IMF Survey : Jordan’s Economy Sees Progress Despite Series of Shocks
IMF News, August 5, 2015
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- Published: August 5, 2015
External shocks and context
- Jordan was hit by a series of exogenous shocks prior to and during the program:
- Disruption of gas supply from Egypt due to repeated sabotages of the Arab Gas Pipeline, requiring substitution with expensive fuel and producing large losses for the electricity company amounting to 5 percent of GDP in 2011.
- The “Arab Spring” in 2011 prompted increased current spending including higher subsidies and wages, contributing to a central government fiscal deficit increase by 5 percent of GDP.
- Combined public sector deficit (central government deficit plus losses of the electricity company) expanded by about 10 percent of GDP in one year.
- The Syrian refugee crisis: authorities estimate there are more than one million refugees, or about 20 percent of Jordan’s population.
- Emergence of ISIS and regional instability disrupted exports and tourism; Iraq is Jordan’s largest trading partner and the destination of some 20 percent of its exports.
IMF program details and flexibility
- IMF Executive Board approved on July 31 the final review under the $2 billion Stand-By Arrangement agreed in 2012.
- Final disbursement of about $400 million was approved, making Jordan the first Arab country in transition to successfully complete an IMF-backed program.
- IMF showed flexibility during the program in:
- Fiscal targets, in light of unanticipated government outlays related to refugees and gas disruptions.
- Timing of program policies to allow authorities sufficient time to consult stakeholders and implement a medium-term energy strategy.
- Additional grants from the international community enabled flexibility.
Achievements of the program
- Program had three main objectives: maintaining macroeconomic stability; ensuring fairer, more equitable policies; and increasing growth prospects.
- Macroeconomic stability:
- Gradual reduction of the combined public sector deficit by some 5.3 percent of GDP over the past three years, attributed to energy sector reform and central government measures.
- Public debt was 71 percent of GDP at the end of 2011 (pre-program baseline).
- Equity and redistribution:
- Abolished general subsidies on fuel pump prices and replaced them with targeted cash transfers to some 70 percent of the population (provided when the oil price is above $100 per barrel).
- Limited reform to income taxes: less than 3 percent of the population are paying income taxes.
- Structural and business environment reforms:
- New investment and private-public partnership laws put in place.
- Improvements in the public investment framework and progress on improving access to finance.
Fiscal position and financing needs
- Current public debt reported at 90 percent of GDP.
- Authorities should bring the electricity company back to cost recovery and consider further central government measures, including widening the income tax base.
- Financing needs expected to remain high for the next couple of years.
- IMF view: reforms needed to reduce debt from the current 90 percent to the authorities’ target of about 70 percent by 2020, regarded as a safe threshold for an emerging economy.
- Sustained donor support is essential given the expense of hosting Syrian refugees; international assistance remains indispensable.
Labor market, social outcomes, and inclusiveness
- Unemployment rates:
- 13 percent overall.
- 20 percent for women.
- 30 percent for the youth.
- Labor force participation and female employment:
- Low overall workforce participation; many people are giving up seeking work.
- Female labor force participation particularly problematic: only 10 percent of the women of working age are actually working.
- IMF assessment: creating jobs remains an area where reform has fallen short; structural unemployment persists even during periods of higher growth.
- Barriers to access to finance noted: absence of a robust law for collateral, insolvency, or bankruptcy inhibits lending.
Growth performance and prospects
- Historical and recent growth:
- Average growth of 6.5 percent from 2000 to 2009.
- Growth “has hovered at about 3 percent” more recently.
- IMF hopes Jordan can return to its medium-term target potential of 4.5 percent growth.
- Employment implications:
- IMF calculations indicate Jordan needs a growth rate of some 6 percent just to absorb new entrants into the labor force.
- Conclusion: structural reforms are needed to raise potential growth, translate growth into higher employment, and attract prospective investors despite regional uncertainty.
Policy recommendations and priorities
- Continue energy sector reforms and ensure the electricity company returns to cost recovery.
- Widen the income tax base to increase revenue and fiscal sustainability.
- Advance labor market reforms to raise workforce participation and reduce structural unemployment, with a focus on female participation.
- Strengthen laws and frameworks to improve access to finance: collateral, insolvency, and bankruptcy legislation.
- Improve the business environment and facilitate investment (including through private-public partnership frameworks).
- Maintain engagement with international donors to secure sustained support for refugee-related and fiscal needs.
Source: IMF Survey, August 5, 2015.