Transcript Slide 1

IMF 1st Standby Agreement Review
Critical Overview …
May 2013
Main Highlights
1
The government was broadly in line with the performance criteria of
the program, with a few exceptions
Growth is expected to reach 3.3%, and inflation to stabilize at an
average of 6% for 2013.
3
Uncertainty took a toll on FX reserves, but confidence is improving
with expectation for end the year at $9 billion
Focus on energy and water strategies, to address widening deficit of
own budget entities.
5
4
NEPCO: The delay in the electricity tariff hikes and repayment of
accumulated arrears will be compensated through more austerity
Capital spending and structural economic reforms are essential to
mitigate negative effects of fiscal consolidation
7
2
IMF staff supporting current high JOD interest rates, & suggesting
hikes if needed to contain inflation
6
2
Economic outlook
•
Growth momentum is expected to pick up in 2013. Real growth is
projected at 3.3% for 2013 with demand boosted by higher capital
spending and the inflow of Syrian refugees.
•
Growth is then projected to return to the estimated potential of 4.5% by
2016, aided in part by the structural reforms and infrastructure
investments funded by the GCC.
•
Headline inflation is expected to rise on the back of the anticipated
increases in fuel and electricity prices. The IMF expects that fuel and
electricity price increases in late 2012 and mid-2013 will likely push up
average annual inflation to 6% in 2013.
•
The fiscal and external positions are projected to improve with higher
grants and gas inflows from Egypt, as well as a result of the planned
policies.
•
Nevertheless, further escalation of the regional unrest and disruption in
the supply of natural gas from Egypt remain key concerns.
•
The government will continue to seek external financial support, and
stand ready to take additional measures to safeguard the economy as
needed.
3
Overall Outlook and Expectations
Output and Prices
Real GDP at market prices
Consumer price index (annual average)
Unemployment rate (period average)
Fiscal Operations / GDP
Revenues and grants
Of which grants
Primary government balance (excluding grants)
Primary government balance (exc. grants + NEPCO)
NEPCO loss
Government gross debt (including NEPCO)
Of which external debt
External Sector
Current account balance (including grants) / GDP
Current account balance (excluding grants) / GDP
Gross international reserves (in million USD)
In months of imports
Prel. 2012
Pro. 2013
Rev. 2013
2014
2015
2.8%
4.8%
12.2%
3.5%
3.9%
-
3.3%
5.9%
-
3.5%
3.2%
-
4.0%
2.6%
-
22.8%
1.5%
-7.7%
-7.4%
-5.2%
79.6%
22.3%
25.8%
3.8%
-10.0%
-6.3%
-3.8%
83.0%
19.5%
26.0%
4.2%
-9.8%
-5.5%
-4.3%
83.8%
22.3%
25.2%
3.3%
-7.2%
-4.5%
-2.7%
87.0%
21.9%
24.9%
3.0%
-4.5%
-2.7%
-1.8%
87.2%
20.4%
-18.1%
-22.8%
5,299
2.9
-9.9%
-14.2%
-
-9.9%
-9.1%
-16.9% -14.2%
7,524 ** 9,092
4.0
4.9
-6.5%
-10.8%
10,011
5.2
**IMF Staff mentioned that reserves may reach 120% of its projected target; a figure close to USD 9 billion in 2013.
4
Targets summary:
The program remains broadly on track
Fiscal Policies
Primary fiscal deficit
Slightly missed target, by 0.03% of GDP
Domestic revenue
Exceeded target by 0.4% of GDP
NEPCO
Stayed in line with program but did not repay its arrears
Monetary Policies
FX reserves
Missed end-December target by $1.7 billion.
Corrective measures were taken, and FX reserves increased significantly
since January 2013. (Target for 2013 is $7.5 billion).
Energy Reforms
Electricity tariffs
Delayed, currently awaiting Parliament approval. New target is for July
1.
Implement a step increase in the
price of diesel by 6%
Met with delay. Diesel prices were increased by 33% in the context of
increases in all fuel prices on November 14
Introduce targeted subsidies
Met target
Structural fiscal matters
Income tax reform law
Met, submitted to parliament
5
Current account deficit deteriorated substantially in 2012
•
The current account deficit deteriorated substantially in 2012 to
18% of GDP. Some of this deterioration was expected under the
program, reflecting lower grants and higher energy imports.
•
However, the increase in the number of Syrian refugees has put
additional pressure on imports—with food imports increasing by
nearly 20% — while lower potash prices and strikes have depressed
export earnings.
•
Challenging external environment, though for
2013
thedeclined
focusbyis22%
onin external
financing
Moreover, exports
to Syria
2012, and transit
trade halted to Turkey, Lebanon and Europe (accounting for 11% of
exports and 30% of imports).
•
Nevertheless, a stronger capital account, reflecting continued strong
FDI inflows and a rebound in trade credit, helped bring the overall
balance of payments to just below the program projections.
•
With higher grants and gas inflows from Egypt, the current account
deficit (including grants) would improve to 10% of GDP in 2013.
•
This also reflects lower global food and fuel prices, a rebound in
exports (with potash and phosphate production normalizing), fiscal
restraint, and further improvements in travel receipts.
6
Challenging external environment,,,
Jordan continues to face high uncertainties
•
International oil and food prices have been higher than
anticipated, and forecasts suggest that they will be slightly higher
as well over the medium term.
•
Also, the conflict in Syria has escalated, resulting in an acceleration
of influx of refugees, currently estimated at over 500 thousand and
expected to register almost one million by end-2013.
•
The humanitarian assistance is preliminarily estimated to have
absorbed about 0.7% of GDP in central government spending,
including through higher health, education, and security costs, in
2012.
•
These developments have put further pressure on Jordan’s
external and fiscal accounts.
•
On the positive side, the flow of gas from Egypt has increased
significantly since early November 2012 to an average of about 130
million cubic feet (mcf) per day, compared with 42 mcf per day
during January–October.
•
In addition, $1.2 billion in grants were received from GCC countries
in early 2013.
7
Current account deficit deteriorated substantially in 2012
•
The current account deficit deteriorated substantially in 2012 to
18% of GDP. Some of this deterioration was expected under the
program, reflecting lower grants and higher energy imports.
•
However, the increase in the number of Syrian refugees has put
additional pressure on imports—with food imports increasing by
nearly 20% — while lower potash prices and strikes have depressed
export earnings.
•
Moreover, exports to Syria declined by 22% in 2012, and transit
trade halted to Turkey, Lebanon and Europe (accounting for 11% of
exports and 30% of imports).
•
However, a stronger capital account, reflecting continued strong FDI
inflows and a rebound in trade credit, helped bring the overall
balance of payments to just below the program projections.
•
With higher grants and gas inflows from Egypt, the current account
deficit (including grants) would improve to 10% of GDP in 2013.
•
This also reflects lower global food and fuel prices, a rebound in
exports (with potash and phosphate production normalizing), fiscal
restraint, and further improvements in travel receipts.
8
Uncertainty took a toll on FX reserves, but confidence is
improving
•
Rising regional and global uncertainty in 2012 along
with reduced public confidence led to pressures on
official reserves toward the end of the year.
•
Dollarization increased substantially during OctoberNovember, as depositors started to convert dinar
deposits into foreign currency, some of which was kept
in cash.
•
This resulted in a decline in JOD liquidity, pushing the
central bank to take measures such as repos and
outright purchases and USD/JOD Swaps.
•
While the international reserves target for endSeptember was met with a significant margin, the
target for end-December was missed.
•
Since its peak in early December, dollarization has
started to decline in recent month.
9
External Borrowing, Donor Support, & CBJ Measures are expected
to Boost Reserves in 2013
•
The authorities managed the episode well, rebuilding
reserves through an increase in interest rates and by
attracting donor funds (including a deposit of $1 billion in
January 2013 from the UAE, a budgetary grant of $200
million from Saudi Arabia) as well as a successful issuance
of a $500 million dollar-denominated domestic bond.
•
The planned Eurobond issue and further donor support
will further increase reserves.
•
Accordingly, FX reserves are expected to meet its 2013
target ($7.5 billion), and actually exceed the target to
above $9 billion.
•
FX reserves by the end of May are expected to reach $9.7
billion according to the central bank.
•
The central bank stands ready to further tighten
monetary policy and take additional appropriate actions
as needed to attain these targets.
10
Current account deficit deteriorated substantially in 2012
•
The current account deficit deteriorated substantially in 2012 to
18% of GDP. Some of this deterioration was expected under the
program, reflecting lower grants and higher energy imports.
•
However, the increase in the number of Syrian refugees has put
additional pressure on imports—with food imports increasing by
nearly 20% — while lower potash prices and strikes have depressed
export earnings.
•
Fiscal policy geared towards growth-friendly
consolidation
reform
Moreover, exports
to Syria declined and
by 22%energy
in 2012, and
transit
trade halted to Turkey, Lebanon and Europe (accounting for 11% of
exports and 30% of imports).
•
Nevertheless, a stronger capital account, reflecting continued strong
FDI inflows and a rebound in trade credit, helped bring the overall
balance of payments to just below the program projections.
•
With higher grants and gas inflows from Egypt, the current account
deficit (including grants) would improve to 10% of GDP in 2013.
•
This also reflects lower global food and fuel prices, a rebound in
exports (with potash and phosphate production normalizing), fiscal
restraint, and further improvements in travel receipts.
11
Fiscal policy
Adjustment in the central government is well underway
•
The central government was broadly on track with 2012 fiscal
balance targets thanks to revenue over-performance coupled
with tighter cash spending control.
•
Substantial measures have been taken since the approval of
the program last August:
–
The authorities eliminated fuel subsidies, raised
electricity tariffs, and cut non-priority capital spending
and transfers
–
In January 2013, the monthly pricing adjustment for fuel
product was reinstated.
•
However, NEPCO was unable to raise funds – which
necessitated that the government service the company’s debt
– resulting in the central government primary deficit to
marginally exceed its end-December target (by 0.03% of GDP).
•
NEPCO’s losses, together with a more expansionary
government stance in the last two years, have been driving up
the debt-to-GDP ratio to 80% of GDP at end-2012.
12
Replacing fuel subsidy with cash transfers
•
The authorities removed the general fuel subsidy on
November 14, 2012.
•
Retail prices were increased for gasoline 90 (14%), LPG
(54%), and diesel and kerosene (33%).
•
The authorities resumed on January 1 the monthly
price adjustment mechanism that had been suspended
in early 2011.
•
A cash transfer (estimated at 1.1% of GDP in 2013) is
compensating families with an annual income below
JD10,000 (70% of the population) if the oil price is
above $100 per barrel.
•
Based on an average oil price of $100 per barrel, the
elimination of the subsidy yields gross savings of about
2.5% of GDP.
•
But this does not take into account the compensatory
cash transfers and that NEPCO does not anymore
receive fuel products at subsidized prices.
13
Fiscal policy focused on growth friendly consolidation
Correction will come from energy sector policies and other measures on the revenue side
•
The 2013 budget projects primary deficit of 5.5% of GDP compared with a programmed 6.3% of GDP.
This reflects mostly revenue over-performance in 2012 carrying over into 2013 as well as tighter
spending to compensate for a delay in electricity tariffs.
•
The 2013 budget is expected to include significant fiscal consolidation measures (about 4% of GDP) to be
implemented in a growth-friendly matter:
•
–
Current spending has been cut in favor of development spending (The 2013 budget envisages a
large reorientation in spending towards an increase in capital spending of 2% of GDP).
–
The targeting of the cash transfer scheme is being strengthened
–
On the revenue side, taxes on luxury goods have been raised and tax exemptions eliminated.
–
The income tax law which is awaiting parliament approval, along with tighter tax incentives, is
expected to further increase revenues in 2014.
–
On the structural front, tax administration measures are expected to reduce tax arrears and a
commitment control system will help to prevent the incurrence of arrears.
The authorities will also start tackling the losses of the water companies. Currently, annual losses could
be about 1% of GDP, reflecting inefficiencies as well as weak revenue collection.
14
Fiscal deficit outlook,,,
•
The
combined
central
government primary deficit and
NEPCO operating losses are
expected to be slightly below
the program target at 9.8% of
GDP in 2013, down from 12.9%
of GDP in 2012 (excluding
arrears repayment).
•
NEPCO’s adjustment in 2013 is
less ambitious than expected
because of the delay in
implementing tariff increases.
•
The resulting higher NEPCO
losses will be more than
compensated by a tighter
central government budget.
15
NEPCO stayed in line with program but failed to repay its arrears
•
NEPCO’s losses were as projected, partly helped by gas inflows
from Egypt increasing to more than twice the programmed level
during November-December.
•
However, bank lending to NEPCO was limited with NEPCO’s debt,
which is guaranteed by the government, reaching 9% of GDP. As
a result, NEPCO’s borrowing was lower than projected in 2012,
and the company did not pay its arrears.
•
In 2013, NEPCO is expected to repay about 2/3 of its arrears (JD
450 million), as the central government will provide direct
transfers to cover NEPCO’s operating losses.
•
Despite the doubling of gas inflows from Egypt since November
2012, NEPCO’s operating losses remain substantial, though
declining, and they are driving up public debt.
•
Due to expected increases in tariffs and better than programmed
gas supplies, NEPCO losses are now projected at 4.3% of GDP
(around JD 1 billion), down from the previously programmed
5.8% of GDP.
16
Energy sector reforms are at the center of fiscal efforts
Delays in formulating and announcing the energy strategy were economically costly
•
To address NEPCO’s losses, the government has prepared a mediumterm energy strategy with World Bank support to bring NEPCO back to
cost recovery by 2017.
•
The new strategy has a clear path for tariff increases, a plan for
diversifying energy sources, with a focus on liquefied natural gas, and
measures to enhance energy efficiency and the use of renewable
energy.
•
Nevertheless, for 2013 the focus is on gradually raising tariffs while
protecting the poor. The strategy recognizes that tariff increases are
the only way to reduce NEPCO losses in the short term.
•
Thee first tariff increase was initially planned for April, but later
delayed to July allowing for sufficient time for Parliament
consultation. To offset the resulting higher NEPCO losses, the central
government has taken additional measures of 0.25% of GDP.
•
Meanwhile, if NEPCO is unable to meet the ceilings on its losses due
to higher oil prices or low gas supplies, the government should be
ready to take offsetting fiscal measures; through further increase in
tariffs among other measures such as timed blackouts.
17
Uncertainty took a toll on FX reserves, but confidence is
improving
•
•
Nevertheless, the IMF stated that the authorities
managed the episode well, rebuilding reserves through
an increase in interest rates and by attracting donor
funds (including a deposit of $1 billion in January 2013
from the UAE, a budgetary grant of $200 million from
Saudi Arabia) as well as a successful issuance of a $500
million dollar-denominated domestic bond.
Monetary policy will continue to focus on
The planned Eurobond issue and further donor support
maintaining the peg and monitoring inflation
will further increase reserves.
•
Accordingly, FX reserves are expected to meet its 2013
target ($7.5 billion), and actually exceed the target to
above $9 billion.
•
FX reserves by the end of May are expected to reach
$9.7 billion according to the central bank.
•
Furthermore, the central bank stands ready to further
tighten monetary policy and take additional appropriate
actions as needed to attain these targets.
18
IMF staff support current high JD interest rates & suggest hikes if
needed
•
In line with our analysis, the IMF cited concern that interest rates
have room to increase in order to maintain attractiveness of the JD.
•
"The CBJ is rightly focused on rebuilding reserves. The CBJ is
seeking to recoup the reserve losses incurred in late 2012. In this
regard, instilling confidence in the program through enhanced
outreach will play an important role, though further interest rate
increases might be needed. The authorities’ intention to seek
additional external financing, possibly through a Eurobond, is
appropriate.“
•
"The interest rate hike in early December is a step in the right
direction. It appears to have calmed markets and already resulted
in a substantial reversal in dollarization...To ensure that the NIR
targets can be met, staff suggested that, unless de-dollarization
continues at the current pace and financing comes in as projected,
the CBJ consider tightening monetary policy further using all
available tools, including interest rates.“
•
In contrast with IMF views and recommendations, market Interest
rates have fallen by more than 2.0% since the beginning of the
year. 1-year bills have fallen by 1.40%, 2-year bonds have fallen by
1.91% and 3-year bonds have fallen by 2.14%.
Start of year
Current rate
1-year
6.75%
5.35%
2-year
7.95%
6.04%
3-year
8.65%
6.51%
19
Monetary authorities assure that inflation & peg as main
focus
•
The central bank of Jordan (CBJ) will continue to anchor
monetary policy on the exchange rate peg. The peg has served
Jordan well by anchoring inflation expectations, supporting
macroeconomic and financial stability, and encouraging FDI.
•
However, inflation picked up in late 2012 due to the
withdrawal of fuel subsidies by the government. During the
year, higher food and energy prices and public sector wage
increases weighed on inflation. Following the liberalization of
fuel prices in mid-November, inflation picked up further to 7%
at end-Aril.
•
The rise in fuel and electricity price increases in late 2012 and
mid-2013 will likely push up average annual inflation to 6% in
2013.
•
With the peg as an anchor, the central bank has asserted to
continue to use the policy tools (including those introduced in
2012) to improve liquidity conditions and build needed buffers.
20
Central bank introduces new tools
•
The central bank introduced new tools to the market in order
to maintain JOD liquidity and recoup reserve losses incurred
due to the dollarization wave witnessed last year.
•
The interest rate hike in early December was a step in the
right direction as it appears to have calmed markets and
already resulted in a substantial reversal in dollarization.
•
Forward contracts, or swaps, worth $1.6 billion were
conducted with the CBJ, boosting JOD liquidity in the market
and recovering foreign currency reserves.
•
On the other hand, the CBJ introduced weekly and monthly
repo agreements. This provided banks with the essential
liquidity it needed to meet financing needs.
•
However, recently the amount of repo agreements has gone
down by about 50% from a high of 800 million JD, to 400
million JD.
21
Uncertainty took a toll on FX reserves, but confidence is
improving
•
•
Nevertheless, the IMF stated that the authorities
managed the episode well, rebuilding reserves through
an increase in interest rates and by attracting donor
funds (including a deposit of $1 billion in January 2013
from the UAE, a budgetary grant of $200 million from
Saudi Arabia) as well as a successful issuance of a $500
million dollar-denominated domestic bond.
Structural issues continue, with more
The planned Eurobond issue and further donor support
improvement needed
will further increase reserves.
•
Accordingly, FX reserves are expected to meet its 2013
target ($7.5 billion), and actually exceed the target to
above $9 billion.
•
FX reserves by the end of May are expected to reach
$9.7 billion according to the central bank.
•
Furthermore, the central bank stands ready to further
tighten monetary policy and take additional appropriate
actions as needed to attain these targets.
22
Structural policies need to be stronger and more
inclusive growth
•
Improving Business Environment: According to the World Bank’s Doing Business 2013
report, Jordan ranks around the median of MENA countries and as 106th out of 185
countries covered by the report.
•
Growth Oriented Spending: The substantial increase in central government capital
spending in 2013 and over the medium term is expected to raise Jordan’s growth rate
and private sector productivity.
•
More focus on job creation: The authorities should concentrate on supporting growth
of skill-intensive sectors (such as financial, education, and health services), where
Jordan has a comparative advantage. Also, addressing skills mismatches, in particular of
university graduates, could go a long way toward reducing youth unemployment.
•
New Investment Law: This law will enhance the transparency of rules related to the
investment process, streamline tax incentives, and pave the way for a one-stop-shop.
•
Stronger focus on improving access to finance: Access to finance for SMEs and lowincome individuals is hampered by the high perceptions of risk and high collateral
requirements.
•
The authorities are also developing new insolvency legislation and seeking international
support to secure resources for SMEs. The OPIC fund is providing a 75% guarantee for
SME loans up to JD 1 million with a portfolio limit of JD 500 million, and $70 million
from the World Bank.
23
Uncertainty took a toll on FX reserves, but confidence is
improving
•
Nevertheless, the IMF stated that the authorities
managed the episode well, rebuilding reserves through
an increase in interest rates and by attracting donor
funds (including a deposit of $1 billion in January 2013
from the UAE, a budgetary grant of $200 million from
Saudi Arabia) as well as a successful issuance of a $500
million dollar-denominated domestic bond.
But challenges remain,,,
•
The planned Eurobond issue and further donor support
will further increase reserves.
•
Accordingly, FX reserves are expected to meet its 2013
target ($7.5 billion), and actually exceed the target to
above $9 billion.
•
FX reserves by the end of May are expected to reach
$9.7 billion according to the central bank.
•
Furthermore, the central bank stands ready to further
tighten monetary policy and take additional appropriate
actions as needed to attain these targets.
24
Downside risks
Syrian refugees : the conflict in Syria imposes a significant burden on
Jordan. The economy is primarily affected through a massive inflow of
refugees and disruptions to bilateral and transit trade.
Tariff hikes: the further the government delays a hike in electricity
tariffs, the tighter the central government budget will be in the
following years to meet fiscal deficit targets set by the IMF
Egyptian gas supplies: though gas supply has improved and more
than doubled since the end of 2012, the supply remains volatile,
and any decrease could add pressures on NEPCO losses, as well as
fiscal and external balances.
Social unrest: Tariff hikes and the influx of Syrian refugees is
putting upward pressure on the labor market and on inflation
rates. If the situation gets worse, we expect social unrest as
Jordanians will find it hard to find a job and prices will soar.25
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