## _cr15225

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### EXECUTIVE SUMMARY — Background and program context
- Conflicts in Syria and Iraq led authorities to estimate Jordan is hosting 1.4 million Syrians (over one fifth of Jordan’s non-refugee population), the majority refugees.
- Near-complete halt of low-cost gas flows from Egypt required imports of more expensive fuel for electricity generation, contributing to large NEPCO losses and adding to already high public debt.
- The Stand-By Arrangement (SBA)-supported program emphasized:
  - gradual public sector consolidation,
  - energy and water sector reforms to restore utilities to operational cost recovery,
  - prudent monetary policy to rebuild international reserves.
- Vision 2025 identified as a 10-year framework to address structural challenges; anchoring it in a medium-term macro-fiscal framework is highlighted as important.
- Fund engagement to continue through Post-Program Monitoring (PPM) unless a new arrangement is agreed.
- Completion of the seventh review makes available SDR 284.167 million (about $400 million).
- Date of document: July 16, 2015.

### Recent economic and program performance — Key macro and financial indicators
- Real GDP growth and labor market:
  - Growth dropped to 2 percent y-o-y in 2015Q1.
  - Macroeconomic framework revised 2015 growth from 3.8 percent to about 3 percent.
  - Growth expected to reach potential only in 2017 under baseline assumptions.
  - Labor force participation fell and unemployment increased in 2015Q1; chronic high unemployment (youth) and very low female participation noted.
- Inflation and credit:
  - Headline CPI inflation: rebounded to 0.3 percent y-o-y in June, from -1.7 percent in February.
  - Core inflation: 3.4 percent y-o-y.
  - Projection: CPI inflation to move into positive territory by end-year, peak at 2½ percent y-o-y in 2016, and decelerate to 2 percent y-o-y thereafter.
  - Private sector credit (excluding the refinery): 4.8 percent y-o-y in April.
- External sector and reserves:
  - Energy imports fell by one third y-o-y in 2015-Q1; remittances increased and more than offset declines in merchandise exports and tourism receipts.
  - Current account deficit (excluding grants) projected at about 11 percent of GDP in 2015, declining to about 9 percent of GDP by 2020.
  - Net international reserves: $13.8 billion at end-April; usable reserves equal to 130 percent of the Fund’s reserve adequacy metric; projected to remain over 125 percent of the reserve metric.
- Financial sector:
  - Banks remain profitable with strong liquidity and capital buffers.
  - NPL decline accelerated in 2014 due to write-offs, foreclosures, and some rescheduling.
  - Deposit dollarization continued to decline.

### Recent economic and program performance — Policy implementation
- Fiscal:
  - January–April revenue exceeded projections by 0.3 percent of GDP (arrears clearance after a tax amnesty).
  - Current and capital outlays lower than expected by 0.9 percent of GDP due to late 2015 budget adoption.
  - Performance criterion on the primary fiscal deficit was met comfortably.
- NEPCO and energy sector:
  - NEPCO losses in line with expectations; combined public deficit PC met.
  - End-March indicative target on clearing NEPCO’s arrears missed; all arrears cleared in early April.
  - LNG terminal started operations in early July.
  - Renegotiated Shell LNG contract: volume increased to 250 million cubic feet per day (from 150 million cubic feet) and average price lowered, substantially reducing NEPCO losses starting this year.
  - Outstanding arrears mainly between the refinery and government projected at about 1.5 percent of GDP by end-2015; Ministry of Finance to pay the refinery on behalf of agencies starting in 2016 and clear existing arrears by end-2018.
- Monetary policy:
  - Central Bank of Jordan lowered interest rates by 25 basis points (bps) in early July (second cut this year after a 25-bps reduction in February).
  - Output gap estimated at 2¼ percent in 2015.
- Structural benchmarks met by end-May:
  - Draft law for TSA adopted and to be sent to parliament in the fall.
  - Cabinet-approved preliminary budget ceilings sent to institutions for 2016 base budget requests.
  - Action plan prepared for resolving energy sector arrears.

### Outlook and principal risks
- Growth and baseline outlook:
  - 2015 growth revised from 3.8 percent to about 3 percent.
  - Framework assumes gradual easing of Syria and Iraq conflicts starting in 2017 (one year later than previously assumed).
  - Growth supported by public and private investment and rebound in exports and tourism; imports and consumption to slow as refugees return.
- Public debt and fiscal trajectory:
  - Public debt is high; continued central government and NEPCO adjustment would lead to public debt starting to decline in 2016.
  - Program projects fiscal windfalls from lower oil prices mainly via smaller NEPCO losses; central government budget savings minor.
- Prominent risks:
  - Escalation/lengthening of conflicts beyond 2016: further weigh on exports, tourism, investor confidence, FDI; additional refugee inflows; pressure on fiscal accounts, infrastructure, and services.
  - Donor fatigue jeopardizing humanitarian assistance.
  - Loss of competitiveness from further U.S. dollar appreciation.
  - Sharp rebound in oil prices and prolonged slowdown in key emerging market economies.
  - Domestic risk: loss of momentum in reforms.
- Projections:
  - CPI inflation: peak at 2½ percent y-o-y in 2016, decelerate to 2 percent y-o-y thereafter.
  - Current account deficit (excluding grants): about 11 percent of GDP in 2015, declining to about 9 percent of GDP by 2020.
  - Reserves projected to remain over 125 percent of the reserve metric over the medium term.

### Policy implications and priorities — Fiscal consolidation and utilities
- Fiscal consolidation:
  - Continue public sector consolidation to put public debt on a downward path; authorities committed to reduce public debt to about 70 percent of GDP by 2020.
  - Achieve gradual reduction of the combined public deficit from 3.5 percent of GDP in 2015 to 0.5 percent of GDP in 2019 (program Sixth Review series targets).
  - To allow capital spending to increase to 5 percent of GDP, complete energy reforms and adopt central government measures of about 2 percent of GDP.
- NEPCO and LNG savings:
  - Savings from renegotiated LNG contract to be used primarily to repay refinery arrears and to slightly slow fiscal consolidation in 2016 and 2017 to support the recovery.
- Energy and water sector commitments:
  - Authorities reaffirm commitment to energy strategy, including future tariff increases; may re-instate full 2015 tariff increase should oil prices rebound.
  - Water fees increases of 10–25 percent scheduled for August; water sector could reach operational cost recovery in 2016 if planned investments are undertaken.

### Policy implications and priorities — Structural and institutional reforms
- Public financial management and tax administration reforms (Fund TA offered):
  - Strengthen budget execution via reconfigured Government Financial Management Information System module (to be implemented with 2016 budget).
  - Make macro-fiscal unit in Ministry of Finance operational; consolidate central government financial statements with extra-budgetary agencies and public utilities; integrate trust accounts into TSA progressively.
  - Improve risk-based assessment of sales tax compliance and clean up taxpayer database.
  - Bring professional service providers into the tax net and consider tax administration assessment TA.
- Structural reforms to boost growth and jobs:
  - Accelerate labor market reforms, improvements in the business climate, and strengthening public institutions.
  - Translate Vision 2025 into an operational medium-term macroeconomic and fiscal framework for the 2016 budget cycle.
  - Fast-track secured lending law and revisit bankruptcy/insolvency draft law.
  - Expand SME finance facilities; credit bureau expected to start operations by year-end.
- PPPs and public investment:
  - Focus on PPP projects with careful assessment of contingent liabilities; make public investment decisions process fully operational to support PPP unit.

### Monetary and financial sector policies
- Monetary stance and reserves:
  - Current stance appropriate; CBJ ready to act to maintain attractiveness of the dinar and keep reserves adequate.
  - CBJ to monitor risk premium, dollarization, core inflation, and monetary transmission effectiveness.
  - Loosening cycle may need to end; monetary decisions should consider U.S. monetary policy normalization timing and magnitude.
- Financial sector resilience and legal framework:
  - Amendments to CBJ and commercial banking laws approved by cabinet; could be sent to parliament as early as September.
  - Banks: NPLs expected to decline further; provisioning increased; challenge to channel excess liquidity into private sector credit.
  - Nonbank sector: assess loss-making insurance sector with Fund TA; finalize actuarial evaluation of Social Security Corporation with ILO by end-year.
  - AML/CFT: TA-supported work to strengthen AML/CFT law and supervision; note litigation risk from Arab Bank lawsuit in New York (damage trial in August).

### Labor market inclusion (Box 3) — Stylized facts and policy recommendations
- Stylized facts:
  - Unemployment: about 31 percent (youth) and 17 percent (educated).
  - Female labor force participation: 13 percent (MENA average 22 percent).
  - Employment rate: 32 percent of working-age people (MENA average 44 percent; world average about 60 percent).
  - To absorb new Jordanian entrants, need to increase employment by an estimated 400 thousand positions by 2020; at current policies requires average annual growth of 6 percent; current forecasts would generate 275 thousand jobs.
- Causes of low employment:
  - Skill mismatches; large public sector (public employment share 35–40 percent); high reservation wages (public sector wage on average 122 percent of private sector); untapped female labor potential (Jordan ranks 142 in female-to-male formal labor force ratio).
- Policy recommendations:
  - Address skills mismatches via education reform and training (scale up programs like Job Compact and Injaz partnerships).
  - Reform public sector hiring and compensation to emphasize skills and competition.
  - Unlock female labor participation: address employer perceptions, information access, targeted active labor market policies, maternity benefits, affordable childcare.
  - Move workers out of informal sector by improving institutions and reducing cost of doing business.

### Debt Sustainability Analyses — Annex I (assumptions, DSA findings, and stress tests)
- Macroeconomic and fiscal assumptions:
  - Real GDP growth: close to 3 percent in 2015; 3.7 percent in 2016; 4½ percent from 2017 onward.
  - Inflation (GDP deflator): 3.5 percent in 2015, declining to 2.5 percent over the medium term.
  - Combined public deficit projected to decline from 3.5 percent of GDP in 2015 to 0.5 percent in the medium term, reflecting NEPCO reaching operational cost recovery by 2018.
- Public sector DSA results:
  - Public debt expected to stabilize at about 90 percent of GDP in 2015 and decline to about 70 percent of GDP by 2020 if fiscal consolidation continues (authorities’ target; close to MAC-DSA high-risk benchmark).
  - Gross financing needs: averaging around 19 percent of GDP in 2015–16; about 22 percent of GDP in 2015 due to short domestic maturities and large rollover requirements.
  - Heat map and stress tests: debt level and gross financing needs breach high-risk DSA benchmarks in baseline and shock scenarios; near-term risks acute.
  - Stress tests: growth shock (cumulative decline of over 5 percentage points in 2016–17) would push public debt near 100 percent in 2017.
- External Sector DSA results:
  - Public external debt expected to peak at most 35 percent of GDP in 2015 and converge below 30 percent in the medium term.
  - Private external debt estimated just over 30 percent of GDP; over three quarters held by banks as of end-2014.
  - Gross external financing need (percent of GDP): 17.6 (2015), 10.0 (2016), 9.5 (2017), 8.8 (2018), 12.3 (2019), 12.9 (2020).
- Scenario / stress-test highlights:
  - Alternative scenario (hist. averages through 2019) — external debt (percent of GDP): 59.7 (2015), 53.8 (2016), 48.8 (2017), 45.4 (2018), 43.4 (2019), 41.5 (2020).
  - Bound tests for gross external financing need (selected): B1 nominal interest rate shock: 17.8 (2015); B3 non-interest current account shock: 19.7 (2015); combined B1–B3 (1/4 sd) = 18.8 (2015).
  - One-time 30 percent real depreciation in 2015 increases gross external financing need to 17.6 (2015) and 19.3 (2020).

### Program assessment, exceptional access, and financing
- Exceptional access criteria:
  - Jordan continues to meet all exceptional access criteria.
  - Fund credit outstanding expected to peak at 5.3 percent of GDP in 2015.
  - Risks to the Fund mitigated by:
    - external loans and grants for July 2015–June 2016 of about $1.5 billion, plus a $0.5 billion non-guaranteed Eurobond and a U.S.-guaranteed Eurobond of US$1.5 billion issued last month;
    - adequate reserves; and Jordan’s adjustment progress.
- Program achievements:
  - Macroeconomic stability preserved, external and fiscal positions strengthened, reserves rebuilt to adequate level.
  - Significant fiscal adjustment for central government, NEPCO, and water companies; grants helped cushion refugee and gas shock costs.
  - Subsidy reform advanced: elimination of fuel pump subsidies; automatic pricing mechanism re-established in late 2012; cash transfers to about 70 percent of the population; general electricity and water subsidies being gradually eliminated; bread subsidy remains.
- Outlook for successor engagement:
  - Authorities expressed interest in a successor Fund-supported program; PPM recommended after SBA expiration (August 2, 2015) unless a successor arrangement is put in place.
  - Staff recommends Jordan be brought back to the standard 12-month Article IV consultation cycle given Fund credit outstanding exceeds 200 percent of quota.
  - Authorities request completion of the seventh review and approval of the related purchase of SDR 284.167 million.

### Safeguards, governance, and monitoring
- Safeguards follow-up:
  - Ongoing work to address 2013 safeguards assessment recommendations, with some delays.
  - Proposed CBJ law amendments envisage a Board committee to oversee audit and financial reporting; CBJ requested Ministry of Finance to launch selection of a new external auditor.
  - Staff urged completion by October of the quality assessment review of CBJ’s internal audit and removal of audit qualifications in CBJ financial statements.
- Program monitoring:
  - Met all end-April performance criteria; implemented three end-May structural benchmarks.
  - Authorities established quarterly projections to maintain a monitorable track record through 2015.

*Source: EXECUTIVE SUMMARY and IMF staff report excerpts, _cr15225 (IMF), July 16, 2015.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background
- Conflicts in Syria and Iraq have led to a massive influx of refugees, with the authorities estimating that Jordan is hosting 1.4 million Syrians (over one fifth of Jordan’s non-refugee population), the majority of which are refugees.
- Near-complete halt of low-cost gas flows from Egypt required imports of more expensive fuel for electricity generation, contributing to large losses at the national electricity company (NEPCO) and adding to already high public debt.
- The Stand-By Arrangement (SBA)-supported program emphasized gradual public sector consolidation, energy and water sector reforms to restore utilities to operational cost recovery, and prudent monetary policy to rebuild international reserves.
- Vision 2025 is identified as a 10-year framework to address structural challenges; anchoring it in a medium-term macro-fiscal framework is highlighted as an important step.
- Fund engagement will continue through Post-Program Monitoring unless a new arrangement is put in place. Completion of the seventh review makes available SDR 284.167 million (about $400 million).
- Date of document: July 16, 2015.

### Recent economic and program performance — Economy: suffering from regional conflicts but holding up
- Real GDP growth:
  - Growth dropped to 2 percent y-o-y in 2015Q1.
  - The macroeconomic framework revised growth for 2015 down from 3.8 percent to about 3 percent.
  - Growth is expected to reach potential only in 2017 under baseline assumptions.
- Labor market:
  - Labor force participation fell; unemployment increased in 2015Q1, indicating a decline in employment in the first quarter.
  - Chronic high unemployment, especially for youth; depressed labor force participation for women (one of the lowest worldwide).
- Inflation:
  - Headline CPI inflation: rebounded to 0.3 percent y-o-y in June, from -1.7 percent in February.
  - Core inflation: continued descent to 3.4 percent y-o-y.
  - Projection: CPI inflation would move into positive territory by end-year, peak at 2½ percent y-o-y in 2016, and gradually decelerate to 2 percent y-o-y thereafter.
- Private sector credit:
  - Excluding the refinery, private sector credit growth reached 4.8 percent y-o-y in April.
  - Corporate credit picked up in Q1; mortgages slowed with real estate prices; bank exposure to real estate credit risk remained limited.
- Current account and reserves:
  - Energy imports fell by one third y-o-y in 2015-Q1; remittances increased, more than offsetting declines in merchandise exports and tourism receipts.
  - The decline in the current account deficit (excluding grants) to about 11 percent of GDP in 2015 is projected; deficit expected to decline to about 9 percent of GDP by 2020.
  - Net international reserves increased to $13.8 billion at end-April, equivalent to usable reserves of 130 percent of the Fund’s reserve adequacy metric; reserves projected to remain at adequate levels (over 125 percent of the reserve metric).
- Financial sector and markets:
  - Banks remain profitable with strong liquidity and capital buffers.
  - NPL decline accelerated in 2014 due to write-offs, foreclosures, and some rescheduling.
  - Deposit dollarization has continued to decline.
  - Amman Stock Exchange regained losses from early-year volatility; bond spreads and other market indicators noted.

### Recent economic and program performance — Policy implementation: on track
- Fiscal performance:
  - January–April revenue exceeded projections by 0.3 percent of GDP (arrears clearance after a tax amnesty).
  - Current and capital outlays were lower than expected by 0.9 percent of GDP due to late adoption of the 2015 budget.
  - The performance criterion (PC) on the primary fiscal deficit was met comfortably.
- NEPCO and energy:
  - NEPCO’s losses were in line with expectations and the PC on the combined public deficit was met.
  - End-March indicative target on clearing NEPCO’s arrears was missed, but all arrears were cleared in early April.
  - The LNG terminal started operations in early July.
  - Authorities renegotiated the Shell LNG contract: contract volume increased to 250 million cubic feet per day (from 150 million cubic feet) and the average price was lowered, substantially reducing NEPCO’s losses starting this year.
  - Outstanding arrears primarily between the refinery and the government: projected at about 1.5 percent of GDP by end-2015; Ministry of Finance will directly pay the refinery on behalf of agencies starting in 2016 and clear existing arrears by end-2018. “Accounting arrears” of the refinery on VAT payments largely expected to be written off due to double-counting.
- Monetary policy:
  - The Central Bank of Jordan lowered interest rates by 25 basis points (bps) in early July (second cut this year after a 25-bps reduction in February).
  - Rationale: over-performing reserves, narrowing risk premium, low inflation, and the aim to revive economic activity and close a negative output gap estimated at 2¼ percent in 2015.
- Fiscal structural reforms:
  - Three end-May benchmarks met:
    - Draft law to ensure all government agency revenue flows through the treasury single account (TSA) adopted and expected to be sent to parliament in the fall.
    - Ministry of Finance sent cabinet-approved preliminary budget ceilings—consistent with medium-term fiscal consolidation—to general budget institutions for 2016 base budget requests.
    - Authorities prepared an action plan for resolution of arrears between agencies in the energy sector.

### Outlook and risks
- Growth and baseline outlook:
  - Growth for 2015 revised down from 3.8 percent to about 3 percent.
  - The framework assumes gradual easing of the Syria and Iraq conflicts starting in 2017 (one year later than previously assumed).
  - Growth supported by public and private investment and a rebound in exports and tourism; imports and consumption would slow as refugees return.
- Public debt:
  - Public debt is high; continued central government and NEPCO adjustment would lead to public debt starting to decline in 2016.
  - Program projects fiscal windfalls from lower oil prices mostly via smaller NEPCO losses; central government budget savings expected to be minor.
  - Public debt targets charted for 2014–20 in IMF staff projections (as presented in source tables).
- Risks (prominent):
  - Escalation and/or lengthening of conflicts in Syria and Iraq beyond 2016: would further weigh on exports, tourism, investor confidence, and FDI; growth would be hit; additional refugee inflows would pressure fiscal accounts, infrastructure, and services.
  - Possible donor fatigue jeopardizing humanitarian assistance, adversely affecting fiscal and external accounts.
  - Loss of competitiveness from further U.S. dollar appreciation could depress exports and services, hurting growth and potentially increasing NPLs.
  - Sharp rebound in oil prices and prolonged slowdown in key emerging market economies.
  - Domestic risk: loss of momentum in reforms.
- Projections for inflation and current account:
  - CPI inflation projected to peak at 2½ percent y-o-y in 2016, then decelerate to 2 percent y-o-y.
  - Current account deficit (excluding grants) projected at about 11 percent of GDP in 2015, declining to about 9 percent of GDP by 2020.
  - Reserves projected to remain over 125 percent of the reserve metric over the medium term.

### Policy implications and priorities
- Fiscal consolidation:
  - Continue public sector consolidation to put public debt on a firmly downward path, including steadfast implementation of the energy strategy and completion of utility reforms.
  - Resolve remaining arrears in the energy sector and implement TSA and budgetary discipline measures to sustain fiscal gains.
- Structural reforms for jobs and growth:
  - Move aggressively on structural reforms geared to job creation, focusing on labor market reform, improvements in the business climate, and strengthening the quality of public institutions.
  - Anchor Vision 2025 in a medium-term macro-fiscal framework to coordinate reform efforts and fiscal planning.
- Monetary and financial stability:
  - Maintain prudent monetary policy to support macroeconomic stability and confidence, while calibrating policy to revive economic activity given low inflation and ample reserves.
- Fund engagement:
  - Continue Fund engagement through Post-Program Monitoring unless a new arrangement is agreed.

*Source: EXECUTIVE SUMMARY, _cr15225 - EXECUTIVE SUMMARY (IMF), July 16, 2015.*

### 13.      Discussions focused on sustaining the program’s achievements. Building on the sizeable

### 13. Discussions focused on sustaining the program’s achievements. Building on the sizeable

### Sustaining program achievements
- Continuing the planned fiscal adjustment will:
  - Anchor economic policies amid uncertainty.
  - Reduce the country’s still large financing needs, including from donors, over the longer term.
- Any fiscal savings should, to the extent possible, go toward further reducing debt to increase the economy’s buffers.
- With protracted regional conflicts depressing exports and investor sentiment, structural reforms are critical to:
  - Enhance Jordan’s competitiveness.
  - Shore up growth.
  - Create more jobs.
- Authorities view Vision 2025—the government’s 10-year framework for economic and social policies—as providing a framework for these reforms.

### Fiscal balances and projections (Central Government, NEPCO, and Consolidated Deficits, 2011–20; in percent of GDP)
- Program (Sixth Review) series (Act./Proj.):
  - Central government primary deficit 1/: 2011 9.6; 2012 7.4; 2013 4.7; 2014 4.6; 2015 1.9; 2016 1.4; 2017 1.0; 2018 0.5; 2019 0.5; 2020 0.5
  - Central government fiscal measures: 2013 0.0; 2014 0.0; 2015 1.1; 2016 0.5; 2017 0.5; 2018 0.0; 2019 0.0
  - NEPCO operating losses: 2011 4.9; 2012 5.2; 2013 4.6; 2014 4.7; 2015 2.1; 2016 1.5; 2017 0.8; 2018 0.0; 2019 0.0; 2020 0.0
  - Reduction in losses: 2011 0.0; 2012 -0.3; 2013 0.7; 2014 0.0; 2015 2.5; 2016 0.6; 2017 0.7; 2018 0.8; 2019 0.0; 2020 0.0
  - Of which: from tariff increase: 2011 0.0; 2012 0.5; 2013 0.2; 2014 0.5; 2015 0.3; 2016 0.6; 2017 0.6; 2018 0.0; 2019 0.0; 2020 0.0
  - Energy arrears clearance: all years 0.0
  - Combined public deficit 2/: 2011 14.5; 2012 12.6; 2013 9.4; 2014 9.2; 2015 4.0; 2016 2.9; 2017 1.8; 2018 0.5; 2019 0.5; 2020 0.5
- Revised projections series:
  - Central government primary deficit 1/: 2011 9.6; 2012 7.4; 2013 4.7; 2014 4.5; 2015 2.1; 2016 2.2; 2017 1.5; 2018 1.0; 2019 0.5; 2020 0.5
  - Central government fiscal measures: 2013 0.0; 2014 0.0; 2015 0.0; 2016 0.8; 2017 0.8; 2018 0.5; 2019 0.0; 2020 0.0
  - NEPCO operating losses: 2011 4.9; 2012 5.3; 2013 4.6; 2014 4.6; 2015 1.4; 2016 0.8; 2017 0.0; 2018 0.0; 2019 0.0; 2020 0.0
  - Reduction in losses: 2011 0.0; 2012 -0.4; 2013 0.7; 2014 0.0; 2015 3.2; 2016 0.6; 2017 0.8; 2018 0.0; 2019 0.0; 2020 0.0
  - Of which: from tariff increase: 2011 0.0; 2012 0.5; 2013 0.2; 2014 0.5; 2015 0.3; 2016 0.6; 2017 0.6; 2018 0.0; 2019 0.0; 2020 0.0
  - Energy arrears clearance: 2015 0.0; 2016 0.5; 2017 0.5; 2018 0.5; 2019 0.0; 2020 0.0
  - Combined public deficit 2/: 2011 14.5; 2012 12.7; 2013 9.4; 2014 9.2; 2015 3.5; 2016 3.0; 2017 1.5; 2018 1.0; 2019 0.5; 2020 0.5
- Sources: Jordanian authorities; and IMF staff estimates and projections.
- Notes: 1/ Excludes grant and transfers to NEPCO and WAJ. 2/ Excludes arrears repayment by NEPCO.

### A. Public Sector Policies — Keeping the Momentum
- Fiscal consolidation priorities:
  - Authorities committed to reduce public debt to about 70 percent of GDP by 2020.
  - Achieve this via gradual reduction of the combined public deficit from 3.5 percent of GDP in 2015 to 0.5 percent of GDP in 2019.
  - To allow capital spending to increase to 5 percent of GDP, authorities need to complete energy reforms and adopt central government measures of about 2 percent of GDP.
- LNG contract savings:
  - Savings from the renegotiated LNG contract will mostly be used to repay arrears to the refinery and to slightly slow fiscal consolidation in 2016 and 2017 to support the recovery.
- Medium-term fiscal framework:
  - Needed to outline how deficit reduction will be achieved and to annex fiscal impacts of the new investment law and other tax expenditures to the budget.
  - Decentralization bill could have important fiscal implications and should be assessed with technical assistance (TA) before decision.
- Central government (2015–2016):
  - 2015 fiscal target is within reach (LOI¶5–6).
  - Revenue over-performance provides a cushion for 2015 but not significant additional revenue in subsequent years.
  - Authorities are managing spending tightly to ensure no new arrears; plan measures to reduce health funds outlays by streamlining eligibility criteria and using any budget over-performance to accelerate health arrears repayment.
  - Higher grants and privatization receipts will allow some increase in capital spending.
  - Work on the 2016 budget (LOI¶7): cabinet-approved preliminary ceilings; staff encouraged identification of measures of 0.8 percent of GDP early.
  - Staff recommended tax reforms: reduce tax incentives, lower the exceptionally high personal income tax threshold (only 3 percent of the population pays personal income tax), and introduce a minimum corporate tax to reduce tax evasion.
  - On spending: engage Royal Jordanian shareholders to prevent further government capital injection; the government will inject an already budgeted 0.2 percent of GDP in Royal Jordanian’s capital in 2015 and may consider an additional 0.2 percent of GDP if other shareholders do not participate. Follow through on restructuring the airline.

### Public Utilities
- Energy strategy:
  - Authorities reaffirm commitment to the energy strategy, including future tariff increases, and may re-instate the full 2015 tariff increase should oil prices rebound.
  - With donor assistance, authorities will revisit by year-end electricity tariff cross-subsidization that benefits mostly households while protecting vulnerable households.
  - Staff noted recent tariff reductions (reversal of half of the tariff increase earlier this year and a May reduction of hotel tariffs) could undermine credibility of the strategy.
- Water sector:
  - Increases of 10–25 percent for water fees are scheduled for implementation in August.
  - If planned investments to upgrade the water supply network and improve service are undertaken, the water sector is on course to reach operational cost recovery in 2016.

### Structural fiscal reforms (LOI¶7) where Fund stands ready to provide TA
- Public Financial Management:
  - Strengthen budget execution via a reconfigured Government Financial Management Information System module to prevent overspending (to be implemented with the 2016 budget).
  - Pending reforms: make macro-fiscal unit in ministry of finance operational; consolidate central government financial statements with extra-budgetary agencies and public utilities; gradually integrate trust accounts into the TSA.
- Tax administration:
  - Improve risk-based assessment of sales tax compliance and clean up taxpayer database.
  - Staff encouraged bringing professional service providers into the tax net and considering a tax administration assessment tool study to map possible TA.

### B. Monetary and Financial Sector Policies — Safeguarding Stability
- Monetary stance:
  - The current monetary stance is appropriate (LOI¶8).
  - CBJ stands ready to take action to maintain attractiveness of the dinar and keep reserves adequate.
  - CBJ will monitor risk premium, dollarization, core inflation, and monetary transmission effectiveness.
  - Regional uncertainty appears to have weakened the credit channel since 2012, though data this year point to some normalization with credit growth slowly picking up.
  - Staff noted the loosening cycle may need to come to an end; monetary decisions should consider expected timing and magnitude of U.S. monetary policy normalization to avoid interest rate volatility.
  - A tighter monetary stance could help strengthen external price competitiveness; back-loaded fiscal policies might further stimulate activity and help close the output gap.
- Financial sector resilience (LOI¶8):
  - Legal framework:
    - Amendments to the CBJ and commercial banking laws approved by cabinet; could be sent to parliament as early as September.
    - CBJ law amendments would foster transparency and align CBJ autonomy/oversight with best practice.
    - Banking law amendments would strengthen corporate governance; further changes recommended on cross-border cooperation, prudential requirements, and resolution.
    - Parliament is discussing a money exchanger law to strengthen the regulatory framework.
  - Banks:
    - NPLs expected to decline further due to write-offs (legacy from global financial crisis) and tighter lending standards.
    - Banks increased provisioning for NPLs.
    - With expected decline in government borrowing needs, key challenge is channeling excess liquidity into private sector credit without compromising standards.
    - Banks highlighted need for institutional, judicial, and foreclosure reform to unlock credit supply; stabilization in regional conflicts could stimulate credit demand.
  - Nonbank financial sector:
    - With Fund TA, authorities will assess the loss-making insurance sector to strengthen supervision and monitoring.
    - Actuarial evaluation of the Social Security Corporation, conducted with ILO, expected to be finalized by end-year; follow-up policy action might be needed.
  - AML/CFT:
    - Ongoing TA-supported work to strengthen AML/CFT law in line with new FATF standard; develop strategy to address CFT regime shortcomings; design risk-based approach to AML/CFT supervision.
    - Note: there is a lawsuit against Arab Bank filed at a New York federal district court in 2004 for alleged provision of financial services to Hamas; the damage trial will take place in August and is expected to be appealed.

### C. Structural Reforms — Redoubling Efforts
- Private sector development progress:
  - Business environment:
    - Authorities’ roadmap to enhance the investment climate (jointly with World Bank) welcomed; pressing reforms include starting a business, registering property, dealing with construction permits, paying taxes, and inspection reform.
    - Launch of the investment window/one-stop-shop in April is encouraging.
    - Other by-laws for the investment law should be expedited, particularly the one dealing with FDI restrictions.
    - A World Bank-OECD transition fund project could improve investor protection and investment regulations.
    - Important to enhance data exchange across government entities and introduce automation in investment-related procedures (e.g., online applications and e-signatures).
  - Access to credit:
    - Facilities for SMEs scaled up with donor support.
    - Credit bureau expected to start operations by year-end to improve banks’ monitoring and assessment of borrowers.
    - Staff urged expedited parliamentary adoption of the secured lending law and revisiting the bankruptcy/insolvency draft law to align with best practice.
- Vision 2025:
  - Appropriately identifies impediments to growth and employment, but a broad-based approach to labor market issues still needs development.
  - Ongoing review of national employment strategy with ILO assistance will consider Syrian refugees joining the labor market.
  - Work to translate Vision into a medium-term macroeconomic and fiscal framework should be in time for the 2016 budget.
  - Successful implementation requires clear deliverables, timelines, transparent costing, an accountability framework, and inclusive stakeholder communication.
- Public-private partnerships (PPPs):
  - Authorities plan to focus on PPP projects; strategic partnerships should go beyond PPPs.
  - Potential projects announced at the World Economic Forum (ICT and renewable energy) could be growth-enhancing, bring private expertise, and reduce initial public cost, but contingent liability risks must be considered.
  - With continued World Bank TA, the recently adopted public investment decisions process should be made fully operational to support the new PPP unit in project design, assessment, prioritization, and implementation.

### Program issues and external financing
- Exceptional access criteria:
  - Jordan continues to meet all exceptional access criteria.
  - Current account pressures and external financing needs remain high and could intensify with regional conflicts (criterion 1).
  - Authorities committed to further fiscal consolidation, including energy reforms, to reduce public debt to about 70 percent of GDP by 2020 (close to the high risk benchmark under the Fund’s DSA for market-access countries).
  - 2015 budget being tightly managed; 2016 budget anchored in credible expenditure ceilings.
  - Debt service burden expected to remain manageable and debt trajectory resilient to severe stress tests (criterion 2).
  - Market access expected to strengthen with issuance of a non-guaranteed Eurobond later this year, plus continued non-resident participation in domestic debt market (criterion 3).
  - Authorities’ implementation capacity and commitment to structural reforms contribute to reasonably strong prospects for sustained program success (criterion 4).
- Capacity to repay the Fund:
  - Fund credit outstanding expected to peak at 5.3 percent of GDP in 2015 (Table 7).
  - Risks to the Fund mitigated by:
    - (i) External loans and grants for July 2015 through June 2016 of about $1.5 billion, in addition to a $0.5 billion non-guaranteed Eurobond, and a U.S.-guaranteed Eurobond of US$1.5 billion that was issued last month.
    - (ii) An adequate level of reserves.
    - (iii) Jordan being well along the adjustment path.
    - (iv) A decline in financing requirements when large amortizations are due to the Fund.

*Source: IMF staff report (excerpt provided).*

### 27.      Work is ongoing to address the 2013 safeguards assessment recommendations, albeit

### _cr15225 - 27.      Work is ongoing to address the 2013 safeguards assessment recommendations, albeit

### Safeguards assessment follow-up
- Work is ongoing to address the 2013 safeguards assessment recommendations, albeit with some delays.
- Positive steps noted:
  - Proposed amendments to the CBJ law envisage establishing a Board committee to oversee audit and financial reporting mechanisms.
  - The CBJ requested the ministry of finance to launch the selection process for appointing a new external auditor.
- Staff urged the authorities to:
  - Complete by October the quality assessment review of the CBJ’s internal audit function in accordance with international standards.
  - Move forcefully on removing audit qualifications in the CBJ financial statements.

### Fund engagement and Post-Program Monitoring (PPM)
- The Stand-By Arrangement expired on August 2, 2015.
- After expiration, Fund engagement will continue including through Post-Program Monitoring (PPM).
- Given that Jordan’s outstanding credit to the Fund exceeds 200 percent of quota, staff recommends:
  - Jordan be brought back to the standard 12-month consultation cycle for Article IV consultations.
  - PPM be initiated upon expiration of the Stand-By Arrangement.
- The authorities have expressed interest in, but have not yet requested, a successor arrangement.
- The PPM would cease if a new arrangement is put in place.
- To maintain a track record through 2015 that can be monitored, the authorities have established quarterly projections.

### Staff appraisal: macroeconomic outcomes and risks (paragraphs 29–35)
- Key findings:
  - Jordan’s Fund-supported program has paid off: good policy implementation enabled the economy to endure severe external shocks from regional conflicts.
  - Recovery is slow but underway, with macroeconomic stability preserved, and external and fiscal positions strengthened.
  - Risks and uncertainty persist due to regional turmoil affecting growth, limited resources, infrastructure, trade, tourism, fiscal accounts, and social fabric.
  - Jordan faces high public debt and chronically low employment.
- Policy priorities and recommendations:
  - Bold policy action is required; continued strong international support is critical but authorities must pursue further fiscal adjustment and decisive structural reforms to reduce dependence on donor support.
  - Public sector adjustment should put debt on a downward path.
  - The new LNG contract provides room to finance clearance of energy-related government arrears.
  - Adoption of cabinet-approved ceilings for the 2016 budget is positive; measures to bring about necessary budget adjustment in 2016 should be soon identified.
  - Consider further equity-enhancing tax reform, in particular on the income tax, while curbing tax incentives.
  - Complement tax changes with tax administration improvements and public financial management reforms to enhance transparency.
  - Continue commitment to the energy strategy; review high cross-subsidization of tariffs in light of recent tariff reductions.
- Financial sector and monetary policy:
  - Financial policies should enhance sector resilience; maintaining adequate reserve buffers is paramount.
  - Any change in monetary policy stance must account for risks, need to strengthen external competitiveness, and normalization of U.S. monetary policy.
  - Efforts to bolster supervision of the insurance sector are welcome.
  - Progress in modernizing the legal framework of the financial sector is welcome, but further changes are needed to align banking law amendments with best practice before submission to parliament.
  - Key legislation aimed at enhancing private sector credit should be fast-tracked.
- Structural reforms and labor market:
  - An acceleration in structural reforms is needed to enhance job opportunities.
  - Long-standing impediments: barriers to high growth, good-quality jobs, a favorable business environment, and strong public institutions.
  - Vision 2025 should be translated into an ambitious implementation plan anchored in a medium-term macroeconomic and fiscal framework.
  - Most urgent: broad-based labor market reforms, improvements to lending legislation, and following through on the roadmap to improve the investment climate.
  - PPPs could help accelerate growth, but due diligence in line with best practice is critical.
- Program assessment:
  - Staff supports completion of the seventh review and the related purchase.
  - PPM is recommended, given outstanding Fund credit to Jordan remains above 200 percent of quota, and the authorities expressed interest in immediate PPM initiation.

### Stand-By Arrangement objectives and achievements (summary)
- Objectives:
  - Maintain macroeconomic stability and improve the external position, focusing on fiscal adjustment to reduce public debt accumulation through gradual deficit reduction for the central government and NEPCO (and water companies).
  - Make policies more equitable: protect the vulnerable while eliminating subsidies and tax breaks for those with higher ability to pay; medium-term energy reform to diversify energy sources and improve electricity efficiency.
  - Strengthen growth via business environment and labor market reforms.
- Achievements:
  - Macroeconomic situation improved: growth holding up despite regional conflicts; inflation declined; external current account deficit narrowed; financial sector resilience strengthened; reserves rebuilt to an adequate level.
  - Significant fiscal adjustment broadly as planned for central government, NEPCO, and water companies; grants helped cushion external shocks including costs of hosting Syrian refugees and gas shortfalls from Egypt.
  - Subsidy reform advanced: elimination of fuel pump subsidies and re-establishment of an automatic pricing mechanism in late 2012, accompanied by cash transfers to about 70 percent of the population; general electricity and water subsidies being gradually eliminated; bread subsidy remains.
  - Mixed progress on structural reforms: tax reforms less ambitious than possible (personal income tax threshold reduction and curbing tax incentives noted); improvements in public institutions (public investment framework, PPP unit); some business environment improvements; labor market reforms lagging—active labor market policies helpful but insufficient to meaningfully lower aggregate unemployment.

### Risk Assessment Matrix — principal risks and policy recommendations (highlights)
- Short-term/high-likelihood risks:
  - Spillovers from escalation in Syria and a broader crisis in Iraq: High likelihood; High expected impact on fiscal accounts, infrastructure, social fabric; recommendations: (1) seek grants from donors for refugees and complementary central government assistance; (2) implement a strong medium-term program to instill confidence and ease fiscal pressures; (3) maintain high reserve buffers.
  - Persistent dollar strength: High likelihood; Low-Medium impact on competitiveness; recommendations: (1) maintain appropriate monetary policy to ensure adequate reserves; (2) implement structural reforms to improve competitiveness.
  - Sharp asset price adjustment and decompression of credit spreads: High likelihood; Medium impact via higher borrowing costs and volatility; recommendations: (1) maintain appropriate monetary policy to ensure an adequate spread over U.S. government debt; (2) issue Eurobonds covered by donor guarantees.
- Medium-term risks:
  - Donor fatigue: Low-Medium likelihood; High impact through lower grants forcing more borrowing and fewer infrastructure projects; recommendations: (1) continue public sector consolidation; (2) accelerate structural reforms; (3) engage donors to eventually reduce donor support.
  - Pressure on foreign exchange reserves: Medium likelihood; Medium-High impact if confidence weakens and deposit dollarization rises; recommendations: (1) maintain appropriate monetary policy to preserve reserves; (2) implement a strong medium-term program with broad national buy-in.
  - Structurally weak growth in major advanced and emerging economies (“the ‘new mediocre’”): Medium-High likelihood; Low expected impact domestically but second-round effects on exports and tourism possible; recommendations: (1) accelerate structural reforms to improve competitiveness; (2) lengthen the maturity profile of debt.

*Source: _cr15225 - 27.      Work is ongoing to address the 2013 safeguards assessment recommendations, albeit*

### Box 3. Fostering Labor Market Inclusion

### Box 3. Fostering Labor Market Inclusion

### Stylized Facts
- Unemployment is structurally high, particularly among the youth and educated, at about 31 percent and 17 percent, respectively.
- Labor force participation is low, especially among females—which, at 13 percent, is lower than the MENA average of 22 percent.
- Only 32 percent of working-age people are employed, a rate that is lower than the MENA average of 44 percent and way short of the world average of about 60 percent.
- To absorb the new Jordanian entrants to the labor force, Jordan will need to increase employment by an estimated 400 thousand positions by 2020.
- At current policies, staff estimates that this requires an average annual growth of 6 percent.
- Current growth forecasts would only generate 275 thousand jobs.

### Why is employment so low?
- Skill mismatches.
  - Entrepreneurs regularly cite the lack of suitable skills among job applicants as an important constraint to hiring, suggesting that the education system is failing to produce graduates with marketable job skills.
- Large public sector.
  - The public sector has been an extraordinarily important source of employment—over the past fifteen years, public sector employment shares have ranged from 35 percent to almost 40 percent.
  - This has distorted labor market incentives and diverted resources away from a potentially more dynamic private sector.
  - Government hiring has typically placed a premium on diplomas over actual skills, influencing educational outcomes and contributing to skill mismatches.
- High reservation wages.
  - The public sector offers comparatively greater job security, higher average wages (the average public sector wage is 122 percent of the one in the private sector), and more generous benefits.
  - This has inflated wage expectations among new entrants.
  - New entrants’ capacity to withstand long periods of unemployment—in anticipation of securing more lucrative opportunities in the public sector—is buoyed by familial support and remittances from abroad.
  - There are currently more than 200 thousand people waitlisted to become public sector employees.
- Untapped talent.
  - The World Economic Forum’s 2014–15 Global Competitiveness Report finds that Jordan ranks relatively low in labor market efficiency—94th out of 144 countries.
  - This is largely driven by a very low ratio of females to males in the formal labor force, with Jordan at rank 142.

### Policy recommendations to improve inclusion
- Address skills mismatches through educational reform and training.
  - The education system will need to focus more on quality, realigning curriculums with private-sector needs.
  - Promising training programs could be scaled up (such as Jordan’s Job Compact and those run by Injaz in partnership with the private sector).
- Reform public sector hiring practices and compensation.
  - Public sector hiring will need to place greater emphasis on skills and competition and less on paper qualifications.
  - Adjustments in government pay scales would strengthen the link between compensation and productivity.
- Unlock the potential of women in the labor market.
  - Address employers’ perceptions; the limited access to information on job opportunities; the lack of targeted active labor market policies for females; the lack of maternity benefits in the private sector; and the absence of affordable and dependable childcare.
- Move workers out of the informal sector.
  - Improving the quality of formal institutions and reducing the cost of doing business will give incentives for informal firms and workers to formalize.

*Source: IMF staff summary of "Box 3. Fostering Labor Market Inclusion."*

### Annex I. Debt Sustainability Analyses

### Annex I. Debt Sustainability Analyses

### A. Assumptions
- Macroeconomic framework:
  - Real GDP growth: close to 3 percent in 2015; 3.7 percent in 2016; 4½ percent from 2017 onward.
  - Inflation (GDP deflator): 3.5 percent in 2015, declining to 2.5 percent over the medium term.
  - Current account deficit (including grants): 7.4 percent of GDP in 2015, gradually declining to about 5 percent of GDP over the medium term.
  - Recovery in FDI inflows and gradual resumption of market access assumed to help finance the current account deficit and maintain international reserves.
- Fiscal:
  - Combined public deficit projected to decline from 3.5 percent of GDP in 2015 to 0.5 percent in the medium term, reflecting continued fiscal consolidation and expectation that NEPCO will reach operational cost recovery by 2018.
- Sovereign yields and interest:
  - Effective interest rate projected to increase over the medium term reflecting expected increase in global interest rates.
- Maturity, rollover, and market access:
  - Domestic debt average maturity: less than two years; projections assume a gradual lengthening of maturities as market access conditions improve.
  - External public debt maturity at issuance: typically more than 5 years, assumed to continue.
  - Macro framework incorporates: issuance of a $1.5 billion international bond with a U.S. guarantee and assumption of a $0.5 billion non-guaranteed bond issued in the last quarter of 2015.
  - Some bond proceeds to retire a $0.75 billion bond due at end-2015.
  - Continued participation of non-residents in local debt markets and increasing international market access are assumed.
  - Guaranteed bonds maturing in outer years assumed rolled over on expected market terms.

### B. Realism of Projections
- Growth and inflation forecast performance:
  - Past growth projections show medium-size forecast errors with a slight tilt toward pessimism overall, except recent years with slight over-projection.
  - Inflation forecast track record slightly better than average; actual inflation being 2.2 percentage points higher than forecast on average.
- Fiscal adjustment realism:
  - Jordan’s 3-year average cyclically-adjusted central government primary balance (CAPB) generally in line with peers.
  - Maximum 3-year adjustment is in the top quartile for program countries, reflecting actual consolidation since program start rather than over-optimism.

### C. Public Sector DSA
- Coverage of public debt in this DSA:
  - (i) central government direct debt;
  - (ii) direct and government-guaranteed debt of public agencies (NEPCO, WAJ, and other public entities);
  - (iii) off-budget project loans;
  - (iv) liabilities to the IMF.
- Baseline debt trajectory:
  - Public debt expected to stabilize at about 90 percent of GDP in 2015 and decline to about 70 percent of GDP by 2020 if fiscal consolidation continues (authorities’ target; close to the MAC-DSA high-risk benchmark).
  - Gross financing needs: averaging around 19 percent of GDP in 2015–16 due to short domestic debt maturities; large rollover requirements and public deficit drive gross financing needs to about 22 percent of GDP in 2015, well above the MAC-DSA benchmark.
  - Assumptions that market access improves and average maturity of newly issued domestic debt lengthens to over 3 years lead to declining gross financing needs in the medium term.
  - Holdings of liquid assets (cash deposits) help mitigate rollover risks.
- Risk assessment (heat map, fan charts, stress tests):
  - Heat map: debt level and gross financing needs breach high-risk DSA benchmarks in both baseline and shock scenarios; near-term risks particularly acute.
  - Fan charts: symmetric and asymmetric distributions show upside and downside risks; asymmetric fan chart skewed upward if downside shocks materialize.
  - Stress test outcomes:
    - Balance of risks mostly tilted to the downside.
    - Debt trajectory particularly vulnerable to lower growth and higher oil prices (shock defined as oil prices higher by $20/barrel compared to the baseline).
    - Growth shock scenario with a cumulative growth decline of over 5 percentage points in 2016–17 would push public debt near 100 percent in 2017.
    - All stress scenarios show public debt well above baseline projections and highlight risks from high debt relative to a relatively low revenue base.
- Policy implications from DSA:
  - Importance of structural reforms to boost growth.
  - Need for progress in implementation of the medium-term energy strategy.
  - Measures to strengthen revenue collection are critical to reduce vulnerability.

### D. External Sector DSA
- Coverage of external debt in this DSA:
  - (i) public and publicly guaranteed external debt;
  - (ii) external liabilities of the banking sector and private corporations.
  - Note: coverage of private external debt (especially the non-banking sector) is probably underestimated due to data limitations; external debt defined by residency criterion.
- Public external debt and financing needs:
  - Public external debt expected to peak at most 35 percent of GDP in 2015 and then gradually converge to below 30 percent of GDP in the medium term.
  - External financing requirements projected to peak in 2015 due to amortization of an international bond coming due by year-end.
  - After declining, financing requirements expected to increase to about 10 percent of GDP in the two last projection years when additional bonds come due and are assumed to be rolled over on market terms prevailing at that time.
- Private external debt:
  - Estimated at just over 30 percent of GDP and expected to remain broadly constant over the medium term.
  - As of end-2014, over three quarters of private external debt was held by banks; the remainder by non-bank private corporations.
  - Projections assume banks maintain exposure to non-residents and non-bank corporates meet part of financing needs with debt-creating flows.
  - Over the medium term, corporates’ share of private external debt projected to increase to almost 50 percent of the total private external debt.
  - Given the moderate size of private external debt and healthy balance sheets of local banks, contingent liability risks to the public sector are expected to be contained.

*Annex I. Debt Sustainability Analyses — IMF staff analysis as presented in the source PDF.*

### 15.  External debt remains vulnerable to shocks. Standard current account and other shocks

### 15.  External debt remains vulnerable to shocks. Standard current account and other shocks

### Assessment of external debt vulnerability
- External debt would rise well above baseline projections under standard current account and other shocks, but would remain around manageable levels.
- This assessment assumes:
  - FDI inflows will remain healthy in the coming years.
  - International market access is maintained.
  - External buffers will help cushion external shocks and anchor private sector expectations.
- Risks from the non-banking sector may be understated due to limited coverage.

### Key assumptions underpinning the assessment
- The baseline external debt (percent of GDP) path: 61.4 (2010), 60.0 (2011), 57.8 (2012), 65.1 (2013), 65.5 (2014), 66.2 (2015), 64.7 (2016), 63.1 (2017), 61.9 (2018), 61.2 (2019), 60.6 (2020).
- Public and Publicly Guaranteed External Debt (percent of GDP): 24.6 (2010), 23.6 (2011), 24.1 (2012), 30.0 (2013), 31.9 (2014), 34.5 (2015), 33.3 (2016), 31.9 (2017), 30.8 (2018), 30.1 (2019), 29.5 (2020).
- Change in external debt (percent of GDP): 2.1 (2010), -1.4 (2011), -2.2 (2012), 7.2 (2013), 0.4 (2014), 0.7 (2015), -1.4 (2016), -1.7 (2017), -1.1 (2018), -0.7 (2019), -0.6 (2020).
- Current account deficit, excluding interest payments (percent of GDP): 5.1 (2010), 8.5 (2011), 13.5 (2012), 8.5 (2013), 4.9 (2014), 5.6 (2015), 5.0 (2016), 4.2 (2017), 3.6 (2018), 2.9 (2019), 2.6 (2020).
- Net non-debt creating capital inflows (negative, percent of GDP): -6.1 (2010), -5.4 (2011), -5.0 (2012), -5.6 (2013), -4.6 (2014), -4.3 (2015), -4.7 (2016), -5.2 (2017), -5.7 (2018), -6.2 (2019), -6.3 (2020).
- External debt-to-exports ratio (in percent): 127.2 (2010), 125.9 (2011), 125.1 (2012), 153.2 (2013), 151.3 (2014), 176.3 (2015), 174.2 (2016), 172.2 (2017), 171.2 (2018), 169.7 (2019), 168.4 (2020).
- Gross external financing need (in billions of US dollars): 2.9 (2010), 4.1 (2011), 6.1 (2012), 4.8 (2013), 4.8 (2014), 6.7 (2015), 4.1 (2016), 4.2 (2017), 4.1 (2018), 6.2 (2019), 7.0 (2020).
- Gross external financing need (in percent of GDP): 10.9 (2010), 14.4 (2011), 19.6 (2012), 14.2 (2013), 13.4 (2014), 17.6 (2015), 10.0 (2016), 9.5 (2017), 8.8 (2018), 12.3 (2019), 12.9 (2020).

### Scenario and stress-test results (selected)
- Alternative scenario (key variables at historical averages through 2019) — external debt (percent of GDP): 59.7 (2015), 53.8 (2016), 48.8 (2017), 45.4 (2018), 43.4 (2019), 41.5 (2020).
- Bound tests (gross external financing need in percent of GDP, selected results):
  - B1. Nominal interest rate = baseline + 1/2 sd: 17.8 (2015), 10.1 (2016), 9.7 (2017), 9.0 (2018), 12.5 (2019), 13.2 (2020).
  - B2. Real GDP growth = baseline − 1/2 sd: 17.8 (2015), 10.1 (2016), 9.7 (2017), 9.1 (2018), 12.8 (2019), 13.6 (2020).
  - B3. Non-interest current account = baseline − 1/2 sd: 19.7 (2015), 12.1 (2016), 11.8 (2017), 11.3 (2018), 15.5 (2019), 16.6 (2020).
  - B4. Combination of B1–B3 using 1/4 sd shocks: 18.8 (2015), 11.2 (2016), 10.8 (2017), 10.3 (2018), 14.3 (2019), 15.2 (2020).
  - B5. One-time 30 percent real depreciation in 2015: 17.6 (2015), 15.0 (2016), 14.2 (2017), 13.2 (2018), 18.4 (2019), 19.3 (2020).
- Combined shock and other bound tests show higher external debt and financing needs relative to baseline, but scenarios generally keep debt around manageable levels given the baseline assumptions.

### Key macroeconomic projection inputs (selected)
- Real GDP growth (percent): 2.3 (historical average), projections include 2.6, 2.7, 2.8, 3.1, 5.1, and baseline projections of 2.6, 2.9, 3.7, 4.5, 4.5, 4.5 (through 2020).
- GDP deflator in US dollars (change in percent): historical average 8.4; projected series includes 6.4, 4.5, 5.6, 3.4, 6.9; baseline projections 5.3, 3.5, 3.1, 2.6, 2.5, 2.5, 2.5.
- Nominal external interest rate (percent): historical average 3.7; projected values include 3.1, 3.1, 3.3, 3.2, 3.1; baseline projections 0.5, 3.0, 2.4, 3.2, 3.4, 3.6, 4.0.
- Growth of exports (US dollar terms, percent): historical average 15.3; projections include 7.8, 4.1, -0.3, 8.7, 10.7, 13.0; baseline  -7.6, 5.9, 5.7, 5.8, 6.8, 6.9.
- Growth of imports (US dollar terms, percent): historical average 10.8; projections include 16.8, 7.9, 5.2, 2.6, 10.8, 11.6; baseline -8.4, 2.9, 3.1, 3.8, 4.6, 5.2.

### Policy implications and recommendations (from assessment)
- Implement structural reforms to further strengthen FDI.
- Maintain prudent policies to preserve external stability, ensuring:
  - Continued healthy FDI inflows.
  - Sustained international market access.
  - Adequate external buffers to cushion shocks and anchor expectations.

*Source: IMF staff (Jordan: External Debt Sustainability Analysis and Public DSA materials).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Overview and program objectives
- Program aims and recent achievements:
  - Maintain macroeconomic stability.
  - Make policies more equitable, including elimination of fuel subsidies.
  - Strengthen growth through business environment reforms and a stronger public investment framework.
- Context:
  - Jordan was hit by shocks including conflicts in Syria and Iraq and near halt of gas imports from Egypt.
  - Donor support and sound policies underpin progress toward program objectives.

### Macroeconomic outlook
- Short-term projections:
  - Growth of close to 3 percent in 2015.
  - Inflation about 2 percent y-o-y in 2015.
- Medium-term baseline expectations:
  - Growth converging toward potential of 4-4½ percent.
  - Inflation contained at around 2 percent.
  - Current account (excluding grants) narrowing from about 11 percent of GDP in 2015 to about 9 percent of GDP in 2020.
  - International reserves continuously exceeding 125 percent of the reserve adequacy metric.

### Fiscal policy and debt targets
- Recent fiscal improvements:
  - Combined public sector deficit reduced from 14½ percent of GDP in 2011 to 9¼ percent of GDP in 2014.
  - Combined deficit projected to decline to less than 3½ percent of GDP in 2015.
- Debt and deficit targets:
  - Aim to reduce public debt to about 70 percent of GDP by 2020.
  - Gradually reduce combined public sector deficit to no more than 3 percent of GDP in 2016 (including clearing arrears of 0.5 percent of GDP to the refinery) and to prudent levels in 2017–2018 to secure the 2020 debt target.
- Specific fiscal measures and commitments:
  - Gradually reduce the central government primary deficit while increasing public investment to 5 percent of GDP.
  - For 2016: contain the wage bill, better administer the general food subsidy, and continue revenue-raising efforts.
  - Strengthen public financial management and tax administration (clean up taxpayers’ database; strengthen general sales tax compliance).
- Energy and water sector commitments:
  - Lower NEPCO losses to about 1 percent of GDP in 2016 and reach cost recovery at the latest by 2018.
  - Recent operational elements: start of LNG terminal operations and agreement increasing LNG imports to 250 MMBTU/day.
  - Tariff increases scheduled for early 2016 and 2017; authorities may revisit cross-subsidization to encourage conservation and equity.
  - Stand ready to re-instate the full tariff increase of early 2015 should the oil price go above $70 dollars per barrel for a period longer than two months.
  - Work toward Water Authority of Jordan operational cost recovery over the medium term through energy efficiency, lower system losses, improved collection, and targeted tariff increases.
- Market access actions:
  - Planned issuance of a $500 million non-guaranteed Eurobond and, for the first time, a domestic Sukuk.
  - Expect continued non-resident participation in the domestic debt market.

### Monetary policy and financial sector
- Monetary stance:
  - Peg to the U.S. dollar anchors policy; focus on maintaining adequate reserve buffers and reducing the output gap.
  - Balance stimulus against safeguarding reserve targets amid elevated regional risks and possible U.S. interest rate increases.
- Financial sector strengthening:
  - Modernize financial system infrastructure.
  - Develop risk-based AML/CFT supervision.
  - Implement recommendations of the CBJ safeguards assessment.
  - Modernize regulatory framework via amendments to CBJ, commercial banking, and money changer laws.
  - Strengthen supervision of microfinance and insurance sectors; actuarial evaluation of the Social Security Investment Fund.

### Structural reforms and growth-enhancing measures
- Vision 2025 and implementation:
  - Translate Vision 2025 into an operational 3-year implementation plan by end-August, with deliverables and deadlines embedded in a medium-term budget framework.
  - Engage stakeholders and develop strategic private-sector partnerships, including through the Competitiveness Council and PPPs; incorporate contingent liabilities into debt sustainability analysis.
- Labor market and inclusive growth:
  - Broaden labor market reforms based on National Employment Strategy: scale up successful projects targeting youth and women; reduce skill mismatches; emphasize skills and competition in public-sector hiring; unlock constraints to female labor force participation.
  - Initiatives include modernizing school and vocational curricula, strengthening local business involvement in schools, introducing flexible work arrangements, enforcing maternity benefits, and rightsizing/restructuring public service.
- Access to credit and insolvency framework:
  - Credit bureau expected to start operations in the fourth quarter.
  - Revamp financial sector legal framework: new secured lending law, new bankruptcy and insolvency laws to grant financial institutions priority rights.
  - Measures to increase SME access to finance and strengthen microfinance industry.
- Business climate improvements:
  - One-stop shop for investors established in April 2015.
  - Focus on reducing costs of starting a business and improving corporate governance, including implementing international standards for stakeholder rights, board accountability, auditing, and transparency.

### Performance criteria, benchmarks, and program monitoring
- Status:
  - Met all end-April performance criteria by wide margins; implemented the three end-May structural benchmarks.
  - Set quantitative targets through 2015 and will maintain close dialogue with the Fund through Post-Program Monitoring and consider a successor arrangement.
- Request:
  - Authorities request completion of the seventh and last review under the Stand-By Arrangement and approval of the related purchase of SDR 284.167 million.
  - Authorities authorize publication of this Letter of Intent and the accompanying staff report.

*Source: Appendix I. Letter of Intent (Amman, July 16, 2015).*

### 0.7 percent of GDP in 2015. Without grants—which increased by 0.7 percentage point to

### _cr15225 - 0.7 percent of GDP in 2015. Without grants—which increased by 0.7 percentage point to

### Fiscal outcomes and reforms
- Grants increased by 0.7 percentage point to 2.8 percent of GDP over this period.
- The deficit is projected at 3.5 percent of GDP in 2015.
- The 2015 deficit is 2.1 percentage points lower than before the crisis in 2010.
- Reduction in the deficit was helped by the fall in oil prices, but is primarily the result of strong consolidation efforts.
- Fiscal position improvements and reforms implemented:
  - Fuel subsidies were completely eliminated early in the program (beyond what had been envisaged under the program).
  - Electricity tariffs have been increased, with cost recovery now expected earlier than had been projected during the last review as a result of arrangements for higher and cheaper LNG imports.
  - Sustainable revenue measures have been taken.
  - Significant reforms to budget preparation practices have been implemented.

### Monetary policy and financial sector
- Monetary policy has been very skillful in balancing stability and growth objectives.
- Reductions in the Central Bank of Jordan policy rate proved to be timely and judicious.
- Policy-rate cuts were motivated by the need to support credit growth—which is starting to recover—in the context of:
  - strong reserve buffers,
  - a low risk premium,
  - continued de-dollarization,
  - and low inflation.
- Financial markets remain robust, with banks reporting strong capital and liquidity buffers, and lower NPL ratios.
- Authorities are continuing efforts to modernize the regulatory framework and improve access to credit.

### Program ownership and political context
- Broad program ownership has been essential in underpinning its successful implementation.
- Authorities have taken politically difficult decisions, balancing political and social considerations to maintain the momentum of the economic transformation.
- The program was implemented at a time of political and constitutional reforms with parliament having a stronger voice in economic issues.

### Outlook and successor Fund-supported program
- Macroeconomic performance is projected to remain strong.
- Growth projections:
  - about 3 percent in 2015,
  - increasing to 4½ percent by 2017.
- Inflation is low, while the fiscal and external positions are expected to further strengthen.
- Authorities have expressed interest in a successor Fund-supported program.
  - Main objectives: consolidate gains made under the current program, especially regarding public debt sustainability, while undergoing structural reforms that underpin higher, sustained, and inclusive growth.
- Need to raise labor participation and reduce unemployment (as recognized in Vision 2025) through:
  - regulatory reforms to the business environment,
  - improvements in the skills and job-readiness of university and vocational training center graduates.
- Vision 2025 will be implemented through three year executive plans starting with 2016-18.
- A successor arrangement with the Fund could commence at the beginning of 2016.

### Donor assistance for Syrian refugees
- There will be a need for sustained donor assistance for Syrian refugees.
- Jordan has proved to be a good global citizen despite paucity of its resources throughout several difficult years.
- Authorities appreciate donors for generous support, including direct support to the budget which helped program flexibility in dealing with the additional shocks.
- There are signs of donor fatigue while the impact of the regional crises on Jordan is not abating.
- Sustainable assistance is needed given the significant costs, including those related to security, health, education, and subsidies.

### Administrative
- The authorities consent to the publication of the report.

*Source: IMF staff report content as provided.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15225.pdf_