Fitch Ratings-Hong Kong/London: A new and expanded agreement with the IMF is broadly supportive for Jordan's finances and reform agenda, although the budget performance in 2019 and the agreed 2020 budget highlight the difficulty of fiscal consolidation in the context of historically low growth, Fitch Ratings says.
On 30 January 2020, Jordan and the IMF reached a preliminary agreement on a USD1.3 billion four-year Extended Fund Facility (EFF) to support economic growth and improve the sustainability of Jordan's fiscal and external finances. The programme does not push for new tax measures, but focuses on gradual fiscal consolidation to reduce government debt, including through better tax compliance and business environment reforms to promote stronger growth. The latter includes reform of the electricity sector to better target subsidies to households to allow for lower costs for businesses.
This agreement overtakes and expands the previous USD723 million three-year EFF agreed in August 2016, under which Jordan accessed only USD309 million as reforms progressed slowly in the face of protests, which forced a change in prime minister in 2018. The new EFF could also be subject to slow implementation and delayed disbursements, but the risk is reduced to some extent because it does not include new taxation.
Prior to the new EFF, Jordan approved a 2020 budget targeting a deficit at a level similar to the 3.9% of GDP deficit reported for 2019. An increase in interest expenditure masks some underlying consolidation, as the primary deficit target is 2.3% of GDP compared with the 3.1% outturn in 2019. The 2019 performance fell short of targets (a deficit of JOD1,215 million, nearly double the target of JOD646 million) and was worse than the 2.4% of GDP deficit in 2018. The government announced that public debt reached 97% of GDP in 2019, up from 94.4% in 2018. Fitch estimates the consolidated general government measure of debt would be about 15pp lower.
The budget assumes 10% growth in domestic revenue (up by JOD733 million), owing to nominal GDP growth of 4%, stronger implementation of the income tax law introduced at end-2018 and general improvement in tax collection. This may prove optimistic, which would put Jordan at risk of missing its deficit target again, although the impact on the deficit may be contained by underexecution of plans for a 33% rise in capex. Current spending is planned to grow by 5.2% driven by higher wages.
The increase in capex, alongside further business environment reforms, reflects the government's desire to boost real GDP growth, which has hovered around 2% in the past four years, and reduce high unemployment (19.1%). Capex has been declining in recent years as a share of GDP. The IMF also stressed growth as a priority of the programme, positing 3.3% as a medium-term growth target. Jordan's growth averaged 6.5% in 2000-2009 when external conditions, both economically and politically, were more favourable.
Jordan has been pursuing a raft of reforms to galvanise investment and was in the top three reforming countries in the World Bank's latest Ease of Doing Business ranking. A priority measure in the budget to improve business conditions is to reduce electricity prices for companies, while not worsening the fragile finances of NEPCO, the state electricity company. The government will seek to target household electricity subsidies only to those who need them and to reduce production costs.
While we expected Jordan to negotiate a fresh and expanded IMF programme, the budget numbers are worse than our forecasts. External finances improved as expected in 2019, with reserves remaining robust.
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