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IMF commends Jordan’s economic resilience but points to major flaws

Experts not optimistic about 2017 outlook, amid weak public sector productivity

By Mohammad Ghazal - Nov 16,2016 - Last updated at Nov 16,2016

AMMAN — Jordan has achieved substantial success in dealing with adverse shocks over the past several years, but several challenges continue to press the economy, according to an International Monetary Fund (IMF) statement following the completion of the first review of Jordan’s economy.

The IMF underlined the need for rethinking policies and the implementation of reforms to effectively boost investment and productivity, adding that the current system of tax exemptions is not helping to promote investment and jobs as originally intended.

In spite of lower growth in 2016, economic performance is expected to improve in 2017, it said.

Economists agreed, saying boosting public sector productivity, which is weak and contributing to financial waste, is key to help reduce public debt. However, they said the economic outlook for 2017 does not seem to be promising.

In the statement following the first review of the economy under a $700 million extended fund facility (EFF) programme, the IMF said the economy has remained resilient and enjoys some strong fundamentals, adding that the financial system is sound and well capitalised. 

Significant progress has been made in reducing the fiscal deficit, and interest rates have declined to low levels, helping to revive credit and support growth.

Challenges, however, remain.

“Real gross domestic product [GDP] growth is below potential, unemployment is high and rising, particularly for youth and women, and regional conditions, including due to protracted conflicts and the refugee crisis from Syria, continue to take a toll on sentiment, public finances, investment, and the external current account,” IMF’s report said.

At the same time, aside from these adverse conditions, there is evidence that Jordan’s economic performance in terms of productivity and per capita income growth had been lagging compared with those of other emerging markets, even prior to those adverse shocks, ever since the aftermath of the global financial crisis, it added.

“The government has recently announced plans to follow up on investments, which materialised and which did not, and this is a very important step because what counts is not announcing that we have attracted investments worth millions and gave them tax exemptions while on the ground they had no impact on economic growth or job creation,” economist Zayyan Zawaneh told The Jordan Times Tuesday.

The economist said that taking the local and regional conditions into account, the outlook for 2017 does not look promising.

“Whether the economy grows by 2 or 3 per cent, the figure does not matter. What matters is how many jobs were created and was there a fair distribution of economic development gains and income or not,” the pundit said.

Unemployment rate in Jordan averaged 12.81 per cent from 2007 until 2016, reaching an all time high of 15.8 per cent in the third quarter of 2016 and a record low of 0.8 per cent in the second quarter of 2007, IMF figures show.

The IMF said in its statement that seasonally adjusted real GDP grew at an annual rate of 3 per cent in the first half of 2016, which bodes well for the outlook for 2017.  This sustained improvement for 2017 and the next several years very much depends on the expectation that the regional environment does not deteriorate further, and on the implementation of the recent agreement with the EU on the relaxation of the rules of origin for Jordanian exports. Nevertheless, regional conflicts and the Gulf Cooperation Council outlook continue to be important sources of downside risks to growth.

“The IMF gives a bright image of the Jordanian economy, while the situation on the ground is different and not encouraging,” said Zayyan.

He added that the declining productivity of the public sector is adding to the economic woes in Jordan.

“When Jordan borrows to pay salaries for employees who do not work efficiently, this is a financial waste,” he said.

Economist Hosam Ayesh agreed, saying that the ratio of employees in the public sector stands at about 42 per cent of the overall workforce in Jordan, which is one of the highest in the world and which negatively affects economic growth.

“Productivity at the public sector is very low and this leads to ‘disguised unemployment’ that hampers economic growth and efforts to cut red tape,” said Ayesh.

He added that there is a dire need to revise tax exemptions granted to investments, saying some taxes are granted to certain economic sectors that do not have any positive impact on Jordanians.

In its report, the IMF said a gradual and steady fiscal consolidation, led by reforms to the tax exemptions framework and income tax, is critical to stabilise and reduce public debt and to help public finances be on a structurally sounder foundation. 

“This stronger foundation would help better buffer against future shocks, address pressing expenditure needs, better balance the burden of taxation among sectors, and enhance income distribution,” it added.

The current system of tax exemptions is not helping to promote investment and jobs as originally intended, and tends to favour disproportionately upper-income segments of the population, while the large foregone revenues are contributing to keep public debt on an increasing and unsustainable path, according to the IMF.

With Jordan’s economy envisaged to face vulnerabilities and risks over the medium term, the implementation of the authorities’ policies and reforms requires timely and continued support from the international community. Looking into 2017, it is critical that fiscal reforms are implemented to support fiscal consolidation through revenue- and equity-enhancing measures, it added.

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