Jordan's IMF deal leading to debate over economic policy

The kingdom’s latest deal with the IMF has drawn both praise and criticism, and while evidence can be marshalled for both reactions, no honest appraisal can take place without the proper context. The three-year Extended Fund Facility (EFF) is worth some 514m special drawing rights (SDRs), an international reserve asset created by the IMF to supplement the official reserves of its members. The SDRs offered under the EFF are equivalent to $723m at current valuation rates, which could reach $900m if targets are met, according to IMF figures. At issue is whether the EFF, as agreed on by the parties, will really help Jordan implement financial and economic reforms without undermining growth and exacerbating unemployment.

Indispensable

Jordan’s economy and population are small, and refugee and other issues caused by regional instability are considerable, strengthening its case for outside assistance. A stable and prosperous Jordan figures in all realistic scenarios for achieving sustainable regional stability. The kingdom’s geographical location and geostrategic position give it the potential to influence outcomes along multiple points of friction, including the Arab-Israeli conflict, the specific case of Palestine and several quarrels between Arab neighbours. Variously described as a buffer zone and mediator, the kingdom is widely viewed as indispensable to resolving some of the region’s most intractable problems. Jordanian leadership is no stranger to this role, and is becoming increasingly effective in the recruitment of outside assistance to bolster its position. And while reform remains a work in progress, this diplomatic approach has managed to secure substantial outside financial support which has been enough to maintain modest growth and a stable security situation.

Misplaced Generosity

It has been argued, however, that, as in other countries, grants and soft loans have helped to delay necessary subsidy cuts and other structural reforms, slow the emergence of a more dynamic private sector and exhaust the patience of multilateral lenders, donors and other partners. In addition, some of the IMF’s own best and brightest have begun to conclude that many of its recent policy prescriptions proved ineffective or even counterproductive, with three high-ranking IMF officials co-authoring a paper titled “Neoliberalism Oversold?” in June 2016. While finding that some neoliberal policies had achieved such goals as poverty reduction, increased technology and knowledge transfer, and more efficient public services, the IMF document also acknowledged that others had “not delivered as expected”.

To whatever extent these factors have had an impact on Jordan, it almost certainly has been diluted by other variables. For one thing, much of the loans and grants in question have been channelled to energy, transport, water and other infrastructure projects that perform several salutary functions at once, including job creation, enhanced business competitiveness, reduced potential for social unrest and huge savings for the state in terms of meeting the rising demand for electricity. Assistance from the IMF and other international actors has also been accompanied since 2011 by a five-year, $5bn investment package extended by the six-nation GCC, led by Saudi Arabia.

The upshot is that Jordan is already benefitting from a variation of what many foreign aid observers have been recommending for years: targeted investment that not only addresses specific challenges like roads, refugees and fuel costs, but also generates positive side effects in the short, medium and long term.

Past Programmes

The list of IMF programmes extended to Jordan is a considerable one, including the original 1989 Stand-By Agreement (SBA) worth SDR60,000 and additional SBAs in 1992 (SDR44,400), 2002 (SDR85,280) and 2012 (SDR1.36m). The organisation also has followed up with EFFs in 1994 (SDR189,300), 1996 (SDR238,040) and 1999 (SDR127,880). This is not to mention the value of expertise shared by the IMF and associated entities, policy improvements undertaken as a condition of lending and guided by the findings of regular IMF reviews, matching loans and/or grants extended by other institutions and friendly governments, and both capital inflows and interest savings made possible by greater investor confidence and improved sovereign credit ratings as a result of IMF support. Indeed, this catalysing effect is among the list of early expectations generated by the latest EFF, with officials hoping it will ensure full and timely fulfilment of the pledges made by donor nations.

Going Strong

Jordan has repeatedly avoided disaster despite myriad regional crises since the 1989 SBA, including the 1990 Iraqi invasion of Kuwait, which both reduced its access to cut-rate Iraqi oil and damaged its relations with Saudi Arabia and other oil-rich Arab monarchies. The 2003 US invasion of Iraq, among other things, ended sales of cheap crude, saw an influx of refugees into Jordan and crippled its primary export market. The ongoing civil war in Syria has more than doubled the number of refugees in the country and closed off another export route, while instability in Egypt’s Sinai Peninsula has regularly shut down the pipeline that had been relied upon to supply natural gas for Jordan’s electricity production. For good measure, the 2008-09 global financial crisis inflicted double-digit contractions on many economies.

Despite all of the above, the Jordanian economy has never stopped growing, however incrementally at times, a performance that economic blogger Julien Brault described in a June 2013 article in Les Affaires magazine as a “miracle.” Additionally, in an August 2015 interview with IMF Survey, the former IMF mission chief to Jordan, Kristina Kostial, attributed the kingdom’s resilience, at least in part, to its relationship with the IMF, the resources that it has made available and the reforms undertaken as a result. The bottom line is: Jordan has consistently avoided serious economic troubles despite multiple individual shocks, each of which would be sufficient to derail even the best-managed economy, and it has done so while benefitting both directly and indirectly from IMF assistance.

Looking Ahead

There is every reason to believe that Jordan will continue to enjoy a strong relationship with the IMF, and to enjoy tangible and intangible benefits as a result. As with previous arrangements, the value of the EFF extends far beyond the $723m, including the sharing of best practice and other forms of expertise, advice on establishing appropriate budgetary and other objectives, and regular monitoring. In October 2016 an IMF team was on the ground in Amman, conducting a thorough review of the national economy mandated by the EFF agreement, based on which it made a series of policy recommendations. In November 2016, The Jordan Times reported that the IMF had already recommended elimination of the general zero rate for sales tax, an increase in the special sales tax on oil derivatives from 6% to 20%, and a slight rise in the tariff rate to raise revenues by 0.19% of GDP. For 2017, the fund proposed that the government impose a moratorium on new tax incentive provision, while expanding existing ones and ending corporate income tax exemptions for firms operating in free zones after a 10-year transition period. Furthermore, the recommendations included a set of medium-term goals for 2018-20 to review Customs duties exemptions, with the aim of eventually eliminating them, except in free zones.

The nature of that advice will be closely watched for what it reveals about a possible shift in IMF priorities in the wake of the “Neoliberalism: Oversold?” paper. Although closely associated with the austerity instituted by many governments since 2008-09, even IMF Managing Director Christine Lagarde has acknowledged that spending cuts can go too far, and recently she expressed reservations about another neoliberal totem. During a September 2016 speech in Toronto, Lagarde acknowledged that while globalisation had produced many positive results, it also led to “dislocation and hardship” associated with “growing inequality in wealth, income and opportunity in many countries.” She made similar comments to reporters at the annual IMF-World Bank meetings in October 2016, arguing that trade-fuelled growth needed to be “more inclusive”. Despite these statements, critics charge that neither the IMF nor the World Bank has fully come to terms with the damage wrought by more than a decade of neoliberal austerity, privatisation and trade liberalisation, and they have not suggested real changes.

The implementation of Jordan’s EFF is a potential testing ground to determine what sorts of amendments, if any, the IMF is ready to make to its prescriptions. Jordan’s unique circumstances mean that what works there may not produce similar results elsewhere and vice versa, making it a poor candidate for experimentation. What is more, the kingdom already looks set to extend its record of modest but steady expansion: the IMF’s latest forecast is for GDP growth of 2.8% in 2016 and 3.3% in 2017, as well as increased exports, more investment and smaller current account deficits. So long as this performance continues, there is little incentive to subject Jordan to any radical changes.