IMF and international aid to help stabilise Jordan's budget

Jordan is in the midst of ambitious fiscal and structural reforms that aim to consolidate financial stability and cut public debt after several years of economic slowdown. The past few years have seen GDP growth slide from more than 8% in 2007 to 3.1% in 2014. Although the IMF originally projected GDP growth would reach 3.5% in 2015, it subsequently downgraded this figure to between 2.6% and 2.9%, with the Jordanian government later reporting GDP growth reached just 2.4%.

The slowdown comes in the wake of unprecedented external shocks that have impacted the country since 2011, including repeated and extensive disruptions to a natural gas pipeline delivering gas from Egypt along the Sinai Peninsula, high global oil prices in the years to 2014, which drove the cost of imports up, and regional tension, particularly in Syria. These issues together have impacted trade, driven public spending higher and necessitated a sharp increase in foreign borrowing.

Perfect Storm

Jordan has dealt with multiple exogenous shocks that have hindered its economy’s performance. The kingdom’s current account deficit widened from 7% of GDP in 2010 to 12% in 2011, according to the IMF, and though large external grants and rising public expenditure on energy subsidies and public sector wage increases helped mitigate the social impact of regional conflict, the kingdom’s macroeconomic challenges worsened in 2012 as a result of high oil prices, lower levels of grant assistance and a growing population of refugees fleeing conflict in neighbouring Syria.

Public debt has concurrently risen to unsustainable levels as the government formulates ways to deal with the aftermath of the 2011 Arab Spring uprisings and support a refugee population that had swelled to over 1.4m as of September 2015, according to the UN High Commissioner for Refugees, as well as bolster economic growth against a backdrop of declining trade volumes and regional economic and political headwinds.

Jordan’s borders with Syria and Iraq, formerly two of its largest trading partners, were both closed in 2015, which will continue to weigh heavily on regional trade: Jordanian exports to Iraq and Syria were valued at a respective $1.2bn and $1bn annually in the years to 2015, according to Reuters.

Disruptions to a gas pipeline originating in Egypt have had a more significant effect on the budget. Damage to the pipeline, which supplied gas for 87% of the kingdom’s electricity supply in 2009, has put upward pressure on Jordan’s energy import bill. Egypt’s contribution to Jordanian electricity fell to 12% in 2012, necessitating costly energy imports that have driven the state-owned National Electric Power Company (NEPCO) to become one of the largest deficit contributors, costing the budget $1.36bn in 2013 alone.

Debt Dynamic

Although Jordan has made considerable progress in reducing its budget deficit in recent years, its economic challenges continue to necessitate increased government borrowing. The kingdom’s current account deficit swelled to 14% of GDP in 2012, and the Carnegie Endowment for International Peace (CEIP) notes that the budget deficit, excluding NEPCO, is between $1bn and $1.5bn annually after foreign aid is factored in, meaning a minimum of 3% of GDP is being added to public debt annually.

The kingdom’s foreign debt has also risen sharply in recent years, with the Central Bank of Jordan (CBJ) reporting that external debt nearly tripled between 2008 and 2015, rising from JD3.6bn ($5.1bn) in 2008 to JD4.9bn ($6.9bn) in 2012, JD7.2bn ($10.1bn) in 2013, JD8bn ($11.3bn) in 2014 and JD9.4bn ($13.2bn) in 2015. Jordan’s debt-to-GDP ratio increased sharply as a result, from 57% of GDP in 2011 to more than 90% in 2015 after a $3.2bn increase in debt was recorded in the same year, stemming from a regular budget deficit, new electricity debt and accumulated interest.

The Ministry of Finance (MoF), reports that Jordan’s foreign debt had eased somewhat, to JD9.3bn ($13.1bn) as of June 2016, after the kingdom reached a series of borrowing agreements, including a $1.5bn US-guaranteed eurobond issued in June 2015 that allowed the government to borrow at lower rates.

Cost-Cutting

The government has increasingly turned to foreign aid in a bid to rein in its debt, particularly from the GCC and US, with the Congressional Research Service reporting that the US aid to the kingdom is set at a minimum of $1.3bn, compared to less than $400m annually in 2011. In aid terms, however, oil prices have worked against the kingdom: Qatar, for example, moved to freeze all aid to the kingdom in 2015, leading the MoF to report that its original budget deficit of $970m had risen to $1.3bn as a result.

With foreign assistance consistently falling below targets, the government has increasingly sought to implement prudent fiscal reforms aimed at reducing public expenditure, cutting NEPCO losses and improving efficiency – partnering with the IMF to implement reforms that have already had a dramatic impact on the state’s debt-to-GDP ratio. The kingdom adopted a national reform programme in May 2012, with the goal of an energy policy shift which would enable sustainable growth, while continuing to provide targeted support to vulnerable groups in the country.

Positive Developments

These reforms have met with some measure of success, IMF officials reported in July 2015 that the bank’s programme had stabilised the Jordanian economy and mitigated the challenges brought on by higher public spending. Jordan’s budget deficit was just 2.3% of GDP in 2014, according to the MoF, and increased to 3.4% in 2015. Although falling global oil prices have impacted aid inflows from the GCC, they have also enabled NEPCO stakeholders to reduce losses, which fell from $1.4bn in 2013 to $738m in 2014. Nonetheless, the kingdom’s debt burden remains a top priority, and the 2016 budget forecast total expenses of JD8.5bn ($12bn), against JD7.6bn ($10.7bn) of revenues, for a deficit of roughly 3% of GDP. The 2016 Budgets Law of Government Units, which factors in the additional expenses and revenues from NEPCO, has total expenses of $2.68bn and revenues of $2.15bn. Together, this means that overall 2016 spending was $14.7bn, of which 79% was covered by revenues, 9% by foreign aid and the rest by now debt.

International support continues to be forthcoming, with the World Bank approving a loan worth $300m in September 2016. The loan is intended to boost opportunities for investors and improve the business climate in the country. The loan is also expected to create job opportunities for Syrian refugees.

New Reforms

In May 2016 the Jordanian government once again began formal negotiations with the IMF to develop a fiscal and structural reform programme expected to run from 2016 to 2020. An IMF delegation travelled to Jordan to meet with officials from the MoF and the Central Bank of Jordan (CBJ), with additional plans to meet government agencies, banks and lawmakers. “The authorities’ programme is underpinned by their Vision 2025 framework for economic and social policies. It aims at advancing fiscal consolidation and a broad range of structural reforms to enhance the conditions for more inclusive growth,” Martín Cerisola, IMF mission chief to Jordan, told OBG.

In addition, the Jordan Investment Commission is working with the US Agency for International Development to promote investment in the country. Nearly $5m has been allocated for the project, and USAID is seeking a local partner to help realise the project.

Done Deal

At the end of June 2016 IMF officials announced that they had reached an agreement with the government of Jordan on a 36-month extended fund facility (EFF). The EFF is expected to open up an additional $1.9bn in donor funding, which will help cover the costs of hosting Syrian refugees. The ratings agency Moody’s said the additional funds will allow the Jordanian government to post a budget surplus of JD170m ($239.1m) by 2019. According to Omar Malhas, minister of finance, stakeholders from ministries, government departments, private sector entities and the IMF had come to an agreement over structural reforms in the kingdom’s labour market, in addition to enhancing and improving the country’s business environment and helping to attract new foreign direct investment.