IMF commends Jordan’s economy
The International Monetary Fund (IMF) executive board on Friday welcomed the Kingdom’s fiscal tightening in the 2012 budget, urging further fiscal consolidation over the medium term.
IMF executive directors commended the Kingdom’s adaptation of a comprehensive medium-term strategy to restore fiscal buffers and reduce public debt. Such a strategy, they said, should encompass enhanced tax administration, further fuel subsidy reforms, better-targeted social and capital spending, continued containment of the public sector wage bill and improved public sector financial management.
In its newly released annual report, the fund said that consultation with Jordan revealed that the 2012 budget focuses on raising domestic revenue by removing tax exemptions, revamping property transfer fees and imposing higher tax rates on luxury goods. The budget is also based on containing current spending by freezing public sector hiring, reducing the operational costs of ministries and reforming the present system of subsidies for gasoline and diesel, the report said.
The budget also provides for the implementation of targeted transfers to alleviate higher fuel costs associated with the phasing out of fuel subsidies. Based on the latest developments and macroeconomic assumptions, the report stated that the 2012 overall deficit is expected to narrow by about 1 per cent of the gross domestic product (GDP) relative to the 2011 outturn, reaching 5.25 per cent of the GDP.
With this, and given likely borrowing for own-budget entities, the public debt-to-GDP ratio would rise slightly to 65.5 per cent by the end of 2012. Further fiscal consolidation will be essential over the medium term to return fiscal and external balances to a sustainable level, the report said.
“As recent unrest in the region is likely to have engendered rising sovereign risk in Jordan and other Middle East countries, further tightening of monetary conditions is appropriate to sustain the attractiveness of Jordanian dinar-denominated assets and strengthen the international reserve position,” the report added.
The peg of the Jordanian dinar to the US dollar has served the country well by anchoring inflation expectations and providing stability in a challenging regional and global environment, according to the report. The IMF welcomed improvements in banking regulations in line with the recommendations of the fund’s Financial Sector Assessment Programme, which have “helped create a liquid, well capitalised and profitable banking sector”.
They encouraged continued vigilance against financial risks, particularly from rising non-performing loans. The directors commended the progress in implementing Basel II regulations, noting that banks are already well placed to satisfy Basel III guidelines on capital adequacy and liquidity.
They also welcomed the authorities’ continued efforts to fight money laundering and terrorism financing. They commended the steps taken to boost the investment climate, governance and regional trade. The IMF urged further progress in strengthening legal and regulatory frameworks, addressing labour market rigidities, resolving skill mismatches and tackling infrastructure bottlenecks.
The report projected the Kingdom’s GDP at market prices to reach 2.8 per cent, the inflation to stand at 9.5 per cent, exports at 8.9 per cent and imports at 16 per cent. The external current account deficit is expected to widen considerably to 9.5 per cent of the GDP in 2011, while the international reserves to reach $9.775 billion (equivalent to 5.9 months of imports), according to the report.
Meanwhile, speaking to Al Jazeera satellite channel from Washington on subsidies, Minister of Finance Umayya Toukan said Jordan is currently planning to activate its subsidies to benefit the poor, rather than serving the rich as the situation is now. Toukan said subsidy mechanisms should be re-examined to ensure their effectiveness, the Jordan News Agency, Petra, reported.
On financial problems that subsidies cause, he said: “The situation is very difficult, it is not stable and countries do not have many alternatives to tackle the deficit.” He explained that amending subsidy systems entails political risks, adding that it is the responsibility of finance ministers to advise governments on ways to restore a healthy economy, according to Petra.