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Jordan: Strategy for Adjustment and Growth

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Jordan: Strategy for Adjustment and Growth OCCASIONAL PAPER 136 Jordan Strategy for Adjustment and Growth Edited by Edouard Maciejewski and Ahsan Mansur, with contributions from Patricia AIonso-Gamo, Jean-Pierre Chauffour, Etienne de Call at ay, and Christopher McDermott INTERNATIONAL MONETARY FUND Washington DC May 1996 ©International Monetary Fund. Not for Redistribution © 1996 International Monetary Fund Cataloging-in-Publication Data Jordan : strategy for adjustment and growth / edited by Edouard Maciejew- ski and Ahsan Mansur, with contributions from Patricia Alonso-Gamo . [et al.]. — Washington, DC : International Monetary Fund, [1996] p. cm. — (Occasional Paper, ISSN 0251-6365 ; 136) ISBN 1-55775-558-2 1. Jordan — Economic policy. 2. Jordan — Social policy. 3. Debts, External — Jordan 4. Jordan — Economic conditions. I. Maciejewski, Edouard. II. Mansur, Ahsan S., 1951-. III. Alonso-Gamo, Patricia. IV. Occasional paper (International Monetary Fund) ; no. 136. HC415.26.J67 1996 Price: US$15.00 (US$12.00 to full-time faculty members and students at universities and colleges) Please send orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431, U.S.A. Tel: (202) 623-7430 Telefax: (202) 623-7201 Internet: [email protected] recycled paper ©International Monetary Fund. Not for Redistribution Contents Page Preface vii I Introduction I M Overview of Macroeconomic Performance and Structural Reforms Since Late 1988 2 Edouard Maciejewski andAhsan Mansur Structure of the Economy 2 Origins of Economic Difficulties 5 Broad Strategy During the 1970s to Mid-1980s 5 Macroeconomic Outcome: An Overview 6 Structural Weaknesses 8 Adjustment and Structural Reform Efforts, 1989-94 9 Performance During 1989-90 9 Performance Since 1992 10 Macroeconomic Stabilization and Outcome 10 Structural Reforms 11 III Macroeconomic Environment and Factors Underlying Growth and Investment 13 Christopher McDermott Economic Developments During 1976-94 13 Boom of the 1970s 13 Economic Slowdown in the Early 1980s 13 Economic Crisis in the Late 1980s 14 Economic Recovery, 1989-94 15 Factors Influencing Long-Term Growth 15 Macroeconomic Stability and Growth 16 Total Factor Productivity Residuals 17 Factors Influencing Investment 18 Methodology and Data 18 Empirical Observations 19 Concluding Observations 20 IV Public Debt Dynamics and Fiscal Policy 21 Etienne de Callatay and Ahsan Mansur Historical Background and Buildup of Public Debt 21 Origin of the Problem 21 Debt Accounting Framework 24 Debt Dynamics and Sustainability of the Debt, 1975-88 25 Shift in Fiscal Policy Stance, 1989-94 25 Debt Dynamics and Sustainability of the Debt Ratio 28 Revenue Mobilization 29 iii ©International Monetary Fund. Not for Redistribution CONTENTS Taxes on Foreign Trade 29 Taxes on Domestic Transactions 30 Taxes on Income and Profits 30 Nontax Revenue 30 Expenditure 30 Recent and Forthcoming Structural Reforms in the Fiscal Area 31 Appendix Methodology of Debt Dynamics Accounting Framework 32 V Financial Liberalization and Monetary Reforms 34 Jean-Pierre Chauffour Background and Developments 34 Operation of Monetary Policy, 1970-88 34 Monetary Developments 34 Credit Expansion Driven by the Public Sector 36 Use of Monetary Instruments Until the Late 1980s 36 Monetary Policy Under Government Stabilization Programs, 1988-94 37 Use of Monetary Instruments 37 Banking Supervision and Regulatory Measures 38 Development of AFM 3 8 Ongoing and Prospective Financial Reforms 41 Appendix I Money Demand Function 41 Appendix II Money Multiplier and Reserve Money, 1980-94 42 Appendix III Monetary Program Under Indirect Monetary Control 45 VI External Debt Strategy 49 Patricia Alonso-Gamo andAhsan Mansur Emergence of the External Debt Crisis 49 Debt Management Strategy After the Debt Crisis 49 Paris Club Agreement, 1989 49 Negotiations with Commercial Bank Creditors 50 Changes in Debt Strategy 50 Paris Club Rescheduling Agreements, 1992 and 1994 50 Revised Debt Strategy vis-a-vis Commercial Banks 51 Negotiations with Other Official Creditors 52 VII Liberalization of Trade and Exchange Systems 53 Patricia Alonso-Gamo Structure of Trade 5 3 Trade Regime and Trade Policy Reforms Since Late 1988 54 Trade Regime Prior to the Reforms 54 Policy Changes in the Trade Regime 55 Opening Up the Economy 56 Regional Developments and Future Challenges 57 Developments in the Exchange System 57 VIII Social Aspects of the Adjustment Program: Strengthening the Social Safety Net 58 Ahsan Mansur Poverty Profile 58 Poverty and Income Distribution 58 Dimensions and Distribution of Poverty, 1991-92 58 Why Poverty Deteriorated 60 Poverty Alleviation Policies 61 Temporary Social Safety Net Instruments 61 Food Subsidy Schemes 61 iv ©International Monetary Fund. Not for Redistribution Contents National Aid Fund 62 Health Care Subsidies 63 Other Welfare Programs 63 Permanent Social Safety Net Arrangements 63 Public Education System 63 Public Health System 63 Other Safety Net Arrangements 64 Overview of Recent Developments and Medium-Term Strategy 64 Boxes 5.1. Banking Crisis of 1989-90 39 8.1. Social Security Corporation 59 Tables 2.1. Social and Demographic Indicators 2 2.2. Selected Economic and Financial Indicators 3 3.1. Macroeconomic Performance 14 3.2. External Financing and Investment 14 3.3. Summary of Estimated Panel Regression Coefficients from a Growth Accounting Framework 16 3.4. Impact of Macroeconomic Policy on Real GDP Growth 17 3.5. Contributions to Economic Growth by Factors of Production 18 3.6. Estimates of Private Investment Equation, 1977-94 19 4.1. Central Government Operations 22 4.2. Fiscal Sustainability 26 4.3. Fiscal Impulse 27 5.1. Comparative Performance of Emerging Capital Markets, 1994 40 7.1. Direction of Foreign Trade 54 8.1. Selected Poverty Indicators 60 8.2. Factors Contributing to Change in Poverty 61 8.3. Food Subsidies 62 8.4. Selected Countries: Expenditure on Education 64 8.5. Health Indicators, 1991 64 Al. Sensitivity of the Monetary Program to Selected Parameters 47 Charts 2.1. Structure of the Economy 6 2.2. Movement in Monetary Aggregates, Prices, and the Exchange Rate 6 2.3. Central Government Operations 7 2.4. Central Government Deficit, Revenue, and Expenditure 7 2.5. External Sector 8 2.6. Exchange Rate Indices 8 2.7. External Debt and Debt Service 9 3.1. Real GDP Growth and Investment 15 3.2. Real GDP Growth, Fiscal Balance, and the Current Account 15 4.1. Fiscal Balance 21 4.2. Expenditure 23 4.3. Tax Revenue 23 4.4. Nonmilitary Current Expenditure 23 4.5. Debt-to-GDP Ratio 24 4.6. Evolution of Debt-to-GDP Ratio 28 4.7. Fiscal Impulse Breakdown 28 4.8. Implicit Interest Rate and Economic Growth Rate 29 4.9. Revenue and Grants 29 V ©International Monetary Fund. Not for Redistribution CONTENTS 5.1. Monetary Aggregates 36 5.2. Prices and Interest Rates 37 Al. Broad Money Demand 42 A2. Income Velocity of Money 42 A3. Quarterly Demand for Money 43 A4. Currency Outside Banks 43 A5. Banks' Cash in Vaults and Reserve Requirements 44 A6. Excess Liquidity and Money Multiplier 45 Figures 5.1. Banking System 35 The following symbols have been used throughout this paper: ... to indicate that data are not available; — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; n.a. to indicate that the item is not applicable; between years or months (e.g., 1991-92 or January-June) to indicate the years or months covered, including the beginning and ending years or months; / between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year. "Billion" means a thousand million. Minor discrepancies between constituent figures and totals are due to rounding. The term "country," as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territor- ial entities that are not states, but for which statistical data are maintained and provided in- ternationally on a separate and independent basis. vi ©International Monetary Fund. Not for Redistribution Preface The papers presented in this study were prepared by staff members who have par- ticipated in cooperative exchanges between Jordan and the IMF over the past three years. The authors acknowledge the excellent research assistance provided by Use- Marie Fayad and secretarial support by Irene Carpenter, Susan Jones, and Mary Ann Miles. The authors are also grateful to Elisa Diehl of the External Relations Depart- ment, who edited the paper for publication and coordinated production. The views expressed here, as well as any errors, are the sole responsibility of the authors and do not necessarily reflect the opinion of the Government of Jordan, the Executive Directors of the IMF, or other members of the IMF staff. The study was completed in August 1995 and is based on information available at that time. vii ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution I Introduction ordan has made major progress over the past sev- supported by several World Bank sectoral lending J eral years in macroeconomic stabilization and programs, extended debt reschedulings from Paris transformation in its economic structure. Its impres- Club official bilateral creditors and commercial sive performance has been the result of a persistent, banks, and financial assistance from the European courageous, and difficult process of adjustment and Union. structural reform, which started in 1989 and intensi- This paper analyzes recent developments, macro- fied in 1992. The IMF and the World Bank have economic policies, and structural reforms in Jordan been associated closely with this process and at the and focuses on several central aspects of the coun- request of the Jordanian authorities continue to assist try's recent experience. Included are discussions on them in these efforts, particularly in the context of a the factors underpinning growth in the form of struc- rapidly changing regional environment.
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