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Jordan's economy bounces back - Report by the International Monetary Funds

Jordan's economy is rapidly recovering from the disruptions caused by the war in Iraq in 2003. Real gross domestic product (GDP) grew by 6.9 percent in the first quarter of 2004, boosted by a surge in exports (29 percent year-on-year). The industrial production index - which excludes the higher gains in manufacturing activity in the Qualified Industrial Zones (QIZ) - increased at an annual rate of 14.7 percent during the same period, while imports rose 32.3 percent.

Inflation remained moderate at an average rate of 2.8 percent in the 12 months through March 2004. The Amman Stock Exchange index rose by 5 percent in the first quarter of 2004, following an increase of 54 percent in 2003. Unemployment, however, remains stubbornly high at 14.5 percent. All quantitative performance criteria at end-March 2004 under the program were met by large margins.

Fiscal performance was much stronger than programmed, reflecting the strong pickup in economic activity, better budgetary management, and higher foreign grants. The central government budget registered a surplus of 137 million Jordanian dinars (1.8 percent of expected GDP) in the first quarter of 2004, compared to a targeted deficit of 140 million Jordanian dinars under the program.

At the same time, the government tightly controlled current and capital spending and collected significant repayments from on-lending operations. In particular, the government issued a budget circular in March 2004 asking all government ministries to cut utility bills by 20 percent. The government also mandated, under the 2004 budget, full payment of taxes for new projects, unless donor financing requires tax exemption. Overall, the fiscal surplus led to a reduction in the net government debt stock in the first quarter of 2004 by 8 percentage points to 93.5 percent of expected GDP, with the foreign debt stock accounting for 69.7 percent of expected GDP. The overall public sector registered a surplus of 2.6 percent of expected GDP, while its net debt declined by 4 percentage points to 55.2 percent of expected GDP.

Jordan's external position remained strong despite a surge in import payments associated with robust domestic activity. The external current account is estimated to have recorded a surplus of $107 million (1.0 percent of projected annual GDP) during the first quarter of 2004. The trade balance registered a deficit of $613 million (5.7 percent of annual GDP), somewhat higher than the same period in 2003, reflecting the surge in imports more than offsetting the increase of 29 percent in merchandise export receipts. The rise in imports suggests a stronger-than-anticipated rebound in economic activity but also reflects higher oil prices and the large import content of booming exports. The export boom was broad-based and fueled by growing demand from the Iraqi market as well as by the continued expansion of textile exports, mainly from QIZs, to the United States. Net tourism receipts increased by an annual rate of 31.2 percent during the first quarter of 2004, supported by higher business travel of non-residents to Jordan and lower travel abroad by Jordanians.

The health of the banking sector improved in 2003, reflecting stronger profitability and more prudent credit policies. Net after tax profits of the banking sector reached 100 million Jordanian dinars in 2003, compared to 79 million Jordanian dinars in 2002. Net profits increased to 0.7 percent of total assets and 2.0 percent of total loans. The level of classified loans excluding interest in suspense fell to 15.8 percent of total loans, compared to 17.5 percent in 2002. The underlying risk-weighted capital adequacy ratio (CAR) improved by 1.3 percentage points in 2003, reflecting a strengthening of the balance sheets of commercial banks.

However, because of the inclusion of market risk in the 2003 calculations, the CAR declined marginally to 15.9 percent, compared to 16.6 percent in 2002.

Further progress has been made in structural reforms. The Privatization Commission received strong expressions of interest from potential investors for bidding on the privatization of electricity generation companies in April 2004. The sale is expected to be completed in the fourth quarter of 2004. The cabinet also approved the privatization of the agricultural marketing company AMPCO. To improve domestic competition, customs duties on steel and cement were reduced by 5 percentage points to 25 percent in April 2004. The government signed a free trade agreement with Singapore that comes into effect in the second half of 2004. On June 2, 2004, the Central Bank of Jordan published revised balance of payments statistics, in line with the fifth edition of the IMF balance of payments manual and a new international reserves template, the last structural benchmark under the SBA.

Economic policies for 2004, cast in the context of a medium-term macroeconomic framework, are designed to strengthen economic growth; maintain financial stability and a solid external reserve position through prudent demand management policy; and reduce further public indebtedness through continued fiscal consolidation. Real GDP growth is projected to reach 5 percent for the year as a whole, which, supported by a strengthened policy agenda, would enable Jordan to reach its full potential of 6-7 percent and achieve a significant reduction in unemployment over the medium term. Inflation is expected to increase somewhat because of upward adjustments in administered prices and certain tax rate increases in early 2004 but is likely to remain moderate at about 3 percent. The balance of payments outlook is expected to remain strong, supported by export growth and the continued flow of external grants in the aftermath of the war in Iraq. As a result, the external current account is now expected to register a surplus of 5 percent of GDP and official external reserves are programmed to remain at a comfortable level of about $4 billion by end-2004.

The government plans to accelerate and broaden the privatization program. Following the privatization of the electricity generation companies in 2004, it intends to proceed rapidly with the privatization of the electricity distribution companies. It also intends to sell a majority stake as well as management control in the Jordan Phosphate Mines Company to strategic investors and possibly an additional portion of the government's share in the Jordan Telecommunications Company. It will continue to privatize the remaining non-core units of Royal Jordanian Airlines and will sell the Jordan Post Company to a strategic partner. The fiscal program for 2004 estimates total privatization proceeds of about 300 million Jordanian dinars.

This is an excerpt from an IMF report on Jordan published Sept. 2004

Beirut,09 13 2004
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