Jordan— Aide-Mémoire for the 2010 Staff Visit Discussions

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December 20, 2010

Jordan’s economic recovery remains on track, on the back of slowly-rising domestic activity. Fiscal prudence and credible monetary management, reinforced by strong supervision and regulation of the financial sector, provide a solid platform for a more robust upturn in 2011.

1. A recovery in economic activity is underway, albeit at a slow pace. Following a sharp downturn in 2009, real GDP is expected to rise by 3½ percent in 2010. Inflation accelerated to about 5½ percent y-o-y in November 2010, driven mostly by higher international fuel and food prices. The external current account deficit is expected to widen moderately to 5 percent of GDP in 2010, as a higher outturn for exports is offset by increased commodity imports. The banking system remains robust and external reserves—a record-high $12.1 billion (equivalent to 8⅓ months of imports) at end-November—continue to strengthen, following the successful first-time issuance of a $750 million five-year Eurobond in November 2010.

2. Economic growth is expected to rise further to reach 4¼ percent in 2011, but remains below potential, reflecting weak global and regional conditions. The external current account deficit is projected to widen to about 6¼ percent of GDP in 2011, largely induced by higher expenditure on imported commodities. The near-term outlook is subject to uncertainty related to world commodity price developments and the growth path of neighboring countries—particularly the Gulf Cooperation Council—to which Jordan’s business cycle is closely linked.

3. The fiscal position is projected to improve in 2010, consistent with the authorities’ fiscal consolidation plans. The overall fiscal deficit is expected to decline by close to 3 percentage points of GDP in 2010, reaching 5¾ percent of GDP, mainly due to: reductions in the operational costs of Ministries; a hiring freeze for civil servants; greater prioritization of capital spending; and a rebound in external grants. As a result, the public debt-to-GDP ratio will rise slightly to about 56 percent at end-2010, remaining below the legislated 60 percent debt ceiling.

4. The draft 2011 budget balances the objectives of fiscal consolidation and supporting economic recovery. The budget focuses on containing current spending (including moderation of growth of the wage bill), and envisages a more than 20 percent increase in capital spending to support economic growth. Based on the latest developments and macroeconomic assumptions, the overall deficit is expected to narrow to 5⅓ percent of GDP. Further fiscal consolidation will be critical over the medium term to bring fiscal and external balances to a more comfortable level. The mission supports the authorities’ policy proposals which (beginning in 2011) would reduce the overall deficit by between one-half and one percent of GDP per year (depending on the level of economic activity), and help achieve an overall deficit of about 3 percent of GDP over the medium term.

5. The monetary policy stance is appropriate. Following a period of monetary easing between November 2008 and February 2010, the absence of demand-related pressures has induced a neutral monetary stance. The extension of private credit by the banking sector has improved—credit growth accelerated to 7.6 percent y-o-y in October 2010, up from a low of 0.5 percent in January 2010. The authorities should continue to stand ready to tighten monetary policy if rebounding private sector credit raises domestic demand and places upward pressure on domestic prices. Monetary tightening could be implemented by: increasing reserve requirements; raising the policy rate; or by resumption of issuance of certificates of deposit (to soak up excess banking system liquidity).

6. Banks’ macroprudential indicators remain strong. Banks are profitable and well capitalized, deposits—largely JD-denominated—continue to be the major funding base, and liquidity ratios remain high. Bank NPLs increased modestly to 7.9 percent of outstanding loans at end-June 2010. The relatively comfortable position of the banking system is supported by a strong supervisory framework. The government recently announced the termination of the blanket bank deposit guarantee introduced in 2008, to be replaced by a larger threshold for deposits guaranteed by the Jordan Deposit Guarantee Corporation. The authorities continue to monitor closely key economic and financial indicators to provide early warning of any pressures. Given Jordan’s projected below-potential growth path and the ongoing fragility of global financial markets, continued vigilance is warranted.

7. Progress on structural reforms help enhance economic performance and reduce vulnerabilities. The mission supports recent progress in strengthening the framework for public-private partnerships (PPP). The draft PPP law, which will be submitted to Parliament in early 2011, is an important step to boost infrastructure investment by ensuring project evaluation, adequate risk transfer to the private sector, and proper accounting and reporting procedures. Following the passage of the credit information law in mid-2010, the Central Bank of Jordan (CBJ) prepared associated draft regulations and bylaws for approval by Cabinet, which should assist in lowering the cost of credit information. The mission also welcomes: the consolidation of several government units with closely-related functions; efforts to draft a sukuk law, which will help develop Islamic financial instruments; and the November 2010 acceptance by the Financial Action Task Force of Jordan’s full compliance with its Anti-Money Laundering and Financing of Terrorism provisions.

8. Capacity-building efforts continue. Hosted by the CBJ and the Institute of Banking Studies, the mission conducted a training course on macroeconomic forecasting, with participants from the CBJ, the Ministry of Finance, the Ministry of Planning and International Cooperation, and the Department of Statistics. The mission will continue to support the authorities’ technical assistance needs, and strengthen cooperation through joint research, and further training.

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The mission would like to thank the Jordanian authorities for their warm hospitality and the candid and productive policy discussions during our stay in Amman, and wishes the government and people of Jordan every success.

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¹ An IMF mission team visited Jordan during December 13–19, 2010, and the mission reviewed macroeconomic and financial developments since the Article IV consultation discussions in July. This statement represents the mission team’s views, and not necessarily those of the IMF.