Jordan -- Concluding Statement for the 2006 Article IV Consultation and Fourth Post-Program Monitoring Discussions

IMF News, November 30, 2006

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Published: November 30, 2006

I. Introduction — Past decade performance

Real GDP growth almost doubled to 6 percent a year during 2000-05 compared with the previous five-year period.
Total factor productivity increased by 3 percent annually during 2000-04, triple the historical norm.
Inflation fell to low single-digit levels.
Public debt ratio reduced from more than 210 percent of GDP in 1990 to 83 percent by end-2005.
Increased trade openness and an unprecedented surge in foreign direct investment.

II. Recent developments and outlook for 2006

Real GDP growth likely to end the year at 6 percent or more.
Core inflation well contained; headline inflation may temporarily increase to 6 percent due to higher domestic fuel and imported food prices.
Unemployment declined but remains high at more than 14 percent.
Amman Stock Exchange index showed more stability after a large correction early in the year.
Current account deficit beginning to narrow; financed mainly by long-term capital inflows.
Import growth for the year projected at 12 percent; exports projected to rise by some 18 percent.
Overall balance of payments surplus estimated at US$1.4 billion.
Gross usable reserves of the Central Bank of Jordan (CBJ) projected to reach US$5.7 billion (an increase of US$0.8 billion over 2005), equivalent to five months of prospective imports.
Foreign direct investment could reach US$2.8 billion in 2006.
Fiscal position improved relative to 2005:
- Domestic revenues and grants projected to be 4.0 percentage points of GDP higher than in the original budget.
- Fiscal deficit excluding grants projected to improve by 2½ percentage point of GDP.
- Public debt ratio projected to decline to 74 percent of GDP by end-2006.
Monetary conditions and banking sector:
- Broad money likely to increase in line with nominal GDP mainly due to net foreign asset growth.
- Strong private sector credit growth at 25 percent year-on-year.
- Dollarization ratio stable at around 27 percent.
- Banks well capitalized; nonperforming loans declined; sector profits comfortable.
Structural reforms and privatization:
- Through November 2006, five companies sold yielding receipts of US$0.6 billion (4.3 percent of GDP); Jordan Telecom sale yielded US$0.4 billion (more than 3 percent of GDP) with additional receipts expected in 2007.
- Program to improve education, health, and public administration under way.
- Jordan became eligible for Millennium Challenge Corporation Compact Assistance.

III. Policy discussions — 2007 and medium term

Focus areas: (i) medium-term external outlook; (ii) macroeconomic policy mix to reduce current account deficit and lower public debt-to-GDP ratio; (iii) structural policies to support medium-term growth.
Medium-term outlook:
- External position likely sustainable with supportive policies and continued private capital inflows and grants only modestly below 2006 peaks.
- External debt could be halved in five years from present level of 52 percent of GDP with strong growth and prudent borrowing.
- By 2011, the current account deficit could fall below 10 percent of GDP, with reserves covering four months of prospective imports.
- Inflation expected to fall to 5 percent next year and then decline gradually.
- Growth expected to remain at 6 percent over the medium term.

A. Fiscal policy

Recommended public debt-to-GDP ratio target of 60 percent in 2011 as a key fiscal anchor.
Update the public debt law (current target 80 percent for 2006) and lay out a medium-term path for the primary balance excluding grants consistent with the debt target.
Main adjustment through rationalizing current expenditure and improving public financial management.
2007 fiscal stance:
- Contain non-priority current and capital spending growth and raise fuel prices.
- Continue well-targeted cash payments to the poor via a unified public assistance program.
- Introduce a fully automatic and symmetric formula-based fuel price adjustment mechanism.
Medium-term revenue measures:
- Strengthen tax administration and broaden the tax base.
- Consider narrowing the list of items subject to the lower GST rate and limit GST exemptions.
- Eliminate fuel subsidies, supplement with an inflation-indexed specific excise on gasoline, and apply full GST to fuel products to generate about 1½-2 percent of GDP in fuel-related revenues.
- Prevent weakening of the income tax regime and ensure tax base not undermined by expansion of free-trade zones.
- Limit tax incentives, including for foreign direct investment.
Pension and municipal finances:
- Social Security Corporation currently achieves surpluses in the order of 1½ percent of GDP; reforms needed to ensure sustainability.
- Reforms should ensure early retirement is actuarially fair, benefits linked to lifetime contributions, and pensions indexed to inflation.
- Monitor municipal deficits to avoid government bailouts or conflicts with macroeconomic management.

B. Monetary policy, budget financing, and financial sector deepening

CBJ conduct of prudent monetary policy; interest rate spread with U.S. rates consistent with stable dollarization ratio.
CBJ should be ready to tighten monetary policy if inflationary pressures become entrenched.
Continue removing excess liquidity via issuance of CDs; increase frequency of CD auctions to aid liquidity management.
Strengthen coordination between CBJ and MOF on debt issuance and find lasting solution to CBJ balance sheet weaknesses (past interest-free government loans and bank bailout operations); consider gradually retiring government debt to CBJ through marketable government securities.
Foster domestic debt markets; extend maturities to 15-20 years to promote nonbank financial sector development.
Explore issuing long-term JD-denominated bonds regionally and consider Islamic financial instruments for shorter-term budget financing.
Monitor prudential regulations closely given private sector credit expansion; pay attention to margin loans and non-collateralized household lending.
Recommend an FSAP update during second half of 2007 to assess Basel Core Principles/Basel II progress, stress testing, payment system improvements, and SSC/pension reforms.

C. Exchange rate policy

Staff analysis: Jordanian dinar value appropriate; fixed exchange rate regime has served Jordan well.
Higher FDI offset potential depreciation from declining grants and worse terms-of-trade.
Indicators (export volumes and market shares, productivity trends, foreign exchange market conditions, growth in international reserves) do not point to exchange rate concerns.
Authorities determined to maintain inflation in line with trade partners and improve productivity under the fixed regime.

D. Other structural and institutional issues

Improve business environment to support private sector: simplify procedures to start/close businesses and register property; improve investor protection; enhance access to credit information via a Credit Bureau Law; increase labor market flexibility; restrain public sector wage increases; strengthen infrastructure.
Continue privatization to support private-sector-led growth.
Prioritize structural fiscal reforms:
- Implement government financial management information system (GFMIS).
- Adopt budget classifications based on GFSM2001.
- Integrate autonomous budget agencies into central budget.
- Show spending out of privatization proceeds in the budget.
- Factor civil service reform costs into the medium-term fiscal framework.
- Implement 2004 World Bank Public Expenditure Review recommendations, including provisions for recurrent costs (maintenance of road network) and legal/accounting framework to promote PPP.
Improve statistics and subscribe to the Special Data Dissemination Standard (SDDS) by mid-2007.
IMF readiness to provide continued technical support on tax administration and macro-fiscal management.
Authorities intend to continue Post-Program Monitoring (PPM) and to publish IMF staff reports.

Key statistics and selected table highlights (2002-06)

Real GDP at market prices (annual percentage changes): 2002: 5.8; 2003: 4.2; 2004: 8.4; 2005: 7.2; 2006: 6.0.
GDP deflator at market prices (annual percentage changes): 2002: 0.9; 2003: 2.1; 2004: 3.1; 2005: 4.0; 2006: 6.2.
Nominal GDP at market prices (annual percentage changes): 2002: 6.8; 2003: 6.4; 2004: 11.8; 2005: 11.5; 2006: 12.6.
Nominal GDP at market prices (JD millions): 2002: 6,794; 2003: 7,229; 2004: 8,081; 2005: 9,013; 2006: 10,148.
Nominal GDP at market prices ($ millions): 2002: 9,582; 2003: 10,196; 2004: 11,398; 2005: 12,712; 2006: 14,313.
Consumer price index (annual average): 2002: 1.8; 2003: 1.6; 2004: 3.4; 2005: 3.5; 2006: [value not listed].
Consumer price index (end of period): 2002: 0.5; 2003: 2.9; 2004: 3.9; 2005: 6.7; 2006: [value not listed].
Unemployment rate (percent): 2002: 15.3; 2003: 14.5; 2004: 12.5; 2005: 14.6; 2006: ...
Gross usable international reserves ($million): 2002: 3,474; 2003: 4,745; 2004: 4,755; 2005: 4,723; 2006: 5,708.
Net international reserves ($ millions): 2002: 3,027; 2003: 4,431; 2004: 4,544; 2005: 4,622; 2006: 5,603.
Private capital inflows (net): 2002: -0.6; 2003: 6.9; 2004: 19.7; 2005: 29.3; 2006: [value embedded in narrative: could reach US$2.8 billion].
Stock market index annual changes: 2003: 53.8; 2004: 62.4; 2005: 92.9.
Population (in thousands): 2002: 5,070; 2003: 5,200; 2004: 5,350; 2005: 5,487; 2006: 5,628.
Nominal per capita GDP ($): 2002: 1,890; 2003: 1,961; 2004: 2,131; 2005: 2,317; 2006: 2,543.
Real effective exchange rate (2000=100): 2002: 103.3; 2003: 95.8; 2004: 92.1; 2005: 91.9.
Terms-of-trade index (1994=100): 2002: 86.2; 2003: 78.1; 2004: 75.5; 2005: 70.4.
Quota: SDR 170.5 million.

Source: IMF staff concluding statement, November 30, 2006.