Photo from: Independent Evaluation Office of the IMF
By Antonia Dimou, Associate at the Centre for Strategic Studies of the University of Jordan, and Head of the Middle East and Persian Gulf Unit at the Centre for Security and Defence Analyses based in Athens
Specifically, in the late 1980s, inflows of both official transfers and remittances fell, with substantial adverse consequences on budgetary revenues. Initially, the authorities resorted to external borrowing to fill the revenue gap, leading to a sharp increase in external debt. In 1989, Jordan had a 30-35% unemployment rate and was struggling with its inability to pay its loans. Structural weaknesses in Jordan’s public finances and balance of payments were soon exposed, leading the authorities to request the country’s first arrangement with the International Monetary Fund (IMF) in 1989 to facilitate orderly external financial relations and reverse a sharp decline in economic growth.
Economic reforms were initiated as part of an agreement between Jordan and the IMF. The key objectives of the economic reforms in the kingdom focused on the reduction of public debts, reduction of the budget deficits, controlling of inflation, tax reforms, credit policy reforms, investment incentives, privatisation and easier trade policies. Nevertheless, a highly growing population and the unstable political situation in the region have been major impediments to immediately reaping the benefits of IMF-introduced economic reforms.
The first and second Gulf wars of 1991 and 2003 respectively had severe disruptive effects on the Jordanian economy. Jordan’s opposition to the 1991 Gulf war led to the termination of aid from regional countries and the expulsion of Jordanian workforce. The “returnees” boosted the population by about 10 percent. After the 1991 war, Iraq provided Jordan with almost all of its oil needs, part of it free and the rest at discounted prices. Since 2003 however, regional oil producing countries have provided oil grants to facilitate Jordan’s recovery from the negative economic consequences of the second war on Iraq.
In this regional context and in view of its grave economic situation, Jordan agreed to a series of five-year reforms sponsored by the IMF. During the period of 1993 to 1999, the IMF extended to Jordan three fund facility loans. As a result, the government undertook massive reforms with priority on foreign investment and easier trade policies. By 2000, Jordan was admitted to the World Trade Organization (WTO), and a year later signed a Free Trade Agreement (FTA) with the United States. Jordan was also able to bring down its overall debt payment and restructure it at a manageable level.
The ultimate objectives in all of Jordan’s IMF-supported programs were the improved living standards and the expanded employment opportunities. Intermediate objectives have taken the form of specific macroeconomic goals such as higher real GDP growth, low inflation, and the strengthening of external and fiscal positions. Over time, the macroeconomic objectives of the programs, as presented in IMF reports, have become more explicitly linked to the Jordanian government’s social policy objectives. For example, the program supported by the 1996 Extended Fund Facility (EFF) allowed for an increase in real per capita consumption, in order to partially reverse sharp declines in preceding years and, together with expanding employment opportunities, the program was made “politically acceptable” and “socially sustainable”. Similarly, the 1999 EFF-supported program sought to strike a balance between the need for progress toward fiscal sustainability, and “avoidance of undue recessionary effects from rapid contraction”. The main elements of growth strategies in the programs focused on a combination of measures to boost domestic saving and investment, and wide-ranging structural reforms covering the government budget, financial sector, external sector (including trade liberalization), regulatory framework, and public enterprises and privatization.
After almost 15 continuous years under IMF arrangements, the Jordanian authorities have indicated that a Stand-By Arrangement (SBA) which expired in July 2004 marked the country’s “exit” from reliance on IMF loans. The IMF acknowledged that steadfast implementation of reforms had strengthened the economy’s foundation and that Jordan was ready to “graduate” from IMF-supported programs. Still, the Jordanian government and all relevant authorities decided to maintain close relations with the IMF in the context of the so-called “post-program monitoring” and technical assistance.
Nowadays, Jordan stands as a country subject of an evaluation that assesses how effectively IMF assistance helped it tackle major macroeconomic challenges, including the effects of shocks related to political and economic developments in the Middle East since the late 1980s and most importantly during the recent global economic crisis.
According to Dominique Strauss-Khan Managing Director of the IMF, “The Jordanian economy has proved resilient to the global economic downturn, thanks to sound economic management and prudent supervision of the kingdom's financial sector”. At the conclusion of his recent visit in Jordan on April 2010, the IMF director acknowledged that looking beyond the immediate task of managing the impact of the global financial crisis, the Jordanian government’s plans as outlined in its National Agenda head to the right direction towards the implementation of political, economic, and social reforms designed to facilitate the further transformation of the kingdom into a highly-competitive, knowledge-based economy".
As noted, towards the end of 2008, the world witnessed a financial crisis, but Jordan has been minimally affected by that crisis. The Central Bank of Jordan has ensured the stability of the banking system while maintaining monetary stability, which indicated that the economy would not face major problems. In fact, the setting of 12% as a percentage for capital adequacy has preserved the banks from any financial problems and led to a zero percent probability of bankruptcy. The world standard for capital adequacy does not exceed 8%; however, Jordan used a conservative banking system in order to save its banks in 2008. Right after the world financial crisis, banks were requested to disclose all their toxic papers which amounted to 40 million dollars; an amount not considered as a major loss taking into account the profits of over a billion dollars for these banks in 2008.
Jordan has continued its progress in enhancing the investment climate and developing its privatization programs. The Jordanian strategy in attracting foreign and domestic investment achieved portions of its goals and it was based on the Investment Promotion Law approved in 2006 for investment regulatory simplification. According to statistics, investments benefiting from the Investment Promotion Law increased in 2008 to reach JD 2.268 million compared to JD 2.221 million in 2007. In addition, JD 310.7 million of investments in special development zones are included to the total investments for 2008.
In response to the recession, Jordan is executing several major infrastructure projects to be financed by public-private partnerships (PPPs) to stimulate the economy. One of these is a nuclear power plant project, the first such scheme to be built on a PPP basis. Since the start of 2010, Jordan’s fortunes have turned a corner. Remittance levels have stabilised and tourist arrivals have picked up. GDP growth is forecast to be 4.1 per cent this year, rising to 4.5 per cent in 2011.
Additional plans, like grand tourism projects in Aqaba as well as two mega water projects are in line. The first is the Disi water project which will tap an aquifer near the Saudi border and pipe it to greater Amman where some 3 million out of the kingdom’s 6 million population lives. The second is the "Red to Dead" project, which entails pumping water from the Red Sea to the rapidly falling Dead Sea, and along the way siphoning water for desalination and also for the cooling of nuclear projects. These are massive, multibillion-dollar projects that require foreign investment and aid.
The IMF-sponsored success with which Jordan has been able to weather the negative impacts and repercussions of regional and world events, while continuing to achieve comparatively high economic growth rates is an issue worth of being evaluated. But as 2009 and past years showed, Jordan’s economy is closely tied to the economies of other countries in the region, and thus it is important to continue to reform and manage its economic policy so that the kingdom pursues its goal of long-term national economic prosperity.
Specifically, in the late 1980s, inflows of both official transfers and remittances fell, with substantial adverse consequences on budgetary revenues. Initially, the authorities resorted to external borrowing to fill the revenue gap, leading to a sharp increase in external debt. In 1989, Jordan had a 30-35% unemployment rate and was struggling with its inability to pay its loans. Structural weaknesses in Jordan’s public finances and balance of payments were soon exposed, leading the authorities to request the country’s first arrangement with the International Monetary Fund (IMF) in 1989 to facilitate orderly external financial relations and reverse a sharp decline in economic growth.
Economic reforms were initiated as part of an agreement between Jordan and the IMF. The key objectives of the economic reforms in the kingdom focused on the reduction of public debts, reduction of the budget deficits, controlling of inflation, tax reforms, credit policy reforms, investment incentives, privatisation and easier trade policies. Nevertheless, a highly growing population and the unstable political situation in the region have been major impediments to immediately reaping the benefits of IMF-introduced economic reforms.
The first and second Gulf wars of 1991 and 2003 respectively had severe disruptive effects on the Jordanian economy. Jordan’s opposition to the 1991 Gulf war led to the termination of aid from regional countries and the expulsion of Jordanian workforce. The “returnees” boosted the population by about 10 percent. After the 1991 war, Iraq provided Jordan with almost all of its oil needs, part of it free and the rest at discounted prices. Since 2003 however, regional oil producing countries have provided oil grants to facilitate Jordan’s recovery from the negative economic consequences of the second war on Iraq.
In this regional context and in view of its grave economic situation, Jordan agreed to a series of five-year reforms sponsored by the IMF. During the period of 1993 to 1999, the IMF extended to Jordan three fund facility loans. As a result, the government undertook massive reforms with priority on foreign investment and easier trade policies. By 2000, Jordan was admitted to the World Trade Organization (WTO), and a year later signed a Free Trade Agreement (FTA) with the United States. Jordan was also able to bring down its overall debt payment and restructure it at a manageable level.
The ultimate objectives in all of Jordan’s IMF-supported programs were the improved living standards and the expanded employment opportunities. Intermediate objectives have taken the form of specific macroeconomic goals such as higher real GDP growth, low inflation, and the strengthening of external and fiscal positions. Over time, the macroeconomic objectives of the programs, as presented in IMF reports, have become more explicitly linked to the Jordanian government’s social policy objectives. For example, the program supported by the 1996 Extended Fund Facility (EFF) allowed for an increase in real per capita consumption, in order to partially reverse sharp declines in preceding years and, together with expanding employment opportunities, the program was made “politically acceptable” and “socially sustainable”. Similarly, the 1999 EFF-supported program sought to strike a balance between the need for progress toward fiscal sustainability, and “avoidance of undue recessionary effects from rapid contraction”. The main elements of growth strategies in the programs focused on a combination of measures to boost domestic saving and investment, and wide-ranging structural reforms covering the government budget, financial sector, external sector (including trade liberalization), regulatory framework, and public enterprises and privatization.
After almost 15 continuous years under IMF arrangements, the Jordanian authorities have indicated that a Stand-By Arrangement (SBA) which expired in July 2004 marked the country’s “exit” from reliance on IMF loans. The IMF acknowledged that steadfast implementation of reforms had strengthened the economy’s foundation and that Jordan was ready to “graduate” from IMF-supported programs. Still, the Jordanian government and all relevant authorities decided to maintain close relations with the IMF in the context of the so-called “post-program monitoring” and technical assistance.
Nowadays, Jordan stands as a country subject of an evaluation that assesses how effectively IMF assistance helped it tackle major macroeconomic challenges, including the effects of shocks related to political and economic developments in the Middle East since the late 1980s and most importantly during the recent global economic crisis.
According to Dominique Strauss-Khan Managing Director of the IMF, “The Jordanian economy has proved resilient to the global economic downturn, thanks to sound economic management and prudent supervision of the kingdom's financial sector”. At the conclusion of his recent visit in Jordan on April 2010, the IMF director acknowledged that looking beyond the immediate task of managing the impact of the global financial crisis, the Jordanian government’s plans as outlined in its National Agenda head to the right direction towards the implementation of political, economic, and social reforms designed to facilitate the further transformation of the kingdom into a highly-competitive, knowledge-based economy".
As noted, towards the end of 2008, the world witnessed a financial crisis, but Jordan has been minimally affected by that crisis. The Central Bank of Jordan has ensured the stability of the banking system while maintaining monetary stability, which indicated that the economy would not face major problems. In fact, the setting of 12% as a percentage for capital adequacy has preserved the banks from any financial problems and led to a zero percent probability of bankruptcy. The world standard for capital adequacy does not exceed 8%; however, Jordan used a conservative banking system in order to save its banks in 2008. Right after the world financial crisis, banks were requested to disclose all their toxic papers which amounted to 40 million dollars; an amount not considered as a major loss taking into account the profits of over a billion dollars for these banks in 2008.
Jordan has continued its progress in enhancing the investment climate and developing its privatization programs. The Jordanian strategy in attracting foreign and domestic investment achieved portions of its goals and it was based on the Investment Promotion Law approved in 2006 for investment regulatory simplification. According to statistics, investments benefiting from the Investment Promotion Law increased in 2008 to reach JD 2.268 million compared to JD 2.221 million in 2007. In addition, JD 310.7 million of investments in special development zones are included to the total investments for 2008.
In response to the recession, Jordan is executing several major infrastructure projects to be financed by public-private partnerships (PPPs) to stimulate the economy. One of these is a nuclear power plant project, the first such scheme to be built on a PPP basis. Since the start of 2010, Jordan’s fortunes have turned a corner. Remittance levels have stabilised and tourist arrivals have picked up. GDP growth is forecast to be 4.1 per cent this year, rising to 4.5 per cent in 2011.
Additional plans, like grand tourism projects in Aqaba as well as two mega water projects are in line. The first is the Disi water project which will tap an aquifer near the Saudi border and pipe it to greater Amman where some 3 million out of the kingdom’s 6 million population lives. The second is the "Red to Dead" project, which entails pumping water from the Red Sea to the rapidly falling Dead Sea, and along the way siphoning water for desalination and also for the cooling of nuclear projects. These are massive, multibillion-dollar projects that require foreign investment and aid.
The IMF-sponsored success with which Jordan has been able to weather the negative impacts and repercussions of regional and world events, while continuing to achieve comparatively high economic growth rates is an issue worth of being evaluated. But as 2009 and past years showed, Jordan’s economy is closely tied to the economies of other countries in the region, and thus it is important to continue to reform and manage its economic policy so that the kingdom pursues its goal of long-term national economic prosperity.
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