On December 14, 2020, the IMF Executive Board completed the 1st Review under Jordan’s Extended Fund Facility Arrangement (EFF). Completion of the review released Fund financing in the amount of around US$148 million, bringing total IMF disbursements to Jordan in 2020 to US$689 million; this includes provision of US$400 million of emergency financing in May under the Rapid Financing Instrument. An additional amount of about US$1 billion is expected to be disbursed over the next three years.
Key questions on the completion of 1st Review of IMF-supported Program for Jordan
How has the IMF shown flexibility to help Jordan cope with the impact of COVID-19 shock? How exactly was the IMF’s EFF program recalibrated to help Jordan deal with the unfolding COVID-19 crisis?
What role do you envision for the donor community and international partners in Jordan during the next phase?
Support from Jordan’s international partners remains crucial. The COVID pandemic has significantly increased Jordan’s financing needs and robust financial support from multilateral and official bilateral lenders will be critical in the period ahead and may need to be stepped up in the event of a more protracted downturn. At the same time, continued capacity building and technical assistance are necessary to help the authorities maintain momentum of reform implementation.
The COVID-19 pandemic and measures to contain its spread have weighed on economic growth, jobs, the external account and public finances.
While there is considerable uncertainty around the economic forecast, IMF staff estimates that the output has contracted by 3 percent in 2020. Output is expected to increase by 2.5 percent in 2021, reflecting a gradual recovery as the pandemic abates.
Unemployment – which reached a record level of 23.9 percent by Q3-2020 – should recede as the recovery sets in. However, in the meantime, high unemployment would likely weigh on domestic demand.
The current account deficit has risen to about 7 percent of GDP in 2020 due to lower exports, tourism receipts, and remittances, and will remain around the same level in 2021, as the expected recovery in tourism is largely offset by increases in imports. International reserves are expected to remain adequate and should provide continued credibility to the peg.
Reduction in government revenues due to a slump in economic activity and the increased spending on healthcare, social protection and security has led to higher fiscal deficits and public debt. The central government primary deficit (excluding grants) is estimated at around 6 percent of GDP respectively in 2020. The 2021 budget submitted to Parliament envisages, appropriately, a reduction in the deficits to around 3.7 percent of GDP in 2021.
The immediate priority is to meet critical health and social protection needs to help save lives and livelihoods. Fiscal and monetary policies have provided significant support to the economy thus far, and continued targeted support in order to limit the rise in unemployment and minimize scarring (long-term effects of the crisis on the economy).
At the same time, with high public debt, and an exchange rate peg, ensuring macroeconomic stability and debt sustainability have become even more important. To this end, the authorities are committed to strengthening Jordan’s public finances over the medium-term through a broadening of the tax base and better targeting and streamlining of current spending. Stronger public finances will also allow more space to durably support the most vulnerable and accommodate large public investment needs.
In addition, the program includes reforms to boost growth and employment, including by reducing obstacles to formal employment, particularly for youth and women; enhancing the business environment; and improving governance and transparency. Reforms are also critical in the electricity sector, where pressures have increased in the aftermath of the pandemic.
The program is on track, and on December 14, the IMF Executive Board completed the 1st Review under the EFF. The Board commended the authorities for implementing timely and targeted measures to protect lives and livelihoods, while also preserving debt sustainability and market access.
While the crisis required significant recalibration of quantitative targets and structural conditionality, the authorities remain committed to (ii) ensuring monetary and financial stability to underpin the peg; (ii) resuming a gradual, growth-friendly and equitable fiscal consolidation as the recovery takes hold; (iii) accelerating reforms in the electricity and water sectors, while protecting the most vulnerable; and (iv) implementing labor market, business climate, and governance reforms to entrench jobs-rich, inclusive, and durable growth.
The fiscal targets for 2020 have been significantly relaxed to support the authorities’ efforts to save lives and livelihoods, which is the top priority.
The program now extends into 2021 the flexibility to accommodate higher-than-expected COVID related spending up to 0.5 percent of GDP.
The program can accommodate higher social protection spending if Jordan can secure additional budgetary grants.
To help Jordan meet its large financing needs in the wake of the pandemic, some of the IMF planned disbursement under the EFF has been shifted to 2021-22. This frontloading of IMF support will also provide a signal to other development partners to strengthen their assistance to Jordan at this challenging time.
The COVID shock does disproportionately affect the more vulnerable, but the authorities’ timely actions have sought to lessen the pain. Specifically, the authorities have increased cash transfers for the unemployed and self-employed, and provided in-kind transfers to the poor. They have imposed caps on salary reductions and encouraged firms to retain workers. They are also working to expand the coverage of the social safety net.
The IMF, through its EFF program, has supported these efforts. It includes a floor (a minimum) on social spending. It also allows for higher social protection spending financed by additional external budgetary grants. This means that the burden of fiscal consolidation does not fall on the poor. Revenue reforms, including the drive against tax evasion and avoidance, do not envision raising tax rates, but rather closing tax loopholes that are more likely to be used by the rich.
Equity considerations are also explicitly considered in the pace and design of the medium-term fiscal consolidation strategy and electricity tariff reforms. The program targets have been adjusted in the face of the large revenue decline to allow the authorities to undertake critical spending on health and to support the most vulnerable. A gradual return to consolidation is envisaged, once the recovery sets in.
The planned fiscal consolidation in 2021 is gradual (0.7 percent of GDP in new discretionary measures). It accommodates critical social protection and capital spending, which have larger multiplier effects on the economy. It also aims to reduce tax expenditures accruing to the rich, in order to provide a more even playing field for smaller companies, while avoiding distortionary increases in tax rates.
Similar growth-friendly measures – i.e. further reduction in tax expenditures; and expenditure reforms focused on efficiency of spending, rather than spending cuts – are expected to underpin fiscal consolidation beyond 2021, and thus should help limit the medium-term fiscal drag from the adjustment effort.
It would be important to accelerate, in parallel, the implementation of growth-enhancing structural reforms – such as removing obstacles to youth and female employment, reducing the cost of doing business; boosting competition and competitiveness; and enhancing governance – which can raise Jordan’s potential growth and make it a dynamic regional hub for investment, business and tourism.
The authorities’ measures have been well-timed and targeted. In addition to the strong containment measures, the authorities established a fund to cover emergency medical outlays, exempted medical supplies from sales tax, deferred tax payments, temporarily reduced consumption tax rates on the badly hit tourism sector, and increased social protection spending.
The Central Bank reduced its main policy rate by 150 basis points and the reserve requirement ratio for banks by 2 percentage points, provided liquidity to banks, allowed a rescheduling of loans, and supported SMEs and affected businesses with low cost credit.
It is important that stimulus measures remain one-off and well-targeted. To this end, the authorities’ plans for gradual deficit reduction and unwinding of the monetary/financial stimuli once the recovery becomes entrenched are appropriate.
Fostering a more flexible and responsive labor market by removing regulatory barriers to female participation, lowering barriers to formalization, and allowing easier access to high-skilled foreign workers will help promote inclusive growth and job creation.
Strengthening the business environment will help foster investment and enhance competitiveness. The program emphasizes reforming electricity tariffs (including to reduce cross-subsidization of households by businesses), making the tax system fairer, streamlining licensing requirements, strengthening governance and tackling corruption, improving investment approval and customs-clearance procedures, and better investor protection.
Reforms to facilitate access to finance will remove an important impediment to growth and job creation. The authorities have already made significant progress in implementing their financial inclusion strategy in terms of increasing the share of adults owning financial accounts and reducing the gender gap in access to finance. Putting the new insolvency framework in place, developing the credit bureau and payment system, enhancing digital financial services, and improving access to microfinance would help in this regard.
Governance reforms are central to the program, as fostering public trust is a key requirement both for supporting growth and maintaining public support and traction on key reforms.
The amendments to the illicit gains law recently submitted to the Parliament seek to enhance the monitoring (by the Jordan Integrity and Anti-Corruption Committee (JIACC)) and transparency, around asset disclosures by public officials. The authorities have committed to build on this progress to strengthen the broader anti-corruption framework.
In addition, the authorities have committed to strengthening and digitizing procurement procedures and regulations to implement the Unified Public Procurement By-law. The authorities are committed to transparency of COVID-related spending, including reporting on beneficial ownership of entities that have been awarded contracts.
Staff switched the reporting, for program purposes, of public debt to the general government debt concept at the time of the EFF request.
The general government concept is widely regarded as the international statistical standard for reporting public finances in advanced and emerging economies and helps facilitate appropriate cross-country comparisons and evenhandedness in debt sustainability assessments.
In Jordan, the new methodology can be best described as near-general government, i.e. it covers many important general government units, but not all of them. For instance, it covers the central government, the social security corporation (SSC), NEPCO, WAJ, and water distribution companies. But it does not yet cover subnational governments and some other own-budget agencies.
Work is on-going in this area, with the help of IMF technical assistance, and we hope that Jordan will be able to move to full general government in the near future.
