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Transcript of Press Conference Call on the IMF Board’s Completion of the Fifth Review under the SBA with Jordan
November 18, 2014
Participants:
Kristina Kostial, Mission Chief for Jordan, Department of the Middle East and Central Asia
Wafa Amr, Communications Department
MS. AMR: Good morning. Thank you for joining us today. This is Wafa Amr from the Communications Department at the IMF. I'd like to introduce Kristina Kostial, the mission chief for Jordan. She's going to make a short presentation and then, we'll be happy to take your questions.
MS. KOSTIAL: Good afternoon, and thank you very much for joining us from Amman. This is Kristina and so, I believe we know each other. As you know, I'm the mission chief on Jordan.
We thought that it would be useful just to start you out with a brief overview of where we stand. And I think first of all, what's very important to note is Jordan has been quite resilient in a really, really difficult environment. And, I mean, a difficult environment, you all know much better than but let me just go through it. Jordan has been suffering from large fluctuations and shortfalls in gas from Egypt, the Syrian crisis has been heavily weighing on Jordan's economy and then, of course, the conflict in Iraq is also having a large impact on the economy.
But despite that, the economy is resilient and what do I mean by that? Growth has remained relatively stable. You've seen the second quarter figures coming out. Growth rate is about three percent. Headline inflation has been coming down. Headline inflation we got the most recent numbers, these are for October, has come in at 2.3 percent international reserves of the Central Bank are (inaudible) from there to comfortable level at about six months of import coverage.
And even during this current account there's a large deficit, it's been gradually narrowing, the deficit for last year was something like 17 percent of GDP and we project it to come down this year to below 14 percent. So I think that overall is very, very good news.
Now, looking forward, what are the challenges for Jordan? And we're seeing two main challenges. The first main challenge is how to deal with public debt. And you will be aware that public debt has been on quite a quick and large increase. Public debt at the end of 2011 was some 71 percent of GDP and we project public debt at the end of this year to reach 89 percent of GDP. And that is quite a rapid increase.
So what does Jordan have to do? It has to do fiscal consolidation and there are two parts to it. It has to do fiscal consolidation on behalf of the central government and fiscal consolidation also on behalf of the utilities and particularly important is the electricity company NEPCO, that this company, as well as the water companies, are implementing their medium term strategies which bring these companies to cost recovery over the (inaudible).
That is the big fiscal challenge for Jordan. But there is another very important challenge and that is more on the structural side. And that is not a new challenge. That is a long-standing challenge that Jordan has been suffering from relatively high unemployment particularly for the young, particularly for women. And I think that is also all the more striking because not only is unemployment high but labor force participation is very low and is actually quite low compared with other countries in the MENA and particularly also for women which I personally found very striking.
So this is a challenge which Jordan needs to tackle, that over the medium-term it reduces unemployment and that is not easy because as you know Jordan's population is relatively young and just -- we did an estimate in April in the context of our Article IV consultation - just to absorb the young into the labor force by keeping the unemployment at its current level, that requires some six percent of growth which is a very large number.
And what we believe is needed is structural reforms, structural reforms particularly in the area of labor markets, particularly focused also on women, structural reforms in the area of the business environment. And there, I think there has been some progress recently with the private/public partnership and investment laws. But also progress in terms of public institution, governance and again, there's been some progress recently there is more transparency in that initiatives are being published so that people can comment on them. So thereis progress on governance, on audit, etc
So these are, as I said, the big challenges we see, taking care of public debts and there the central government and the utilities are on their way to reduce the deficit so that's on the way. And then, we believe a stronger focus on structure reforms is needed. And there we hope that vision 2025 which is currently under discussion can really make a big difference.
So now, where does the Fund come in? And you will have seen our press release of last week. We had a meeting of our Executive Board on November 10th and the Board, at that point in time, approved the completion of the fifth review on the Jordan's program with the IMF which is a standby arrangement. And that releases a trench of about $129 million.
And you know, let me make a comment on our relationship here. I think what you will see is and that what you've seen also before that we, from the Fund side, have remained flexible because I think that is something which is very much needed in a difficult situation as Jordan is in that we all remain flexible and try to make the best out of that situation because things change. And we've been flexible before.
We have been increasing the deficit target both to take into account the pressures on the fiscal accounts from the Syrian refugees but also to take into account the shortfalls and gaps from Egypt. And we're shown again with the fifth review flexibility and we have widened the deficit target both this and also in the next year anticipating further shortfalls in gap from Egypt.
In terms of next steps, we have just discussed with the authorities that we will come on a short one-week staff visit to Amman in December and then the next review mission, the review is going to be based on performance at the end of the year. The next review mission we need to discuss the timing but probably it's going to happen sometime in March.
So I thought, you know, that would give you a little bit of background and I'm now looking forward to your questions.
QUESTIONER: Is there agreement between Jordanian government and IMF on certain measures including the introduction of new taxes in 2015 budgets? Thank you.
MS. KOSTIAL: One of the major discussions which we had during the mission was how to bring about the adjustment in the central government because in a sense, the adjustment for the public utilities that has been publicly announced, there's the water strategy. There's the energy strategy and as you know, there will be tariff increases in electricity tariffs early next year and also, what is very important is that the liquefied natural gas terminal would start operation mid-next year. And that was bringing about the adjustment on the energy side.
So what we really focused on during our last mission and also, you know, as part of our review is how to bring about the adjustment in 2015. Now, from our side, what we believe is that we think that Jordan should do an adjustment mostly on the revenue side and why is that so?
When you look at Jordan's revenue figures, Jordan has lost a lot of revenue during 2007-2011. Jordan has lost some nine percent of GDP. That’s a very large number in revenue. So if Jordan still had that money right now, then it wouldn’t have needed an IMF program. So this is a very large amount and we believe that it's important to recoup some of this revenue loss.
And where do we see -- go for recouping that revenue loss? First of all, on the income tax, as you know there is a law currently in Parliament which we believe overall is a step in the right direction. But we believe that that law could have been more ambitious. And we believe that this law could have been more ambitious in providing more fairness for the Jordanian people.
And what do I mean by that? Right now, there's very few taxpayers in Jordan and only three percent of the population are paying taxes. And that, when you compare Jordan with other countries, makes Jordan a very large outlier even in the region. So what we think is that rather than only three percent of the population paying taxes, that should be widened to say the richest 20 percent of the population.
That would not hit the middle class but that would have the richest 20 percent pay and that is fair. That is fair to the economy and that is fair to the Jordanians. So that was one big issue for discussion.
We also believe that a large part of the revenue shortfall comes from providing tax incentives and tax incentives are very intransparent and you will have seen that the Ministry of Finance about a year ago posted on its Web site a study which shows the cost of tax incentives. And we believe it's important to reduce those tax incentives and to be transparent about them.
So we talked a lot about taxes because we feel that it's important to do an adjustment from the revenue side given these large revenue shortfalls. But in our discussions, the Ministry of Finance felt that they do not want to move on the revenue side but that they preferred to move on the expenditure side. And that was really the thrust of the review discussions.
Now, what is the most important? What is the most important as I said at the start is to bring down debt in the medium term. Now, there are two ways of doing it or there are actually three ways of doing it. One is on the revenue side. The other way is on the expenditure side and then, of course, you also want to increase growth which will help reduce your debt.
And in our discussions with the authorities, we would have as I said preferred more revenue measures but the authorities opted more for measures on the expenditure side. The bottom line is the same and the bottom line is bringing down debt and reducing the deficit. So this is where we stand on the review and in terms of taxes.
MS. AMR: Any more questions?
QUESTIONER: I want to ask about what is the future plan about the program of Jordan and will the IMF agree to a new program after the current one expires?
MS. KOSTIAL: As you know, the standby arrangement with the IMF will expire on August 2 next year. And it is completely up to the authorities on whether they want to request a further program with the IMF. And from our side, of course, we stand ready to continue our relationship and I think that this has been a very successful relationship. Because, as I said, at the very beginning, Jordan's economy has proven resilient to shocks and that is something new.
And we hope that the program has helped in that regard. So it's completely up to your government if they are interested in a follow-up program. From our side, of course, we would be happy to help your government and the Jordanian people in any form we can.
QUESTIONER: I have a question.
MS. AMR: Yes, please, go ahead.
QUESTIONER: My question is about the fifth review of the Jordanian program. Is the program on track despite the non-compliance of the benchmarks?
MS. KOSTIAL: The program is on track, the standby arrangement is on track and that you see by our Executive Board concluding the fifth review. So the program is -- the actions of the authorities are consistent with the program and we're continuing our support through the program. So I'm a little bit confused by your question. But very clearly the standby is on track.
Maybe I should clarify, a standby arrangement or any arrangement with the IMF, we are flexible and yes, of course, we set performance criteria and have some benchmarks so that we can see whether the program remains on track. But this world is a very changing world. And Jordan, things are changing and I mean, then of course, I mean, for your government they also have to change their policies and that is what I said that is very important that there is flexibility in the program to adjust to circumstances on the ground.
Because, I mean, just having benchmarks and performance and just saying you have to stay with that, that is meaningless. So that is exactly what I was talking about. I mean, that this program is flexible. So really, very clearly, this program is on track as evidenced by our Board concluding the fifth review.
QUESTIONER: Okay, thank you. My second question, you know, Jordanian authorities were committed to endorse a new tax law this year, I mean, 2014, which intends to increase the public revenue and to mend the taxation system, particularly to remove the exemption and also review things of tax evasion. It was postponed, you know, to 2015 and maybe to 2016. Do you think the authorities should look for another alternative?
MS. KOSTIAL: Again, going back to what is the objective of the program? The objective of the program is to reduce debt. And that should be done in a way which is good for the economy and in the sense that it should not affect growth, because very often when you have fiscal adjustment that is when the government is reducing its deficit, this could be detrimental. This could be bad for growth.
Then the other thing to look at on fiscal adjustment it needs to be fair. It needs to be fair to the Jordanian population. Now, we believe that the income tax law as it currently is at Parliament is definitely a step in the right direction. Do we believe that this could be a more ambitious law? Yes.
As I said before, I think particular on the personal income tax threshold that that should be lower because there are very, very few Jordanians which are paying the taxes. Now, if the law is not going to be approved this year again, it's a question of flexibility. Then, we have to find other measures and ideally, on the revenue side to make sure that debt is on a downward path.
And let me also clarify one issue just to give you orders of magnitude. If the law is going to be passed this year, we expect a revenue impact of like 0.3 percent of GDP for next year and that revenue impact is about doubling for the fourth year, sorry, for the following year which is 2016 simply because the income tax payments are back-loaded.
So if the law is not going to be approved this year, this would open up a gap of 0.3 percent of GDP for next year and we'll have to discuss on what is going to happen on that. But we would expect to get to be close from the revenue side.
QUESTIONER: And my last question, you know the government has asked the IMF Board to reschedule the rest of the loan for three payments. Has this been approved?
MS. KOSTIAL: Uh-huh. That actually was part of the discussion at the Executive Board last Monday and what we discussed there, we call it rephasing. And what we discussed there is to reduce the number of reviews and that was we could have completed the fifth and the sixth review at this point in time but because not all of the adjustment for 2015 is already implemented and in place, we only concluded the fifth review.
And because of that, the Jordanian authorities asked us to rephase the program which de facto means that we are -- this reduces the number of pending reviews. So there are only three more reviews left in the program.
The overall disbursement on the program is completely unaffected. It's the same disbursement over the period of three years. But we did -- rather than distributing it over five reviews, we're now distributing it over three reviews.
QUESTIONER: What are the measures the government should take to reduce debt?
MS. KOSTIAL: Let me just clarify, this is measures to increase revenue?
QUESTIONER: You mentioned the government should take some alternative measures to reduce the debt and increase revenue. What kind of measures are you proposing if the tax law is not passed by parliament?
MS. KOSTIAL: Okay, if the income tax law is not passed, then there are alternative measures to look at and I think that will be in a discussion of the sixth review. But possibilities include reducing tax incentives and we're -- I think we would be in particular looking at tax incentives under the sales tax. Because tax incentives increase substantially, with a couple of years they doubled and this is very costly to the budget.
There are also alternatives that the authorities could look into increasing custom duties. I mean, there are all sorts of things. Now, this is -- we haven't yet discussed that with the authorities on what would be done at that point. But this is something which we'll look into when we go on the next review mission which I said probably is going to be around March next year.
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