Growth Against the Odds

Despite having to contend with regional turmoil and significant domestic challenges, the IMF’s Mission Chief for Jordan believes the Kingdom’s economy will keep expanding in 2017.

By Dina al-Wakeel 

It’s been a trying few years for Jordan’s economy. From raging wars in neighboring Syria and Iraq—two of the Kingdom’s leading trading partners—to an oil slump that’s threatening vital remittances and financial assistance from the Gulf. Throw in some more homegrown challenges such as high unemployment and soaring public debt, and you have a recipe for trouble.

To stave off an economic disaster, Jordan has sought out the help of the IMF over recent years. It signed two successive agreements with the lender. The first Stand-By Arrangement (SBA) ended in mid-2015, and an Extended Fund Facility (EFF) was signed last summer.

To evaluate the success, or lack thereof, of the SBA and the terms under the new EFF, the IMF’s Mission Chief for Jordan, Martin Cerisola, spoke to Venture about this year’s growth prospects, and what reforms Jordan is expected to undertake to lower public debt, improve the social safety net, and transform the Kingdom’s business environment to enable the private sector.

Jordan has been through some very tough times during the past few years. Do you see these challenges continuing throughout 2017?

Yes, unfortunately, we expect the external and regional environment to remain challenging in 2017 despite the authorities’ good policy efforts. Regional conflicts, the refugee crisis, and the difficult economic outlook in the GCC, in light of the sharp and persistent decline in oil prices, continue to affect negatively exports, tourism, remittances, and investor confidence.

As you know, economic activity has been subdued in the first half of 2016, reflecting the weak performance of some sectors, such as mining, which appear to be recovering. Excluding these sectors, however, economic activity has been significantly stronger and recovering in the first half of 2016, which bodes well for the outlook for 2017.

Of course, an improvement for 2017 much depends on the expectation that the regional environment does not deteriorate further. The implementation of the recent agreement with the EU on the relaxation of rules of origin for Jordanian exports is an important positive development. The opening of the Iraq border could also help boost growth and prospects.

Do you think the agreement with Jordan that ended in August 2015 was successful, especially since some economists blamed both the IMF and the government for not seeking real reforms, and instead increasing taxes and fees? 

I think Jordan has made important reforms and the SBA made significant contributions to the Jordanian economy. You will recall the very difficult conditions Jordan faced in 2012. The SBA successfully supported the authorities’ efforts in regaining macroeconomic stability. Given the difficult starting position and the subsequent large and adverse shocks that Jordan experienced, the Jordanian economy experienced rising current account deficits, a deterioration in NEPCO’s and the government’s finances, and lower foreign exchange reserves. The SBA was successful in supporting the authorities’ policies to restore macroeconomic stability and in reducing several of Jordan’s vulnerabilities, while advancing some structural reforms. In addition, the program also provided an important framework for foreign financing.

What are the new EFF’s requirements and what reforms is Jordan expected to undertake? Are the Tax Law and the bloated public sector part of them?

Let me just clarify that the Fund is supporting the Jordanian authorities’ economic program, which is underpinned by their 10-year framework for economic and social policies: Vision 2025. The Fund supported-program aims at enhancing the conditions for more inclusive growth and preserving macroeconomic stability.

One important part of this strategy is to reduce public debt through a gradual and steady fiscal consolidation over the medium-term while maintaining essential social spending in order to preserve macroeconomic stability and free resources for private investment. An essential part of the fiscal consolidation rests on removing tax exemptions that are too costly, ineffective, and which tend to benefit the wealthier more. There are also important measures to strengthen public financial management, planning, and transparency.

In fact, we hope that a comprehensive structural agenda will enhance the conditions for more sustainable and inclusive growth, despite the difficult external environment. A swift implementation of this agenda would help enhance the resilience and depth of the financial sector, the business environment, and help tackle challenges facing small and medium-sized firms in terms of access to finance. Labor market reforms are needed to boost youth and female employment and lessen informality.

How is NEPCO fairing now with the low oil prices?

The situation in NEPCO has improved considerably over the past year and a half. This improvement largely reflects the efficiency gains stemming from the shift to liquefied natural gas (LNG) for generation (thanks to the construction of the LNG terminal in the port of Aqaba which has allowed the authorities to import LNG since the second half of 2015) and the decline in oil prices since late 2014.

Under the IMF supported-program, the authorities have taken measures to better shield NEPCO from future changes in oil prices. They have published a study on options for dealing with cross subsidization in electricity tariffs and for adjusting electricity tariffs to absorb oil price shocks. Based on these studies’ findings, they have also enacted an electricity tariff-adjustment mechanism, to be implemented in January 2017 following the findings in the study.

What growth do you foresee for the Kingdom in 2017?

As mentioned earlier, we expect some improvement in real GDP growth in 2017, which could be about 3 percent. This largely depends on no further deterioration of the external environment and on progress with implementing the recent agreement with the EU on exports, as well as advancing structural reforms.

Some officials have warned that any additional reforms that directly affect people’s income could result in social unrest. Is that something that the IMF has taken into consideration before reaching this new agreement with the Kingdom?

As I mentioned earlier, the IMF-supported program was designed in a flexible manner, taking into consideration the challenges posed by regional conflicts on exports, investments and the labor market. The program will pursue gradual and steady fiscal consolidation to bring public debt toward safer levels, but more importantly, this is being done while also protecting the most vulnerable. In parallel the authorities must advance comprehensive reform to enhance the conditions for more inclusive growth to enhance competitiveness, job prospects (particularly for youth and women), and foster equity and fairness. The authorities will notably intensify their efforts to facilitate access to finance, reduce the cost of starting and operating businesses, further strengthen investor protection, and promote financial inclusion.

The IMF’s advice and recommendations have also specifically focused on ways to improve the social safety net. In particular, fiscal reforms are envisaged to focus on revenue, and reforms to the tax system—such as the removal of tax exemptions, which mainly benefit the most affluent—and energy and water sector reforms that will continue to protect the poor, who will continue to benefit from affordable prices. Also to ensure that reforms will not affect the most vulnerable, the program closely monitors social spending and includes measures that ensure that such expenses will not be cut.

Many economists have also blamed the IMF for only seeking to increase Jordan’s revenues without a clear roadmap. Do you think that’s a fair argument?

There has been extensive preparatory work and analysis on the road map for reforms, including for those aimed at increasing Jordan’s revenues. The authorities’ program also focuses on better prioritizing and improving spending, with clear commitments on maintaining prudent growth in the public wage bill, better targeting some subsidies and transfers, while also ensuring that social spending is preserved. The strategy to strengthen inclusive growth is underpinned by measures aimed at strengthening private sector firm-level productivity, which are highly complementary for boosting growth, employment, and enhancing social outcomes. These reforms are focused on facilitating access to finance, the labor market, and improving the business environment. As for the reforms to enhance revenues, Jordan provides extensive exemptions on taxes that are becoming increasingly difficult to afford, do not seem to be achieving many of their intended goals, and which are not well targeted and equitable. With public debt at very high levels, removing some of these exemptions will help support macroeconomic stability and promote investment in a more equitable and efficient manner.