Syrian children play near Amman: The Syrian refugee crisis was one of several recent shocks to Jordan’s economy (photo: Muhammad Hamed/Reuters/
Newscom)
ECONOMIC HEALTH CHECK
The IMF Executive Board approved on July 31 the final review under the $2 billion Stand-By Arrangement agreed in 2012. With the Board’s approval of the final disbursement of about $400 million, Jordan becomes the first Arab country in transition to successfully complete an IMF-backed program.
In an interview, IMF mission chief Kristina Kostial discusses the country’s achievements over the course of the three-year program and the challenges that lie ahead.
IMF Survey: Why did Jordan need a program?
Kostial: In the run-up to the program, Jordan was hit by a series of exogenous shocks. Jordan had been getting gas below market price from Egypt, but that supply of gas, which was used to generate electricity, was disrupted because of repeated sabotages of the Arab Gas Pipeline. Jordan thus had to substitute expensive fuel products for this gas, with the result that the electricity company began to run large losses amounting to 5 percent of GDP in 2011.
On top of that, the “Arab Spring” started that same year, and in response the Jordanians increased current spending, including through higher subsidies and wages. As a result, the central government’s fiscal deficit increased by 5 percent of GDP. So they had an expansion in the combined public sector deficit (central government deficit plus losses of the electricity company) by about 10 percent of GDP in just one year. Despite a large grant from donors, Jordan had difficulty financing this gap, and the central bank was losing reserves. That’s when the authorities sought IMF assistance.
IMF Survey: But once the program was agreed, the economy continued to sustain shocks that no one anticipated.
Kostial: During the course of the program, Jordan was hit by further shocks, the worst being the Syrian refugee crisis. Jordan has received a huge flow of refugees— the authorities estimate that there are more than one million refugees, or about 20 percent of Jordan’s population. On top of that came the emergence of the Islamic State in Iraq and the Levant (ISIS). Iraq is Jordan’s largest trading partner and the destination of some 20 percent of its exports. There have been a lot of disruptions to these exports as well as to tourism in Jordan.
So when you consider that the country faced a difficult situation to begin with and a worsening external environment over the course of the program, what the authorities accomplished is remarkable.
IMF Survey: What has the program achieved?
Kostial: The program had three main objectives: maintaining macroeconomic stability; ensuring fairer, more equitable policies for the population; and increasing growth prospects for Jordan. Overall, the program has been a success.
The biggest success was on the first objective, maintaining macroeconomic stability, because the country suddenly found itself with a huge deficit coupled with already high public debt (amounting to 71 percent of GDP at the end of 2011). The big achievement under this program was the gradual reduction of the combined public sector deficit by some 5.3 percent of GDP over the past three years. This came from two things: energy sector reform and measures by the central government.
On the objective of making Jordan’s economy more fair and equitable, it was a mixed success. Early on, the authorities abolished the general subsidies on fuel pump prices and replaced them with targeted cash transfers, which go to some 70 percent of the population (provided when the oil price is above $100 per barrel). That was a bold move, even if a program of cash transfers to such a large share of the population is still pretty broad. Also, we see the limited reform to income taxes as a missed opportunity to bring more taxpayers into the tax net (less than 3 percent of the population are paying income taxes).
The third objective of the program was to increase Jordan’s growth potential. This task is difficult in a situation with so much regional uncertainty, because it makes prospective investors think twice. But despite this uncertainty, the authorities could still move forward on structural reforms. There has been some progress—they’ve put in place new investment and private-public partnership laws. We’ve seen some improvement in the public investment framework and progress on improving access to finance.
IMF Survey: The IMF displayed a fair amount of flexibility with regard to Jordan.
Kostial: We showed flexibility in terms of fiscal targets, because there were unanticipated government outlays related to the Syrian refugees in Jordan and to gas flows from Egypt coming to an almost complete halt. Additional grants coming in from the international community allowed us to be flexible.
We also had flexibility with regard to the timing of the program policies. Some of the things that we had agreed on were desirable to have early on, most notably the medium-term energy strategy, the lack of which was giving rise to a large deficit. But we needed to make sure that the authorities had sufficient time to consult with stakeholders and put this strategy in place.
IMF Survey: Where is there room for more progress?
Kostial: One area where reform has fallen short is creating more jobs. In Jordan, unemployment is relatively high—13 percent overall, 20 percent for women, and 30 percent for the youth. It’s structural in nature, so even when Jordan had high growth rates, unemployment did not fall much.
What is also striking is the low workforce participation, which means that a lot of people are giving up on seeking work. Female labor force participation is particularly problematic, even when compared to elsewhere in the region, and only 10 percent of the women of working age are actually working.
Jordan needs reforms to raise potential growth and create jobs. There is a need address labor market challenges. More also needs to be done to increase access to finance—there is no robust law for collateral, insolvency, or bankruptcy, and that inhibits lending. Finally, the government could take further steps to improve the business environment and make it easier for investors to come to Jordan.
IMF Survey: You mention the need to raise potential growth. What’s the current growth rate and how do you see that evolving?
Kostial: Jordan had high growth rates from 2000 to 2009, on average 6.5 percent. With the global financial crisis, growth tanked. More recently growth has hovered at about 3 percent, and we hope that, over time, Jordan can return to its medium-term target potential of 4.5 percent growth.
Is this enough to make a dent in unemployment? No. According to our calculations, Jordan needs a growth rate of some 6 percent just to absorb new entrants into the labor force. What the economy really needs is structural reforms to grow faster and to translate this growth into higher employment.
IMF Survey: Will the country need additional financial assistance?
Kostial: Jordan is now on a sounder fiscal footing and public debt is broadly stabilizing, but at a pretty high level—90 percent of GDP. Jordan has done the bulk of its fiscal adjustment, but it’s not over yet. The authorities should bring the electricity company back to cost recovery. And there is room for additional central government measures. For example, we believe there is scope for widening the income tax base.
So, financing needs are still going to be high for the next couple of years. The authorities will need to carry out further reforms that will ensure they can reduce debt from the current 90 percent to their target of about 70 percent by 2020, which we regard as a safe threshold for an emerging economy.
Because it’s expensive for Jordan to host the Syrian refugees, the help of the donor community continues to be indispensable. It’s important for the country to stay engaged with the international community—the country cannot shoulder this burden alone.
