On April 28, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Jordan and also completed the third and fourth reviews of Jordan’s economic performance under a three-year program supported by a Stand-By Arrangement (SBA).
Jordan has faced strong headwinds in recent years, particularly from the Syria conflict and fluctuations in gas supplies from Egypt. These have been putting pressure on the fiscal and current accounts. At the same time, unemployment has been persistently high.
Nonetheless, the economy is strengthening gradually. Growth has recovered from the trough of 2.3 percent in 2010 to almost 3 percent in 2013. Headline inflation dropped to 3.3 percent at end-2013 (though core inflation remains elevated). The current account (excluding grants) narrowed to 16½ percent of GDP in 2013, thanks to cheaper energy imports and higher transfers.
Policies were adjusted to exogenous shocks. Fiscal consolidation started in mid-2012, reducing the combined primary central government deficit and the electricity company’s losses from 14.5 percent of GDP in 2011 to 8.3 percent of GDP in 2014. The consolidation was anchored in a bold reform of general subsidies, including in the electricity sector.
The Central Bank of Jordan (CBJ) complemented the fiscal efforts and reserves are now at comfortable levels. Starting in mid-2013, the CBJ’s focus shifted to stimulating economic activity by gradually reducing policy rates by a total of 75 basis points. Private sector credit growth, which slowed in 2012, has recently picked up.
The economy is expected to further strengthen in the next years. Growth is projected to increase to 3½ percent in 2014, and to 4½ percent in the medium term. Inflation is expected to decline to about 2½ percent at end-2014, and 2 percent in the medium term. The current account deficit would gradually improve to about 4½ percent of GDP over the medium term, reflecting mainly a lower energy import bill. Risks to this outlook remain substantial, mostly related to the Syria conflict and further fluctuations in gas from Egypt.
Executive Board Assessment
Executive Directors welcomed the authorities’ commitment to their Fund-supported economic program, which has buttressed the economy’s resilience in the face of significant external shocks. Directors noted, however, that Jordan’s continued exposure to adverse global and regional spillovers underscores the importance of persevering with prudent policies and sustaining the reform momentum. Directors invited the international community to continue its support of Jordan’s economic and institutional transformation.
Directors agreed that the 2014 budget strikes an appropriate balance between fiscal consolidation and supporting growth and encouraged the authorities to implement contingency measures if their fiscal targets appear threatened. More broadly, they noted that strengthening the fiscal position over the medium term will require sustained efforts. In this regard, Directors recommended the rapid approval of the new income tax law which, together with a reduction in tax incentives, would boost revenue and enhance equity. They also saw scope for streamlining expenditures, including the public wage bill and remaining universal subsidies.
Directors took note of the staff assessment that Jordan’s exchange rate peg has served the country well and that the current exchange rate level remains in line with medium-term fundamentals. They commended the Central Bank of Jordan’s responses to external pressures, which was instrumental in returning international reserves to a comfortable level. Directors concurred that lingering inflation risks argue for a continued cautious approach.
Directors agreed that the financial system is generally sound. They encouraged the authorities to reinforce the framework for cross-border supervision and accelerate implementation of the remaining Basel II prudential requirements. Directors looked forward to additional efforts to improve data on financial soundness and welcomed the authorities’ continued efforts to fight money laundering and the financing of terrorism.
Directors underscored that structural reforms on a broad front are essential to safeguard macroeconomic stability and bolster Jordan’s social outcomes. They agreed that faster job creation calls for improving the business climate, reducing skill mismatches, promoting the participation of women in the labor force, and implementing new employment policies in the public sector. In this context, Directors welcomed recent steps to facilitate access to finance to small businesses and looked forward to the approval of the new laws on investment, secured lending, and insolvency. Efforts to enhance transparency and governance, including in tax administration and public financial management, would also be important.