Jordan—Aide-Mémoire for the Staff Visit Discussions
December 13, 2009
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
Jordan has experienced robust economic growth in recent years, underpinned by its strong links with the region and the rest of the world, but the global economic downturn had a significant impact on the domestic economy in 2009. The economic environment will remain difficult in 2010, with activity in Jordan strongly influenced by slowly-rising growth in trading-partner countries. The authorities’ plans to tighten the fiscal stance in 2010 will help ensure debt sustainability, and should be supported by cautious monetary policy easing to help stimulate domestic demand.
1. The pace of economic activity in Jordan has slowed considerably, adversely affected by the weak regional and global outlook. Due to sluggish activity in the finance, trade, and mining sectors, output growth declined from about 8 percent in 2008 to 3 percent projected in 2009. Lower world commodity prices and weak domestic demand have reduced inflation sharply, with prices declining by 1 percent for the eleven months through November 2009. Official foreign exchange reserves continue to rise, reaching $10.6 billion by end-November 2009 (equivalent to 8 months of imports). The real effective exchange rate has depreciated by 4 percent thus far in 2009, partially reversing its sharp appreciation during 2008.
2. The economic environment will remain difficult in the year ahead. According to the IMF’s World Economic Outlook, global growth is not expected to return to positive territory until 2010, and substantial downside risks remain. Against this background, discussions focused on recent domestic and regional economic developments, and on the appropriate mix for the near-term macroeconomic policy response.
3. Economic growth is expected to pick up modestly to about 4 percent in 2010, reflecting slowly-recovering global and regional conditions. Export growth is projected to rebound, but will remain below its long-term trend because of still-weak external demand. The impact on the external current account, however, will be broadly offset by increased imports arising from higher food and fuel prices, with the deficit narrowing slightly to about 7½ percent of GDP in 2010 (down from 8 percent in 2009). However, the near-term outlook is subject to considerable uncertainty related to world commodity price developments and the liquidity situation in the region, particularly in the Gulf Cooperative Council countries, which account for a large share of Jordan’s FDI, remittances, grants, and tourism receipts.
4. Pressures on the fiscal position intensified in 2009, particularly due to a significant shortfall in external grants. While the underlying deficit (before grants) is expected to narrow by 0.7 percent of GDP—as increased civil service salaries and capital spending, accompanied by a cyclical weakening in domestic revenues, will be offset by lower commodity price subsidies—declining external financing will widen the overall deficit to 7⅓ percent of GDP. This widening of fiscal imbalances occurred despite vigorous efforts taken by the authorities to reduce spending in the second half of the year, by limiting current spending and large cuts to capital spending.
5. The 2010 budget envisages substantial fiscal consolidation, which is necessary to support a decline in the external deficit and underpin continued low inflation. The mission agrees with the authorities that there is no room for countercyclical fiscal policy, given the slowdown in flows of external financing and the need to mitigate risks related to Jordan’s already-high public debt and debt servicing. Based on the latest macroeconomic assumptions, the 2010 Budget passed by Cabinet will yield a narrowing of the overall deficit to 4¼ percent of GDP. With this, public debt would fall below the legislated public debt-to-GDP ceiling of 60 percent by end-2010, and debt servicing would rise to 11 percent of domestic revenue. Given the already-high revenue ratio, while revenues will increase (supported by a reduction in tax exemptions), most of the consolidation in 2010 will occur on the spending side, involving: constant wages and salaries (as a share of GDP), supported by a freeze in public sector hiring; declining food and fuel subsidies; and prioritization of capital spending. However, substantial risks remain: higher interest rates, lower economic growth, or delays in policy implementation could imply a renewed increase in the debt-to-GDP ratio, and correspondingly lead to heightened financing risks.
6. With inflation muted and output growth below potential, there is scope for further cautious monetary easing, to support fiscal tightening. Over the past year, the Central Bank of Jordan (CBJ) has taken several steps to maintain confidence and support the domestic economy, including a full guarantee of bank deposits, cessation of liquidity operations, and cuts in the policy interest rate and reserve requirements. However, there is scope for further easing of monetary policy, given the negative inflation rate and sizeable interest rate differential against U.S. rates. With excess liquidity in the banking system—maintained as overnight deposits with the central bank—increasing to 24 percent of GDP following the cessation of CD issuances, a gradual lowering of the policy rate would help stimulate domestic demand.
7. The Jordanian banking system has been little affected by the global financial crisis, and remains sound. Prudent financial oversight and proactive supervision by the CBJ has shielded banks from exposure to troubled international banks, structured products, and wholesale financial markets. Together, these policies have helped maintain confidence in the Jordanian economy and financial system, allowing for a steep build-up of international reserves, even during the global financial crisis. While private sector credit has remained essentially flat in 2009, bank deposits have continued to grow at a healthy pace. Banks’ macroprudential indicators remain strong—liquidity positions are comfortable and the average capitalization remains high, total deposits continue to be the major funding base, while nonperforming loans remain low. However, underlying vulnerabilities—banks could be exposed to higher non-performing loans in light of the projected period of below-potential growth in Jordan and the region—remain, suggesting the need for continued vigilance in bank supervision.
8. Banks have little exposure to corporate debt in Dubai. At the same time, they continue to reprice credit risks, closely monitor their exposures, and have built up capital buffers to strengthen their capacity to withstand shocks. The mission welcomes the measures taken by the CBJ to further enhance its effective banking supervision, including: continuing to implement Basle II regulations (introduced in 2008); regular stress testing of banks; enhanced cross-border bank regulation through consolidated supervision of international branches; publication of financial stability reports; and close monitoring of financial soundness indicators as part of an early warning system. These measures will help the authorities further reduce banking system vulnerabilities.
9. Safeguarding the exchange rate peg remains the lynchpin for the maintenance of financial stability. The peg of the Jordanian dinar to the U.S. dollar has served the country well by anchoring inflation expectations and providing stability in a challenging regional and global environment. The mission’s analysis of the real exchange rate suggests that the dinar remains broadly aligned with medium-term fundamentals. In the medium term, more decisive progress in structural reforms—such as further liberalization of the energy sector and implementation of social security reforms (including provision of short-term unemployment benefits to social security recipients)—is needed to boost productivity and support the long-run sustainability of the peg.
10. Continued progress in public sector structural reforms is critical to support sustainable private sector led growth and enhance the business environment. Early advancement of income tax reforms and the investment promotion law would be essential in promoting private sector activity in Jordan. The mission welcomes continued steps taken to improve public sector financial management, through efforts to: strengthen the medium-term framework for budget formation and implementation; enhance public debt management (supported by technical assistance from the Fund); achieve further progress in rolling out the Government Financial Management Information System (to be implemented in six ministries in March 2010); and improve cash management through full implementation of the Treasury Single Account.
11. The mission welcomes ongoing work by the authorities to resolve outstanding data issues, including implementation of the remaining requirements for the Special Data Dissemination Standards subscription (supported by Fund technical assistance). In addition, the large increase in errors and omissions in the balance of payments since 2007 is indicative of weaknesses in the coverage of balance of payments statistics. The mission welcomes ongoing efforts by the authorities to correct these weaknesses, as a better understanding of external flows is critical for macroeconomic policymaking.
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.
1 An IMF mission team visited Jordan during December 7–13, 2009. The mission reviewed economic and financial developments since the Article IV Consultation discussions in March, assessed the near-term outlook in the wake of the global financial crisis, and evaluated medium-term prospects. This statement represents the mission team’s views, and not necessarily those of the IMF.