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Program note

Jordan

Last Updated: September 30, 2013

Current Program Status:

A 36-month Stand-By Arrangement (SBA) in the amount of SDR 1.364 billion (about $2 billion, 800 percent of quota), approved by the Executive Board of the IMF on August 3, 2012. The Board approved the first review under the SBA on April 10, 2013, bringing total disbursements to SDR 512 million (about $774 million).

Background

Jordan’s economy has been hit hard by exogenous shocks, starting in 2011. Repeated and extensive disruptions to the flow of natural gas from Egypt due to the damage of the Sinai Peninsula pipeline, together with high and rising oil prices, have required imports of expensive fuel products for electricity generation. At the same time, regional tensions, especially in Syria, and the global economic downturn have adversely affected tourism, worker remittances, and foreign direct investment. As a result, the current account deficit widened significantly in 2011 to 12 percent of GDP from 7 percent in 2010, and growth slowed to 2.6 percent after registering an average of 6.1 percent over the last decade.

Aided by high external grants, fiscal and energy policies in 2011 mitigated the social impact of these shocks by protecting consumers from the increase in energy prices, through measures that include higher subsidies, social spending, and targeted wage increases. These steps, though, have contributed to a higher central government deficit and rising operating losses of the electricity company NEPCO, which subsidized electricity tariffs.

Macroeconomic challenges intensified in the first half of 2012. The fiscal accounts came under further pressure, largely as a result of higher oil prices, lower-than-expected grants, and rising outlays for hosting Syrian refugees. At the same time, balance of payment pressures increased—new sabotage of the gas pipeline in February and April reduced gas inflows even more compared with 2011, further increasing imports of expensive fuel for electricity generation and, with it, NEPCO’s losses. Such pressures resulted in a decline in the central bank’s reserves, which was exacerbated in May by an increase in deposit dollarization, reflecting depositor nervousness. The large public financing needs—including for NEPCO—further pushed up public debt and also crowded out the private sector.

Role of the IMF

In response to the negative external shocks, the Jordanian government adopted a national reform program in May 2012. In this context, it took significant measures to return fiscal and energy policies to a sustainable path while providing targeted support to the vulnerable parts of the population. But, looking forward, further adjustment and reforms, particularly on the energy front, are needed.

To avoid sharp adjustments that could adversely affect growth and the vulnerable parts of the population, and to guard against additional shocks, the Jordanian government asked for financial assistance from the IMF under a 36-month SBA. The SBA is supporting Jordan’s agenda for a socially acceptable fiscal consolidation. It will provide liquidity over the period 2012–15 to allow the authorities to gradually implement their program. The key objectives of the authorities’ program are to correct fiscal and external imbalances while strengthening growth prospects.

Progress to Date

The external environment continues to be challenging. The first half of 2013 was favorable as it saw a drop in international fuel prices and slightly higher-than-expected gas flows from Egypt. This helped reduce energy imports and electricity generation costs. However, global oil prices have spiked in response to escalating tensions in the region, and gas flows came to a halt in early July after sabotage of the pipeline in Sinai, and have not yet resumed. At the same time, the conflict in Syria continues to weigh on Jordan, which is currently hosting 532,000   registered refugees, according to the United Nations (the authorities believe that the actual number is much higher). These developments have put pressure on the balance of payments and the fiscal position.

Nonetheless, economic performance has been broadly positive:

  • Growth was 2.7 percent in 2012, and registered 2.6 percent in the first quarter of 2013. Trade, finance and insurance, and a recovery in construction are the key growth drivers.
  • Inflation eased to 5.0 percent year-on-year in August 2013—from 6.5 percent in December 2012—as the impact of the fuel price liberalization in late 2012 faded.
  • Largely reflecting lower energy imports, the current account deficit narrowed in the first half of the year to 9.7 percent of GDP (from 16.8 percent in 2012). However, pressures remain, including from high food imports and depressed export earnings owing to continued difficulties in the mining sector.
  • The IMF-supported program has stayed broadly on track:
    • The central government budget has been tightly managed. In late 2012, the authorities eliminated the highly sensitive fuel subsidy while at the same time providing cash transfers to compensate low- and middle-income Jordanians. In 2013, the authorities continued to keep expenditures tight by undertaking selective cuts in non-priority domestically-financed capital projects, while safeguarding a wide spectrum of growth-enhancing projects that are financed by grants from the Gulf Cooperation Council (GCC). At the same time, they continued to implement revenue-enhancing measures, most notably the introduction of a mobile phone tax in early July, and plan to submit to parliament a revised income tax law, a major revenue raiser for 2014.
    • NEPCO’s losses are expected to decrease following increases in electricity tariffs for most economic sectors on August 15 this year (households were exempted).
    • The Central Bank of Jordan (CBJ) has been rebuilding reserves, which are now at a comfortable level, helped by sizeable grants from GCC countries, and two successful U.S. dollar-denominated domestic bond issuances.

The Challenges Ahead

The key challenges facing the authorities are to:

  • Achieve cost recovery in the energy sector in a socially acceptable way. Success will hinge on sustained implementation of authorities’ energy strategy, which is built on three key pillars:
    • Diversifying Jordan’s energy sources to reduce generation costs. The main source is the construction of a liquefied natural gas terminal in Aqaba, which would make Jordan less dependent on gas supplies from Egypt. The authorities expect the terminal to be operational by end-2014.
    • Increasing energy efficiency. A new legal framework to enhance energy efficiency is largely in place, thanks to the energy efficiency bylaw implemented in November 2012. The authorities continue to adopt actions aimed at encouraging the utilization of energy-efficient devices and equipment.
    • Gradually raising tariffs while protecting the poor. The authorities held discussions in parliament on this issue, explained to the public the need for reform, and published in the official gazette a new electricity tariff structure—that protects the poor—for 2014 and the medium term.
  • Continue fiscal consolidation in a gradual manner so as not to jeopardize growth prospects and social stability. This, together with energy sector reform, would place public debt on a downward trend.
  • Maintain reserves at a comfortable level as a buffer to protect the economy from further unforeseen shocks.
  • Sustain structural reforms aimed at addressing unemployment and enhancing access to finance. The authorities’ approaches to the former include a recent initiative (Jordan Job Compact) designed to help unskilled, semi-skilled, and skilled youths find jobs through a combination of training, stimulus packages to employers, and small and medium-sized enterprise (SME) finance. Regarding access to finance, the authorities are improving the legal framework in favor of SME financing and actively seeking international support to secure resources for such enterprises. Work is also ongoing on a new investment law, which could significantly enhance the transparency of the rules governing investments.