Jordan -- Aide-Mémoire for the Staff Visit Discussions

July 25, 2007

Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

July 25, 2007

At the outset, we would like to thank the authorities for their warm hospitality and for the excellent policy discussions. We look forward to continued fruitful dialogue in the future.

I. Recent economic Developments and Outlook for 2007

1. Jordan's growth remains robust and inflation is under control. Real GDP grew by 6 percent in the first quarter, supported by buoyant domestic demand and large foreign direct investment. Average inflation declined to 6.3 percent in June (year-on-year), reflecting mainly a drop in the prices of meat and vegetables, while core inflation remained well contained at 2 percent. With continued sound policies and large capital inflows, growth is expected to remain at 6 percent in 2007 and average inflation to fall to 5 percent.

2. In 2007, the external current account excluding grants is expected to improve. However, the overall current account deficit is projected to stay at about its 2006 level of 13.6 percent of GDP. Excluding grants, the deficit should improve by about 1 percent of GDP. With continued strong export performance—reflecting buoyant U.S. and regional demand and large recent investments—and large remittances and private capital inflows, reserves rose to $6.3 billon at end-June and could reach $6.5 billion at year-end.

3. On the fiscal front, performance early in the year was positive, though pressures have begun to emerge. Domestic revenue performance remained robust as a result of strong tax revenue collection. The public debt-to-GDP ratio has fallen further, to about 65 percent by end-May, from 72.5 percent at end-2006. In recent months, however, the rising cost of fuel and food subsidies points to risks of a higher-than-budgeted deficit for the year as a whole, unless offsetting measures are taken.

4. Monetary policy continues to support the U.S. dollar peg, and the banking system remains sound. With tighter liquidity conditions and policy interest rates moving in line with U.S. rates, the central bank has been a net buyer of foreign exchange. Broad money in 2007 is expected to grow in line with economic activity, while private credit growth is expected to decelerate further—it has slowed to 10.5 percent during the first half of the year (June over December) compared to 17 percent for the same period last year.
II. Policy Discussions

5. Discussions focused on emerging fiscal pressures and recent monetary developments. Generally, the policy framework discussed during the last mission—which envisages a medium-term public debt target, continuation of the currency peg, and policies to narrow the current account deficit further—remains valid.
A. Fiscal Policy

6. The rising cost of fuel and food subsidies will complicate fiscal policy in the remainder of the year. Without an automatic price adjustment mechanism, the cost of fuel subsidies could reach 1.8 percent of GDP (compared to zero in the budget). Similarly, food and animal feed subsidies (wheat and barley) could increase by about 1 percent of GDP relative to the 2007 budget due mainly to higher international food prices. The mission welcomes the authorities' efforts to improve food subsidy targeting and recommends, in line with the government's commitment, replacing these generalized subsidies by targeted measures, including cash transfers to the poor.

7. The authorities are concerned about the possible deterioration in the fiscal position and are looking at ways to keep the budget deficit close to its original target. A number of expenditure saving measures are being considered (about 2 percent of GDP) that would, in addition to improved revenue (1.3 percent of GDP), compensate for higher subsidies. These include some expenditure cuts (including transfers) and a freeze in hiring (under the capital budget) in the remainder of the year, as well as potential savings from pensions, capital spending, and interest payments. If fully implemented and all budgetary grants arrive, this could limit the budget deficit to about 3 percent of GDP.

8. Nonetheless, given the sensitivity of the budget to oil price developments, and the need to meet the medium-term public debt ratio (of 60 percent of GDP by 2011), the authorities should consider raising the prices of subsidized petroleum products. Adopting an automatic price adjustment mechanism remains the preferred option as it insulates the budget process from frequent oil price fluctuations and avoids the need to resort to supplementary budgets. If this is not possible at this time, given the recent sharp increase in the price of oil, a partial price adjustment should be adopted soon to be followed by a full elimination of the subsidy next year.

9. With government financing needs set to increase over the medium term, the authorities have started exploring the possibility of expanding their set of debt instruments. In consultation with the Islamic Development Bank, the government is considering issuing Islamic sukuk. The mission believes that Jordan should also consider issuing long-term bonds in local currency in the region. This would place Jordan on the financial market map and improve its image with foreign investors, since potential investors would undertake a thorough assessment of the country risk in terms of monetary, fiscal, and financial policies. Given Jordan's favorable economic conditions, ample regional liquidity, and the current appetite of financial markets for these instruments, the interest rate premium should be small.

10. Further steps are needed to accelerate fiscal structural reforms. The authorities should complete the establishment of the Treasury Single Account in order to achieve its full benefits (better cash management, lower borrowing needs, stronger revenue collection), and consolidate the budget process, particularly in the area of capital projects. Budget coverage and classification should also be improved to make the budget a more comprehensive tool for macrofiscal management. Improving budget accounting practices is important as Jordan considers subscribing to the IMF's Special Data Dissemination Standard (SDDS). The mission welcomes the steps being taken by the authorities to resume tax reforms. Close coordination among donors and technical assistance providers in fiscal structural reform areas is highly recommended.
B. Monetary Policy and the Banking Sector

11. The monetary policy framework has strengthened further with the simplification of the CBJ's interest rate structure. The mission supports the CBJ's more active policy stance in absorbing excess liquidity through CD issuance and its intention to increase the frequency of CDs auctions (from bi-weekly to weekly). This, together with the narrowing of its interest rate corridor, has helped reduce interbank interest rate volatility and allowed for stronger monetary signals. The CBJ is ready to adjust interest rates to respond to domestic developments, particularly with regard to inflation, and to protect the peg. To improve liquidity management and the conduct of monetary policy, the MOF will communicate soon to the CBJ its plans regarding debt issuance for the second half of the year.

12. The CBJ continues to monitor closely developments in the credit market. The CBJ has continued to strengthen banking supervision and will introduce Basel II regulations at the beginning of 2008, implement fully the electronic checking clearance by September 2007, issue soon new governance guidelines, publish bi-annually a financial stability report on banks, and refine classification of consumer loans for better monitoring. The adoption of the Anti-Money Laundering/Combating Financing of Terrorism legislation is an important step and the mission hopes that the Credit Bureau legislation will be adopted soon after the new parliament is elected. To further consolidate this progress, the authorities have requested a Financial Sector Assessment Program (FSAP) update.

Table 1. Jordan: Selected Economic Indicators and Macroeconomic Outlook, 2003-07
(Quota: SDR 170.5 million)
      Prel. Est. Projections
  2003 2004 2005 2006 2007

Output and prices

(Annual percentage changes)  

Real GDP at market prices

4.2 8.4 7.2 6.4 6.0

GDP deflator at market prices

2.1 3.1 4.0 5.4 5.0

Nominal GDP at market prices

6.4 11.8 11.5 12.2 11.3

Nominal GDP at market prices (JD millions)

7,229 8,081 9,013 10,108 11,253

Nominal GDP at market prices ($ millions)

10,196 11,398 12,712 14,257 15,871

Consumer price index (annual average)

1.6 3.4 3.5 6.3 5.0

Consumer price index (end of period)

2.9 3.9 4.2 7.5 3.7

Unemployment rate (percent)

14.5 12.5 14.8 14.0 ...

Investment and savings

(In percent of annual GDP)  


99.7 102.5 113.7 108.7 106.3


23.2 21.3 19.9 20.7 23.8


76.5 81.1 93.8 88.0 82.6

Gross domestic investment

20.8 27.4 27.0 27.6 28.5


8.8 9.3 6.5 7.3 6.8


12.1 18.1 20.5 20.3 21.7

Gross national savings

32.4 27.4 9.2 14.1 14.7


7.7 7.6 1.5 3.6 4.0


24.7 19.8 7.7 10.5 10.7

Savings-investment balance

11.6 0.0 -17.8 -13.6 -13.8


-1.0 -1.7 -5.0 -3.8 -2.8


12.6 1.7 -12.8 -9.8 -11.0

Fiscal operations


Revenue and grants

34.7 36.7 33.0 34.2 36.0

Of which: grants 1/

11.7 10.9 5.0 3.3 5.1

Expenditure and net lending (including off-budget)

35.8 38.4 38.0 37.9 38.8

Overall fiscal balance including grants

-1.0 -1.7 -5.0 -3.8 -2.8

Overall fiscal balance excluding grants

-12.7 -12.7 -10.0 -7.1 -7.9

Primary fiscal balance excluding grants

-9.0 -9.8 -7.0 -3.9 -4.6

Government and government-guaranteed net debt

97.7 88.5 82.8 72.5 67.5

Of which: external debt

74.5 66.2 56.1 51.3 45.4

External sector


Current account balance (after grants), of which:

11.6 0.0 -17.8 -13.6 -13.8

Exports, f.o.b. ($ billions)

3.1 3.9 4.3 5.2 6.0

Imports, f.o.b. ($ billions)

5.1 7.3 9.3 10.2 11.5

Oil and oil products ($ billions)

0.8 1.4 2.2 2.4 2.5

Private capital inflows (net)

6.9 6.5 19.7 26.8 17.4
  (Annual percentage changes)  

Merchandise exports, f.o.b. ($)

11.2 26.0 10.8 20.8 15.5

Merchandise imports, f.o.b. ($)

12.8 43.0 28.3 9.8 12.0

Monetary sector


Broad money

12.4 11.7 17.0 14.1 11.3

Net foreign assets

24.5 7.2 3.0 22.4 4.3

Net domestic assets

-0.8 17.9 34.5 6.1 19.1

Credit to private sector

3.5 17.3 30.3 24.5 15.0

Stock market index

53.8 62.4 92.9 -32.6 ...

Memorandum items:


Gross usable international reserves ($ millions) 2/

4,740 4,826 4,745 6,104 6,450

In months of prospective imports of GNFS

6.5 5.2 4.8 5.6 5.4

As percent of JD broad money

46.4 43.5 35.6 40.1 37.6

Net international reserves ($ millions) 2/ 3/

4,431 4,544 4,622 6,032 6,414

Budgetary grants ($ millions)

1,193 1,246 633 470 810

Population (in thousands)

5,230 5,350 5,473 5,599 5,728

Nominal per capita GDP ($)

1,949 2,131 2,323 2,546 2,771

Real effective exchange rate (2000=100)

95.8 92.1 91.9 97.4 ...

Percent change (+: appreciation)

-7.2 -3.9 -0.3 6.0 ...

Sources: Jordanian authorities; and Fund staff estimates and projections.
1/ There is a difference between the grants included in the current account and budget because the 2007 budgetary grants were received.
2/ NIR exceeds gross usable international reserves in years where the net fund position is negative.
3/ Net of short-term foreign liabilities, foreign currency swaps, and commercial bank foreign deposits with the CBJ.


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