09 - Introduce sales tax on mobile phones and air conditions: 80; 0.04 - Remove exemptions on agricultural usage items: 150; 0.07 - Increase tax on air tickets: 200; 0.09 - Increase tax on alcoholic and tobacco products: 100; 0.04 - Expenditure: 652; 2.93 - Capital spending cuts: 244; 1.10 - Projects by Prime Ministry: 250; 0.11 - Other capital expenditures: 169; 0.76 - Land acquisition for mega projects: 500; 0.22 - Step increases in domestic fuel prices: 188; 0.85 - Gasoline 95 (26%): 111; 0.50 - Gasoline 90 (13%): 48; 0.22 - Diesel and kerosene (6%) 1/: 29; 0.13 - Other current expenditure cuts: 220; 0.99 - Military expenditures: 150; 0.67 - Subsidies to independent institutions: 30; 0.13 - Operational expenditure (15%): 300; 0.13 - Other current expenditure: 100; 0.04 - Note: 1/ Increasing diesel and kerosene prices is the only measure that is not yet taken in 2012. ### Box 2 — Oil Prices, Gas Supply, and Energy Subsidies (key findings) - Energy imports increased from 9 percent of GDP in 2003 to 19 percent of GDP in 2011, largely due to higher fuel imports to generate electricity. - Fuel price subsidy: Jordan Petroleum Refinery Company sells fuel at administered prices; subsidy for 2012 would have amounted to 3.7 percent of GDP without any measures. - Electricity tariffs: NEPCO purchases gas from Egypt at below-market price; shock to gas supplies from Egypt in 2011 increased subsidy paid to the refinery and NEPCO’s mounting losses because electricity tariffs were not adjusted for more expensive fuel mix (producing electricity with fuel is about three time more expensive than gas from Egypt). - Government action: June 2012 reinstated monthly fuel price adjustment for less socially sensitive fuels; with planned diesel price increase and lower international prices, subsidy expected to be 2.8 percent of GDP in 2012; based on WEO prices, subsidy in 2013 estimated at 0.7 percent of GDP. - Sensitivity: at international price level of 100$/barrel, staff estimates an increase of $10 per barrel would currently increase the subsidy by around JD 450 million (2 percent of GDP). - Gas scenarios (selected figures): - Gas flows from Egypt (million cubic feet per day): 50, 100, 150, 200, 250 - Equivalent million cubic meters per year: 517; 1,034; 1,551; 2,068; 2,585 - NEPCO losses (annualized, JD millions): 1,088; 872; 660; 451; 268 - Energy import bill (USD millions): 5,485; 5,228; 4,970; 4,713; 4,456 - Assumption: Based on 3 percent growth of annual energy supply from 2011 onward. - Electricity tariffs short-run: cover NEPCO losses by increasing tariffs to cost recovery level; would require almost doubling current average tariff, so authorities plan gradual and equitable increases with protection for lowest-income decile. - Medium-term energy diversification plans: tender to build LNG terminal in Aqaba with estimated investment of $100 million (construction ~two years); LNG availability would decrease NEPCO costs by around 20 percent in the medium term; potential to expand gas extraction from Risha and start shale oil production. ### 2013 and beyond — planned adjustment and revenue measures - Authorities plan to reduce the primary deficit, excluding grants, by almost 2 percent of GDP to 6.3 percent of GDP in 2013. - Expected measures (~1 percent of GDP), assuming no further refugee spending and lower wage bill percent of GDP. - Already changed mining royalty from specific to ad valorem effective March 2013, yielding annual revenue gain of 0.3 percent of GDP. - Possible revenue measures discussed: - Increase excise rates on fuel products (0.4 percent of GDP) - Restore standard sales tax rate on specific goods (0.2 percent of GDP) - Raise nontax revenue from licensing agreements (0.1 percent of GDP) - Expenditure measures: gradually reinstate monthly fuel price adjustment for diesel and kerosene in 2013 and introduce targeted subsidies if oil price exceeds $100 per barrel (structural benchmark); speed depends on international prices. - Contingency: if oil prices higher than projected or other risks materialize, authorities ready to cut low-priority capital spending. ### Tax administration and reform agenda - Authorities focusing on enhancing tax administration strategy: making taxpayer register accurate, raising filing compliance, and bringing arrears under control. - Revised income tax law to be submitted to parliament in September 2012 (structural benchmark), not expected to yield much revenue in 2013 but could boost revenue substantially in 2014. - Staff welcomed features: lowering personal income tax threshold (not affecting lower-income households) and increasing top individual and corporate tax rates to align with peers. - Authorities decided not to set different corporate tax rates by company size to avoid incentives for tax avoidance. - Authorities will review tax system by end-2012 to explore further revenue options and will refrain from providing new tax incentives. ### Fiscal consolidation beyond central government and other public entities - Need to gradually reduce deficits of other public enterprises and own-budget agencies not included in central government’s budget; these entities ran deficits between zero and two percent of GDP in the last three years. - Water company incurs highest losses and authorities plan to reduce its deficit, possibly requiring water tariff increases. - World Bank to lead discussions with authorities on program for addressing financial problems of other public agencies within first year of the program. - Staff urged avoiding debt guarantees for public entity borrowing. ### Energy policy (concluding points) - Jordan has been at the forefront of energy sector reform and is a role model of public-private participation in the sector. - Jordan’s no energy subsidy policy—first implemented in 2008—encouraged efficient use of energy and should be gradually reinstated. - Gas supply shock provides strong rationale to expedite diversification of energy sources, including alternative energy. *Source: IMF staff report (content unit _cr12343).* ### 22. Recent tariff increases reduce NEPCO’s losses by almost 1 percent of GDP on an ### _cr12343 - 22. Recent tariff increases reduce NEPCO’s losses by almost 1 percent of GDP on an ### NEPCO operating losses, scenarios, and sensitivities - Recent tariff increases for some sectors (banks, the mining sector, and hotels) and large consumers were implemented in June; these reduce NEPCO’s losses by almost 1 percent of GDP on an annual basis (¶17). - NEPCO’s financing needs are expected to rise to 7.1 percent of GDP in 2012, taking into account the repayment of arrears incurred in 2011. - Projections assume gas inflows slightly above those in the first half of the year for the remainder of 2012; under this scenario: - NEPCO operating losses in the second semester would decline only marginally compared to the January–June level. - NEPCO operating losses amount to 5.3 percent of GDP for the full year 2012. - Alternative scenarios: - Further disruptions in gas supply are possible (downside). - Upside: a significant and sustained resumption of gas flows. Should gas flows resume at the maximum contracted levels in the near future, NEPCO’s annualized operating losses would narrow to 1.2 percent of GDP (see Box 2 for scenarios). ### Medium-term path to cost recovery and tariff strategy - Authorities’ targets for NEPCO operating losses: - 3.8 percent of GDP in 2013 - 2.7 percent of GDP in 2014 - 1.8 percent of GDP in 2015 - Reach cost recovery in mid-2016 - Policy actions to achieve targets: - Formulate and announce a medium-term plan to address Jordan’s energy issues, incorporating World Bank inputs (structural benchmark for September). The plan will include a specific timetable on measures for 2013 and beyond. - Short-term: increase tariffs. World Bank assessment: NEPCO is a well-run company and savings from efficiency gains are expected to be minor, implying little scope for efficiency gains. - Even with Egypt gas fully restored, cost recovery will not be achieved given the current tariff profile and the volume and price levels in the recently renegotiated contract with Egypt. - Tariff reform aim: bring the average tariff close to cost recovery without harming vulnerable populations; technically achievable and socially acceptable with the right communication strategy. - World Bank recommended approach: preserve current tariff for households that consume less (the lowest brackets) and impose increases, possibly sequenced, on larger consumers, including commercial users not affected by the recent tariff hike. - Medium-term energy diversification: - Construct a liquefied natural gas terminal in Aqaba as the main option (requires upfront capital, cheapest long-term supply). - Develop existing small gas field and the prospected oil shale field in Jordan. - Energy supply technical note: - The gas contract with Egypt provides 2.5 billion cubic meters per year. - Staff estimates that demand for gas for electricity generation would exceed 3 billion cubic meters per year in the medium term. ### Monetary and exchange rate policy highlights - Exchange rate peg remains an appropriate anchor for financial stability. - With a strong improvement of the balance of payments projected in the medium term, the real effective exchange rate is estimated to remain broadly in line with medium-term fundamentals. - Maintaining the peg hinges on following through on the strong adjustment path and a favorable external environment. - Reserve adequacy and short-term focus: - In the short term, the key objective is maintaining an appropriate level of reserves by restoring confidence; staff estimates based on the Fund’s reserve adequacy metric suggest that the current level of reserves is sufficient. - Over the medium term, reserve coverage would increase. - Central Bank of Jordan (CBJ) actions to preserve attractiveness of dinar assets: - Injected liquidity in late May through a new weekly repo facility and buying government papers on the secondary market in response to dinar liquidity drying out. - Announcement of the Fund program expected to help arrest and gradually reverse dollarization. - If confidence does not strengthen adequately, CBJ would consider tightening monetary policy (including further interest rate increases) to make dinar-denominated assets more attractive and stem pressure on reserves. - CBJ judged increasing reserve requirements for foreign exchange deposits less effective because banks keep excess reserves in foreign currency with the CBJ; low return on U.S. dollar assets also renders raising reserve requirements ineffective in widening the JD-USD interest rate margin. ### Structural policies and banking supervision - Banking supervision enhancements: - Improve frequency and timeliness of banking system indicators to allow more frequent publication of Financial Stability Reports and shorten publication lags. - Introduction of an automated bank data collection system for supervisors, expected in 2013. - Develop an early warning statistical model with Fund technical assistance. - New credit bureau expected to be licensed by end-2012 to improve banks’ risk assessment capabilities. - Strengthen governance code for banks, customer protection rules, fit and proper criteria for bank board members and managers, and risk management by banks within Basel II. - Consider accelerating completion of the Internal Capital Adequacy Assessment Process (ICAAP). - With possible Fund technical assistance, enhance AML/CFT regime. - Structural policies to support growth and employment: - Enhance business investment framework in favor of job-creating activities. - Emphasize educational reforms and training to address skill mismatches and encourage private investment in skill-intensive sectors. - Improve business environment for all firms to create a level playing field and strengthen trade promotion programs. - Increase trade openness through free trade negotiations and enhancing linkages with the GCC. ### External adjustment and financing needs - Current account and external outlook: - Current account deficit peaks at 14.1 percent of GDP in 2012; projected large adjustment in 2013 due to lower food and fuel prices, rebound in export growth, and improvements in travel receipts. - Continued fiscal consolidation and energy diversification expected to support external adjustment. - Projected additional external financing needs to maintain reserves at about four months of imports (assuming budgetary grants come in as projected, 3–4 percent of GDP): - $0.8 billion in 2012 - $1.1 billion in 2013 - $1.1 billion in 2014 - $0.9 billion in 2015 - Financing package overview: - Donors expected to cover most of the gap; Fund to close the remaining gap. - World Bank: Development Policy Loans (with $150 million envisaged for 2013) and other facilities; possibility of World Bank and IFC loans for Jordan’s solar power program. - EBRD investments expected to reach an annual average of about €250–300 million focusing on power/energy, agribusiness, and financial institutions. - Steadfast commitment to consolidation would ensure financing as programmed; if projected financing is not received, authorities will consult the Fund on alternatives (including market access) or further fiscal adjustment. - Upside possibility: amount under discussion with the GCC could be larger than currently included in the macro framework. ### Program modalities: Stand-By Arrangement (SBA) and exceptional access - SBA request and rationale: - Authorities requested a Stand-By Arrangement covering 36 months. - Duration reflects time to implement consolidation in central government and NEPCO, including securing an alternative energy source expected by mid-2015; NEPCO expected to return to cost recovery by mid-2016. - Exceptional access and proposed financing: - Proposed access: 800 percent of quota (about $2 billion). - Staff assessment: Jordan meets the exceptional access criteria. - Access would cover about half of the cumulative financing gap and help keep reserves at about four months of imports. - Frontloading proposal to maximize confidence-building: - Disbursement phasing proposed: - 300 percent of quota (SDR 511.5 million or about $763 million) disbursed in the first year. - Additional 185 percent of quota in 2013. - 180 percent of quota in 2014. - 135 percent of quota in 2015. - Box 3: SBA key phasing and conditionality (high-level bullets): - Access: SDR 1,364 million (800 percent of quota). Length: 36 months. - Phasing highlights: - SDR 255.75 million (about 150 percent of quota) available upon Board approval. - Second tranche SDR 255.75 million available in December 2012 upon completion of first review. - Third tranche SDR 85.25 million available in March 2013 upon completion of second review. - Ten subsequent quarterly tranches of SDR 76.725 million each. - Program conditionality (selected): - Quantitative performance criteria: - Ceiling on the primary fiscal deficit of the central government excluding grants. - Ceiling on the borrowing of the National Electric Power Company (NEPCO). - Floor on the net international reserves of the Central Bank of Jordan. - Continuous performance criterion: - Non-accumulation of external debt payment arrears by the general government. - Quantitative indicative targets: - Ceiling on the stock of accounts payable of the central government. - Ceiling on the stock of arrears of NEPCO. - Ceiling on the net domestic assets of the CBJ. - Structural benchmarks (selected): - Submit to the parliament an income tax reform law, including changes on mining sector taxation, by end-September 2012. - Announce a medium-term electricity/energy strategy incorporating World Bank inputs, including a timetable and measures for bringing NEPCO back to cost recovery by end-September 2012. - Implement a step increase in the price of diesel by the first review in 2012. - Introduce a commitment control system through the Government Financial Management Information System by end-January 2013. - Introduce targeted transfers to the poor to protect from higher oil prices should they increase beyond $100 per barrel by end-January 2013. *Source: IMF staff report excerpt (chapter/section content provided).* ### 83.9 percent of GDP by ### _cr12343 - 83.9 percent of GDP by ### Debt trajectory and program strategy - Public debt projected to reach 83.9 percent of GDP by end-2014. - Program strategy aims to: - Bring NEPCO back to cost recovery to arrest rapid debt increase. - Reduce the central government deficit so that debt would gradually decline to 78.6 percent of GDP in 2017. - Key operational requirements: - NEPCO brought to a break-even position by mid-2016. - Further fiscal measures to improve the government’s overall balance. - Contingency: - If NEPCO cannot be brought back to cost recovery within that time frame or risks materialize, further fiscal measures are likely to be needed. ### Exceptional access criteria and market access - Criterion 3 (market access): - Jordan has one outstanding Eurobond issue maturing in 2015. - Spreads were in the range of 410–430 bps in the last month. - Authorities intend to issue additional bonds, possibly as soon as in late 2012. - Staff expects Jordan’s access to private capital markets during the program period and beyond to be on a scale and timing so as to make repayments to the Fund. - Criterion 4 (prospect of program success): - Authorities implemented a large fiscal adjustment in 2010 and enacted measures in 2012 expected to result in fiscal consolidation of more than 3 percent of GDP. - Reforms to income and mining taxation have been discussed with parliament and appear to have good prospects of success. - Staff assesses that Jordan’s economic program, based on fiscal consolidation and medium-term solutions to its energy issues, is addressing remaining external and fiscal vulnerabilities and sustaining the exchange rate peg. ### Capacity to repay the Fund - Proposed access of 800 percent of quota. - With proposed access: - Fund credit outstanding would reach a maximum of 5.1 percent of GDP. - Fund credit outstanding would reach 21.5 percent of gross reserves in 2015. - Debt service to the Fund would rise to 3.4 percent of exports of goods and nonfactor services in 2017. - Rating context: - Moody’s and Standards & Poor’s maintained sovereign ratings of Ba2 and BB, respectively, with a negative outlook. Fitch does not rate Jordan. ### Main risks to the program - Energy sector (main risk): - Could take longer than expected to bring the sector back to cost recovery. - Program targets are highly sensitive to oil prices changes. - Higher-than-projected oil prices would drive up the cost of electricity production and fuel subsidies, and increase NEPCO’s deficit. - Upside possibilities: increased gas inflows from Egypt; liquefied natural gas terminal could be operational before 2015. - Risks could also come from additional losses of other public agencies. - Domestic political risks: - Strong consolidation requires implementation of politically sensitive measures. - Reversal of tariff increases earlier in the year showed the need for well-communicated measures. - Ongoing discussions on an election law, parliamentary elections planned for end-2012, and expected change of government add uncertainty. - Authorities have engaged broad social and political representatives; measures were presented to parliament during the vote of confidence discussions for the new government at end-May. - Regional and global deterioration: - Could hurt tourism receipts and FDI, and have fiscal and political implications. - Situation in Syria disrupts transit trade and increases spending pressures to accommodate refugees. - A slowdown in Europe could increase borrowing costs and reduce activity in regional oil exporters, spilling over to Jordan through lower tourism, exports, and remittances. ### Risk mitigation features - Strong upfront actions in 2012, notably increases in energy prices, to restore confidence. - Technical assistance and monitoring through quarterly reviews to support objectives and allow early detection and remedial action in case of slippages. - Engagement with social and political spectrum to build momentum for a national program. ### Program monitoring, conditionality, and safeguards - Monitoring: - Initially through quarterly reviews; semi-annual reviews could be considered during the second year depending on performance. - Test dates for quantitative targets for the next six months are the last day of quarters starting in September 2012. - Quantitative targets and indicative targets: - Performance criteria on the primary deficit of the central government (excluding grants) and NEPCO borrowing monitor fiscal consolidation toward debt reduction. - Indicative targets on (1) the stock of accounts payable of the central government; and (2) the stock of NEPCO’s arrears, to be repaid in 2012. - Monetary policy monitored by a performance criterion on the net international reserves of the CBJ combined with an indicative target on its net domestic assets. - Structural conditionality: - Changes in income taxation to improve fiscal position and place burden primarily on relatively well-off groups. - Step increases in the price of diesel accompanied by targeted transfers to protect the poor. - A commitment control system to register, report and account for expenditure commitments against cash allocations. - Critical benchmark: formulation of a medium-term electricity/energy reform strategy to bring NEPCO back to cost recovery. - Use of Fund resources and safeguards: - Fund resources will be used for budgetary financing to provide balance of payments support and fiscal support through its domestic counterpart. - Ministry of Finance and the CBJ to finalize a Memorandum of Understanding regarding responsibilities for servicing charges and obligations to the Fund before completion of the first review. - A safeguards assessment of the CBJ will be conducted before the first review; audited financial statements of the CBJ are published; safeguards assessment mission expected to visit Jordan in September 2012. ### Staff appraisal — key findings and recommendations - Shocks in 2011–2012 (rising oil prices, fall in gas supplies from Egypt, regional unrest) exposed vulnerabilities and pushed the combined deficit of the central government and NEPCO into double digits. - Return to fiscal and external sustainability hinges on strong policies and adequate financing, with an emphasis on: - Lowering fiscal and external imbalances. - Safeguarding the currency peg. - Establishing pass-through of international prices as soon as possible while cushioning effects on the population. - Authorities have taken strong measures in 2012 to restore confidence; the policy package was a good first step. - "Make or break" points: - Continued commitment to adjustment and policy implementation. - Fiscal policies to increase revenue through appropriate tax changes and improve spending composition toward targeted subsidies and growth-enhancing investments. - Strengthen tax administration. - Energy policies to bring NEPCO back to cost recovery via tariff increases and diversifying energy sources. - Adjustment beyond current plans may be needed if program risks materialize. - Public financial management needs improvement, notably cash management and coordination of fiscal and monetary policies. - Central Bank of Jordan (CBJ) considerations: - Manage dollarization and pressures on the peg; unwind liquidity injections when trends reverse to avoid inflationary pressures. - Be ready to increase attractiveness of dinar-denominated assets if dollarization pressures resume. - Banking sector: - Bank soundness indicators stabilized at safe levels; CBJ should monitor effects of fiscal tightening and regional/global developments, increase frequency and timeliness of banking system reporting, and develop an early warning mechanism. - Ongoing updates to governance code, customer protection rules, and fit and proper criteria should be intensified. - Structural and growth reforms: - Improvements in business climate are necessary for sustainable and inclusive growth. - Fiscal consolidation requires shifting the public-private relationship and enhancing private sector role for growth and employment. - Strengthening trade relationships with the GCC, the European Union and Mercosur could provide momentum to exports. - Overall assessment: - Risks are considerable, with the largest risk from an increase in energy prices. - Upside risks include resumption of gas from Egypt or a new energy source before 2015. - The exceptional level of access under the proposed arrangement (800 percent of quota) is justified by Jordan’s balance of payments needs and is consistent with medium-term external and debt sustainability, provided the program is implemented as envisaged and shocks are addressed promptly. *Source: IMF staff report excerpt contained in the provided content unit.* ### 53. The authorities have indicated commitment to implement their program ### _cr12343 - 53. The authorities have indicated commitment to implement their program ### Program endorsement and IMF support - The authorities have indicated commitment to implement their program steadfastly, while being ready to respond to any adverse developments. - Fund staff supports the authorities’ request for a 36-month SBA. ### Macroeconomic outlook and projections (selected) - Real GDP at market prices (annual percent change): 5.5, 2.3, 2.6, 2.8, 3.0, 3.5, 4.0, 4.5, 4.5, 4.5 - GDP deflator at market prices (annual percent change): 2.8, 8.4, 6.4, 4.1, 5.4, 4.3, 4.6, 3.4, 3.3, 3.3 - Nominal GDP at market prices (annual percent change): 8.5, 10.9, 9.1, 7.0, 8.6, 8.0, 8.7, 8.1, 7.9, 7.9 - Nominal GDP at market prices (JD millions): 16,912; 18,762; 20,477; 22,201; 22,230; 23,998; 26,097; 28,205; 30,436; 32,846 - Nominal GDP at market prices ($ millions): 23,840; 26,447; 28,881; 31,309; 31,353; 33,847; 36,808; 39,781; 42,928; 46,327 - Consumer price index (annual average): -0.7, 5.0, 4.4, 5.9, 4.5, 3.9, 3.8, 3.0, 2.9, 3.0 - Unemployment rate (percent): 12.9, 12.5, 12.9, ... , 11.4 ### External sector and balance of payments (selected) - Current account balance (including grants, $ millions): -4.9; -7.1; -12.0; -7.9; -14.1; -9.9; -7.7; -5.1; -4.2; -4.3 (percent of GDP: -12.0; -8; -14.1; -9.9; -7.7; -5.1; -4.2; -4.3) - Current account balance (excluding grants, percent of GDP): -9.0; -11.3; -19.0; -13.1; -18.9; -14.2; -11.5; -8.3; -7.3; -6.2 - Exports of goods, f.o.b. ($ billions): 6.4; 7.0; 8.0; 8.9; 8.3; 9.2; 9.8; 10.4; 11.1; 11.9 - Imports of goods, f.o.b. ($ billions): 12.7; 13.8; 16.8; 16.0; 18.2; 18.5; 19.2; 19.7; 20.9; 22.2 - Oil and oil products ($ billions): 2.2; 3.1; 4.9; 4.2; 5.8; 5.4; 5.3; 4.8; 4.9; 4.9 - Gross usable international reserves ($ millions): 11,093; 12,449; 10,733; 9,776; 7,455; 7,520; 8,229; 9,419; 10,249; 11,150 - In months of prospective imports: 7.7; 7.4; 6.0; 5.9; 4.0; 3.9; 4.1; 4.5; 4.6; 5.0 - Private capital inflows (net, percent of GDP): 9.5; 10.8; 7.5; 5.3; 3.9; 4.7; 6.0; 6.7; 6.7; 6.7 ### Fiscal operations and public debt (selected) - Revenue and grants (percent of GDP): 26.5; 24.9; 26.4; 25.8; 25.2; 25.8; 25.2; 24.6; 24.6; 23.4 - Of which: grants (percent of GDP): 2.0; 2.1; 5.9; 3.9; 4.2; 3.8; 3.3; 2.7; 2.7; 1.5 - Expenditure and net lending (percent of GDP): 35.4; 30.4; 33.2; 31.0; 31.7; 31.3; 31.1; 31.0; 30.8; 30.6 - Overall fiscal balance before measures (percent of GDP): -8.9; -5.6; -5.7; -5.2; -6.5; -5.5; -5.9; -6.4; -6.2; -7.1 - Additional measures needed (percent of GDP): ............; 0.0; 0.0; 0.0; 1.4; 2.9; 3.2; 4.1 (presented in projection rows) - Overall fiscal balance after measures (percent of GDP): -8.9; -5.6; -5.7; -5.2; -6.5; -5.5; -4.5; -3.5; -3.0; -3.0 - Overall fiscal balance excluding grants (percent of GDP): -10.9; -7.7; -11.7; -9.1; -10.7; -9.3; -7.8; -6.2; -5.7; -4.5 - Primary fiscal balance excluding grants (percent of GDP): -8.6; -5.6; -9.6; -6.6; -8.2; -6.3; -4.7; -3.1; -2.6; -1.5 - NEPCO cash balance (JD billions or percent of GDP context): ...; -0.9; -2.8; -3.8; -7.1; -3.8; -2.7; -1.8; -0.7; 0.0 - Government and government-guaranteed gross debt (percent of GDP): 64.8; 67.1; 70.7; 70.8; 79.2; 83.0; 83.9; 83.3; 81.2; 78.6 - Of which: external debt (percent of GDP): 22.9; 24.6; 21.9; 21.1; 20.8; 19.5; 18.4; 16.6; 16.0; 15.7 ### Budgetary tables (highlights) - Total revenue and grants (JD millions, 2012–17 projections): 5,596; 6,185; 6,579; 6,949; 7,481; 7,696 - Total budgetary expenditure (JD millions, 2012–17 projections): 7,047; 7,501; 8,117; 8,757; 9,371; 10,043 - Total revenue and grants (percent of GDP): 25.8; 25.8; 25.2; 24.6; 24.6; 23.4 - Total budgetary expenditure (percent of GDP): 31.0; 31.3; 31.1; 31.0; 30.8; 30.6 - Wages and salaries (JD millions and percent of GDP): JD 1,149 (5.2 percent of GDP in 2012); projected JD 1,287, 1,360, 1,438, 1,522 (percent series: 5.0; 4.9; 4.8; 4.7; 4.6) - Interest payments (JD millions and percent of GDP): JD 572 (2.6 percent of GDP in 2012); projected JD 728, 795, 878, 927, 983 (percent series: 2.6; 3.0; 3.0; 3.1; 3.0) ### Monetary sector and central bank (selected) - Broad money (annual percent changes and levels): growth examples 9.3; 11.5; 8.1; 7.0; 8.1; 9.5 (levels, JD millions for select periods: 24,119; 25,803; 26,063; 24,505; 24,999; 25,491; 26,063; 28,527) - Net foreign assets (JD millions series, selected): 9,359; 8,709; 7,227; 8,868; 7,574; 7,099; 7,227; 6,381 - Credit to private sector (annual percent changes): 0.5; 7.2; 9.6; 13.2; 6.7; 7.1; 5.2; 5.8; 6.7; 9.0 (mem. item annual private sector credit growth: 9.6; 13.2; 6.7; 7.1; 5.2; 5.8; 6.7; 9.0) - Gross usable international reserves (CBJ definition, $ millions): 10,733; 7,455; 7,520; 8,229; 9,419; 10,249; 11,150 ### Financing needs and external financing framework - Calculated gross financing requirements (2012–15, $ millions): 6,441; 5,335; 4,738; 4,572 - Current account deficit (excl. official transfers): 5,938; 4,794; 4,220; 3,315 - Trade deficit: 8,633; 7,765; 7,601; 7,156 - Energy import bill: 5,801; 5,444; 5,317; 4,810 - Gross financing sources (2012–15, $ millions): 5,486; 4,145; 3,666; 3,706 - FDI: 1,032; 1,254; 1,854; 2,294 - Public grants: 1,517; 1,454; 1,379; 1,270 - Gross reserve drawdown: 3,278; -65; -709; -473 - External financing gap (2012–15, $ millions): 954; 119; 010; 728; 66 (table lists 954; 119; 010; 728; 66 across years with debt-creating and non-debt creating breakdowns) - Proposed IMF disbursements (in SDR millions), under SBA purchase schedule: Board approval August 3, 2012 — 255.750 million SDR (384 million U.S. Dollar; 150 percent of quota; 19 percent of total access) - Total under Table 6: 1364 million SDR; 2046 million U.S. Dollar; 800 percent of quota; 100 percent of total access ### IMF access, phasing, and obligations (selected) - Table 6 purchase/phasing sequence (dates, actions, amounts): - Board approval of SBA (August 3, 2012): 255.750 million SDR; 384 million U.S. Dollar; 150 percent of quota; 19 percent of total access - First Review (December 3, 2012): 255.750 million SDR; 384 million U.S. Dollar; 150 percent of quota; 19 percent of total access - Second Review (March 3, 2013): 85.250 million SDR; 128 million U.S. Dollar; 50 percent of quota; 6 percent of total access - Subsequent reviews through July 15, 2015 allocate the remainder to reach total purchases of 1364 million SDR (2046 million U.S. Dollar; 800 percent of quota) - Indicators of Fund credit and obligations (Table 7 highlights): - Stock of proposed SBA disbursements (end-of-period SDR stock): 511.5; 826.9; 1,133.8; 1,332.0; 1,015.5; 576.5; 268.5; 57.5; 0.0 - Stock of existing and prospective Fund credit (in percent of quota): 300.0; 485.0; 665.0; 781.2; 595.6; 338.1; 157.5; 33.7; 0.0 - Stock in percent of GDP: 2.5; 3.7; 4.7; 5.1; 3.6; 1.9; 0.8; 0.2; 0.0 ### Capacity to repay and public external debt metrics - GRA credit to Jordan (SDR millions): 511.58; 826.91; 1,133.81; 1,332.01; 1,015.55; 576.5 - In percent of quota: 300.0; 485.0; 665.0; 781.2; 595.6; 338.1 - Charges and interest due on GRA credit (SDR millions): 3.3; 8.1; 11.6; 14.8; 13.6; 9.6 - Total external government and government guaranteed debt (percent of GDP): 23.3; 23.2; 23.0; 21.6; 19.5; 17.5 - Excluding proposed IMF: 20.8; 19.5; 18.4; 16.5; 15.9; 15.6 - Debt service ratios (percent of exports of goods and services): Total external government and government guaranteed debt service: 5.9; 4.6; 4.2; 8.4; 5.8; 6.6 ### Banking sector soundness (selected) - Risk-weighted capital adequacy ratio (percent): 17.6; 21.4; 20.8; 18.4; 19.6; 20.3; 19.3 (2005–2011 series) - Non-performing loans (in millions of JD): 481; 405; 453; 550; 877; 1,159; 1,315 - Non-performing loans (percent of total loans): 6.6; 4.3; 4.1; 4.2; 6.7; 8.2; 8.5 - Liquidity ratio (percent): 168.0; 161.4; 157.5; 141.2; 159.1; 161.4; 152.9 - Return on assets (percent): 2.0; 1.7; 1.6; 1.4; 1.1; 1.1; 1.1 - Loans to deposits (percent): 59.0; 66.9; 70.7; 72.1; 65.6; 64.2; 65.0 - Loans to GDP (percent): 86.8; 91.4; 93.1; 83.7; 78.7; 77.0; 77.4 *Source: IMF staff estimates and projections as presented in the provided content.* ### Annex 1. External Debt Sustainability Analysis ### Annex 1. External Debt Sustainability Analysis ### Overview - External debt has been broadly stable since 2008, hovering on average around 22 percent of GDP following the $2.1 billion buyback of Paris club debt in 2008. - The external debt-to-GDP ratio is expected to stay broadly unchanged in 2011–14 because it gradually improves after a sharp widening of the current account deficit in 2012. - Despite substantial prospective and IMF financing, the debt ratio would decline to about 17 percent by end-2017 driven by a sizeable adjustment in the current account in the outer years—largely reflecting fiscal consolidation, lower oil and food prices as well as diversification to a new energy source. ### Macroframework changes and key assumptions - This update reflects a change in the macroframework relative to the 2012 Article IV consultation: the current outlook for commodity prices (particularly fuel) is now more favorable. - Downside risk assumptions: - In 2012 Jordan receives about half the 2011 level of natural gas supplies from Egypt and about 50 million cubic feet per day during 2013–14. - Jordan is able to access alternative energy sources in mid-2015 (projection assumption). ### Financing and borrowing assumptions - Government external borrowing strategy: rely on market access and official sources (multilateral and regional development banks and the IMF). - Eurobond assumptions: - $750 million Eurobond maturing in 2015 is assumed rolled over. - New Eurobonds of $200 million and $350 million are assumed placed in 2013 and 2014, respectively. - $500 million and $700 million Eurobonds are assumed placed in 2016 and 2017, respectively. ### Stress scenarios and sensitivity - Scenario 1 (tourism, remittances and FDI shock similar to 2011): - Assumes a 16 percent decline in tourism receipts, a 4 percent decline in remittances, and an 11 percent decline in FDI in 2012 relative to 2011, and a similar decline in 2013 relative to 2012. - Financing shortfall of about $ 4.1 billion. - If authorities use reserves to cover the shortfall: - Import coverage would decline to 0.6 month of imports in 2013, reaching a trough of 0.4 months of imports in 2014. - If authorities maintain reserves and borrow to meet needs: - The debt ratio would worsen by about 16 percent relative to the baseline, reaching 39 percent by end-2013. - Scenario 2 (typical emerging market shock per IMF (2011)): - Assumes a 15 percent decline in exports, a 5 percent decline in FDI and a 5–10 percent decline in rollover rates in 2012–13. - Financing shortfall of about $10.9 billion ($3.3 billion in 2012 and $7.6 billion in 2013). - If authorities use reserves: - Reserves would decline to 1.7 months of imports in 2012 and could be depleted in 2013. - If authorities maintain reserves and borrow: - The debt ratio would deteriorate by about 55 percent relative to the baseline, reaching 78.4 percent at end-2013. - Fuel price sensitivity: - If fuel prices increased by 20 percent in 2012 and 2013, the debt ratio would edge up reaching a peak of 38.8 percent of GDP in 2014. ### Baseline projections and selected key statistics (2007–2017) - Baseline external debt (in percent of GDP): 43.3 (2007), 23.4 (2008), 22.9 (2009), 24.5 (2010), 21.9 (2011), 23.3 (2012), 23.2 (2013), 23.0 (2014), 21.6 (2015), 19.5 (2016), 17.5 (2017). - Debt-stabilizing non-interest current account: -6.0 (percent of GDP). - Change in external debt (in percent of GDP): -5.3 (2007), -19.9 (2008), -0.5 (2009), 1.7 (2010), -2.7 (2011), 1.4 (2012), -0.1 (2013), -0.1 (2014), -1.4 (2015), -2.1 (2016), -2.0 (2017). - Identified external debt-creating flows (4+8+9, in percent of GDP): -8.9 (2007), -15.8 (2008), -6.4 (2009), -5.9 (2010), 2.5 (2011), 9.6 (2012), 2.9 (2013), -0.6 (2014), -3.9 (2015), -3.6 (2016), -3.3 (2017). - Current account deficit, excluding interest payments (in percent of GDP): 15.8 (2007), 8.3 (2008), 4.3 (2009), 6.6 (2010), 11.4 (2011), 13.5 (2012), 9.3 (2013), 7.1 (2014), 4.5 (2015), 3.6 (2016), 3.8 (2017). - External debt-to-exports ratio (in percent): 79.9 (2007), 41.3 (2008), 49.9 (2009), 51.3 (2010), 48.0 (2011), 51.1 (2012), 49.6 (2013), 50.0 (2014), 47.4 (2015), 43.1 (2016), 39.0 (2017). - Gross external financing need (in percent of GDP): 24.0 (2007), 20.9 (2008), 6.7 (2009), 8.9 (2010), 14.1 (2011), 16.2 (2012), 11.4 (2013), 9.0 (2014), 8.3 (2015), 6.2 (2016), 6.8 (2017). - Key macroeconomic assumptions (selected): - Real GDP growth (in percent): 8.2 (historical average), 7.2 (10-Year Std Dev), 5.5 (2007), 2.3 (2008), 2.6 (2009), 6.1 (2010), 2.4 (2011), 3.0 (2012), 3.5 (2013), 4.0 (2014), 4.5 (2015–2017). - GDP deflator in US dollars (change in percent): 5.1 (historical average), 19.9 (10-Year Std Dev), 2.8 (2007), 8.4 (2008), 6.4 (2009), 6.1 (2010), 5.7 (2011), 5.4 (2012), 4.3 (2013), 4.6 (2014), 3.4 (2015), 3.3 (2016–2017). - Nominal external interest rate (in percent): 3.3 (historical average), 2.8 (10-Year Std Dev), 3.1 (2007), 2.5 (2008), 2.7 (2009), 2.7 (2010), 0.4 (2011), 2.8 (2012), 2.4 (2013), 2.5 (2014), 2.6 (2015), 2.1 (2016), 2.0 (2017). - Growth of exports (US dollar terms, in percent): 14.4 (historical average), 33.9 (10-Year Std Dev), -11.9 (2009), 15.6 (2010), 4.1 (2011), 13.9 (2012), 15.7 (2013), 8.5 (2014), 10.7 (2015), 7.2 (2016), 7.0 (2017). - Growth of imports (US dollar terms, in percent): 18.7 (historical average), 22.6 (10-Year Std Dev), -14.4 (2009), 10.9 (2010), 16.8 (2011), 38.1 (2012), 34.9 (2013), 7.4 (2014), 2.9 (2015), 4.1 (2016), 3.0 (2017). ### Key implications and policy recommendations - External debt is expected to remain low under the baseline but is vulnerable to shocks to current account inflows, FDI, tourism, remittances, and fuel prices. - Reserve management and choice between using reserves vs. additional borrowing critically affect import coverage and debt ratios under shock scenarios. - Policies to strengthen sustainability highlighted implicitly by projections: - Pursue fiscal consolidation to support current account adjustment in outer years. - Secure alternative energy sources by mid-2015 to reduce energy import bill and support debt reduction. - Rely on a mix of market and official external financing while managing rollover risks. *Source: Annex 1. External Debt Sustainability Analysis, IMF staff estimates and country desk data.* ### 1. Jordan’s exposure to multiple external shocks put pressure on macroeconomic ### 1. Jordan’s exposure to multiple external shocks put pressure on macroeconomic ### External shocks and 2011 outcomes - Regional tensions and the global crisis in 2011 adversely affected tourism, remittances, and FDI; fuel and food prices increased. - Repeated disruptions in natural gas flows from Egypt (sabotage of the Arab Gas Pipeline) required imports of expensive fuel products for electricity generation in 2011. - Growth slowed significantly; the external current account deficit (including grants) widened to 12.0 percent of GDP in 2011 from 7.1 percent in 2010. - Primary fiscal deficit (excluding grants) increased to 9.6 percent of GDP in 2011 from 5.6 percent in 2010. - NEPCO ran losses of 4.9 percent of GDP in 2011 due to use of more expensive fuel (before 2010 NEPCO was broadly at cost recovery). - Additional extra-budgetary losses of 1.1 percent of GDP came from the public water company (water tariffs below cost recovery). - Gross public debt rose to 70.7 percent of GDP at end-2011 from 67.1 percent of GDP at end-2010. ### Early 2012 developments and vulnerabilities - Natural gas inflows were substantially reduced after sabotages in February and April 2012, increasing imports of expensive fuel for electricity and pressuring CBJ reserves. - Gas supply since May 2012 remained low and unreliable; if gas inflows stay at current low levels: - NEPCO losses are expected to increase to 5.3 percent of GDP (despite recent electricity tariff increases). - Taking into account arrears repayments of 1.9 percent of GDP, NEPCO’s cash needs in 2012 are projected at 7.1 percent of GDP. - UNDP study estimates the cost of hosting Syrian refugees at $300 million in 2012. - Tourism income increased by 19 percent in the first half of 2012; remittances started to recover. - Oil price declined significantly from its level in the first half of 2012 but a significant increase in oil prices remains an important vulnerability. ### Program objectives and economic outlook - Program objectives: - Maintain macroeconomic stability via fiscal, monetary, and structural policies; establish transparent and sustainable energy prices and bring NEPCO and other utilities back to cost recovery. - Make policies more equitable and inclusive through targeted subsidies and better opportunities for the vulnerable while eliminating subsidies for those with higher ability to pay. - Support growth and the medium-term external position by improving the investment climate through targeted structural reforms. - Macroeconomic framework assumption for 2012: gas from Egypt at about half of 2011 levels. - Energy timeline: dependence on expensive fuel products to be reduced once new energy sources come on stream, expected by mid-2015. - Growth and inflation projections: - GDP growth projected to stay broadly at the same level as last year in 2012; medium-term growth expected to increase to about 4½ percent. - CPI inflation (end-of-period) expected to increase to 4.4 percent in 2012 due mainly to an increase in fuel pump prices; inflation expected to decline slightly in 2013 and further over the medium term. - External sector projections: - External current account deficit expected to increase to 14.1 percent of GDP in 2012, mostly because of more expensive fuel imports. - Exports and tourism expected to grow by 3.6 and 18 percent, respectively. - Current account expected to improve over the medium term due to lower energy and food prices; major correction expected only when a new energy source is operational. - Financing expectations: continued generous support from development partners (IMF, World Bank, bilateral donors, Gulf Cooperation Council) to cover sizable balance of payments financing needs during the program; expectation to access sovereign debt markets soon. ### Fiscal policy: objectives and measures - Overall aim: reduce central government primary fiscal deficit and public companies’ losses (notably NEPCO); preserve social protection for the poor. - Short-term fiscal target: reduce central government primary deficit excluding grants to 8.2 percent of GDP in 2012 from 9.6 percent of GDP in 2011 (expected as a result of 2012 measures). - Public debt projection: increase from 70.7 percent of GDP in 2011 to 83.9 percent in 2014; debt to start falling only after NEPCO reaches cost recovery and the primary deficit (excluding grants) reaches about 5 percent (debt-stabilizing level). - Monetary policy: continue to safeguard the peg and introduce tools to improve liquidity operations and free up resources for the private sector. - Structural reforms: improve functioning of labor and financial markets, enhance job creation, protect consumers, and improve investment climate. Fiscal measures in 2012 (totaling 3.3 percent of GDP) - Revenue measures expected to yield 0.4 percent of GDP: - Increased taxes on luxury goods (airline tickets, cars, alcohol, tobacco); introduced sales tax on mobile phones and air conditioners. - Removed exemptions from general sales tax on agricultural usage items. - Increased residency fees for non-Jordanians and money transfer fees for sending money from Jordan abroad. - Expect revenue from a tax amnesty (not included in projections). - Fuel subsidy and pump price changes: - Fuel subsidy cost was almost 3 percent of GDP in 2011, compared with less than ½ percent of GDP in 2010. - Increased price of gasoline 95 by 26 percent and gasoline 90 by 13 percent. - Will increase diesel and kerosene prices in 2012 by 6 percent (structural benchmark). - Jet fuel, heavy fuel, and gasoline prices now adjusted monthly in line with international fuel prices. - Expenditure cuts totaling 2.1 percent of GDP: - Cuts focused on current spending to safeguard capital spending. - Military spending cut by 0.7 percent of GDP. - Subsidies to independent institutions cut by 0.1 percent of GDP. - Operational and other current spending cut by 0.2 percent of GDP. - Capital expenditure cuts limited to 1.1 percent of GDP. - Contingency: stand ready to undertake further measures if oil prices rise or other shocks materialize to stay within deficit target. - Grants: expect grants to the budget of 4.2 percent of GDP; in discussions to obtain an additional $1 billion. If indications show this financing cannot be received, will consult IMF Managing Director on alternatives. Fiscal plans for 2013 and beyond - 2013 target: reduce primary fiscal deficit (excluding grants) to 6.3 percent of GDP, requiring additional measures equivalent to about 1 percent of GDP and assuming world oil price around $94 per barrel. - Revenue plans: - Review and cost all tax incentives; refrain from providing further incentives. - Restore standard sales tax rates for hotels, luxury goods, and building materials on January 1, 2013. - Consider implementing a special tax on fuel products. - Submit revised income tax law (including mining taxation changes) to parliament by September 2012 (structural benchmark); law to become effective in early 2013 and envisages reduction in personal income tax threshold and increase of top personal and corporate tax rates to over 20 percent, with protections for lower-income families and SMEs. - Changed royalty from specific to ad valorem in royalty agreements with mining companies (overall increase in royalties effective in March 2013). - Review tax system by end-2012 to raise further revenue; increase fees related to licensing agreements. - Expenditure plans: - Gradually reintroduce monthly fuel price adjustment for diesel and kerosene in 2013 while introducing targeted transfers to protect the poor if benchmark price increases beyond $100 per barrel (structural benchmark). - Allow capital spending to reach more than 5 percent of GDP (up from 3.4 percent in 2012). - Medium-term fiscal trajectory: - Primary fiscal balance excluding grants targeted at 4.8 percent of GDP in 2014 and 3.2 percent of GDP in 2015. - Combined with reductions in NEPCO’s losses, expected to put debt on a downward path. Fiscal structural reforms and PFM - Tax administration improvements: - Implement an audit strategy by end-September 2012 emphasizing in-depth quality auditing. - By end-2012: (1) update taxpayer register; (2) increase filing compliance in the Large Taxpayer Office and the Medium and Small Taxpayer Office to 100 and 80 percent, from current 95 and 70 percent, respectively; (3) implement action plan to reduce tax arrears (stock of tax arrears estimated at JD 1.7 billion). - Public financial management (PFM) priorities for 2012: - Improve cash management and Commitment Control System (CCS) by limiting accumulation of accounts payable (pending checks) and net liability of trust accounts. - Introduce a commitment control system through GFMIS to register, report, and account for expenditure commitments against monthly cash allocations by January 1, 2013 (structural benchmark). - Generate monthly reports on stocks of pending checks and trust account liability. - Accelerate rollout of GFMIS and TSA, especially CCS module; review accounts payable to explore reductions. ### Energy policy and NEPCO restructuring - NEPCO measures in 2012: - Without electricity tariff increase, NEPCO’s losses would have reached 5.8 percent of GDP. - June 2012 electricity tariff increases for selected sectors and households expected to yield revenue gain for NEPCO of 0.5 percent of GDP (0.9 percent of GDP on an annual basis). - This reduces NEPCO’s losses to 5.3 percent of GDP while financing needs expected at almost 6 percent of GDP (reflecting payments of accounts payable from 2011). - Energy strategy and benchmarks: - Present a detailed public plan to address energy issues by end-September 2012 (structural benchmark), incorporating World Bank inputs; plan to provide timetable to bring NEPCO back to cost recovery by mid-2016 and outline energy sources and tariff implementation schedule. - Planned reduction in NEPCO losses: 3.8 percent of GDP in 2013, 2.7 percent of GDP in 2014, 1.8 percent of GDP in 2015, and 0.7 percent of GDP in 2016. - Diversification and medium/long-term options: - Tenders issued for a Liquefied Natural Gas terminal in Aqaba and for solar and wind farms. - Jordan’s oil shale could become substantial source but expected to take time. - Other longer-term options include gas supply through rail from Aqaba or pipeline from Iraq. - Electricity tariff policy: - Further increases in electricity tariffs to be implemented starting January 2013 to reduce NEPCO’s losses and ensure supplier payments; studying ways to implement tariff increases without unduly burdening the poor or harming competitiveness. - Petroleum supply and efficiency: - Progressively open distribution and refinery markets. - Ensure timely publication of audited accounts for NEPCO and JPRC (refinery company). - Work with three electric distribution companies to increase pace of reductions in distribution losses. ### Monetary and exchange rate policy - Exchange rate peg retained as anchor for monetary policy (fixed regime used for 17 years). - Monetary policy focus: limit inflationary pressures and sustain attractiveness of JD-denominated assets. - CBJ policy adjustments in first half of 2012: - Narrowed interest rate corridor; introduced weekly repo operation to signal expected interbank rate. - Built portfolio of short-term government securities to influence liquidity. - Tools helped inject needed liquidity in Q2 and stabilize interest rate structure. - Liquidity management: - With grants and foreign borrowing financing domestic needs in H2 2012, potential increase in liquidity could put downward pressure on JD interest rates. - CBJ stands ready to withdraw liquidity using all instruments including selling government securities and issuing CDs to maintain attractive JD-denominated interest rate structure. - Interest rates: - CBJ raised interest rates twice in 2012 and stands ready to further increase rates if needed. *IMF staff report chapter: Jordan — macroeconomic developments, policies, and program framework (2011–2016).* ### 23. Jordan’s banking system remains sound. The nonperforming loan (NPL) ratio, ### _cr12343 - 23. Jordan’s banking system remains sound. The nonperforming loan (NPL) ratio, ### Banking system soundness — findings - NPL ratio stabilized at 8½ percent in 2011. - Provisioning level: 52 percent of NPLs. - Capital adequacy: "very strong, exceeding by far the CBJ’s requirements." - Profitability (2009–11): average return on assets of 1.1 percent. ### Central Bank of Jordan (CBJ) supervisory strengthening — actions and timelines - ICAAP supervisory reviews: - Completed for more than half of the banks. - Remaining ICAAPs to be completed by end-2012. - Basel III quantitative impact study: - CBJ started to receive banks’ submissions. - Analysis planned in the second half of 2012 with IMF technical assistance. - New credit bureau: - Expected to be licensed by end-2012. - Anticipated effect: better risk assessment and improved access to finance for SMEs and low income individuals. - Additional CBJ initiatives: - (1) Automated bank data collection system for supervisors — expected in 2013. - (2) Strengthening regulatory framework: governance code for banks, customer protection rules, fit and proper criteria for bank managers. - (3) Developing an early warning statistical model with IMF technical assistance. - Publication of banks’ financial soundness indicators: - Increase frequency and timeliness during 2013 once the automated data collection system is operational. - AML/CFT regime: - CBJ will continue enhancing Jordan’s AML/CFT regime, with possible IMF technical assistance, in line with recommendations of the mutual evaluation report adopted by the Middle East and North Africa Financial Action Task Force in 2009. ### Growth-enhancing policies — focus areas - Comparative strengths: - Strong human capital base, large endowment in engineers, doctors, accountants and IT specialists, substantial highly-skilled diaspora. - Market-oriented reforms of the early 2000s created one of the most open economies in the Middle East and North Africa Region and spurred dynamic nontraditional sectors (information and communication technologies, health tourism and business services). - Priority policy actions (next years): - (1) Improve business environment for all firms: - (i) Streamline laws related to the business environment and ensure appropriate enforcement. - (ii) Transfer responsibilities and decision-making to appropriate tiers of public administration to avoid administrative delays. - (iii) Provide training on regulatory questions to relevant staff. - (2) Strengthen trade promotion programs to assist firms penetrate markets of countries with which Jordan has signed free trade agreements. - (3) Improve transparency and accountability of industrial policies by implementing and enforcing anti-trust and monopoly legislation. - (4) Develop a national strategy for a comprehensive and private sector-led innovation. ### Program monitoring, structural benchmarks, and key dates - Safeguards and institutional arrangements: - Authorities recognize importance of completing a safeguards assessment by the first review of the SBA; documentation provided and IMF safeguards mission to be received as necessary. - Ministry of Finance and the CBJ will finalize a Memorandum of Understanding regarding responsibilities for servicing IMF lending before the first review is completed. - Monitoring framework: - Progress monitored through quarterly reviews, quantitative performance criteria (PCs), indicative targets, and structural benchmarks (detailed in Tables 1 and 2 and the TMU). - Quantitative targets for September and December 2012 are PCs. - Structural benchmarks and deadlines (selected): - Submit to parliament an income tax reform law, which include changes on mining sector taxation — By end-September 2012. - Announce a medium-term electricity/energy strategy incorporating World Bank inputs and measures for bringing NEPCO back to cost recovery — By end-September 2012. - Implement a step increase in the price of diesel — First review. - Introduce a commitment control system through the GFMIS to register, report and account for expenditure commitments — January 2013. - Introduce targeted transfers to protect the poor from higher oil prices should they increase beyond $100 per barrel — January 2013. ### Quantitative performance criteria and indicative targets (Table 1 — Sep-12 and Dec-12) - Performance Criteria (Target Sep-12, Target Dec-12) - Primary fiscal deficit of the central government, excluding grants in JD million (flow, cumulative ceiling): 1,199 ; 1,754 - NEPCO borrowing in JD million (flow, cumulative ceiling): 1,273 ; 1,568 - Net International Reserves of the Central Bank of Jordan in USD million (stock, floor): 7,667 ; 8,257 - Ceiling on accumulation of external payment arrears 1/: 0 ; 0 - Indicative Targets (Sep-12, Dec-12) - Net Domestic Assets of the Central Bank of Jordan in million JD (stock, ceiling): -620 ; -695 - Stock of accounts payable of the Central Government in million JD (ceiling): 682 ; 682 - Stock of arrears of NEPCO: 0 ; 0 - Memo items and adjusters (flow, cumulative) - Budgetary grants: 911 ; 1,317 - Other grants: 137 ; 200 - Net external financing excluding project loans: 65 ; -18 - Privatization proceeds: 0 ; 0 - Cap for fiscal adjustor (TMU par.11, in million JD): 40 ; 80 - Exchange rate ($ per dinar): 1.41 ; 1.41 ### TMU — program exchange rates, NIR, and definitions (selected) - Program exchange rate conventions: - Exchange rate set at JD 0.709 = $1. - Gold price set at JD 1,117.025 per fine troy ounce. - Program exchange rates (one Jordanian dinar per unit of foreign currency) - British Pound: 1.105 - Japanese Yen: 0.009 - Euro: 0.887 - Canadian dollar: 0.692 - SDR: 1.073 - Net International Reserves (NIR) — definition and stock as of end-June: - NIR defined as foreign assets of the CBJ minus its foreign liabilities. - As of June 28, 2012 (end-June), stock of NIR amounted to U.S. dollar 8,556.4 million. - Foreign assets of the CBJ: U.S. dollar 9,707.7 million. - Foreign liabilities of the CBJ: U.S. dollar 1,151.3 million. - Key definitional and monitoring points (selected) - Primary deficit of the central government excluding grants: measured on a cash basis; defined by specified inclusions and exclusions in paragraphs 5–11. - Net domestic assets (NDA) of the CBJ: defined as reserve money less the sum of NIR plus Jordan’s outstanding liabilities to the IMF; ceilings on NDA adjusted per paragraph 21 rules. - Continuous performance criterion: zero ceiling on accumulation of external arrears. - Adjustors: Floors on NIR and ceilings on NDA are adjusted by the extent that foreign grants, net external financing of the central government, and privatization proceeds from abroad deviate from Table 1 levels. ### Data provision and reporting (selected) - Government will provide to the IMF (Division B of the Middle East and Central Asia Department) specified reporting tables and data. - Reporting requirements (selected): - Nine standard fiscal data tables prepared by the Ministry of Finance (monthly). - Stocks of checks issued but not yet cashed, trust account liabilities and deposits (monthly). - NEPCO: income statement including stock of accounts payable and payments overdue less and more than 60 days (quarterly); monthly gas flows from Egypt in million cubic meters (quarterly). - CBJ: foreign exchange reserves and preliminary data on dollarization (weekly); data on CD auctions (following each auction); monetary statistics as per attached reporting tables. *Source: IMF staff report content from the provided PDF chapter/section.* ### 28. Related to the continuous performance criteria: ### _cr12343 - 28. Related to the continuous performance criteria: ### Related to the continuous performance criteria - Details of official arrears accumulated on interest and principal payments (both external and domestic) to creditors. - External arrears data will be provided using actual exchange rates. ### Other economic data - Interest rates and consumer prices; and exports and imports (monthly). - Balance of payments (current and capital accounts) and external debt developments (quarterly). - List of short-, medium- and long-term public or publicly-guaranteed external loans contracted during each quarter, identifying, for each loan: the creditor, the borrower, the amount and currency, the maturity and grace period, and interest rate arrangements (quarterly). - National accounts statistics (quarterly). ### Data submission timing and revisions - Weekly data and data on CD auctions should be sent to the Fund with a lag of no more than one week. - Monthly and quarterly data should be sent: - within a period of no more than six weeks for the monetary and fiscal variables; - within a period of no more than eight weeks for other data; - three months for national accounts statistics and balance of payments and external debt statistics. - Data related to the continuous criterion should be sent within one week after the date when the arrear was incurred. - Any revisions to previously reported data should be communicated to the staff in the context of the regular updates. ### Definitions of principal concepts and variables - Any variable mentioned for monitoring a performance criterion and not explicitly defined shall be defined in accordance with the Fund’s standard statistical methodology, such as the Government Financial Statistics. - For variables omitted from the TMU but relevant for program targets, the authorities of Jordan shall consult with the staff on the appropriate treatment based on the Fund’s standard statistical methodology and program purposes. ### Background and context (select highlights) - The authorities are requesting a 36-month Stand-By Arrangement (SBA) with access of SDR 1,364 million (800 percent of quota), with SDR 255.8 million (150 percent of quota) available upon Board approval and the first review, SDR 85.3 million (50 percent of quota) upon the completion of the second review and the remainder in ten equal installments of SDR 76.7 million (45 percent of quota), subject to quarterly reviews. - The last purchase under the arrangement is scheduled for July 15, 2015. - Jordan’s external debt has ranged between 22 and 25 percent of GDP over the last few years and is projected to decline to about 15 percent by 2019 under the baseline scenario. - Jordan’s public external debt for end-2012 is projected to be 23.3 percent of GDP. - In 2012, Jordan’s external debt service to export ratio is projected at 5.9 percent (2.7 percent of GDP). ### The new Stand-By Arrangement — risks to the Fund - Access under the proposed arrangement would exceed both annual and cumulative normal access limits. - If all purchases were made as scheduled: - Jordan’s outstanding use of GRA resources would rise from about 150 percent of quota to about 395 percent of quota during the first year, and then peak at 800 percent of quota in July 2015. - The Fund’s exposure to Jordan would peak at 5.1 percent of GDP and 23.5 percent of total external debt by 2015. - Front-loaded disbursements and back-loaded fiscal adjustment: - Total financial support of SDR 512 million (300 percent of quota) is scheduled to be disbursed during the first two purchases. - About 50 percent of the program (about 400 percent of quota) is scheduled to be disbursed within the first year. - Jordan’s projected debt service to the Fund would peak at SDR 459.6 million in 2017, equivalent to: - 5.7 percent of government revenues, - 1.5 percent of GDP, - 6.3 percent of gross international reserves, - 3.4 percent of projected exports of goods and services. - Jordan’s total external debt service for 2017 is projected to amount to 3 percent of GDP and about 7 percent of exports of goods and services. ### Impact on the Fund’s liquidity and risk exposure - Commitments under the proposed arrangement would reduce the one-year forward commitment capacity (FCC) of SDR 251.9 billion as of July 25, 2012 by SDR 1.4 billion, 0.5 percent. - If the first purchase is made, Fund credit to Jordan would represent about 0.3 percent of total GRA Fund credit. - The share of the top five borrowers of total credit outstanding would remain virtually unchanged at 74 percent. - Charges on the new GRA obligations will be about SDR 10 million in 2013, over 90 percent of the current estimated burden sharing capacity, and increase to over SDR 33 million in 2016. - Estimated peak GRA credit to Jordan represents about 15 percent of current precautionary balances. ### Key quantitative tables and projections (selected exact figures) - Proposed SBA access and phasing (total): SDR 1,364; 800.0 percent of quota. - Table 3 (Total External Debt, in millions of dollars): 2008: 5,135; 2009: 5,455; 2010: 6,490; 2011: 6,319; Proj. 2012: 7,302. - Table 3 (Total External Debt, in percent of GDP): 2008: 23.4; 2009: 22.9; 2010: 24.6; 2011: 21.9; Proj. 2012: 23.3. - Table 4 (GRA credit to Jordan, in SDR millions): 2011: 511.5; 2012: 826.9; 2013: 1,133.8; 2014: 1,332.0; 2015: 1,015.5; 2016: 576.5; 2017: 268.5; 2018: 57.5; 2019: 0.0. - Table 4 (GRA credit to Jordan, in percent of quota): 2011: 300.0; 2012: 485.0; 2013: 665.0; 2014: 781.3; 2015: 595.6; 2016: 338.1; 2017: 157.5; 2018: 33.8; 2019: 0.0. - Table 4 (Charges due on GRA credit, in SDR millions): 2011: 3.3; 2012: 10.3; 2013: 19.7; 2014: 29.3; 2015: 33.2; 2016: 20.5; 2017: 6.2; 2018: 2.1; 2019: 0.3. - Table 4 (Debt service due on GRA credit, in SDR millions): 2011: 3.3; 2012: 10.3; 2013: 19.7; 2014: 61.3; 2015: 349.7; 2016: 459.6; 2017: 314.2; 2018: 213.1; 2019: 57.9. - Table 4 (Total public debt, percent of GDP): 2011: 70.7; 2012: 79.2; 2013: 83.0; 2014: 83.9; 2015: 83.3; 2016: 81.2; 2017: 78.6; 2018: 76.1; 2019: 73.6; 2020: 71.1. - Table 5 (Forward Commitment Capacity (FCC) as of 7/25/2012): 251,975 (millions of SDRs). - Table 5 (Impact on FCC on approval): 1,364 (millions of SDRs). - Table 5 (Fund's precautionary balances (end-April 2012)): 9,500 (millions of SDRs). - Table 5 (Fund's Residual Burden Sharing Capacity): 10.8. *Prepared by the Finance and Strategy, Policy and Review Departments (In consultation with other Departments); Approved by Andrew Tweedie and Thomas Dorsey; July 30, 2012.* ### 10. The financial risks under the proposed arrangement for Jordan appear ### _cr12343 - 10. The financial risks under the proposed arrangement for Jordan appear ### Financial risks and downside scenarios - The financial risks under the proposed arrangement for Jordan are judged manageable, but important downside risks to the baseline scenario are identified. - Specific downside scenarios: - A worsening of the situation in the energy sector: "A large and prolonged increase in energy prices, lower natural gas inflows from Egypt, and a prolonged exploration of alternative and cheaper sources of energy could worsen substantially the fiscal and external current account deficits." - A difficult political situation: "Parliamentary elections planned for end-2012 and an expected change in the government could result in a failure to implement near- and medium-term fiscal consolidation." - A deteriorating regional and global environment: "Increased social unrest and protests in the region and a slowdown in activity of the regional oil exporters (as a result of an escalation of the euro zone crisis) could hurt external inflows, in particular remittances, tourism receipts and FDI inflows. Aid to more refugees from Syria would put pressure on the fiscal accounts. The euro zone crisis could affect Jordan also through increasing borrowing costs." ### Fund exposure, access, and liquidity implications - The proposed access is front-loaded and intended to strengthen market confidence and safeguard the currency peg. - The impact of the arrangement on the Fund’s liquidity position would be small. - Exceptional access and credit concentration context (Figure 4 summary): - Greece, 20.3 (In billions of SDRs) - Portugal, 17.1 - Ireland, 16.1 - Romania, 11.3 - Jordan, 0.3 - Other arrangements, 49.9 - Credit outstanding as of July 16, 2012 plus expected first purchase under the proposed arrangement with Jordan. ### Jordan’s capacity to repay and program credibility - "Jordan’s capacity to repay the Fund is good." - Authorities have indicated commitment to implement the program steadfastly and, if downside risks materialize, to take additional measures (most likely cuts in capital spending). - Risks to capacity to repay: - "A combination of front-loaded disbursements and the back-loaded fiscal adjustment could pose additional pressures on Jordan’s capacity to repay the Fund that depends critically on Jordan’s ability to access international markets at favorable conditions." - Positive factors: - Jordan’s overall external debt and debt service are expected to remain low in the baseline scenario. - Jordan’s excellent track record of meeting its obligations to the Fund supports the assessment that "Jordan’s capacity to repay is expected to remain good." ### Modification request for Net International Reserves (NIR) performance criteria - The authorities requested modification of the NIR performance criteria for end-September and end-December, 2012 due to a technical error. - The bilateral facility of $1,082 million was inadvertently included in the NIR calculation and should be excluded because it is overdue and not readily available. - Modified NIR floors requested: - Net International Reserves of the Central Bank of Jordan in USD million (stock, floor): 6,585 (end-September 2012) - Net International Reserves of the Central Bank of Jordan in USD million (stock, floor): 7,175 (end-December 2012) - Staff supports the modification; exclusion does not change the substance of the program or projected NIR flows. ### Program design, measures, and policy priorities - IMF Executive Board approved a 36-month Stand-By Arrangement: SDR 1.364 billion (about US$ 2.06 billion). - The approval made SDR 255.75 million (about US$ 385.35 million) immediately available; remaining amount phased subject to quarterly reviews. - The Stand-By Arrangement entails exceptional access amounting to 800 percent of Jordan’s quota. - Key policy goals and measures: - Cut the primary deficit (excluding grants) by about 6 percent of GDP during the program period. - Reduce NEPCO losses by 3 percent of GDP. - Establish transparent and sustainable energy prices; reverse revenue losses through tax policy and tax administration reforms. - Shift spending composition toward better targeted subsidies and growth-enhancing investment; improve public financial management. - Energy policies to bring the electricity company back to cost recovery through tariff reform and diversification of energy sources (in cooperation with the World Bank). - Maintain the pegged exchange rate as the anchor for financial stability; central bank stands ready to raise policy rates if warranted. - Strengthen banking supervision and regulatory frameworks; new credit bureau projected to start operating by end 2012. - Structural reforms to improve the business climate, enhance trade, reform education, and develop training programs. ### Fiscal, monetary, and sectoral developments and pledges - Fiscal measures exceeding three percent of GDP were implemented in 2012; absent these measures the deficit for 2012 would have reached 9.6 percent of GDP. - NEPCO losses rose due to reduced gas supply from Egypt; authorities preparing a plan to bring NEPCO back to cost recovery by mid-2016 and to diversify gas supply (including an LNG terminal in Aqaba). - Monetary policy actions in 2011–2012: - Central bank tightened stance in June 2011, February 2012, and May 2012. - New monetary tool: weekly repo operation; narrowed interest rate corridor. - Central bank injected liquidity by trading government papers on the secondary market. - Banking sector: "sound, well-supervised, and highly capitalized." Nonperforming loans stabilized in 2011; bank profitability remains stable. ### Quantitative performance criteria and indicative targets (as presented) - Performance Criteria - Primary fiscal deficit of the central government, excluding grants in JD million (flow, cumulative ceiling): 1,199 (Sep-12), 1,754 (Dec-12) - NEPCO borrowing in JD million (flow, cumulative ceiling): 1,273 (Sep-12), 1,568 (Dec-12) - Net International Reserves of the Central Bank of Jordan in USD million (stock, floor): 6,585 (Sep-12), 7,175 (Dec-12) - Ceiling on accumulation of external payment arrears 1/: 0 (Sep-12), 0 (Dec-12) - Indicative Targets - Net Domestic Assets of the Central Bank of Jordan in million JD (stock, ceiling): -620 (Sep-12), -695 (Dec-12) - Stock of accounts payable of the Central Government in million JD (ceiling): 682 (Sep-12), 682 (Dec-12) - Stock of arrears of NEPCO: 0 (Sep-12), 0 (Dec-12) - Memo items for adjusters (in US$ millions) - Budgetary grants (flow, cumulative): 91 (Sep-12), 317 (Dec-12) - Other grants (flow, cumulative): 137 (Sep-12), 200 (Dec-12) - Net external financing excluding project loans (flow, cumulative): 65 (Sep-12), -18 (Dec-12) - Privatization proceeds (flow, cumulative): 0 (Sep-12), 0 (Dec-12) - Cap for fiscal adjustor (TMU par.11, in million JD): 40 (Sep-12), 80 (Dec-12) - Exchange rate ($ per dinar): 1.41 (Sep-12), 1.41 (Dec-12) *Source: Stand-By Arrangement—Request for Modification of Performance Criteria; Prepared by the Middle East and Central Asia Department; Approved by Adnan Mazarei (MCD) and James Roaf (SPR); September 24, 2012.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12343.pdf_