Jordan Times
Tuesday, January 10, 2006
Adjustment to sharply
lower grants, reducing fiscal rigidities remain key challenges for Jordan — IMF
Report commended the government for the impressive economic performance
with an exceptionally strong economic recovery and fall in unemployment, low
inflation, and a continued strong external reserves position
By Khaled Nuaimat
AMMAN — A report by the International Monetary
Fund (IMF) commended Jordan's efforts in stabilising its macroeconomics during
the past several years.
The IMF directors concluded earlier this week the 2005 Article IV consultation,
post-programme monitoring discussions, and ex post assessment with Jordan.
The IMF executive board, noted that significant progress has been made in Jordan
over the past several years towards macroeconomic stabilisation and economic
restructuring, supported by external debt rescheduling.
They commended the government for the impressive economic performance in 2004,
with an exceptionally strong economic recovery and fall in unemployment, low
inflation, and a continued strong external reserves position.
According to sources in the IMF, this favourable outcome reflected the adoption
of sound macroeconomic policies and strong ownership of the reform efforts, as
well as the positive impact of large external grants.
The directors said: “Notwithstanding these achievements, there is a need to
sustain strong policies, as the economy remains vulnerable to external shocks.”
The IMF said that some of these vulnerabilities have materialised in 2005 and
that the macroeconomic situation is likely to deteriorate in the near term under
unchanged policies.
Although the economy has continued to grow briskly in the first half of 2005,
mainly on account of higher domestic consumption, the rapid increase in oil
prices and the sharp decline in external grants have significantly weakened the
macroeconomic outlook.
They added the Kingdom has suffered a durable terms of trade loss, noting that
the budget and the external current account deficits, including grants, are set
to widen significantly in 2005, and could deteriorate further in the medium term
if external grants decline further and oil prices remain high.
“Adjustment to the sharply reduced level of foreign grants and reducing fiscal
rigidities remain the key challenges for Jordan to go forward,” the IMF report
stressed.
They welcomed the thrust of the government's new reform strategy that was
launched in July 2005.
The strategy aims at containing aggregate demand by eliminating politically
sensitive subsidies for petroleum products by March 2007, curbing government
expenditures, and mobilising revenues in order to gradually reduce the fiscal
deficit over the next four to five years, supported by a tighter monetary
policy.
At the same time, a group of the directors said that “in the absence of
additional external financing, further expenditure cuts and intensified revenue
mobilisation might be required to meet the official plans for containing the
fiscal deficit.”
Other directors, however, considered the government's medium-term reform agenda
broadly appropriate and that it strikes the right balance between short-term
macroeconomic goals and long-term growth objectives. They welcomed the
government's intention to take additional measures as warranted by future
developments.
The report supported the government's plan to eliminate petroleum product
subsidies by March 2007, but some directors encouraged the government to adopt a
quarterly, or even monthly, formula-based automatic petroleum product price
adjustment system in place of semi-annual discretionary increases.
Other board members, however, considered the government's gradual approach to
adjusting fuel prices to be appropriate given the associated social and
political constraints.
However, all members broadly agreed that, in order to mitigate the likely
adverse effects of such reforms on the poor, the social safety net should be
reformed expeditiously as recommended by the fund technical assistance and with
the support of the World Bank to better target support through the National Aid
Fund to the most vulnerable segments of the society.
“There is scope for significant further reductions in current expenditures
through early civil service reforms and limiting capital spending to projects
with firm financing and high economic returns,” the report said.
“Moreover, concerted efforts are needed to improve expenditure management,
macro-fiscal forecasting and analysis, and to strengthen fiscal management
through the introduction of a government financial management information system
and closer coordination of fiscal and monetary policies,” the report added.
IMF directors underlined the importance of realignment of the General Sales Tax
(GST) rate with the standard rate, elimination of GST exemptions, and an early
reform of the income tax as envisioned by the government.
They said consideration should also be given to improving real estate taxation
emphasising that the momentum of privatisation should be maintained in order to
improve resource allocation and support market-oriented private sector-based
economic growth.
The IMF supported the efforts of the Central Bank of Jordan (CBJ) to tighten
monetary policy since 2004, in view of the rapid growth of domestic credit, and
consistent with maintaining the dinar peg to the US dollar.
The report also welcomed the CBJ's intention to take further action to support
price stability and stressed the need for improved coordination of monetary and
fiscal policies.
“While the peg has served the country well, the government should continue to
develop institutional capacity regarding monetary policy with the help of fund
technical assistance, which might facilitate a future shift towards greater
exchange rate flexibility,” the IMF directors said regarding the exchange rate
policy in Jordan.
According to some directors, the peg should be maintained noting various factors
that can be expected to help safeguard competitiveness and improve the external
position, including the recent pick up in productivity growth, and the benefits
to the export sector of the ongoing trade liberalisation and other reforms.
The report supported the CBJ's cautious approach towards the licensing of new
banks, and agreed that stricter regulation of concentration ratios and a better
assessment of guarantees, in addition to safeguards on personal consumer loans,
would help further improve risk management.
“While sound and sustainable macroeconomic policies will be a critical element
in the development of the domestic financial markets, the volatility of capital
flows and asset prices would need to be addressed through strengthening domestic
financial institutions,” the IMF stated.
In addition, the development of Jordan's securities markets will be crucial to
serve as an alternative source of funding and managing of the financial risks
associated with asset price volatility.
The IMF said the regulatory system should be simplified and modernised to
encourage investment in productive and tradable activities.
They agreed that, in a difficult geopolitical situation, significant progress
has been made in macroeconomic stabilisation, but long-standing vulnerabilities
to external shocks remain.
The IMF directors supported the authorities' intention to continue their post-programme
monitoring with the fund.