Public Information Notice No. 07/38

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation and Fourth Post-Program Monitoring Discussions with Jordan

March 22, 2007

On March 5, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the 2006 Article IV consultation and fourth Post-Program Monitoring (PPM) discussions with Jordan.¹

Background

Jordan graduated from a series of Fund-supported programs in 2004 and has since been engaged in PPM, which expires at end-2007. The Jordanian economy has performed remarkably well in recent years, due mainly to far-reaching macroeconomic and structural reforms. Despite negative shocks (including high oil prices and regional uncertainties), growth has been robust, inflation has remained low, public debt has continued to fall, and reserves have reached an all-time high.

Economic performance remained strong in 2006. Growth is estimated at 6 percent for the year, reflecting buoyant domestic demand (private consumption and investment), in part financed by large private capital inflows. Average inflation was 6.3 percent, stemming mainly from fuel and imported food price increases, with core inflation (excluding food and energy) well contained. Unemployment declined to 14 percent, from 15 percent a year earlier.

The current account deficit narrowed in 2006—albeit to a still-high 16 percent of GDP—as a result of a broad-based slowdown in import growth and continued strong performance of exports and remittances. This deficit was financed by record levels of long-term private capital inflows reflecting foreign investments in banking, mining, telecommunications, and real estate. As a result, gross reserves reached US$6.1 billion at end-2006—more than US$1¼ billion higher than at end-2005—equivalent to about five and a half months of prospective imports.

The fiscal situation also improved in 2006. Stronger revenue performance (income tax and general sales tax receipts), larger-than-expected grants (especially from Saudi Arabia), and the authorities' decision to raise domestic fuel prices (lowering substantially oil subsidies) more than offset higher primary spending on transfers, security outlays, and wage bonuses. Preliminary estimates suggest that the fiscal deficit in 2006 was about 4¼ percent of GDP including grants, and 7½ percent excluding grants, both lower than in 2005. The deficit was financed comfortably without adding to macroeconomic pressures. The narrowing of the fiscal deficit, together with partial privatization of Jordan Telecom and strong growth, reduced the public debt-to-GDP ratio further, to 73 percent by end-2006, from 83 percent in 2005.

Meanwhile, monetary policy supported well the peg of the Jordanian dinar (JD) to the U.S. dollar. The spread on 3-month JD-denominated CDs issued by the Central Bank of Jordan (CBJ) over the U.S. dollar 3-month Treasury bill rate has been kept to a 1½-2 percentage point range during the past year. The dollarization ratio has been stable, at about 27 percent of deposits, reflecting continued confidence in the dinar. Broad money increased in line with nominal economic activity, with strong private sector credit growth (24 percent year-on-year) broadly offset by reductions in credit to government (privatization receipts) and a large increase in banks' capital.

Executive Board Assessment

Executive Directors commended Jordan's strong economic performance, noting the critical role played by supportive macroeconomic and structural policies over the past decade. Looking ahead, Directors stressed that staying on course with the economic reform agenda will help sustain good economic performance, and address the large current account deficit and the still-high public debt. To this end, they supported the authorities' policy package, with continued fiscal adjustment at its core.

Directors welcomed the authorities' plan to introduce a new public debt ceiling—60 percent of GDP by 2011—and underscored the successful role that the previous debt target played in helping to ease Jordan's debt burden. To ensure a similar success, the new target should be legislated and accompanied by a medium-term path for the primary fiscal balance. They also supported the authorities' plans to deepen the domestic debt market and tap regional liquidity by issuing dinar-denominated bonds.

Directors observed that, with Jordan already well taxed, achieving the new debt targets will depend mainly on containing nonpriority current primary expenditure over the medium term. Eliminating fuel subsidies in 2007, adopting an automatic fuel price adjustment mechanism, better targeting the social safety net, and improving public financial management should be priorities. On the revenue side, measures should include specific inflation-adjusted excises on selected petroleum products and further improvements in revenue administration.

Directors considered the 2007 budget to be consistent with the new medium-term fiscal targets. They recommended that the authorities consider more ambitious targets, which would limit the susceptibility of the debt target to shocks, while helping to moderate inflation and the current account imbalance.

Directors agreed that the dinar is fairly valued and most observed that the exchange rate peg continues to serve Jordan well as a nominal anchor, supported by solid macroeconomic policies and a more resilient economy. They noted that the interest rate spread relative to U.S. rates has contributed to maintaining confidence in the peg. They also encouraged the CBJ to remove remaining excess liquidity through the issuance of additional certificates of deposit to help slow domestic credit growth and further strengthen the interbank market. Directors welcomed the authorities' intention to keep credit and inflation developments under close review. They also were encouraged by the ministry of finance plan to retire gradually its old debt to the central bank and thus strengthen its balance sheet.

Directors noted banks' strong performance and welcomed the authorities' commitment to strict financial sector supervision. They commended the authorities for implementing core Financial Sector Assessment Program (FSAP) recommendations, including introducing a prompt corrective framework and improved off-site surveillance. They looked forward to the early passage by parliament of Anti-Money Laundering/Combating Financing of Terrorism legislation and to an FSAP follow-up later this year.

Directors welcomed the authorities' commitment to continue with post-program monitoring as a sign of continued close cooperation between the authorities and staff.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.