IMF Executive Board Concludes Third Post-Program Monitoring Discussions with JordanPublic Information Notice (PIN) No. 06/56
May 23, 2006
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report for the Article IV consultation with Jordan may be made available at a later stage if the authorities consent.
On May 1, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the third Post-Program Monitoring (PPM) discussions with Jordan.1
Jordan graduated from a series of Fund-supported programs in 2004 and has since been engaged in PPM, which is expected to last through the end of 2006. The Jordanian authorities successfully addressed major economic shocks during 2005 as external grants fell faster than expected and oil import prices rose sharply. Staff's assessment is that Jordan's economic situation and prospects have improved since the last staff report as a result of favorable economic and financial developments, as well as on-going policy adjustments. The capacity to repay the Fund is expected to remain strong.
The macroeconomic situation in 2005 turned out to be better than projected. Real GDP growth is estimated to have been strong at 7.2 percent, mainly on account of a sharp increase in private consumption and investment, in part financed by large private capital inflows. Average inflation remained under control, at 3½ percent. However, unemployment is reported to have remained high at about 15 percent. In part reflecting the rapid economic growth, high corporate profitability, and an increase in private capital inflows mainly from the region, the Amman Stock Exchange index rose by 93 percent during the year. However, over the first quarter of 2006, stock prices have fallen moderately.
Fiscal adjustment was intensified in 2005 and the fiscal deficit (including grants) turned out to be about 5 percent of GDP as against the projected 6 percent. While external grants fell to 5 percent of GDP from 11 percent in 2004, domestic revenues increased by 2 percentage points of GDP to 28 percent, as tax revenue increased sharply, mainly on account of higher GST and corporate income tax receipts. In response to higher world oil prices, the authorities raised domestic fuel prices in July and September 2005, entailing a reduction in fuel subsidies by about 5 percent of GDP on a full-year basis (with most of the savings accruing in 2006). For 2005 as a whole, fuel subsidies increased, but were offset by substantial cuts in capital spending, and thus, total expenditures remained at about 38 percent of GDP. Excluding grants, the deficit fell by 2½ percent of GDP between 2004 and 2005, to 10 percent. Reflecting strong economic growth, the total public debt-to-GDP ratio fell to 84 percent and external debt to 58 percent—in line with the Public Debt Law.
The external current account deficit (including grants) rose sharply to 18 percent of GDP in 2005. Import growth continued at a high rate (28 percent) on account of high oil prices and strong demand, while exports grew at about 10 percent and grants fell sharply. This deficit was financed by sharply higher capital inflows, including substantially higher foreign direct investment, leaving official foreign reserves virtually unchanged at about US$4.7 billion—equivalent to about 5 months of prospective imports and nearly 100 percent of combined debt service and foreign currency deposit liabilities. With inflation remaining subdued and the nominal exchange rate pegged, the real effective value of the dinar was broadly stable in 2005, after having depreciated by about 10 percent in 2002-04.
Monetary policy remained focused on maintaining the peg of the Jordanian dinar to the U.S. dollar. Reflecting mainly the increase in net domestic assets, broad money increased by 17 percent in 2005, substantially higher than the 12 percent growth recorded in 2004. Domestic credit grew sharply by 30 percent, in line with the increase in domestic demand, despite the increase in domestic policy interest rates—the spread with respect to the relevant U.S. interest rate rose to over 200 basis points by end-2005. Bank supervision has been strengthened over the past few years and Jordan generally observes international standards and codes in banking, payment systems, securities, and insurance.
The near- and medium-term outlook appears stronger than previously assessed, though challenges remain. Reducing the fiscal and current account deficits will continue to be a challenge, as they are projected to decline only gradually under current policies. The economy also remains susceptible to fluctuations in private capital inflows, security concerns, stock market volatility, and shortfalls in the pace of privatization.
Executive Board Assessment
Executive Directors welcomed the robust economic performance in 2005 and commended the authorities for the strong fiscal measures taken in 2005, which were particularly opportune in light of the twin shocks of higher oil import prices and a sharper-than-expected decline in external grants. While welcoming the improvement in the near- and medium-term outlook, Directors cautioned that the widening current account deficit and high debt levels continue to pose a challenge over the medium term. They also underscored that the economy remains vulnerable to regional security concerns and fluctuations in private capital inflows, a risk heightened by recent stock market volatility.
Directors commended the authorities' strategy, centered on a strong and sustained fiscal adjustment, supported by a tight monetary policy to help contain domestic demand and support the exchange rate peg. The strategy would also require structural reforms to increase productivity and strengthen competitiveness so as to encourage exports and investment, with a view to sustaining growth under the fixed exchange rate regime.
Directors agreed that the planned fiscal adjustment in 2006 is appropriate and should be built upon over the medium term with the objective of eliminating the primary fiscal deficit excluding grants and reducing the debt burden to a more sustainable level. They supported the authorities' plans to reduce current expenditures through reductions in fuel subsidies and administrative outlays, and strengthening adherence to budgetary allocations. To mitigate the potential impact on the poor, Directors supported direct cash payments to the poor under a transparent social safety net mechanism. They also emphasized the need to resist pressures for increased current spending, including wages. While the policy of discretionary petroleum product price increases has significantly reduced fuel subsidies, Directors noted that an automatic, formula-based mechanism for price adjustments would prevent the reappearance of subsidies. Over the medium-term, Directors considered that the revenue position will need to be strengthened through broader tax bases, the elimination of exemptions, and improvements in the tax rate structures. Directors also called for the adoption of comprehensive structural reform measures to contain current expenditures, including a civil service reform with a wage structure aimed at improving efficiency and reducing wage pressures in the private sector. Directors emphasized that the social safety net should be reformed to improve targeting and the efficient provision of services, including through the centralization of all social safety net activities.
Directors noted that the exchange rate peg to the U.S. dollar had helped anchor financial policies. In this context, they underscored that the planned fiscal restraint should be supported by a tighter monetary policy stance to ensure private sector confidence in the stability of the dinar. They emphasized that, in the event of a decline in private capital inflows, the growth momentum should not be sustained through expansionary macroeconomic policies and that interest rate policy should react effectively should private sector credit growth exceed the authorities' expectations. While the tighter fiscal policy stance has helped contain the dinar's real effective appreciation, some Directors were of the view that the authorities should keep exchange rate policy under review, particularly if growth slowed unexpectedly or external imbalances worsened. They also underscored that a strengthening of the institutional infrastructure for more active monetary and exchange rate policies would allow a greater degree of policy flexibility to address unforeseen developments.
Directors supported the authorities' policy of closer supervision of banks and the monitoring of banks' exposure to the stock market. They urged caution toward the licensing of new banks and encouraged the Jordan Securities Commission to enhance the effectiveness of regulation and supervision of capital markets. Directors also welcomed the authorities' progress in the passage of AML/CFT legislation.
Directors encouraged the authorities to accelerate structural reforms to improve competitiveness and export capacity. This included steps to strengthen the investment climate for export-oriented activities, including those in the Qualified Industrial Zones. Directors also supported the authorities' plans to accelerate privatization of public enterprises with a view to increasing efficiency, transparency, and the supply of equities in the market. They also emphasized that steps should be taken to promote greater flexibility and integration in the segmented labor market to facilitate market-determined real wages and improve competitiveness. In this context, Directors stressed that any wage increases in the public sector should take into account the implications for wages and costs in the private sector.