Jordan and the IMF
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The International Monetary Fund (IMF) today approved a request by the Jordanian authorities for the replacement of its current extended arrangement with new credits totaling the equivalent of SDR 200.8 million (about $295 million) under the extended fund facility (EFF).1 The credits are being made available over the next three years to support the Government's medium-term economic and structural reform program.
In 1994, Jordan initiated a comprehensive program of macroeconomic adjustment and reform supported by a three-year EFF arrangement (see Press Release No. 94/63). The program aimed at sustaining rapid economic growth with low inflation, improving the external position, and enhancing the supply response of the economy while reducing its vulnerability to adverse exogenous developments. The Jordanian economy responded well to these reforms. In 1994-95, real GDP growth was around 6 percent per annum; inflation remained in the 3-3.5 percent range; and the external current account deficit declined by 7 percentage points of GDP. To build on the 1994-95 achievements and to benefit from the opportunities arising from the peace process, the integration with the European Union, and the future changes in the world economy, the Jordanian authorities have formulated an intensified program of macroeconomic adjustment and structural reforms for 1996-98 supported by the new EFF credits.
Medium-Term Strategy and Reforms
The medium-term program for 1996-98 aims at the following: 1) achieving an average annual real GDP growth rate of at least 6 percent in order to sustain improved living standards and expand employment opportunities; 2) maintaining low inflation rates in line with those of industrial countries; 3) narrowing the external current account deficit to below 3 percent of GDP on average, which would lower the debt and debt-service burden over the medium term; and 4) building up gross official reserves to the equivalent of about three months of imports.
To achieve these objectives, fiscal policy aims at further reducing the budget deficit (excluding foreign grants and receipts from sales of assets) to 2.5 percent of GDP in 1998 from 4.8 percent in 1995. The authorities are committed to a tight monetary policy and flexible interest rates geared to maintaining the relative attractiveness of dinar-denominated assets.
The centerpiece of the program is a significant acceleration of broad-ranging structural reforms, including in the areas of taxes, budgetary expenditures, the regulatory framework, the financial system, and the trade system. Over the medium term, measures will also address issues such as food subsidies and reform of the civil service and the pension system. Overall, these measures represent a more determined effort to promote the role of the private sector in the economy through an overhaul of the regulatory framework, a comprehensive reform of public sector enterprises, an intensified action plan for privatization, and, for the first time, an undertaking for the divestment of government holdings in the productive sectors. In their totality, these reforms would enable Jordan to reap significant benefits from developments in the regional and international economies.
The 1996 Program
Within the medium-term macroeconomic framework, the program for 1996 aims at sustaining the growth of real GDP at about 6.5 percent, containing the annual inflation rate to 3.5 percent, reducing the external current account deficit further to below 4 percent of GDP, and building up foreign exchange reserves significantly. To these ends, the overall budget deficit is targeted to decline to 3.8 percent of GDP in 1996 through a sustained reduction in current outlays and increased revenues from domestic taxation. Structural reforms in 1996 focus on liberalizing the trade system further, reforming the subsidy system, formulating a comprehensive privatization plan, and continuing with regulatory and financial sector reforms.
Addressing Social Costs
The program envisages several measures to strengthen the social safety net in order to protect the poor from the temporary hardships of the economic reform process. The authorities have already partially replaced generalized food subsidies by a coupon-based rationing system and provision of direct income support to extremely poor families. Moreover, the coverage and benefits of the National Aid Fund (NAF) are to be extended to include all poor families, and the NAF would administer the direct cash transfers intended to compensate for the reduction of the wheat subsidy. Over the medium term, broad-based sustainable real growth remains the most effective way to raise the living standard of the population and reduce poverty.
The Challenge Ahead
Even with the programmed macroeconomic adjustment and strengthened reform measures, external financing gaps are projected to persist over the medium term. Timely availability of external assistance on appropriate terms will be crucial to support implementation of the Government's program and to achieve a rapid and significant build-up in reserves.
Jordan joined the IMF on August 29, 1952, and its quota2 is SDR 121.7 million (about $179 million). Its outstanding use of IMF credit currently totals the equivalent of SDR 169 million (about $248 million).
Sources: Jordanian authorities; and IMF staff estimates
1. The EFF is an IMF financing facility that supports medium-term programs that seek to overcome structural balance of payments maladjustments. A program generally lasts for three years, although it may be lengthened to four years.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT