IMF projects Jordanâ€™s real GDP to grow by 2.3 per cent in 2017
The IMF concludes the 2017 Article IV consultation mission to Jordan and reaches staff-level agreement on first review under the Extended Fund Facility.
Led by Martin Cerisola, a team from the International Monetary Fund (IMF) visited Amman during 2–11 May to complete discussions on the 2017 Article IV Consultation and First Review under Jordan’s economic programme supported by an Extended Fund Facility (EFF) arrangement. At the end of this visit, Cerisola issued the following statement:
“Since our mission last November, macroeconomic conditions have remained challenging. Real GDP growth was 2 per cent in 2016, 12-month inflation accelerated to 4.3 per cent in March 2017 before receding to 3.5 per cent in April, and the current account deficit rose to 9.3 per cent of GDP in 2016. Against this backdrop, the unemployment rate continued to rise, particularly for youth and women, reaching 15.8 per cent in the second half of 2016, its highest level in more than a decade.
“In spite of challenging conditions, the authorities have managed to proceed with programme implementation, with a reassuring positive fiscal outturn in 2016 and progress in implementing several important structural measures, particularly with regard to the energy and water sectors and public financial and debt management. However, international reserves were below programme goals, while there were some delays in strengthening the business environment and in submitting legislation on deposit insurance and the insurance sector and, most notably, in implementing macro-critical structural fiscal reforms.
“The fiscal performance, which saw the combined public sector deficit decline from 7.1 per cent of GDP in 2015 to 3.8 per cent of GDP in 2016, was underpinned by the strong improvement in the performance of the National Electric Power Company (NEPCO) and in the primary balance of the central government, with a somewhat better-than-programmed outcome for the Water Authority of Jordan (WAJ). Nonetheless, with growth below expectations, the public debt-to GDP ratio increased to 95.1 per cent at end-2016.
“Looking ahead, domestic, regional, and global geopolitical and security developments are expected to continue to impinge on investor confidence, exports, investment, and public finances. Recent economic indicators are encouraging, pointing to a rebound in exports, remittances, and tourism in the first few months of 2017. But without significant improvements in regional conditions, real GDP is projected to grow by 2.3 per cent in 2017. Over the medium term, growth is projected to accelerate gradually, supported by structural reforms and fiscal consolidation.
“In light of the challenging environment and the need to preserve macroeconomic stability and enhance the conditions for higher and more inclusive growth, the discussions focused on the need to recalibrate policies and some of the structural reforms—particularly those aimed at establishing a more effective and equitable tax system. With the downward revisions to growth, public debt is now expected to decrease to 77 per cent by 2022, one year later than originally envisaged. Donor support, including through budget grants, remains highly critical to alleviate the persistent pressures from hosting Syrian refugees, and to help the authorities meet their programme’s debt reduction and inclusive growth objectives.
“The authorities’ intention to continue removing gradually the exemptions for general sales tax and customs duties (excluding health and basic food items) over the years ahead is welcome. Similarly, their plans to broaden the income tax base, firmly tackle tax evasion, expand and better target social assistance, and contain non-priority current expenditure are essential to strengthen the resilience of public finances to shocks and to better target investment and social needs. To support these reforms and goals, particularly in light of the recently announced Jordan Economic Growth Plan 2018-2022, improving the efficiency of public investment—including through a strict adherence to the Public Private Partnership (PPP) framework (particularly in large sectors currently exempted)—would enhance predictability and productivity, and minimise fiscal risks. The adoption of the new electricity tariff adjustment mechanism is also an important step to safeguard NEPCO’s operational balance going forward, and it is critical that this new mechanism operates as envisaged. The authorities’ commitment to conduct a comprehensive public expenditure review in 2018 is welcome and should help identify additional options to streamline expenditures across different public sector related entities.
“The recent steps by the Central Bank of Jordan (CBJ) to raise its policy rates have helped to better balance the need for preserving an adequate reserves buffer and confidence in the Jordanian dinar peg against the need to provide supportive credit conditions to the economy. Going forward, the discussions confirmed the CBJ’s readiness to increase its policy rates if pressure on reserves were to emerge, in order to keep the reserves buffer at its current comfortable level.
“Discussions also focused on how to improve the competitiveness of the Jordanian economy. Efforts need to be stepped up on the implementation of legislation that would enhance the business environment, including with regard to secured lending, bankruptcy, and inspections, as well as to the strengthening of financial inclusion and access to finance. The current environment of low growth and high unemployment requires more active policies targeted at job creation and lessening informality. Several options could be considered to reduce the cost of, and increase the demand for, formal jobs. In particular, the authorities may want to explore the potential benefits of a temporary (and fiscally neutral) cut in social security contributions or a well-targeted employment tax credit. These reforms, along with a better framework that guides the setting of minimum wages should assist with reigniting employment and inclusive growth.
“In light of progress in programme implementation and the authorities’ reiterated commitment to implement their ambitious programme of economic and structural policies, the authorities and the mission have reached a staff-level agreement on the completion of the First Review under the EFF. The IMF Executive Board is expected to consider the authorities’ request to complete this review by late June 2017.
“The team would like to thank the authorities for constructive discussions and for their warm hospitality.”