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IMF says Jordan’s correction plan a ‘success’

By JT - Aug 06,2015 - Last updated at Aug 06,2015

AMMAN – Jordan needs a growth rate of some 6 per cent to absorb new entrants into the labour force, said an International Monetary Fund (IMF) official, who also urged the world community to aid the Kingdom in  dealing with the Syrian refugee crisis.  

In an interview with the IMF Survey, IMF mission chief to Jordan Kristina Kostial said the Kingdom needs more structural reforms to grow faster and to translate this growth into higher employment.

Jordan had high growth rates from 2000 to 2009, on average 6.5 per cent but with the global financial crisis, growth tanked, Kostial said, adding that more recently growth has hovered at about 3 per cent. However, Jordan can over time return to its medium-term target potential of 4.5 per cent growth.

“Is this enough to make a dent in unemployment? No. According to our calculations, Jordan needs a growth rate of some 6 per cent just to absorb new entrants into the labour force,” she said in the interview to discuss the country’s achievements over the course of the three-year Stand-By Arrangement (SBA) agreed in 2012. 

In the interview, she also talked about the challenges that lie ahead for Jordan after concluding the SBA. 

On July 31, the IMF executive board approved the final review under the $2 billion SBA. With the board’s approval of the final disbursement of about $400 million, Jordan becomes the first Arab country in transition to successfully complete an IMF-backed programme, according to the fund.

Kostial said that Jordan maintains economic stability while coping with refugees and regional shocks;  the next phase should focus on creating jobs and improving the business climate while continuing to strengthen public finances, the official added. 

Sustained donor support will be essential to deal with the humanitarian crisis caused by the influx of hundreds of thousands of Syrian refugees, she stressed. 

Asked why Jordan needed a programme, Kostial replied that in the run-up to the programme, Jordan was hit by a series of exogenous shocks.  The Kingdom, she noted, had been getting gas below market price from Egypt, but that supply of gas, which was used to generate electricity, was disrupted because of repeated sabotaging of the Arab Gas Pipeline.  Jordan thus had to substitute expensive fuel products for this gas, with the result that the state-owned electricity generation company began to run large losses amounting to 5 per cent of the gross domestic product (GDP) in 2011.

On top of that, the “Arab Spring” started that same year, and in response the Jordanians increased current spending, including higher subsidies and wages. As a result, the central government’s fiscal deficit increased by 5 per cent of the GDP.  

“Despite a large grant from donors, Jordan had difficulty financing this gap, and the central bank was losing reserves. That’s when the authorities sought IMF assistance,” she added.

Kostial indicated that during the course of the programme, Jordan was hit by further shocks, the worst being the Syrian refugee crisis. Jordan has received a huge flow of refugees estimated at more than one million refugees, or about 20 per cent of Jordan’s population. On top of that came the emergence of Daesh in Iraq, Jordan’s largest trading partner and the destination of some 20 per cent of its exports.The new threat caused a lot of disruption to these exports as well as to tourism in Jordan, she noted.

Asked on the achievements of SBA programme, the IMF official said the plan had three main objectives:  maintaining macroeconomic stability; ensuring fairer, more equitable policies for the population; and increasing growth prospects for Jordan. Overall, the programme has been a success.  

“The biggest success was on the first objective, maintaining macroeconomic stability, because the country suddenly found itself with a huge deficit coupled with already high public debt [amounting to 71 per cent of the  GDP at the end of 2011].  The big achievement under this programme was the gradual reduction of the combined public sector deficit by some 5.3 per cent of the  GDP over the past three years. This came from two things: energy sector reform and measures by the central government,” she said. 

The IMF Survey told Kostial that the fund displayed a fair amount of flexibility with regard to Jordan.

She commented that the IMF showed flexibility in terms of fiscal targets, because there were unanticipated government outlays related to the Syrian refugees in Jordan and to gas flows from Egypt coming to an almost complete halt. Additional grants coming in from the international community allowed us to be flexible.  

“We also had flexibility with regard to the timing of the programme policies. Some of the things that we had agreed on were desirable to have early on, most notably the medium-term energy strategy, the lack of which was giving rise to a large deficit.  But we needed to make sure that the authorities had sufficient time to consult with stakeholders and put this strategy in place.” 

Responding to a question on whether there is room for more progress, Kostial said one area where reform has fallen short is creating more jobs.  In Jordan, unemployment is relatively high — 13 per cent overall, 20 per cent for women, and 30 per cent for the youth. It is structural in nature, so even when Jordan had high growth rates, unemployment did not fall much.  

“What is also striking is the low workforce participation, which means that a lot of people are giving up on seeking work. Female labour force participation is particularly problematic, even when compared to elsewhere in the region, and only 10 per cent of the women of working age are actually working.” The head of the IMF mission said Jordan is now on  sounder fiscal footing and public debt is broadly stabilising, but at a pretty high level — 90 per cent of the GDP, adding the Kingdom has done the bulk of its fiscal adjustment, but it’s not over yet. The authorities should bring the electricity company back to cost recovery and there is room for additional central government measures, such as widening the income tax base.

 

Because it’s expensive for Jordan to host the Syrian refugees, the help of the donor community continues to be indispensable as it is important for the country to stay engaged with the international community — the country cannot shoulder this burden alone. 

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