Document o f The World Bank FOR OFFICIAL USE ONLY Report No. 49971-50 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED RECOVERY UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN IN THE AMOUNT OF US$300 MILLION TO THE HASHEMITE KINGDOM o f JORDAN October 19,2009 Social and Economic Development (MNSED) Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY AND EQUIVALENTS (Exchange Rate as o f October 19,2009) Currency Unit = Jordanian Dinar (JD) D US$l = J 0.708 JD 1 = US$1.414 FISCAL Y E A R January 1 - December 3 1 ABBREVIATION AND ACRONYMS CAS Country Assistance Strategy CASPR Country Assistance Strategy Progress Report CBJ Central Bank o f Jordan EC European Commission ESW Economic Sector Work CPI Consumer Price Index DB Doing Business DPL Development Policy Loan GCC Gulf Cooperation Council GDP Gross Domestic Product GFMIS Government Financial Management Information System GNI Gross National Income GoJ Government o f Jordan FDI Foreign Direct Investment FSAP Financial Sector Assessment Program IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IMF International Monetary Fund MENA Middle East and North Africa MNSED Middle East and North Africa Social and Economic Development MOU Memorandum o f Understanding MTEF Medium-Term Expenditure Framework METAC Middle East Technical Assistance Center NAF National A i d Fund PER Public Expenditure Review PPP Public Private Partnerships QIZ Qualified Industrial Zones ROSC Report on the Observance o f Standards and Codes SPEP Social Protection Enhancement Project ssc Social Security Corporation USAID United States Agency for International Development ZF Zakat Fund Vice President: Shamshad Aktar Country Director: Hedi Larbi Sector Director: Ritva Reinikka Sector Manager: Farmkh Iqbal Task Team Leader: Sebnem Akkaya FOR OFFICIAL USE ONLY HASHEMITE KINGDOM OF JORDAN PROPOSED UNCERTAINTY RECOVERY GLOBAL UNDER DEVELOPMENT POLICY LOAN TABLE OF CONTENTS . I INTRODUCTION ......................................................................................................................... 1 . I1 COUNTRY BACKGROUND ......................................................................................................... 1 111.MACROECONOMIC PERFORMANCE AND OUTLOOK .............................................................. 3 A . Macroeconomic Developments Prior to Global Turmoil ............................................... 3 B. Macroeconomic Outlook in the Context o f the Global Turmoil .................................... 5 C. Debt Sustainability ....................................................................................................... 10 . I V THEGOVERNMENT REFORM PROGRAM .............................................................................. 11 A . Long-Term Vision ........................................................................................................ 11 . B National Agenda and Government Policies .................................................................. 11 Fiscal Adjustment and Reforms ............................................................................. 12 Financial Sector Reforms ...................................................................................... 12 Business Environment Reforms .............................................................................. 15 Social Insurance andsocial Safety Net Reform ..................................................... 17 . v BANKSUPPORT TO THE GOVERNMENT'S PROGRAM ........................................................... 18 A . Links to the Country Assistance Strategy..................................................................... 18 B. Collaboration with the IMF and Other Donors ............................................................ 19 C. Relationship to Other Bank Operations ........................................................................ 19 D. Analytical Underpinnings............................................................................................. 20 E. Lessons Learned ........................................................................................................... 22 . VI THEPROPOSED OPERATION .................................................................................................. 22 A . Operation Description .................................................................................................. 22 B. Policy Areas ................................................................................................................. 23 Fiscal Adjustment and Reforms ............................................................................. 23 Financial Sector Policies ....................................................................................... 25 Business Environment Reforms .............................................................................. 26 Social Insurance andsocial Safety Net Reform ..................................................... 28 . VI1 OPERATIONIMPLEMENTATION ............................................................................................. 29 A . Consultations and Distributional Aspects ..................................................................... 29 B. Environmental Aspects ................................................................................................. 32 C. Implementation. Monitoring and Evaluation................................................................ 33 D. Fiduciary Aspects ......................................................................................................... 33 E. Disbursements .............................................................................................................. 34 F. Risks and Risk Mitigation ............................................................................................ 35 ANNEXES ANNEX 1: LETTER OF DEVELOPMENTPOLICY ANNEX 2: POLICY MATRIX ANNEX 3: COUNTRY AT A GLANCE (INCLUDES COUNTRY MAP) This DPL was prepared by an IBRD team led by Sebnem Akkaya (MNSED) and included Anton Dobronogov. Chadi Bou Habib. Douglas Pearce. Jean Michel N. Marchat. Wael Mansour (MNSED); Bill Fox (Consultant); Gustavo Demarco. Haneen lsmail Sayed (MNSHE); Laura A . Ard (GCMCG); Robert Bou Jaoude (MNAFM); Sophie W . Warlop (MNCA2); Hyacinth Brown (CTRFC); and Kenneth Mwenda (LEGEM) . Farrukh Iqbal (Sector Manager) and Ritva Reinikka (Sector Director) provided internal oversight. Excellent administrative support was provided by Muna Salim. The team i s grateful for the close and productive cooperation o f the Government o f Jordan during loan preparation. This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization . LOAN PROGRAM SUMMARY AND HASHEMITE KINGDOM JORDAN OF RECOVERY UNDER GLOBAL UNCERTAINTYDEVELOPMENT POLICY LOAN Borrower Hashemite Kingdom of Jordan Implementing Agency Ministry of Planning and International Cooperation Financing Data IBRD Loan Amount : US$300 million will be paid by Borrower. Operation Type Single tranche Development Policy Loan to be disbursed upon loan effectiveness. Main Policy Areas This Development policy Loan supports the Government's efforts to address economic and social consequences o f the current global financial crisis and economic slowdown while improving resilience of the Jordanian economy to adverse shocks. Four complementary policy areas are supported: (i) reducing fiscal vulnerability by broadening the tax base and enhancing effectiveness o f government expenditures; (ii) strengthening the financial sector by further enhancing regulation and supervision and improving access to finance; (iii)improving the business climate to encourage more private sector investment; and (iv) facilitating access o f vulnerable groups to a more effective and fiscally sustainable social protection system. Key Outcome Indicators (by 1) Reduced fiscal imbalances and enhanced macroeconomic stability November 20 10) Reduced tax exemptions that distort relative prices and create inequity, and a new framework for scrutinizing introduction of hture preferential rates. Reduced expenditure pressures, improved fiscal sustainability and increased flexibility of the budget by reinstituting fiscal consolidation plan, including completion o f subsidy reform. New budget calendar, facilitating the first Cabinet discussion in the first quarter of 2010 on budget performance, strategies and priorities based on first such study. 2) Strengthened financial sector and broadened access to finance All banks run first pilot stress test. Stress testing process becomes a part of individual banks' risk management process and Central Bank systemic evaluation; prospective capital needs become more measurable. Plan for more comprehensive consolidated supervision adopted by Central Bank which will provide a more comprehensive and systemic view of potential threats and risks to the banking sector. A step towards reducing barriers to SME and individual lending via issuance o f a Request for Proposal for a provider to develop a credit bureau. Risk monitoring enhanced by lowering reporting threshold to the public credit registry thereby increasing borrowers covered by 40,000, representing 14 percent o f bank borrowers. 3) Further improvement in business environment 1 The minimum capital requirement for limited liability's companies i s down to zero percent o f GNI. Four additional one-stop-shops outside Amman offering a full range of services. Clear definition o f secured creditor priority in bankruptcy case in a unique legal document. Commercial cases are brought in eight selected courts outside Amman. Increased use of on-line filing system for tax returns and electronic payment systems which are used by at least 10 percent o f corporate tax payers. 4) Workers affiliated with Social Security Corporation (SSC) protected against the risk o f becoming unemployed and the effectiveness of the National Aid Fund (NAF) i s being increased All SSC members covered by the new unemployment insurance scheme. Coverage o f target poor population by NAF assistance increase to 40 percent of those under NAF threshold. Program Development The overall development objective of the DPL i s to support the Objective(s) and implementation o f the Government's medium-term development program Contributionto CAS in the context o f the current global financial crisis and economic slowdown. More specifically, the program supports following policy areas, aiming at strengthening the resilience o f the economy to better position Jordan to resume and sustain high growth while cushioning the impact of the economic slowdown on the poor and vulnerable: Reducing the fiscal vulnerability by broadening tax base, and enhancing effectiveness o f government expenditures; Increasing resilience of the financial sector by further strengthening regulation and supervision, and improving access to credit; Improving the business climate to encourage more private sector investment; Facilitating access of vulnerable groups to a more effective and fiscally sustainable social protection system. The DPL operation i s a core element of the Bank's Country Assistance Strategy, CAS, (FY06- 10) and the Country Assistance Strategy Progress Report (2009). I t constitutes a strong support o f the three pillars o f the CAS which seek to "(i) strengthen the investment environment and build human resources for a value-added, skill-intensive and knowledge-basedeconomy; (ii)reform social protection and expand inclusion; and (iii)restructure public expenditures and support public sector reform." By consolidating the Bank's long standing technical dialogue and assistance to support the key reforms in these areas, this operation i s also expected to inform the preparation of the new CAS (scheduled for FY2011). Risks and Risk Mitigation The Program faces two main risks: Economic risks. The global crisis continue to unfold, exposing Jordan's economic prospects to risks driving from further weakening o f global, and particularly Gulf, economy. At the source o f these risks are still high level o f public debt, large twin deficits and heavy dependence on remittances and foreign aid. W h i l e the risk o f external instability arising from the capital account i s mitigated by the fact that external debt i s owed predominantly to official creditors, and reserves provide comfortable liquidity cover relative to short-term liabilities, heavy reliance on regional liquidity to sustain financing inflows translate into high external vulnerability. Exports, .. 11 including tourism, and remittances could slow more sharply than anticipated as a result o f the regional economic slowdown, while tighter liquidity in the Gulf countries may lead to lower capital inflows and grants. Lower economic activity and lower international prices, on the other hand, checks the growth of current account imbalance. If financing further dries, the contraction of real GDP and the increase in unemployment would be more pronounced over the coming year than anticipated. This would strain the banks and the corporate sector and would also create difficulties for the achievement o f the fiscal targets. The risk of gradual economic recovery has been incorporated into the macroeconomic projections. The risk o f external financing difficulties i s mitigated by largely prudent policies supporting a measured external adjustment and adequate liquidity, Jordan's relative attractiveness to Arab investors, and significant donor support, including bilateral support from the U S and Gulf states. Weakening political support. A prolonged and deeper domestic slowdown could add to social pressures, lead to backsliding on resumption o f more disciplined approach to expenditure management policies, and adversely impact the health o f the financial sector. In 2008 a resumption o f expansionary fiscal policy in response to price shocks has led to adverse public debt dynamics and increased reliance on donor grants. This risk i s addressed by the fact that key measures, such as control over excessive tax exemptions and capital spending, and elimination o f remaining key subsidies, which will reduce fiscal pressures, are already being implemented as prior actions. Furthermore, the Governments medium-term fiscal framework which establishes the expenditure ceilings for 2010 budget and indicative ceilings for the next two years, constrains the room for excessive spending without matching revenues. The risks in the banking system have been further addressed through an active CBJ approach to identify risks and strengthen the supervisory powers. Similarly, major risks related to the implementation of specific program components are not foreseen because the reforms are mature, supported by technical assistance and widely discussed within the Government and with key stakeholders and donors. Operation ID P117023 ... 111 INTERNATIONAL BANKFOR RECONSTRUCTIONDEVELOPMENT AND PROGRAM DOCUMENT A FOR RECOVERY PROPOSED UNCERTAINTY UNDER GLOBAL POLICY LOAN DEVELOPMENT KINGDOM JORDAN TO HASHEMITE OF I. INTRODUCTION 1. This document describes a Development Policy Loan for US$300 million to Jordan. The operation supports the Government's efforts to address economic and social consequences o f the current global financial crisis and economic slowdown while improving resilience of the Jordanian economy to adverse shocks. Specifically, it supports policy measures which (i) reduce fiscal vulnerability by broadening the tax base and enhancing effectiveness o f government expenditures; (ii) strengthen the financial sector by further enhancing regulation and supervision and improving access to finance; (iii) improve the business climate to encourage more private sector investment; and (iv) facilitate access o f vulnerable groups to a more effective and fiscally sustainable social protection system. 2. Envisaged in the Country Assistance Strategy (CAS) for 2006-10, the preparation o f this DPL in FYlO has been triggered by the second order effects o f the global economic downturn on Jordan's economy. The Government has requested the Bank to prepare the DPL as part o f i t s rapid response actions aimed at supporting the real sector of the economy, including by diversifying i t s financing instruments (which over the recent years relied mostly on domestic market), while consolidatingthe long standing cooperation with the World Bank in advancing the key structural reforms that has been at the core o f implementation o f the CAS. The impacts o f the unfolding global and regional economic slowdown, the Government response and proposed World Bank support are described in the following sections. 11. BACKGROUND COUNTRY 3. Jordan i s a lower middle income country with a population o f 5.9 million and a per-capita GNI o f US$3,310 (2008). Jordan's natural resources are potash and phosphate-agricultural land i s limited and water i s considerably scarce. The population i s urbanized at around 80 percent and i s one o f the youngest among lower-middle income countries, with 38 percent under the age o f 14. Fertility rate (3.6 percent) i s higher than Middle East and North Africa (MENA) and lower middle income countries average.' Jordan's economy i s dominated by services, which account for over 70 percent o f GDP and more than 75 percent of jobs. Jordanian policy makers' ambition i s using the demographic opportunity o f a very young population to move toward a high-wage, knowledge-based economy. This transformation would require policies that encourage business creation and remove the distortions that presently distract entrepreneurs from focusing on Jordan's comparative advantage: its relatively well-educated citizens; it also requires emphasizing the quality o f education-areas of priority in Jordan's National Agenda. 4. Notwithstanding the difficult regional political environment and the lack o f resources, Jordan has achieved above-average development outcomes within its income group. Underpinned by i t s strong trade links with the region, Jordan's economy has shown strong performance since 2000 with annual real GDP growth averaging 7.5 percent and per capita GDP more than doubling. Growth has been broad based, led by manufacturing, construction, real estate and services sectors. Inflation remained low ' World Development Indicators (2008). Fertility rates for MENA and lower middle income countries are 2.85 percent and 2.28 percent in 2007, respectively. 1 (except for the surge in 2008 driven by international oil and food prices) and although the external deficit widened, sizable FDI inflows enabled a steady and sizable increase in international reserves. This can be credited to sound development policies, recent substantial capital inflows and to one o f the world's highest levels of unilateral transfers (workers' remittances and public grants, amounting to about 20-25 percent of GDP). However, Jordan i s vulnerable to adverse external events, such as the recent increase in world oil and food prices and the global recession as well as deterioration in external flows. 5. Over the last decade, Jordan has been very active in reforming its economy. It has a sound record as one of the lead reformer in MENA, particularly in liberalizing private investment regime, opening the trade regime, establishing modem regulation and institutions for the private sector development and privatization, strengthening public financial management system and building human resources through a comprehensive education sector reform. The process of structural reforms has been accompanied by a painful fiscal consolidation that has steadily reduced government debt from above 200 percent of GDP in the early 1990s, to 62.4 percent by the end of 2008. While the price shocks in 2008 (which coincided with the elimination of oil subsidies) led to divergence from the fiscal consolidation efforts with wide-ranging compensation policy, the Government's continues to emphasize economic reforms and macro-fiscal sustainability. Sustained progress in the implementation of fiscal consolidation program, with increased emphasis on strengthening effectiveness of the expenditure management, and structural reforms are key to maintaining good economic performance and achieving faster decline in poverty in the period ahead. 6. Achieving sustained growth and reducing unemployment and poverty are the main development challenges in Jordan. Commensurate with strong growth in investments and GDP, labor force growth in Jordan has been strong.* However, unemployment among nationals declined slowly (from 14.5 percent during 2000-05 to 12.7 percent in 2008). Among the key factors explaining the simultaneous existence of high job growth with persistent unemployment among Jordanians are mismatches between the high expectations of the unemployed and the prevailin low wages of available jobs, and between the B location o f the new jobs created and those of unemployed. While employment among those who actively seek work need to be supported through increased focus on skills, addressing voluntary unemployment requires aligning policies with the Jordan's aspiration for becoming a knowledge economy. Such alignment requires removing legal and regulatory distortions and encouraging creation of new businesses, while increasing incentives to accept existing jobs by ensuring social protection reforms to increase incentives to work and by removing disincentives caused by civil service hiring practices. 7. While high, the poverty rate has been declining in recent years. The 2006 Household Income and Expenditure Survey estimated that 13 percent of the Jordanian population i s living below the national poverty line.4 Contrary to public perception, poverty in Jordan dropped between 2002 and 2006,5 but deep pockets of poverty persist-poverty in Jordan i s shallow with large share of the population consuming at levels close to the national poverty line. The decline in poverty i s explained by an increase in real expenditure especially among the poorest resulting from a robust GDP growth and increasing remittances since 2000.6 In contrast, income levels remained stagnant over the same period. The Government has been providing cash transfers and various subsidies as part of its safety net, which *From 2000 to 2005, the Jordanian economy created between 24,000 and 44,000 additional jobs per year which increased to 60,000-70,000 by 2008. World Bank (2008). Jordan's Labor Market Paradox 4 The national poverty line i s estimated at JD46.3 per person per month. Keeping the poverty line level o f consumption fixed in real terms, adjusting for changes in prices over time and using 2006 as a base year standard o f living, poverty declined from 20 percent in 2002 to 13 percent in 2006. World Bank and Jordan Department o f Statistics, Ministry o f Planning and International Cooperation (2008). Jordan Poverty Update 2 reached i t s peak in 2008 at the time of international price shocks. Focusing on mechanisms that are systematically included in the budget, such as revising the National Aid Fund targeting, i s more effective in protecting the poor and vulnerable. Similarly, given that the labor income i s the most important source of income for Jordanian households, fostering growth in poor areas and promoting broad-based growth, higher employment and productivity are important in attaining strong poverty reduction. 8. Addressing these development challenges are the key priorities of the Government. In 2005, a Steering Committee (including representatives from the government, civil society, private sector, Parliament, and media) completed the National Agenda-an ambitious development agenda to transform Jordan into a modern knowledge-based economy with higher value added, increased productivity, employment and welfare through sustained and broadly-shared growth, while achieving fiscal sustainability. Modernization o f the country's economic, institutional and political infrastructure, reforming education, improving the business environment, and attacking deep poverty are at the core of this Strategy. The current Government's program presented to Parliament in December 2007 runs along the same lines of the National Agenda. 111. MACROECONOMIC PERFORMANCE AND OUTLOOK A. Macroeconomic Developments Prior to Global Turmoil 9. Jordan maintained strong growth performance in 2004-08. Real Figure 1. Real GDP Growth (YO) I GDP growth, after averaging 8.4 percent 9 QA during 2004-07, stood at 7.9 percent in 8% 2008. The economic performance reflected 7O h the increasing strength of sectors that have 6O h been benefiting from: i) high regional demand of services; ii) large inflows of 5% capital, income, and transfers from the 4O h region; and iii)the consecutive rise in both 3% private and public consumption. Among the leading sectors are services (hotels, 2% transport, storage and communications, 1 Qh finance, insurance, real estate and business 0% services) as well as manufacturing and 2003 2004 2005 2006 2007 2008-Re1 2009-Proi construction7(Figure1). Collectively, these ~Conrtnlctmn 0 Manufactruing OTranrpon & Communmlmm 0Finance.Rw.l Ertae, BusmssSenice sectoral trends pointed to an increasing OPmduocrs afGovernment Services OOther strength of non-traded goods and services Source: Oflcial data and World Bank staff estimates in the Jordanian economy. 10. Inflation rose in line with world oil and food prices in 2008. Average increase in the Consumer Price Index (CPI) remained in the range of 3.4-6.2 percent in 2004-07 but shot up to 14.9 percent in 2008 (combination o f a 15.4 percent y-0-y increase in the first nine months o f the year and of a 13.4 percent y-0-y increase in the last quarter). With imports to GDP ratio averaging to 9 1 percent during this period, a large portion of inflation was imported. The relative slowdown in the CPI starting in the last There has, however, been a marked slowdown in the performance of manufacturing in 2008 even before the onset o f the global recession. This mainly reflected the decline in the exports o f garments from the Qualified Industrial Zones (QIZ) to the USA-main destination for QIZ exports. And it i s only partially related to the impact o f the global recession on the demand from the U S market; even prior to the crisis, QIZs were unable to compete with similar industrial zones that are developing activities particularly in Egypt. 3 quarter of 2008 reflects the sharp reversal in the trend of international fuel and food prices, which have brought import costs down. 11, Gradual elimination of the oil subsidy significantly helped Jordan's fiscal position in recent years. Starting in the early nineties, Government of Jordan fixed the retail price of oil and implemented a (budgetary) subsidy system in an effort to insulate the domestic market from fluctuations in international oil prices. This subsidy scheme increasingly weighted on the government's budget with the disruption of the preferential oil supply arrangement with Iraq (on a partly grant, partly preferential rate basis) in 2003 and the subsequent rapid rise in international oil prices. In response, the Government took a decision to gradually eliminate the subsidy scheme as part of i t s fiscal consolidation plan under the National Agenda: oil prices increased by almost 270 percent between July 2005 and April 2006 and the oil price subsidy eliminated as of February 2008. However, the associated loss in real income for low and middle income groups particularly in 2008 has largely been compensated by variety o f measures, including tax reductions and exemptions, various subsidieshransfers and substantial public sector pay increase. 12. The improving fiscal position was reversed in 2008. After falling from 14.0 percent of GDP to 6.6 percent between 2003 and 2006, the budget deficit excluding grants has increased to 9.4 percent in 2008 on the back of higher expenditures (see Table 1.). The major source of the increase was the compensation package that the Government phased in through 2008 in order to mitigate for the sharp increase in domestic prices driven by the world prices. Additional foreign grants (reaching US$l,Ol4 billion compared to US$485 million in 2007), helped to attenuate the strong rise in pre-grant fiscal deficits: foreign grants as a share of GDP increased from 2.8 percent in 2007 to 4.8 percent in 2008, financing just about half of the overall deficit in 2008. Table 1. Fiscal performance 2003-2008 2003 2004 2005 2006 2007 2008 Domestic revenues (YOGDP) 23.2 26.5 28.6 30.1 30.1 26.7 Grants (% GDP) 13.0 10.0 5.6 2.9 2.8 4.8 Primary expenditures (% GDP) 33.8 35.6 35.9 33.7 34.6 33.6 o/w o i l subsidies 1.2 3.2 5.9 2.0 2.5 1.3 olw food subsidy 0.0 0.0 0.8 0.7 1.7 1.5 olw social assistance 0.7 0.8 1.5 2.3 1.8 1.4 o/w social safety net 0.0 0.0 0.0 1.1 0.9 0.3 Interest expenditures (% GDP) 3.7 2.8 3.0 3.0 3.0 2.5 Fiscal deficit excl. grants (YOGDP) -14.3 -11.9 -10.2 -6.6 -7.6 -9.4 Primary deficit excl. grants (% GDP) -10.6 -9.1 -7.3 -3.6 -4.5 -6.9 Public debt -Gross (% GDP) 99.7 91.8 84.0 77.4 74.2 62.4 Public debt - N e t (% GDP) 98.2 88.8 83.7 69.9 68.0 56.8 Source :O8cial data 13. The public debt declined significantly through 2008. The mostly concessional nature of foreign lending and the fiscal consolidation efforts helped Jordan remain largely on track to reach the provision of the public debt law which capped the total (net) public debt ratio at 80 percent by 2007 (which was further reduced to 60 percent in 2009). In 2008, Jordan signed a debt buyback operation at an 1 1.O percent discount rate with 10 Paris Club member states. The operation covered up to US$2.4 billion o f foreign debt and the effective debt buyback after discount amounted to US$2.1 billion. It was financed by privatization proceeds (estimated at US$1.2 billion) and land sale. As a result, public debt declined from 74 percent o f GDP in 2007 (below the cap) to 62 percent o f GDP in 2008. At the same time, the 4 share o f external debt in total debt declined t o 39 percent (59 percent at end-2007), while the share o f domestic debt increased to 6 1 percent (4 1 percent at end-2007). 14. External current account deficit deteriorated and became volatile after 2004. Jordan has maintained current account positions that were broadly balanced from mid- 1990s through 2004. The deterioration in 2004-2005 and 2008 reflected an exceptionally rapid increase in imports, as the saving- investment balance shifted.' In 2008, the current account deficit was 11.3 percent o f GDP, down from a peak o f 17.3 percent in 2007. It continued to increase in the first three quarters o f 2008, reflecting a significant increase (38.4 percent) in imports o f goods and non-financial services, before falling sharply in the last quarter o f the year, mainly due to the decline in the commodities prices following the international financial turmoil. The FDI financed about three quarters o f the deficit, with remainder mostly coming from errors and omissions, possibly remittances from Iraqi migrants and overseas Jordanians. This allowed for a rise in official reserves which stood at 8.6 billion dollars by end 2008 (up from US$7.5 billion in 2007). 15. Monetary policy has generally maintained the exchange rate peg. The Jordanian dinar i s pegged to the U dollar. After having depreciated by about 16.5 percent by end-2007 from i t s peak in S 2002, the real effective exchange rate has appreciated by 8.4 percent in 2008. This reflected increase in oil and food prices which pushed up the inflation differential relative to trading partners, as well as S strengthening o f U dollar against other currencies. Facing inflationary pressures, resulting from rising commodity prices and the excess liquidity in the system (money supply increased by 17.3 percent in 2008), the Central Bank o f Jordan (CBJ) increased i t s interest rates gradually during the first nine months o f 2008; there was also an increase in the mandatory reserves requirements from 8 percent to 10 percent o f total deposits. During this period, dollarization rate declined steadily to 21.7 percent (27 percent in December 2007).' According to the IMF staff assessment, real effective exchange rate i s broadly in line with medium-term fundamentals. Over the recent years o f a rapid increase in private sector credit growth, the CBJ has also strengthened the Bank regulation and supervision. Banks have been required to strengthen their risk management systems as well, and stricter provisioning rules have been introduced. B. Macroeconomic Outlook in the Context o f the Global Turmoil 16. The global economic slowdown has created several medium-term challenges for Jordan. The three most important o f these are declining global o i l prices (which have a positive impact on trade deficit but a negative impact on transfers and capital account), declining private capital flows to developing countries (which were a major source o f growth for Jordan in the recent past), and sharply lower global and regional growth outlook (which affect exports and remittances). Reflecting these effects, domestic economic performance has worsened since September 2008. The collapse in commodity prices favored a reduction in expenditures through a decline in budgetary subsides but also generated a drop in tax revenues because o f lower prices and lower economic activity. Also, while improving the current account balance, the decline in international prices and more broadly global turmoil has reduced foreign inflows, and negatively affected growth. * Jordan faced three major shifts in i t s external environment: (i) exceptional provision and subsequent sharp the cut- o f f in grants to the government following the onset o f the Iraq war; (ii) rise in global oil and food prices; and a (iii) surge in foreign investment inflows. The simultaneous impact o f these external developments, coupled with a strong economic growth, contributed to the large current account deficits in 2005 and 2007. 9 This decline i s mainly explained by the widening o f the spread between interest rates on JD denominated deposits and international interest rates. Indeed, with the decline in the Libor, the spread between time deposits in JD and Libor-3 months increased from 58 basis points (bpt) in December 2007 to 240 bpt in September 2008. 5 17. Economic activity i s expected to slow significantly in 2009. In the first quarter of 2009 (Ql- 09), GDP i s reported to have increased by 3.2 percent, well below the trend. According to the Bank's Quick Response Survey (QRS),'' about two thirds of firms expect the same or a lower level of sales, exports, investment, and employment in 2009 compared to 2008. This situation contrasts with the one observed in the last quarter of 2008 when no firm expected to reduce labor force-a signal of the unfolding impact of the global/regional economic slowdown. As most of the surveyed f i r m s (64 percent of them) export to the MENA region and to a smaller extent to Europe, it i s not surprising to see a majority of firms expecting a decline-or at best stabilization-of their activity. According to preliminary figures, foreign direct investment (FDI) to Jordan declined by 80 percent" in the first quarter of 2009 (y- o-y)--data available for the past ten years show a strong sensitivity of FDI, exports of goods to the Arab countries, exports of services and remittancesto the change in the international oil prices. 18. Possible repatriation of Jordanian migrant workers may put further upward pressure on the unemployment rate. Available data so far shows that unemployment rate i s on the rise, reaching 13.0 percent in Q2-09 (y-0-y), up from 12.1 percent in Q1-09 and 12.5 percent in Q2-08. With the Gulf remaining the main destination for Jordan's emigrant labor, the economic slowdown there along with domestic economic slowdown could push Jordan's unemployment rate further up in 2009. Decline of remittances has been limited in the first half o f 2009 (4.4 percent y-0-y), suggesting that repatriation of emigrant workers has been limited too; however there i s a possibility for the repatriation to accelerate in the second half of 2009, putting additional upward pressure on the unemployment rate if realized. 19. Preliminary data confirm the adverse impact o f the economic slowdown on Jordan's fiscal balances. While income tax revenues increased by 30.0 percent in the first seven months of 2009 (y-0-y), a l l other revenues are on the decline, with particularly large decline in land registration fees (39.0 percent). The overall increase in domestic revenues during this period i s limited to 2.2 percent (down from 14.6 percent for the same period last year) while increase in expenditures i s at 14.4 percent, despite some savings from budgetary subsidies due to sharp decline in international commodity prices. This implies significant divergence from the initial 2009 budget law, prepared before the onset of global economic crisis, which projected a 15.3 percent increase in revenues and a 13.3 percent increase in expenditures. The result i s higher overall budget deficit, excluding grants, which i s expected at 9.3 percent of GDP in 2009. Among the actions the Government i s considering to contain the overall budget deficit at this level i s reduction in this year's capital expenditures by 1.9 percent of GDP (from 9.1 to 7.2 percent), thus bringing the implementation rate of the capital budget close to the recent years average of about 85 percent, and public consumption by 1.2 percent o f GDP (from 18.0 to 16.8 percent).'* 20. On the other hand, some macroeconomic variables such as inflation, the current account balance and reserves, are expected to maintain a favorable trend in 2009 relative to 2008. This i s largely because of the effects of much lower oil prices and lower imports (which declined by 23.1 IO The survey covered 61 private companies in several major sectors o f the Jordanian economy: food, chemicals, metal industry, tourism, garments and IT/electronics during April 2009. Total employment was 27,113 workers in this sample. The survey followed up on a similar exercise conducted in November 2008. 11 This large decline partly reflects the inclusion o f a large one-time sale o f Aqaba port land in the corresponding FDI figures for the Q1-08. Excluding this transaction, the FDI in the Q1-09 declined by 56 percent (Y-0-J). The Government o f Jordan has revised the budget for 2009, taking stock o f net effect o f the drop in revenues, and subsidies and transfers, and envisaging (i)a less ambitious increase in public investment (to offset potential negative impact o f the global economic slowdown on growth); and (ii) containment o f public consumption. Domestic revenues in 2009 are declining because o f the slowdown in activity; decline in prices o f goods (decline in sales tax) and decline in FDI (drop in real estate registration fees). 6 percentI3 in the first half o f 2009 compared to the same period in 2008) partially associated with lower investments. As a result, the trade-in-goods deficit during this period was significantly lower at U S 3 . 4 billion compared to US$5.0 billion in the same period last year. Foreign exchange reserves o f the CBJ increased to US$10.3 billion in July 2009 (equivalent to about 10.9 months o f imports), from US$8.6 billion in December 2008, partly reflecting the continuation o f the conversion from foreign currency denominated deposits to Jordanian Dinar (JD) denominated deposits. 21. Jordanian banks' financial indicators were not immediately affected by the first round impact o f the global financial turmoil but may begin to reflect the impact o f the economic downturn. Limited integration with global financial markets buffered Jordan from the recent turmoil preventing immediate and direct losses among banks. The aggregate nonperforming loan (NPL) ratio increased only slightly (from 4.1 percent in 2007 to 4.2 percent at year end 2008). However, the second round effects o f the financial turmoil have the potential to develop into more discernable trends. Banks' credit portfolios are characterized as being relatively highly concentrated and the real estate, construction, and foreign trade sectors are vulnerable to weaker market activity. Banks with substantial exposures to these sectors as well as to markets abroad through their foreign operations are likely to be more adversely affected by the slowdown. Some deterioration in loan quality i s expected by both the authorities and the banks as economic activity slows, the long period o f high credit growth reverses, and property prices soften. Currently, banks are monitoring exposures closely and re-pricing credits and/or cutting credit lines to customers facing increased risks, especially in the real estate and foreign trade sectors. Notwithstanding a moderate decline in the banking system's capital adequacy ratio in 2008 due to implementation o f Basle I1 standards, the aggregate ratio remains well above the 12 percent requirement. Although current indicators are stable, additional measures being taken by the CBJ are needed to identify, anticipate and manage risks. 22. The Central Bank o f Jordan has taken pre-emptive steps to maintain confidence and support the domestic money market.I4 These measures include a full guarantee o f all bank deposits by the Government until end-2009, scaling back operations to soak up liquidity, reducing policy interest rate (so far by 150 bps) and reducing the reserve requirements (from 10 percent in October, 2008 to 7 percent o f total deposits). Currently, liquidity position o f the banking system remains comfortable after bank deposits edged down slightly in October 2008.15 The share o f dinar deposits has continued to increase since then, reflecting the interest rate differential between dinar and dollar denominated deposits. At the same time, loan to deposit ratios have fallen from 72 percent in 2008 to 69 percent in the first seven months o f 2009. Growth in credit to the private sector has slowed sharply, falling by 1.2 percent between August 2008 and July 2009 reversing the annual growth o f 14 - 28 percent in each o f the last four years. Bank lending to industry has been particularly affected (down by 7.5 percent in July 2009). While large well-known enterprises report renewed access to bank credit, banks are s t i l l very cautious about lending to small and medium enterprises given the lack o f information and limited options for collateral.I6 23. The ongoing global economic turmoil and uncertain outlook pose exceptional challenges to Jordan's short- to medium-term economic prospects. Jordan's strong regional ties provided a cushion l3 The decline in the imports o f goods i s the combination of a 16.4 percent decline in prices and o f an 8 percent decrease in volumes. 14 CBJ followed a relatively tight monetary policy in the previous period in an attempt to dampen inflationary pressures. 15 While demand for interbank loans diminished as excess liquidity in the banking system surged, some reluctance by banks to lend to one another may also be playing a role. 16 Microenterprises though seem to be able to access increasing donor and government funds through non-bank microcredit institutions. The largest micro-lender, the Government-supported Development and Employment Fund, recorded a yearly increase o f 28 percent in lending volume up to the first quarter o f 2009. 7 in i t s exposure to global economic slowdown-given the relatively limited impact of the financial turmoil in MENA. Still the economic outlook i s characterized by a high level of uncertainty, related to the evolution of world commodity prices, the level of foreign current and capital inflows as well as the regional security situation. Jordan has, however, demonstrated strong resilience to dramatic external economic and political shocks since 2003, maintaining focus on comprehensive development strategy. The Government's increasing emphasis on cushioning the population from the impact of the price shocks and economic downturn since 2008 led to a divergence from the fiscal consolidation program and erosion of fiscal gains achieved over the previous years. Looking forward, however, the ongoing efforts to re- institute the fiscal discipline and address the economic slowdown by accelerating the key structural reforms which have been under preparation over the last several years combined with selected short-term policy actions aimed at addressing immediate adverse impact of the crisis, augur well for a continuation of the more cautious economic policies of the recent years. 24. Bank staff projections on the medium-term (2010-2012) take into account the importance of external economic environment for Jordan's economic prospects. The base-case scenario takes account of: (i) the projected evolution of oil prices (and hence regional oil wealth) and their impact on foreign inflows and growth; (ii) projected growth worldwide and i t s impact on Jordan's exports; the the emerging favorable development of export activities to Iraq; and the slowdown in garments exports to the USA; (iii) Government's 2010 fiscal policy mix which envisages adoption of new sales and income the tax legislation, rationalization of tax exemptions, the containment of public consumption, including through liberalization of prices for barley and cooking gas oil, and rationalization of budgetary social safety net spending (mostly compensation spending). I7Also, the projections take into account the feedback from the Bank's QRS on the expectation o f the real sector representatives for sales, investments and exports over the near term. 25. The above assumptions project a gradual economic recovery over the medium-term. Following an estimated decline in real GDP growth to 3.2 percent in 2009, the growth i s projected to recover gradually in 2010 (at about 4 percent), reaching to 5.0 percent in 2012, at par with the long term growth potential o f Jordan's economy but remaining well below the pre-shock average growth performance (see Table 2). Among the drivers of this gradual recovery are the expected (i) gradual recovery in regional oil wealth,lg with the projected gradual increase in oil prices positively affecting Jordan's economy through exports, income transfers, remittances, FDIs, and portfolio investments; this positive impact will largely compensate for the negative impact of the rise in oil prices on Jordan's external balance; and (ii) positive response of domestic private investment to relatively relaxed monetary policy (given higher reserves and lower inflation), and ongoing improvements in the business environment. 26. The twin-deficits are expected to improve during the projection period. The current account deficit i s expected to reach a low 9.7 percent of GDP in 2010, before settling at around 11.0 percent of GDP through 2012 with the gradual increase in imports. Reflecting the Government plan of containing key expenditures pressures and increasing the emphasis on effectiveness of expenditure management, fiscal balance gradually improves over the projection period. Accordingly, primary deficit after grants i s projected to decline from 4.0 percent of GDP in 2009 to 2.6 percent of GDP in 2012, which help stabilize the debt to GDP ratio in 20 10-20 11 and put it in a downward path thereafter. " For the years 2010-2012, income tax revenues w i l l most probably decline due to the cut in tax rates projected in the new tax law currently debated in the Parliament. The long term growth for Jordan over the period 1992-2008 has been 4.8 percent on average per year. l 9 Reflecting projected gradual increase in oil prices from average o f US$60 per barrel in 2009 to US$80 per barrel in 2012. 8 27. The base case described above i s subject to risks emanating from the uncertain global environment. If o i l prices remain at around US$50 per barrel range, then lower regional demand o f goods, services and labor, and lower regional transfers and capital inflows will have a modest contribution to economic growth.20 A lower demand from Iraq for Jordan's exports and a lower worldwide growth will have similar effects as lower o i l price. Under these circumstances, Jordan will , benefit from the positive effect o f lower o i l prices on inflation and on current account deficit. However, Table 2. Jordr 's Medium-Term Macro Outlook 2007 2008 2009 2009 2010 2011 2012 I I I Actual Prelunina~ Original Prg Estimated Projected National Accounts Real GDP Gronth (%) RealGross Domstic I n \ e s t w n t Groulh (%) 8.91 4.0 7,9( 10.5 ss/ 9.4 3.21 -24.8 ;:I I 4.51 11.2 s,ol 11.2 GDP Deflator (change in %) C o n s u w r Pnce Index(change m %) Growth ofMoney Supply (%) Total Deposits-Resident (% ofGDP) Lending to the Public Sector to Total Banks Assets (YO Ekternal Accounts Balance ofTrade in Goods & Services (YO f GDP) o Current account balance (% ofGDP) Foreign Direct lnvestwnts (% ofGDP) Remittances (US$million) International Resenes (USS million) Fiscal Accounts (YO ofGDP) Total revenues Domestic revenues Grants Total expenditures Primly current expenditures o/w wages and salanes o/w oil & food subsidies Total interest expenditures 2.7 2.5 2.6 2.6 2.7 2.7 2.8 'Interest expenditures on domestic debt 14 17 20 19 20 20 21 'Interest expenditures on foreign debt 13 09 06 07 07 07 06 Capital expenditures 7.0 6.3 8.1 7.2 7.5 7.7 7.7 Ftscal balance exludmg grants -1 6 -9 4 -8 1 -9 3 -8 I -7 7 -7 4 Flscal balance mcluding all grants -47 -46 -41 -6 6 -5 6 -5 4 -5 4 P m r y balance exludmg grants -49 -6 9 -5 5 -6 I -5 4 -5 0 -41 P m r y balance mcludmg all grants -2 1 -2 1 -1 5 -40 -3 0 -2 8 -2 6 68.01 56.81 57.51 Source: Official data and World Bank staffprojections *' Data fi-om the recent past show that a one percent change in oil prices could generate as high as a 2.0 percent change in FDI, a 0.4 percent change in remittances, a 0.88 percent change in exports to Arab Countries and a 0.7 percent change in the exports o f services. For example an oil price o f US$SO/barrel in 2010-1 1 could lead to inflation lower by 0.5 percent and to a 2-3 percentage point improvement in the current account deficit. However, growth could decline by 0.5 percentage points and primary deficit rise by 0.7 percentage points. 9 policy-makers may be tempted to rely more on fiscal policies and on debt financing of public deficits in order to promote growth. On the contrary, if oil prices rapidly increase, and if Iraqi and international demand for Jordan's goods and services remain strong, then the role of exogenous factors in growth dynamic will prevail as well experienced in 2008. Fiscal and monetary policy will then have to focus on containing inflationary pressures, growing current account deficit, and pressures for faster improvement in living standards (commensurate with overall economic performance) through higher public spending. 28. On the financing side, Jordan has recently shifted towards lesser reliance on domestic borrowing. The context of global financial crisis and the significant increase in the financing requirement2'has recently led the Government to revise i t s sources of fiscal deficit financing particularly for 2009. Given the comfortable liquidity in the market in recent years o f high external inflows, the Government opted for increasing net financing from domestic sources, which led to a major shift in the composition of the public debt even before the external debt buyback operation in 2008 (see para.13). However, in a context where liquidity in the market might be less abundant than in the past few years, and where public financing requirements are higher, that financing option may significantly suck up liquidity otherwise available for the private sector and other economic agents. That in turn could adversely affect private investment and undermine growth and job creation. While the Government i s seeking to finance a portion of i t s now higher financing requirements from external borrowing (including through the proposed DPL) or higher access to foreign grants, it remains cautious about resorting to a sovereign exposure to the international market. C. Debt Sustainability 29. Jordan's public debt can be kept on a sustainable trajectory provided fiscal adjustment continues. Public debt has been significantly reduced in 2008 with debt to GDP ratio dropping by over 10 percentage points to 62.4 percent, thanks to the Paris Club debt buyback as well as rapid nominal GDP growth, The IMF staff assessment based on the original 2009 budget22 suggested that in the absence of fiscal consolidation measures, the ratio i s likely to increase by about one percentage point per year over the medium term (through 2014). Since then the Government took actions to contain expenditures in 2009 especially in the face o f much weaker-than-envisaged revenue performance in the original 2009 20 10-20 12 envisages further significant budget. The Government's Medium-Term Fiscal F r a m e ~ o r k ~ ~ f o r reduction in public expenditures in terms of GDP at 1.4 percentage points compared to 2009 (see Table 2,). A stronger discipline in fiscal policy-keeping debt increases below the rate of growth of the economy-will, in turn, put the debt ratio on a downward path by 2012. Overall, the Jordanian policy makers' successful policies in improving fiscal and debt sustainability over the past decade makes the achievement of their envisaged fiscal adjustment over the medium term plausible: for instance, the debt to GDP ratio was successfully brought down by about 40 percent between 1999 and 2008, as the primary deficit (including grants) was, on average, in balance during this period. While Jordan's debt outlook remains vulnerable to adverse shocks, they are unlikely to put the debt on unsustainable trajectory unless their magnitude i s unusually large. In this regard, the Bank and Fund analyses implies that if fiscal adjustment i s implemented, such events as a one-half standard deviation shock to real growth, interest rates, and the primary balance, or a combined one-fourth standard deviation shock, or a 30 percent real exchange rate depreciation, are unlikely to bring the debt to GDP ratio above i t s 2007 level (74.2 percent) '' The financing requirement after grants i s estimated to reach 6.6 percent o f GDP in 2009 (or U S $ l . 5 billion), significantly up from 2005-07 levels o f around 3.7-4.7 percent o f GDP (or US$550-800 million) and 2008 level o f 4.6 percent o f GDP (or US$979 million). 22 Jordan: 2009 Article I V Consultation - Staff Report (May 2009) 23 The Medium Term Fiscal Framework provides the basis (including aggregate expenditure ceilings and deficit targets) for roll-out o f the Medium Term Expenditure Framework, which collectively feed into Jordan's Budget Law that i s being prepared on a three-year basis since 2008. 10 in the medium term. Jordan's external debt i s relatively low: i t s ratio to GDP declined sharply to 25 percent after the buyback in 2008. IV. REFORM THEGOVERNMENT PROGRAM A. Long-Term Vision 30. Becoming a modern knowledge-based economy with higher value added, increased productivity and employment i s at the core o f Jordan's long-term development vision. This vision implies a bold modernization of the country's economic, institutional and political infrastructure, based on the enhancement o f its human capital, and the amelioration of poverty. The Government acknowledges that this requires a modern and efficient administration, and a more open and participatory policy. B. National Agenda and Government Policies 31. Jordan's National Agenda was prepared in 2005 by a Steering Committee including representatives from the government, civil society, private sector, Parliament, and media. The National Agenda i s an ambitious 10-year development agenda to transform Jordan from a lower-middle income country into a modem knowledge-based economy with higher value added, increased productivity and employment, and improved quality of l i f e for Jordanians. The National Agenda distinguished three consecutive phases: the first phase (2007-20 12) i s focusing primarily on improving the business environment, creating employment opportunities, and building the skills needed for the knowledge economy. The second phase (2013-2017) focuses on strengthening the industrial base, and preparing the ground for the development o f high value-added sectors in the knowledge economy. The final phase (20 18-onward) would complete Jordan's transformation to a world class competitor in the global knowledge economy. 32. The first phase o f the National Agenda includes multi-ranging development areas. Among these areas are political development and inclusion, justice and legislation, investment development, financial services and fiscal reform, employment support and vocational training, social welfare, education, scientific research and innovation, and infrastructure upgrade. The Government programs approved since then, including the executive program for Kuluna a1 urdun (2007-2009)-"We are all Jordan" initiative-have been consistent with the goals o f the National Agenda, and further defined and complemented i t s socio-economic objectives by setting up short- to medium-term initiatives aiming also to increase participation and inclusiveness. 33. The National Agenda includes a number of key performance indicators to measure its implementation. The Agenda was complemented by broad strategies, policies and quantifiable objectives in an integrated way, providing general guideline actions for the policy makers. The Government has made progress on the macro-economic and social quantitative indicators included in the Agenda, particularly in the areas of growth, budgetary subsidy polices and public debt, poverty, and education. To address the impact o f the recent exogenous shocks, the GoJ has taken a set o f actions that had not been envisaged during the preparation o f the Agenda. While the ongoing global economic crisis may render some o f the targets difficult to reach by their due dates, the Government remains firmly committed to reaching the National Agenda's development objectives and the strategies envisaged are being implemented. 11 Fiscal Adjustment and Reforms 34. The National Agenda calls for radical fiscal reforms to improve budget performance and increase Government efficiency. The Agenda puts its emphasis on addressing expenditure pressures in order to control the budget deficit especially to address vulnerabilities due to the expected decline in foreign grants and increase in international o i l prices over time. Among the key reforms to improve the budget performance are (i) phasing out oils subsidies by 2007 along with eliminating other subsidies; (ii) pension reform; (iii)reform o f civil service pay and grading system to improve productivity; (iv) accelerating privatization and channeling the proceeds to facilitate the fiscal reforms; (v) tax reform to simplify the procedures, ensure fairness, broaden the tax base and improve collection performance; and (vi) modernization o f customs administration. As discussed throughout this document, the Government has made a considerable progress in implementing and or initiating most o f these critical reforms, which will strengthen fiscal management. Areas where the progress has been limited are reforms in pay and grading system and overall human resources management to streamline government. Yet progress has been registered within several ministries/public institutions using different tools such as the King Abdullah I1 Center for Excellence, which plays an innovative role in promoting excellence in service delivery by public sector institutions. 35. The National Agenda focuses on a comprehensive public sector reform program and e- government program for improving Government efficiency. An area with steady implementation progress i s the public financial management reform. A number o f PFM reforms are currently underway, following the introduction o f a three-year medium term expenditure framework (MTEF) with the 2008 budget, a new Chart o f Accounts, revision to the budget planning timetable to allow for the Budget to be promulgated prior to the start o f new fiscal year and revision o f Jordan's Organic Budget Law. These reforms include installation o f a Government Financial Management Information System, GFMIS (expected to be piloted in six ministries by January 1, 2010), completion o f a Treasury Single Account (MoF i s in the process of finalizing the bidding process with the banking sector), further development o f the MTEF, and implementation o f steps towards the introduction of some results-orientation in the budget process. When it becomes operational, the GFMIS will significantly improve data reliability and will enable more timely and accurate centralized accounts reconciliation. 36. A recent review o f progress with public expenditure management and the MTEF reforms that were initiated in 2007 noted that despite significant progress in a short time, Jordan i s still at an early stage o f these reforms. While MTEF roll out had been constrained'by the wider demands o f a comprehensive PFM reform agenda, the macroeconomic and fiscal analysis underlying the Budget had been significantly enhanced, the budget planning horizon had been extended to three years, improved procedures for setting ministry resource ceilings had been adopted, performance indicators have been introduced into the budget documentation, and new policy-led budgeting procedures were being piloted in some ministries such as Health Care and Education. However, the experience under the MTEF has shown that linkages between planning and budgeting needs to be further strengthened. Capacity limitations both in central and line ministries have also been highlighted. Implementation of the expenditure planning reforms has also been overly focused on project spending with limited attention given to improving the effectiveness and efficiency o f recurrent spending. In order to handle these challenges, the Government plans to put a stronger focus on the efficiency and impact o f public spending in budget analysis and preparation, including through strengthening the strategic phase o f the MTEF/budget preparation. Financial Sector Reforms 37. The National Agenda puts its emphasis on strengthening governance and structure of financial services, facilitating funding to start-ups and SMEs, and developing the insurance sector. 12 Through these reform, policy-makers aim at consolidating the substantial progress that the banking and insurance sectors made in updating the organizational frameworks and control procedures governing company operations as well as in introducing new financial instruments, and increasing competition and focus on retail banking. 38. The CBJ has continued to carry forward the strengthening agenda through further development o f bank supervision and ongoing updating and issuance o f a number of regulations. The updating and refining o f bank regulations over the last few years has brought Jordan more closely in line with international standards. Some o f the areas addressed through this effort include, inter alia: prompt corrective action, licensing, asset and liability management o f foreign currency, business continuity, asset classification, corporate governance, internal control, and liquidity requirements for Islamic banks. 39. The CBJ has required banks to comply with the Basel I1 Capital Accord, effective 2008. CBJ continues to,require much more focus by banks on risk identification, anticipation, and management processes. Preparation o f an annual Financial Stability Report has begun, increasing the transparency o f banking sector condition as w e l l as policy making. 40. The CBJ has also taken a number o f measures to promote financial sector stability in the wake of the global financial and economic crisis. Banks are being encouraged to build capital buffers, both through increased profit retention and through capital injections by shareholders, and the CBJ continues i t s efforts to oversee the implementation o f the Basel I 1 capital accord. The staffing o f the supervisory function has recently expanded with the employment o f fifteen new staff and a new on-site supervisory manual i s in the final stages o f preparation. Global consolidated supervision i s being pursued. The CBJ recently conducted examinations o f selected bank operations o f Jordanian banks abroad and intends to continue this program o f supervisory visits in the coming year. In this context, it has increased contacts with foreign supervisory agencies and has established memorandums o f understanding (MOU) with thirteen foreign financial sector regulators and two domestic regulators. Furthermore, plans for a formal consolidated supervisory approach are being prepared which will include, inter alia, continuation o f supervisory reviews o f Jordanian banking operations abroad, periodic supervisory monitoring o f consolidated banking entities, and further interaction with other supervisor^.^^ A review o f the existing legal framework to determine if it provides adequate scope to execute comprehensive consolidated supervision will also be conducted. 41. Currently, the CBJ i s in the process of enhancing the implementation o f stress testing of banks and indentifying follow up actions. Going forward, the exercise will be conducted annually and will be used to assist in identifying and analyzing various forms o f banking risk, to contribute to the analysis o f capital adequacy under different scenarios, and when necessary, t o identify the possible need to require remedial actions from banks. Likewise, it will provide banks' and the C B J an additional tool with which to identify developing systemic trends. In the future, banks will be responsible for conducting their own "bottom up'' stress tests o n a semi-annual basis using C B J provided parameters as well as their 24 The supervisors aim at continuing to evaluate the relevant consolidated entities, ensuring ongoing documentation and updating o f the full range o f relationships banks have with not only downstream subsidiaries and affiliates, but with other entities which form economic relationships with the bank or are otherwise in a position to impact the risk profile and capital o f the bank. The supervision effort would include both evaluation of relevant group-wide business strategies and their impact on the banking entity; group-wide risk management and financial control processes; effectiveness o f capital (on a solo and consolidated basis); and establishment o f regulatory reporting (solo and consolidated) for the bank group as a whole and i t s relevant relationships to enumerate more formalized supervisory strategies for each group based on the above evaluations. 13 own developed assumptions. The CBJ will review the banks' established assumptions and will expect banks to address any issues or trends that are highlighted from the exercises. 42. The CBJ and banking sector are also in the process o f undergoing a complete revamp of their statistical and regulatory reporting. This i s intended to achieve several goals: (i)upgrade and automate regulatory reporting so that it feeds into the Early Warning System (EWS); (ii) provide additional granularity needed to accumulate data series to measure compliance with Base1 11; (iii) meet the (standardized) statistical data reporting configurations prescribed by IMF which will allow more concise reporting o f positions; and (iv) present the monetary and banking statistics on the website (and elsewhere) with more depth and accuracy (e.g., additional detail will be provided on (aggregate) loan portfolio breakdown (housing, SME, corporate and the like), capital position, o f f balance sheet info, etc.). The project i s currently in process with threshold dates set for various achievements during the upcoming months. The first run pilot test for system-wide reporting i s currently scheduled for the end o f 2009. 43. The GoJ signaled its commitment to improving access to financial services when it adopted the National Microfinance Strategy in 2005. This set out a market-oriented vision for microfinance, with the public sector providing an enabling policy and legal framework, and not directly providing financial services. The National Agenda emphasizes the importance o f access to financial services for socio-economic development, in particular for SME development and for the poor and marginalized. Jordan has one o f the highest rates o f market coverage (46 percent) for microcredit in the region. Microfinance institutions lend to low income borrowers (average loan balance i s less than one-third of GDP per capita) and to women, who make up 84 percent of microfinance institution clients. Microfinance institutions are not allowed to also directly offer savings and payment services, so broader microfinance access i s much more restricted. The GoJ retains an indirect involvement in the sector as the principal source of funding for the largest micro-lender, the Development and Employment Fund, which accounts for 22 percent of the total $29 million microcredit portfolio in Jordan. The GoJ also provides guarantees to promote SME finance by commercial banks, through the Jordan Loan Guarantee Corporation. 44. M o r e recently the GoJ has initiated wide ranging legal and financial infrastructure reforms to broaden access to financial services. The CBJ has embarked on lowering the threshold on credit reporting by banks and thereby so far doubled the number o f borrowers included in the public credit registry, while improving the timeliness and quality of the reported data. The Ministry o f Industry and Trade has led the preparation o f a draft law to allow the creation of a private credit bureau, which would further reduce credit risk by including information on a l l borrowers, by including non-bank lenders such as financial and leasing companies, and by enabling banks to expand SME and consumer lending safely using credit rating and scoring techniques. The draft law i s consistent with data privacy and consumer protection aspects, with written consent by borrowers envisaged for information disclosure. Collateral constraints to increased access to finance have also been eased alongside credit information deficiencies, through the 2008 Financial Leasing Law. Further progress would be achieved through a Secured Transactions Law that would allow the use o f movable assets as collateral and out-of-court collateral enforcement. This i s consistent with the National Agenda commitment o f "modernizing the law on mortgaging of immovable properties." 45. Telecoms and payments innovations show promise for improving access to finance in Jordan. The national e-commerce strategy formulated by the Telecommunication Regulatory Commission identified mobile phones as a promising channel for e-commerce. Jordan has one o f the highest levels o f mobile phone use in MENA outside o f the GCC, with penetration rates estimated at up to 80 percent, and high levels o f remittance transfers linked to the large share o f foreign nationals living in Jordan. There i s interest by leading mobile network companies in Jordan to roll out e-payment and transfer products, given a clearer legal and regulatory environment for this activity. 14 Business Environment Reforms 46. A key element o f the National Agenda i s to make Jordan an attractive location for knowledge-based private investment in order to support further job creation. This rests on the fact that the earlier waves of reform initiated in the mid 1990s did not trigger a sufficiently strong private sector response.25 47. Past structural reforms liberalized the private investment regime, opened the trade regime and overhauled customs administration, and established more modern regulation and institutions for private sector development and privatization. To complement structural reforms, Jordan broadened its free trade agreements (in the region, with EU and the USA) and engaged in an extensive privatization program.26 2006, cumulated privatization receipts reached above 13 percent of annual GDP, and above By 10,000 new direct and indirect job opportunities were created owing to privatization and opening up the sectors to private investment^.^^ 48. Despite these significant structural reforms and open access to markets, the private sector response has not been strong enough to make a stronger impact on unemployment. Among the key factors behind this outcome i s the persistence of cumbersome bureaucratic procedures, red tape, and poor public service delivery, which increase transaction costs for the private sector. The indicators of Doing Business from 2004 to 2008 show that Jordan, while performing close to regional averages, i s far from being top of the class in MENA, and compares less favorably with some of the most dynamic emerging economies in Asia and Latin America. 49. I n 2008 the GoJ launched a Public Private Partnership program while broadening and deepening its investment climate reform process. The GoJ has adopted a more strategic approach to capital formation, combining efforts to improve the investment climate and attract/encourage private business investment, which involves promoting Public Private Partnerships (PPPs) for selected infrastructure investments, and reserving the GoJ-only investment for general public goods. 50. I n parallel, GoJ's efforts to improve business environment gained depth and pace. In 2008, the GoJ put together a Committee to coordinate and facilitate faster improvement in the business environment headed by the Ministry of Planning and International Cooperation. The Committee, which includes representatives of ministries and agencies concerned, devised a strategy to improve the business environment in Jordan on the basis of the framework provided by the Doing Business (DB) report, and key areas of concern underlined by the 2007 Investment Climate Survey. Key areas in the GoJ's plan include: Improving entry and exit regulations to foster Competition. In mid-2008, the GoJ reduced the minimum required capital to establish an LLC (from 795 percent of GDP per capita in 2007 to 24 percent in 2008) to encourage businesses to enter the formal sector. This effort i s now being furthered within the upcoming new Companies Law, to abolish both the minimum capital requirements for LLC and the requirement for depositing 50 percent of the capital of LLCs in commercial banks. Other measures in preparation include expanding facilities for e-payment of registrations fees and taxes, 25 World Bank (2002). Jordan Development Policy Review: A Reforming State in a Volatile Region, Washington DC. and World Bank (2006). Country Assistance Strategy for the Hashemite Kingdom o Jordan: 2006-2010, Washington DC. f 26 Recent significant achievements include a major privatization deal in the energy sector obtained in October 2007 by selling 5 1 percent of the Central Electricity Generating Company to the newly formed Enara Company and an initial public offering by the national carrier Royal Jordanian's in December 2007 making 74 percent o f the shares available for sale (with the government keeping 26 percent). ''World Bank (2006). 15 expanding the one-stop-shop with specialized offices (municipality office, public notary, chamber o f commerce, chamber o f industry, Income and Sales tax office) for company registration and improving the bankruptcy and insolvency procedures; Improving the tax administration process. All tax forms has been simplified by the GoJ since late 2008 and an investor's guide to all taxes in Jordan has recently been prepared (April 2009). In early 2009, an online filing system for Income Tax has become operational and, following a 2008 amendment of the relevant legislation,28 limited electronic payment facilities have been made available through the proprietary I T system o f the Income and Sales Tax Department. While this i s a major improvement, the system i s still in its infancy.*' Its slow start i s largely due to technical limitations, a relative lack o f confidence by corporate tax payers in the security o f the system and a preference for paper receipts. In the coming months, the GoJ plans to significantly improve and expand the system. Improving further the working o customs in order to facilitate trade. The introduction o f the f ASYCUDA World System3' and its integration with the Single Window system3' currently operational in Aqaba, the Comprehensive Integrated Tariff System (CITS),32 and many other Customs systems since April 2009 will increase the efficiency o f the Customs clearance process and therefore greatly facilitate trade. Improving contract enforcement procedures. Since early 2009, specialized sections (Maritime Law, Companies and Commercial Agencies, Intellectual Property, Liquidation and Bankruptcy, Documentary Credit and Letter o f Guarantee) have been created in the first court o f Amman which handles roughly 80-85 percent of the civil cases (incl. business disputes) in the country. In addition, a computerization of case management and an electronic filing system are now being implemented in all courts. In the upcoming year, the GoJ expects to create similar specialized sections in the remaining 16 first instance courts of the country outside Amman. This new system should better facilitate the resolution of business disputes once it i s fully operational. 51. There has also been renewed emphasis on strengthening the framework for investment development and growth across regions. A new Economic Zones Law has been prepared for discussion in the upcoming session of the parliament. In order to rationalize the management o f the zones and the incentives which are provided for investors, this law proposes the establishment o f a single authority that will merge the tasks o f overseeing the activities o f three existing categories o f zones (development, free and industrial zones). This new authority will be autonomous, and will have the ability to conduct management o f the zones and establish other contracts (including contracts related to selling and renting land). In addition, a new Investment Promotion Law i s being drafted for discussion in the upcoming session of the Parliament. If approved, it would transform Jordan Investment Board into a pure investment promotion agency without any kind o f registration activities. 28 The Ministry o f Information and Communications Technology, in cooperation with the Ministry o f Finance, amended the Legislation Number 40, in a manner that allows for e-payment transactions to take place. This was published in the official gazette on March 27,2008. 29 In effect, as o f July 2009, out o f the 700 large corporate tax payers registered for online filling o f their income tax return (Le. which received a username/password combination to access the system), only 10 effectively used the system to fill their returns. 30 The ASYCUDA world system allows Customs Administrations and traders to handle most o f their transactions--from Customs Declarations to Cargo Manifests and Transit documents-via the Internet. 31 A single window system enables international (cross-border) traders to submit regulatory documents at a single location and/or single entity. The Single Window i s intended to reduce the number o f transactions to a minimum, reduce error rate, speed up clearance time, and drastically reduce the face-to-face contact between traders and government agents so as to enhance transparency. 3 2 CITS i s a "middleware" application that provides all necessary information to importers and exporters on the internet, without exposing the sensitive and classified information records available in the clearance software databases o f ASYCUDA. 16 Social Insurance and Social Safe@ Net Reform 52. Among the key themes of the National Agenda is social welfare which consists o f three priority areas: (i)public health care, (ii)social security and (iii)poverty alleviation. In public health care, the main challenges being addressed are developing a cost effective medical insurance system to cover all Jordanians, reforming health sector policies and improving the institutional framework, and enhancing the operational efficiency o f the public health care system. In social security, the GoJ embarked on a reform plan to expand coverage, revise benefits and eligibility criteria, and ensure financial sustainability o f the Social Security Corporation (SSC). In the poverty alleviation area, the priorities have been to reduce poverty rates via a series o f strategic and institutional reforms, including renewal o f the National Aid Fund, providing assistance to the unemployed poor to integrate in the workforce, increasing penetrationof microfinance services in poor communities, among others. 53. The social security system of Jordan provides old age, disability and survivors' pensions but i s not financially sustainable as currently structured. I t covers 36 percent o f the labor force at a cost of 5.7 percent of GDP-among the highest in the region. According to World Bank projections, the pension system administered by the SSC will face a financial deficit by 2012 and depletion of reserves by 2027. The conclusions o f different analysis jointly conducted by the World Bank and SSC reaffirmed the urgent need to introduce reforms to make the system sustainable in the long term. In addition to this, the SSC needs to substantially increase the scope of the social security programs in areas such as maternity benefits, unemployment and health insurance. 54. The SSC has prepared an ambitious reform proposal addressing the most critical issues. I t includes the following: (i) adjusting pension benefit formulas and eligibility conditions to ensure financial sustainability and equity; (ii) expanding coverage by extending the mandate to contribute to firms o f less than five employees; (iii) introducing savings mechanisms to protect workers against the risk o f income loss due to unemployment; (iv) introducing maternity benefits to finance maternity leave currently paid by employers to eliminate a significant disincentive to hire women; and (v) introducing social health insurance mechanisms. 55. A major achievement to date in the social insurance reform process i s the approval in June 2009 by the Cabinet o f the new draft Social Security law submitted by the SSC. The law will serve as basis o f a comprehensive social insurance reform and i s currently being considered by the extraordinary session o f the parliament. As part o f the reform process, the SSC also developed a comprehensive program to build institutional capacity with the support o f the World Bank and other partners, including participation of staff in technical workshops, specialized training courses in different areas o f social security, local and international conferences, international fora, etc. 56. The reform o f the social safety net and the renewal of the National Aid Fund i s a key priority for Government. The objective of the safety net reform i s to improve the operations and management, coverage o f the targeted poor population, and targeting efficiency and effectiveness o f the cash assistance extended to the population through the National Aid Fund (NAF). 57. Overall, Jordan has most of the programs commonly found in a relatively well developed and diversified social safety net system. Classified into three general categories, these are: (i) income support to poor and vulnerable families, implemented by two key institutions, the NAF and the Zakat Fund (ZF); (ii) s social care services to vulnerable groups such a people with disabilities, children, families and women in distress, and others; and (iii) economic empowerment through skills and asset development. Total public spending on safety nets i s estimated at more than 1.0 percent o f GDP, with 17 two-thirds (0.6 percent) spent through the NAF. The total number o f beneficiaries i s estimated at about 8- 10 percent o f the population, with NAF reaching 4.0 percent o f the population. 58. Several issues concerning the performance of the safety net programs have emerged, in particular the NAF. The main issue i s that the poverty impact o f the cash transfers has been found to be modest: a major segment o f the poor i s not reached (low coverage) and the leakage o f resources to the non-poor i s substantial. In 2006, only some 20 percent o f people under the threshold for the NAF assistance received NAF benefits, comprising 14 percent o f the total number o f recipients; and only some 20 percent o f recipients rose above the poverty line as a result o f receiving NAF benefits.33 t i s important I to note, however, that NAF i s most likely reaching a larger number o f its target population (such as certain categories o f the population) within the targeting criteria that it currently applies. 59. Recently completed studies, including background documents prepared for the National Agenda, point to several factors behind the relative inefficiency and ineffectiveness o f the NAF. These include (i) weaknesses in targeting method: NAF uses a combination o f categorical and income based targeting which are not most suitable for Jordan's economic structure (high level of informality and seasonality); (ii) an incomplete policy and institutional framework; (iii) overlapping institutional mandates as well as fragmentation and duplication o f programs; and (iv) weak monitoring mechanisms and modest use of Management Information System in managing programs. The GoJ i s in the process of initiating a NAF renewal process which aims at addressing these issues. v. BANKSUPPORT TO THE GOVERNMENT'S PROGRAM A. Links to the Country Assistance Strategy 60. The Bank Group assistance program supports the Government's overarching objectives of poverty reduction and productive jobs creation. The program i s set out in the Country Assistance Strategy (2006-1 0) that was presented to the Board o f Executive Directors in May 2006. The structure o f the CAS i s based on four clusters: (i)strengthening the investment environment and building human resources for a value-added, skill-intensive and knowledge-based economy; (ii)supporting local development through increased access to services and economic opportunities; (iii) reforming social protection and expanding inclusion; and (iv) restructuring public expenditures and supporting public sector reform. 61. The CAS Progress Report was completed in March, 2009 and has concluded that the four clusters remain consistent with the governmental priorities and are relevant in guiding the Bank's future program choices. The CAS envelope included US$540 million in IBRD lending (base case), o f which $240 million investments, US$lOO million in partial risk guarantees, and US$200 million in development policy loans. As of now, all the investment operations envisaged in the CAS have been approved for a total commitment amount o f US$230 million, and US$95 million in guarantee, leaving the development policy loans with an allocated envelope of US$200 million available in the final year o f the CAS implementation. The context of the global financial crisis led the Government to be prudent about its financing needs in 2009 and to request a larger loan amount o f US$300 million. Indeed the Government i s keen to avoid crowding out the private sector in the domestic market for finances by diversifying its financing instruments, which over the recent years relied mostly on domestic market. 62. The CAS PR envisages that two criteria will guide the Bank's engagement in Jordan over the last year o f the CAS implementation with a view to being able to quickly respond to requests 33 This analysis, utilizing the 2006 Jordan HIES, i s based on the households' per capita annual consumption o f JD396. A similar analysis was carried out using a special survey in 2007 from which similar results emerged. 18 from the GoJ. These are: (i) focus on select sectors with the highest contribution to the GoJ's strategic objectives and in which the Bank can serve as a catalyst for reform; and (ii)focus on addressing emergency issues, particularly the impact o f the global economic and financial downturn on Jordan's economy. The proposed DPL i s consistent with this engagement strategy and consolidates the Bank's long standing technical dialogue and assistance to support the key reforms in growth, macro-fiscal stability, and social protection policy reforms. The new Country Assistance Strategy (scheduled for FY2011) i s envisaged to continue Bank support in these key areas o f reform in Jordan as the country moves to the implementation o f the next stage o f its National Agenda. B. Collaboration with the IMF and Other Donors 63. The Bank and the Fund teams maintain close collaboration. The World Bank-IMF Financial Sector Assessment Program for Jordan (finalized in March 2009) informed the financial sector component o f this loan. The other areas of joint work cover ongoing technical assistance to Ministry o f Finance in developing medium-term debt management strategy, and assessment of progress and way forward with public financial management reforms. Cooperation also includes the review o f macroeconomic developments. The Bank has discussed with the IMF about the content o f the DPL program and will continue to do so in the near future. The Fund will provide the Bank with an Assessment Letter o f the Government's reforms. Jordan has no formal program with the Fund, though relations are close. The Fund undertakes two Article I V missions a year and has provided technical assistance to the CBJ, including through its Middle East Technical Assistance Center (METAC). This has covered the budgeting and costing framework, external sector statistics (foreign direct investment survey, balance o f payments and international investment information, collection and compilation o f remittances data) and monetary and banking statistics. METAC has also been providing technical assistance to the Ministry o f Finance in cash management and treasury single account. 64. The Bank has good collaboration with USAID and European Commission (EC), both of which have a strong local presence in Jordan. USAID-funded technical assistance for the Government in reforming the business environment has covered: property registration, a bankruptcy and insolvency law, the private credit bureau law, and an expansion o f the e-filing regime for tax payments; and in reforming the fiscal management has covered: comprehensive tax reform, introduction o f result orientation to the budget, improvement of budget classification and financial management system. USAID has been coordinating technical assistance support in these areas both with the IFC and the IBRD. The proposed DPL program i s consistent with the key findings and recommendations under these technical assistance programs. The Bank has also been collaborating closely with the EC in the implementation o f technical assistance for the introduction o f the Medium Term Expenditure Framework process, whereby the EC assistance focuses on sector level budget preparation, particularly on the education sector. Finally, social insurance i s an area where the International Labor Organization and the Bank has been providing complementary technical assistance. C. Relationship to Other Bank Operations 65. The proposed DPL complements the Bank's other activities in Jordan which encompass investment lending, AAA, and technical assistance. Among the investment operations, the proposed DPL has strong links with the Social Protection Enhancement Project, SPEP, (US$4 million, FY08), which i s designed to support the implementation o f the NAF renewal plan by improving the management and operations o f the cash social assistance programs and the access to and quality o f social care services. In addition, IFC i s extensively involved in the financial sector, focusing on promoting access to finance by: promoting leasing by strengthening the legislative regime and clarifying the tax treatment of leasing; supporting the preparation o f the corporate governance code for banks in Jordan; supporting the 19 microfinance sector; stimulating the housing finance market through an investment in a new mortgage finance company and advisory services to support new legislation for the sector; and assisting the GoJ in drafting the new legislation that will regulate the sharing o f credit information. Through its Global Trade Finance Program, IFC also supported the capacity o f three commercial banks to deliver trade financing through partial or full guarantees covering payment risks on banks in the emerging markets for trade related transactions. In addition, a US$50 million IFC equity investment (IFC's largest equity investment in the banking sector in Jordan) in Capital Bank supports the bank in i t s small and medium enterprise and housing finance strategy, promoting better corporate governance standards, and helps with future regional expansion. D. Analytical Underpinnings 66. The proposed DPL i s underpinned by a series of recently completed and ongoing analytical and advisory tasks, programmatic technical assistance, and projects. The proposed policy actions and outcomes are founded on a continuous engagement o f the Bank in the four areas covered under the proposed DPL: fiscal adjustment, financial sector, business environment, and social insurance and safety nets, with a comprehensive list o f the analytical and advisory activities presented in Table 3. 67. The ongoing programmatic assistance in public financial management initiated in 2006 underpinned the need for further fiscal consolidation and more efficient public spending in Jordan. The joint Bank-GoJ Public Expenditure Review highlighted the importance o f rationalizing levels o f public expenditure and prioritizing sector resource allocations in order to reflect better the government's policy priorities. Follow-up policy noteddialogue on the budget reform process and macro/fiscal- sustainability set the stage for moving from a retrospective analysis o f spending trends to a forward looking analysis for implementing budget reform with the aim o f integrating planning and budgeting processes. Since 2007 the Bank has assisted the GoJ with the introduction and implementation o f the Medium Term Expenditure Framework (MTEF) with emphasis on strengthening the policy orientation o f the budget planning reforms. The assessment o f the global financial crisis impact, which examined mechanisms o f transmission o f the financial crisis to the Jordanian private sector and real economy, and the ongoing study on price shocks and subsidy reforms identified areas o f fiscal vulnerability and selectively quantified the gains/losses o f compensation policies, confirming the need for fiscal consolidation to reduce fiscal imbalances and strengthen the effectiveness and efficiency o f public spending. 68. The investment climate survey, the business environment seminar/dialogue, and IFC's study on doing business better in Jordan, and technical assistance on licensing and inspection reform identified and sought to address (in a consultative way) constraints to doing business in Jordan. The key recommendations included: streamlining regulatory framework (including obtaining licenses and permits, contract enforcements and the justice system), reforming taxation and tax administration, providing demand-driven skills training for workers, providing greater opportunities for private employment agencies to operate in Jordan's labor market, and developing the capacity o f insolvency administrators. The GoJ has accelerated its efforts to address these issues since last year, which informed the key DPL measures in streamlining regulatory framework and improving tax administration. 69. The financial sector assessment program update ( F S A P ) and the Insolvency and Creditor Rights Report on Observance o f Standards and Codes (ROSC) completed in 2009 identified measures needed to improve the transparency o f the banking sector through re-examining regulatory reporting, dissemination o f information and enhanced analytical capacities. The FSAP observed the need to continue focusing on risk assessment and risk management systems in the Jordanian banking sector and recommended the adoption o f an enhanced stress testing exercises as part and parcel to the banking sector 20 oversight process. I t further encouraged a move to more formalized consolidated supervision. The FSAP and ROSC also outlined legal and institutional reform actions that have informed the proposed policy matrix actions for access to finance. Improved sharing o f credit information was highlighted in both, as well as by the 2003 Financial System Stability Assessment, and the Doing Business analysis. The agreed policy actions would improve the quality o f credit information and reporting, and provide the legal basis for a credit bureau to share borrower information. 70. The ongoing programmatic assistance on social insurance identified key areas o f reforms and provided the continued assistance to the GoJ. This assistance channeled to: (i) adjust the pension benefit formulas and eligibility conditions to ensure financial sustainability and equity; (ii) improve the administrative capacity o f SSC to perform its tasks and invest its reserves efficiently; (iii)review the mandate o f the SSC and achieve a more balanced mix between public and private sources of savings for retirement; (iv) develop an integrated regulatory framework for voluntary private pensions; (v) identify appropriate mechanisms o f coverage expansion through contributory and non-contributory schemes to cover the long-term poor; (vi) introduce savings mechanisms to protect workers against the risk o f income loss due to unemployment; and (vii) improve social health insurance mechanisms in order to increase the overall efficiency, reduce high costs and better allocate resources of the health system. Table 3: Analytical and Advisory Activities Underpinning the Operation Policy Area AAA, T A and Project Activities Type Status Public Expenditure Review 2006-07 ESW Completed Programmatic T A on Public Expenditure Management 2007-09 PSEW Ongoing Fiscal Adjustment Price Shocks and Subsidy Reform: Fiscal and Poverty Impact Std. 2008 ESW Ongoing Impact on the Real Economy and Private Sector Assessment ESW Periodic Financial Sector Assessment Program Update 2008-09 Advisory Completed Financial Report on the Observance o f Standards and Codes 2008-09 Advisory Completed Sector Jordan Leasing Project (IFC) 2006 Advisory Completed InvestJAdv Microfinance Project (IFC) 2007 isory Completed Investment Climate Survey 2007 ESW Completed Business Investment Climate Seminar 2008 Advisory Completed Environment Doing Business Better in Jordan (IFC) 2009 Advisory Completed Licensing and Inspection Reform Program (IFC) 2007 Poverty Update 2008 Completed Poverty Institutional Framework 2007-08 Completed Wage and Earnings Statistics 2008 Completed Social Insurance Programmatic T A on Social Insurance 2006-09 PSEW Ongoing and Safety Strategy for Modernization o f Social Safety Nets 2007-08 ESW Completed Net Investment and Labor Market 2007 ESW Completed Institutional Financial Management Capacity Asses.-Social Sector 2007 ESW Completed Social Protection Enhancement Project 2008 Lending I Ongoing 21 71. The modernization o f social safety net report and the follow-on social protection enhancement investment project identified the need to modernize and scale up the National Aid Fund. The reforms identified include: (i) shifting from the current targeting mechanism (category-based) to a proxy-means tested (PMT) targeting mechanism; (ii) developing monitoring and impact evaluation mechanisms o f services; and (iii) coordinating with other social assistance institutions (Le. Zakat) to better target resources towards at-risk groups, particularly children, youth and the disabled. In addition, Institutional Financial Management Capacity Assessment report for social sectors pointed to the need for further enhancement of the financial management and reporting systems of the NAF, which i s being addressed through the NAF renewal and modernization process. E. Lessons Learned 72. Lessons learned from implementing policy reform based operations in Jordan and elsewhere highlight that country ownership o f the proposed policies and a clear strategy to move forward i s key for success. Country ownership i s also emphasized in both the CAS and CAS PR as being critical for the success o f the Bank's program. As a consequence, the DPL and, more broadly, the overall dialogue and program o f the Bank in Jordan are well aligned with Government's reform strategy in the National Agenda and complementary programs. 73. Strong analytical underpinnings and links to the Bank operations and technical assistance programs provide foundations for a well-designed and cohesive policy reform based operation. The key pieces o f analytical and advisory activities shown in Table 3 above contributed not only to the design o f the proposed DPL, but also helped inform and facilitate the reform efforts of the Government and supported a fruitful policy dialogue. 74. Realistic policy reform agenda in terms o f content and risks has also been important factors that need to be weighed carefully in the preparation o f the operation. Drawing from this, the proposed DPL focuses on reforms implementation o f which consolidates key set of reforms under the first phase o f the National Agenda, paving the way for broadening and deepening the reforms under the Government's comprehensive development strategy. Ensuring the understanding o f and the appropriate support for reforms through well implemented communication strategy o f the government should be part o f its overall efforts to maintain the implementation momentum. VI. OPERATION THEPROPOSED A. Operation Description 75. The proposed operation i s designed to support the implementation o f the Government's medium-term development program. The overall development objective o f the DPL i s to support the implementation o f the Government's medium-term development program34 the context of the current in global financial crisis and economic slowdown. More specifically, the program supports following policy areas, aiming at strengthening the resilience of the economy to better position Jordan to resume and sustain high growth while cushioning the impact o f the economic slowdown on the poor and vulnerable (the next section and Annex I1 show the main policy actions supported by the proposed operation): 3 4 This i s broadly described by the National Agenda as "stimulate economic development and improve social welfare and security through reforms revolving around creating a favorable investment environment, fiscal discipline, justice, accountability, transparency, employment support, economic competitiveness, supporting small and medium enterprises.. ." National Agenda, Government o f Jordan, (2006-2015), page 4. 22 0 Reducing the fiscal vulnerability by broadening tax base, and enhancing effectiveness o f government expenditures; 0 Increasing resilience o f the financial sector by further strengthening regulation and supervision, and improving access to credit; 0 Improving the business climate to encourage more private sector investment; 0 Facilitating access o f vulnerable groups to a more effective and fiscally sustainable social protection system. 76. The Bank has maintained a continuous dialogue in the above policy domains and hence has a high degree o f confidence regarding their strategic importance. Reforms in these integrated policy areas will not only support macroeconomic stability, at present perceived as the most important business- enabling issue, and growth, but will also pave the way for advancing Jordan's structural reform agenda which envisages progressively promoting higher value-added sources o f growth and job creation in transitioning economic sectors to the knowledge economy. This single tranche DPL operation consolidates the Bank's long standing technical dialogue and assistance to support the key reforms in these areas. Further implementation progress o f specific program components over the period ahead are expected to continue because the reforms are mature, supported by technical assistance and widely discussed within the Government and with key stakeholders and donors. This operation will inform the preparation o f the new CAS which will facilitate continuity in the reform dialogue. B. Policy Areas Fiscal Adjustment and Reforms 77. The main objective of prior actions in this policy area i s to support Government's efforts to reinstitute the fiscal consolidation plan so as to reduce large fiscal imbalances and to maintain macroeconomic stability. In pursuit o f this objective, prior actions have focused on broadening the tax base, and improving efficiency and effectiveness o f the public expenditure policies, including through enhanced processes for formulation and evaluation of fiscal policies. Prior Action I: The Cabinet has issued a decision that (i) eliminated tax exemptions without specijk duration or amount and issued under the Cabinet's authority; (ii) made Cabinet consideration o any new f exemption conditional on an explicit Ji.amework that identij?es the rationale, costs in foregone revenues, and establishes a speciJied duration: and (iii) clariped that no tax exemptions w i l l be proposed through non-tax legislation. In Jordan the extent o f tax preferences granted by the Cabinet through differential rates and project specific exemptions has increased significantly over the past few years and i s currently excessive-the total forgone revenues have reached over US$I billion in 2008 (or approximately one-third o f tax .2 revenues), nearly three times as high as their 2005 level. The exemptions are generally granted for individual projects and for specific commodities. The greatest revenue loss has been in sales and customs taxes. For instance, the existing sales tax legislation contains 240 preferred items, o f which 128 items were articulated last year by the Cabinet in response to sharp price increase^.^' The Government's proposed new draft Sales Tax Law carries forward these preferential rates while eliminating the continued occurrence o f this practice for commodities by allowing the Cabinet to reduce (but not increase) the extent o f such preferences without going back to Parliament.36 In 35 A wide set o f transactions are taxed below the standard rate (16 percent) by the use o f four preferential sales tax rates (exemption, 0, 4, and 8 percent). 36 Some o f these exemptions such as for food stuffs, were intended to lower the cost o f consumer goods at a time when prices were rising rapidly. Others were expected to help industries, such as construction and tourism that 23 addition, emphasizing that the preferential tax policies distort relative prices, harm equity and reduce revenues, the Government i s in the process o f reviewing all exemptions previously provided by the Cabinet that have no limit on their duration or amount, and rationalizing the granting of project specific exemptions through much tighter scrutiny o f when they should be provided. Prior Action 2: The Prime Minister has issued 201 0 Budget Circular including (i) the medium-term fiscal parameters for 2010-12 with a revised budget for the fiscal year 2009 as a baseline in which 2009public expenditures, other than subsidies, were reduced by at least 4.0 percentage points o GDP compared to f original 2009 budget law; and (io a comprehensive policyJi.amework-including stable wage and salary expenditures in terms o GDP compared to the fiscal years 2008-09 and termination o remaining f f subsidies for oil derivatives and b a r l e p a n d resulting expenditure ceiling, which translates into a lower budget deficit before grants by at least 1.Opercentagepoint o GDP in 2010 over 2009. f Excessive public expenditures and resulting high budget deficits reduce Jordan's fiscal space and increase the country's vulnerability to the risks created by the external shocks as well demonstrated since 2008. Some of the expenditures, such as commodity subsidies, were reduced automatically as the global economic slowdown put a downward pressure on the global commodity prices in 2009. However, these reductions were insufficient to ensure that public finances are on a sustainable trajectory. Originally in its 2009 budget law, the government planned to sharply increase capital expenditures in order to provide a stimulus to the domestic economy. However, once negative implications of the global downturn for the budget revenues were realized and it became clear that the balance o f risks was shifting toward putting fiscal deficit in an unsustainable trajectory, the government took a bold step o f reducing this year's capital expenditures (to levels more at par with those in recent high growth years), thus demonstrating its commitment to continued enhancement o f fiscal sustainability. While first steps toward resuming fiscal consolidation have been taken in 2009, more needs to be done to ensure that Jordan's fiscal position becomes robust in the face of large external uncertainties the economy will face in 2010. As capital expenditures are essential for ensuring the longer-term economic growth, optimization o f current expenditures also needs to be considered to make sure that they neither crowd out capital spending, nor increase the risk o f macroeconomic instability. In 2008, the GoJ compensated the loss in real income associated with the doubling of the world price o f oil and food (hitting Jordan particularly heavily through high import costs) by a fiscal stimulus from a variety o f mitigation measures in which largest single components were the wheat and fodder subsidy and the increase in government wages. Based on expected high inflation, 2009 budget also provided a significant compensation vis-a-vis inflation for government wages which exceeded the intended compensation by the government in the face o f a sharp reversal in inflati~n.~' line with its planned In more cautious fiscal policy approach over the medium-term, the government will put the emphasis on protecting the share o f wages and salaries in GDP. In addition, as part of its overall subsidy reform program that has been initiated in 2006, the government has eliminated remaining barley subsidies which will help in putting Jordan's current expenditures into a more stable path. were affected by the global crisis. The exemptions that are intended to enhance specific industries are particularly unlikely to have productive outcomes (the primary beneficiary will be the service providers themselves thereby distorting relative investment alternatives in Jordan) since they reduce revenues, distort relative prices, and harm equity with little probability that they stimulate economic activity. 37 According to the Government projections, the CPI inflation in 2009 i s expected to remain low at around 1.6 percent, much lower than 6.0 percent projected under the 2009 budget program, when the 2009 wage and salary compensation scheme was introduced. The result i s significant excessive spending o f 0.8 percent o f GDP in 2009. Based on experience in countries applied it in the past, forward looking compensationsystem (Le. based on expected inflation), carries a high risk o f creating a wage-price spiral. In addition, it leads to a excessive spending when the n inflation projections are subject to high margin o f error. 24 Prior Action 3: The Ministry o Finance has adopted an enhanced budget calendar to strengthen the f initial strategic phase o budget preparation, during which budget performance, strategies and priorities f are reviewed and medium-term spending requirements evaluated. The calendar includes Cabinet level consultations in the first quarter o each fiscal year on the key parameters and issues underlying the f development o the A4TEF based on a Budget Policies and Priorities Paper. f The current downturn in the economy highlights the importance o f stronger focus on identification o f budget policy and priorities and on the efficiency and impact o f public spending-with a more balanced approach to improve effectiveness and efficiency o f both capital and recurrent spending. Adoption o f a revised budget calendar allowing for establishment o f a practice of cabinet level consultations in the first quarter o f each year on the budget policy and priorities-setting out the key issues and parameters against which the Budget i s to be prepared-will greatly enhance institutional framework in fiscal-policy making. The Ministry o f Finance has set up this process this year, in order to guide the development o f the hture MTEFs based on a Budget Policy and Priorities Paper for Cabinet discussion annually over the coming period. This i s being complemented by establishment o f a new policy analysis unit in the General Budget Department for in-depth budget analysis. Financial Sector Policies A. Strengthening o the Regulatory and Supervisory Framework f 78. The main objective o f this component i s to support the CBJ in its continuing effort to promote financial sector stability and bank soundness. Prior action focus on the CBJ's efforts to identify and to respond to existing, perhaps previously unidentified risk through actions to apply more rigorous risk management, and improve capital adequacy and address systemic trends. Prior Action 4: The Central Bank o Jordan has completed afirst run o stress testing on the aggregate f f banking sector balance sheet and has issued guidelines on stress testing to individual banks; first run stress testing by each individual bank has been completed. The recent financial market turbulence and the subsequent global economic slowdown have reinforced the need for financial institutions and supervisors alike to possess the necessary tools with which to identify and anticipate existing and developing risks and to be able to quantify and react to those risks. The CBJ i s in the process o f introducing tools with which to expand analysis o f banking sector risks through stress testing selected bank and market variables. This will help banks and the CBJ to anticipate the impact o f adverse market movements, identify risks that may not be immediately evident, and flag the possible need for corrective actions by banks. Not only will this facilitate bank and supervisory response to potential risk, but the process will feed into the requirements o f the second pillar o f the Basel I1 Capital Accord for adequate supervisory review processes. The CBJ has completed a first run stress test analysis and has issued guidelines to banks that provide directions and parameters for their own stress testing, analysis and risk projections. In response to the stress testing, the CBJ has also undertaken supervisory follow up to initiate preventative and corrective actions as necessary. 79. I n parallel, the CBJ i s pursuing consolidated supervisison. One o f the issues brought to light by the recent global market turmoil was the nature and the extent o f risk taken by expansive and sometimes remote operations o f financial institutions, some o f which had not received adequate supervisory attention and scrutiny. To avoid similar risks from accumulating and becoming a threat to systemic soundness, the CBJ has also initiated a plan for consolidated supervision o f the relevant banks in the sector and recently undertook onsite inspections o f the foreign operations o f selected domestic 25 institutions. I t has also prepared concrete plans for additional onsite reviews of selected foreign Jordanian bank operations in 2010 and has entered into a total of fifteen M U with domestic and foreign O s regulatory bodies. Dialog with foreign supervisors continues in an effort to receive and process various sources o f technical and market information through which to oversee the relevant banking groups. The near-term steps envisaged include establishment of an adequate legal scope to effectively conduct comprehensive consolidated supervision and expansion o f supervisory strategies for the relevant institutions to ensure review of the entire consolidated group in which a bank resides, governance structures, group risk profiles, and central control functions. B. Access to Finance 80. This component supports the Government's objective of increasing employment and reducing poverty through improved access to finance. Improved access to finance for SMEs will contribute to achieving the National Agenda target of raising SME's contribution to employment in Jordan to 45 percent in 2017. Bank lending as a transmission mechanism for the economic slowdown i s Ms amplifying the impact on S E and risks constraining private sector employment and holding back the ability o f the SME sector to play its part in economic recovery. The prior action for access to finance build on the Government's program to improve the legal and policy infrastructure for restoring and expanding access to finance, while strengthening management o f credit risk. Prior Action 5: Cabinet has approved a draft Credit Bureau Law that makes f i l l borrower credit information and history available,for both bank and non-bank borrowers, and that gives borrowers the right to verifL their data. This draft law addresses the lack of information on potential borrowers that constrains S E and M individual lending in Jordan. Banks and non-banks will be able to expand lending using credit bureau information, with better management and pricing of credit risk based on a more accurate assessment of the likelihood of borrower default. 8 1. I n addition, the CBJ has reduced the reporting threshold to the public credit registry from JD30,OOO to JD20,000, thereby doubling the number o f bank borrowers covered. This increases the CBJ's ability to effectively monitor risk in bank lending, by doubling the borrower coverage to 80,000, or 14 percent of total bank borrowers. This action also provides aggregate portfolio information for banks to enhance their credit scoring models, and thereby to potentially reduce lending costs and risk. The central bank's program to continue to lower credit reporting threshold down to JD5,000 for the public credit registry and to automate bank reporting will amplify these benefits and cover a much greater percentage of total bank borrowers. Business Environment Reforms 82. The objective o f this component is to further improve the business environment in Jordan through reducing firms' operating costs. Recent analytical underlines the persistence of serious regulatory bottlenecks, with regulations continued to be perceived as complicated and costly by firm's managers. Similarly, tax administration processes remain at the forefront of firm's concerns in Jordan with an unclear system and the wide discretion given to officials creating a large burden for enterprises to comply with the tax regime.39 Prior actions under the proposed operation focuses on reducing firm's entry 38 Investment Climate Analysis (World Bank 2007); Doing Business (World Bank, various years); Quick Response Survey (World Bank, November 2008 and April 2009). 39 According to the 2007 ICA, the percentage o f firms having been inspected in Jordan the year before the survey i s among the highest in the region. 26 costs and improving the exit process; and improving the resolution o f business disputes at the level o f the judiciary in order to reduce firm's operating costs, allowing more firms to be created with positive impact on job creation and employment. These actions are fully in line with the National Agenda objectives and will help increase the real sector's resilience to the adverse shocks to the economy. Prior Action 6: The Cabinet has approved a draft Company Law thereby (i) abolishing the minimum capital requirementsfor limited liability's companies and (ii) eliminating the requirementfor depositing SO percent o f the capital o limited liability's companies in commercial banks. f The cost o f creating a company remains high in Jordan (in spite o f an improvement in 2008). Cmntly, the cost of creating an LLC amounts to 60.4 percent o f GNI per capita and the required minimum capital amounts to 24.2 percent of GNI per capita. Although much lower than the regional average, these costs are substantial compared to advanced economies were they respectively stand at 4.9 and 19.7 percent of GNI per capita. Eliminatingthese costs will foster f m ' s entry and thereforejob creation. Prior Action 7. The Cabinet has approved a draft Bankruptcy and Insolvency Law thereby deJning the priority order o secured creditors in bankruptcy cases. f The framework for bankruptcy and insolvency in Jordan i s severely limited by both legislative and institutional constraints. Legislatively, the provisions that affect insolvency are scattered across numerous acts, without clear coordination. This has resulted in confusion amongst stakeholders on a number o f issues, including such essential issues as secured creditor priority in bankruptcy. Moreover, there i s no clear legislative set o f tools for restructuring distressed companies in order to sell them as a going concern or to preserve enterprise value. Institutionally, there i s a distinct concern amongst market participants regarding the lack o f quality o f insolvency administration.40 This negatively impacts the conduct o f existing and future bankruptciesAiquidations.The clarification o f the priority order o f secured creditors through the Bankruptcy and Insolvency Law will provide clarity for stakeholders and greatly improve the bankruptcy and insolvency regime in Jordan, hence, allowing for easier market exit. Combined with improved entry conditions, this will foster greater competition on the market and help remove one o f the major impediments to private sector development in the country. Prior Action 8: The Ministry o Justice has institutedfully operational specialized commercial sections at f eight courts outside Greater Amman to improve the resolution o business disputes. f Contract enforcement and the resolution o f business disputes i s a key concern for firms in Jordan. Business disputes were mostly being resolved by the First Instance Court o f Amman which handled about 80 percent o f the cases. This implied delays and difficulties in enforcing judgments which were detrimental to a proper working o f the system as there was no specialization. As a consequence, it costed almost a third of the value of a claim and almost 2 years to enforce a contract in Jordan according to DB 2009. Under the GoJ plan for enhancing the business environment, specialized sections (Maritime Law, Companies and Commercial Agencies, Intellectual Property, Liquidation and Bankruptcy, Documentary Credit and Letter of Guarantee) have been created in the first court o f Amman since January 2009. However, similar specialized sections were missing in the remaining sixteen first instance courts o f the country outside Amman. Having such sections at eight o f the remaining courts through a decision o f the Judicial Council will facilitate the resolution o f business disputes and contribute to reduce the operating cost o f firms. 40 Doing Business (2009). Jordan: January 2009 Reform Memorandum, Washington DC. 27 83. I n parallel, the Companies Control Directorate o f the Ministry of Industry and Trade has expanded the one-stop-shop setting. Currently, the Companies Control Directorate o f the Ministry o f Industry and Trade has in place a unified form for company registration and also allows for on-line- registration o f companies, although e-payment o f fees and taxes i s not yet operational. Furthermore, at the one-stop-shop in its Amman location and four other locations in the country, it provides for services (municipality, public notary, Chamber o f Commerce, Industry Chamber, Income and Sales Tax Department) through specific offices in the same building. With this setting, a l l the documentation required or missing at the time a company i s to be registered can be obtained on the spot and this does not slow down the entire process. This system o f representative offices was needed in the four other locations where a one-stop-shop exists in Jordan (Karak, Madaba, Mafraq and Zahar) but where these supporting services were not available. Having in place representative offices for municipalities and the Income and Sales Tax Department will considerably help the process o f registration in the other locations, thereby fostering firm's entry and job creation. 84. Moreover, the Ministry o f Finance has initiated the implementation o f an online filing system for general sales tax return and an electronic payment system for corporate income tax and general sales tax. Since early 2009, an online filing system for Income Tax i s operational and, following a 2008 amendment o f the relevant legislation, limited electronic payment facilities have been made available. However, the system i s still in its infancy. Initiating the development o f an additional on-line filing system for General Sales Tax returns (with completion by mid-2010) and connecting the payment system to the e-government gateway from the Ministry o f Telecommunications will greatly improve tax administration for the benefit o f Jordanian firms by contributing to reduction in their operating costs. Social Insurance and Social Safety Net Reform A. Social Insurance Reform 85. This component supports the Government's objective o f improving the long term sustainability o f the social insurance system while expanding the scope o f the benefits to include unemployment insurance. To this effect, the regulatory framework o f the SSC will be reformed in the following areas: (i)old age, disability and survivorship pensions; (ii) work injuries and professional diseases; (iii) unemployment insurance; (iv) maternity benefits; and (v) health insurance. Prior Action 9: The Cabinet has approved a draft Unemployment Insurance Program, as part o the draft f Social Security Law, to provide unemployment insurance benefits to the members o Social Security f Corporation which consists o the following: (0 a flexible mechanism o unemployment insurance f f savings accounts (UISA) financed by contributions o employers and employees: (io provisions allowing f to use the balances o savings accounts or borrow >om accumulated pension rights with limits to be f determined by regulations; (iio coverage for all Social Security Corporation members after a minimum vesting period to be defined by regulations The unemployment insurance scheme i s a new program that i s being created under the Social Insurance Law, which will provide mechanisms to respond to adverse labor market consequences o f shocks to the economy, enhancing the structural long term impacts o f the Law. The scheme allows workers to insure against unemployment by being able, upon losing a job, to draw on savings generated while working (both workers and their employers contribute to workers' individual unemployment insurance savings accounts). The scheme thus provides income protection to job losers without worsening employment incentives. A simple and low cost mechanism will be set in place to finance unemployment benefits through individual accounts, UISA, and the accumulated rights in the current pension scheme. The design o f the UISA mechanism allows it to be introduced in a relatively 28 short period o f time, making it possible to serve as a response tool to the consequences o f the present economic downturn. B. Social Safety Net Reform 86. The main objective of this component i s to increase the efficiency and poverty impact of Jordan's social safety nets through acceleration o f the N A F Renewal Plan. Accelerating the NAF's renewal plan has become urgent as fiscal constraints and poverty concerns-especially given high exposure to external shocks-require that the poverty impact, and effectiveness and efficiency o f the social assistance be maximized. The renewal plan, which has recently started being implemented, consists of: (i) implementation o f a Management Information System to establish a Database on Poor and Vulnerable Population; (ii) strengthening NAF technical, administrative and benefit delivery capacity; and (iii)improving the targeting mechanism by adoption of the proxy-means testing (PMT) targeting method. The prior action for this component i s as follows: Prior Action 10: The National Aid Fund has initiated testing o new targeting mechanism that is f envisaged under the NAF Renewal Action Plan, including: (i) improved questionnaire Jnalized; (ii) database software developed; and (iii) data @om at least 2,000 households out o planned total 6,000 f collected. As part o f adoption of the PMT method, the NAF will test the new method on a nationwide sample o f 6,000 households, utilizing an improved questionnaire that incorporates adjustments to the targeting formula. Once the test has been completed, which includes the development o f the database and its population with the data on the households as well a the necessary training and administrative s capacity building, the NAF would be in position to expand the new targeting mechanism nationally. If successfully implemented, the NAF Renewal Plan i s expected to increase NAF coverage o f the target poor population (from the current 20 percent to closer to 70 percent in five years after adoption). It will also reduce the error of inclusion from (80 percent to closer to 30 percent). VII. IMPLEMENTATION OPERATION A. Consultations and Distributional Aspects 87. The DPL supports the Government's development program, which has been consulted with a broad range o f stakeholders. One o f the key objectives o f the National Agenda i s enhancing public participation in the decision making process and strengthening the role of the civil society institutions. In addition to the consultative preparation o f the National Agenda, the GoJ has made use of various consultation fora to develop reform and reach agreement since the adoption o f the Agenda, which increases the prospects o f successful reform. For instance, all draft laws in Jordan-including the recent ones related to the business environment, access to finance, tax regime, SSC law and the like-are being developed through consultative approach and put on an official government website to receive comments from the citizen^.^' This systematic approach to a public information and consultation strategy, in turn allows the GoJ to take into account all points o f views. The recent examples o f other GoJ consultation efforts are as follows: n 4 ' The Government has launched in 2007 a interactive website (www.lob,io). All draft laws and regulations are posted on this website for public comments prior to discussing them at the Legislative and Opinion Bureau and forwarding them to Parliament. In addition, the Legislative and Opinion Bureau, while reviewing the draft laws and regulations, invite government and non-government stakeholders to discuss them and reach consensus on their content and objectives. 29 0 Consultations in the business environment area have been on-going and extensive over the last two years. In February 2008, the GoJ organized a two-day conference to develop consensus- driven responses to findings from the Bank's June 2007 investment climate report. The conference was attended by more than 100 policy makers and private sector representatives. Breakout group discussions focused on key issues highlighted in the ICA survey: business start- up, contract enforcement and tax administration issues. Detailed feedback on implementing such reforms was delivered by the participants and provided the backbone o f the GoJ's current strategy. Since then, each agency participating in the Inter-Ministerial Committee in charge o f developing the strategy for enhancing the business environment has been receiving feedback from the private sector in its own area. 0 The CBJ consults with banks regarding proposed measures to improve reporting standards and managing risk. For example the draft `stress testing' guidelines were sent to banks for feedback through the Association of Banks, before they were finalized and issued. The draft private credit bureau law includes good practice consumer protection measures, to ensure that individuals benefit from increased access to lower cost credit, while at the same time being protected from inaccurate data on their records. The Legislative Bureau met with chambers o f commerce and private sector committees to consult on the draft credit bureau law. 0 In the case o f the social insurance reform, the SSC proposals have been developed through continuous and regular consultations with a wide range of stakeholders and widely disseminated since their inception. This included consultations with union representatives, employer groups, and others. The reform program received inputs and approval from the Board o f Directors o f the SSC in 2008, which i s a tripartite entity with representation of workers, employers and the government. The SSC also regularly publishes on its website information on the reform program including the actuarial assessments. 0 During the preparation of the World Bank supported Social Protection Enhancement Project (SPEP), a wealth o f information was gathered through consultations conducted with various NGOs, community representatives, NAF beneficiaries, and others. The consultations revealed that citizens expected the safety net programs to perform better by inter alia: (i) better specified criteria; (ii) providing NAF assistance in a fair and equitable manner; and (iii) linking NAF and the other cash assistance to training and work. The NAF renewal program also developed options for transitional arrangements for current beneficiaries who might not be eligible for assistance under the new targeting criteria. I t i s expected that after the completion of the nation-wide testing o f the new targeting mechanism, additional consultations with stakeholders will be carried out. 88. The measures contemplated under the proposed DPL are expected to ensure stability, support growth, and provide employment opportunities and better protection for the poor and vulnerable. To the extent that the measures allow economic recovery as the global economic distress turns around and increase growth in the medium term, employment opportunities should increase and the poor should benefit. While the DPL includes fiscal adjustment measures, these do not impact the basic social services at the lower income segments which are protected. 89. The overall fiscal adjustment measures aim at increasing confidence and investment funding to the economy while having positive social impact over the medium term. The fiscal policy dimensions o f the proposed operation are expected to have a positive medium-term social and poverty impact in a number o f ways. Firstly, rationalization o f inefficient preferential tax rates, which have created sectoral distortions by altering relative prices and harmed equity while having no tangible impact on prices or demand will contribute to putting Jordan's fiscal deficits on a downward-sloping path. This will also help maintain macroeconomic stability which, in turn, has been an essential ingredient o f any poverty reduction strategy. Secondly, these measures increase the government's fiscal space which i s 30 crucial for ensuring delivery of pro-poor social services. Thirdly, they remove price distortions and the resulting deadweight losses in economic activity, thereby promoting economic growth which has been the key factor in Jordan's poverty reduction over the recent years. Fourthly, rationalization o f tax preferences will improve investment decisions in Jordan by equalizing both before and after tax rates o f returns on investments in different industries, which will enhance economic growth as investment i s better directed to industries and geographic areas yielding higher rates o f return. On the expenditure side, the GoJ puts its emphasis on eliminating low-efficiency and wasteful spending without impacting basic social services. Any remaining adverse effects on the poor are expected to be addressed by strengthening o f the country's social safety nets which i s another component o f this operation. 90. The measures to enhance financial sector prudential supervision and regulation and increase access to finance are expected to have an indirect positive impact on poverty reduction. By reducing the exposure to potential vulnerabilities in the financial sector, the DPL measures help ensure that growth and the government's program on poverty reduction are sustainable. An expanded credit registry and credit bureau would open up access to loans for enterprises and people that banks would not otherwise have considered (including women and lower income borrowers), or who would have had to pay a higher interest rate. Restarting bank lending for SMEs through improving credit information and allowing the use of movable assets, would remove constraints to incomes and employment. SMEs are a principal source o f private sector employment in Jordan. E-payment mechanisms also hold significant potential to improve access to finance, at a lower cost, for rural and lower income populations. 9 1. The measures to strengthen the business environment will support growth and employment creation, key objectives of the Government. The measures aimed at reducing firm's entry costs, easing registration procedures (by improving the operation of existing one-stop-shops outside Amman) and rationalizing exit regulations will promote competition and favor a better use o f resources on an economy wide basis. Firm's operating costs should be reduced by improvements in i) contract enforcement processes (operationalization o f specialized commercial sections by nominating specialized judges in courts outside Amman); and ii)in tax administration procedures (online filing system for tax returns and electronic payment system) which will help existing firms to remain profitable. Overall, the combination o f measures aimed at improving markets contestability and reducing firm's operating costs should lead to improved profitability, higher firm entry and new employment opportunities, fostering output growth in the medium term which should benefit the poor. 92. While improving the long term sustainability and extending the coverage and scope o f social security benefits, the social insurance reform attempts to correct some o f the main sources o f inequality in the current system. Some specific mechanisms that will add progressivity to the social insurance scheme include: (i) change in the pension formula defining the pensionable salary as an average o f a period o f 3 years prior to retirement, instead o f the current rule o f 2 years;42(ii)introduction o f income-related accrual rates; (iii) extension o f social security benefits to workers in firms with less than 5 employee^;^' (iv) partial elimination o f some regressive benefits such as early retirement and subsidized n 42 The use o f last salaries to calculate pensions i s a important source o f regressiveness. While the new Social Insurance law will not adopt the recommended lifetime income to calculate pensions, the extension o f the reference period will certainly have a impact. In fact, this measure benefits workers with lower wage growth, often those n with lower level o f education and qualification. For this group o f workers, average o f lifetime career i s not different from the average o f the last two years o f salaries, so long as adequate wage valorization i s set in place. Hence, the extension o f the base period to calculate average pensionable wage i s expected to have a progressive redistributive impact. 43 The extension o f social insurance benefits to firms with less than five employees i s expected to have a positive redistributive impact. W h i l e the size o f the firm does not necessarily show positive correlation with the average income o f the employees, many small firms o f the quasi formal sector with lower productivity and average 31 purchase o f years o f service;44(v) social insurance for the unemployed; (vi) maternity benefits financed through contributions on all employers. Although unemployment insurance i s defined in the new draft Social Security law as a system o f individual accounts, the provision o f resources partially financed through employers' contributions will increase the protection o f workers who become exposed to the risk o f losing their jobs. In the current system incentives to hiring women are low, since women employees or their employers have to bear the costs associated with maternity leave. This also increases the wage differential between men and women. The introduction o f maternity benefits in the new draft Social Secuity law will tend to correct this undesirable redistributive impact by imposing the burden of financing to all employers based on a payroll contribution on salaries o f men and women. 93. Concerning the distributional impact of the N A F renewal, simulations have shown that the new PMT-based targeting formula performs much better in terms of reaching the population below a certain threshold than the current targeting mechanism. While the current system covers 20 percent of the households with per capita annual consumption expenditures below JD396, the new targeting mechanism could reach 8 1 percent o f such households. Raising the poverty line to JD504 increases the number o f households below it and understandably worsens the targeting outcomes o f both systems. However, even in the case o f the higher poverty line, the new targeting methodology was shown to be able to reache four times more of these households than the current mechanism (62 percent vs. 15 percent), potentially significantly improving poverty outcomes. In terms o f cost efficiency, the simulations indicate that the new targeting methodology will be much more cost-efficient in comparison to the current system. Currently, for each JD that i s transferred to those with per capita consumption below JD 396 per year (the target group), the NAF spends about JD 10, because of the high error o f inclusion. The proxy-means formula improves this ratio to 1:2.5 due to 80 percent coverage and a significantly reduced error o f inclusion. The NAF renewal plan also provides an opportunity to strengthen management and monitoring o f programs by NAF through much greater reliance on ICT for evidence- based administration of the programs. The forthcoming implementation o f the new system on a nationwide sample of 6,000- 10,000 households, which the D P L focuses on, will provide further valuable feedback on the distributional impact o f the new targeting mechanism and guide necessary improvements prior to its nation-wide implementation. B. Environmental Aspects 94. This operation i s a development policy loan in support o f a program o f reforms for which the environmental requirements o f OP03P8.60 apply. Overall, policies supported by the proposed loan on are not likely to have any significant direct effects45 the environment and natural resources and safeguard policies (such as OP 4.01 Environmental Impact Assessment) do not apply to this operation. salaries will become contributors, therefore extending the benefits o f SSC membership to their workers. 44 Early retirement benefits and purchasing years o f service also have a negative distributional impact. Because the penalties and costs are not actuarially fair at present, these mechanisms allow to substantially increase the implicit rate o f return to higher income workers who can benefit from them. The new law will change the rules to discourage and increase penalties to workers who opt for these extraordinary mechanisms to become eligible for pensions. 45 Business environment reforms under this operation focuses on improvement o f the operation o f existing facilities (one-stop-shops, courts) and/or in firm's operating costs and should not create risks for proper environmental due diligence within Jordan's legal framework. Similarly, changes in expenditure policies are intended for wasteful and/or low efficiency spending and do not target environmental budget or regulatory functions. 32 C. Implementation, Monitoring and Evaluation 95. The responsibility for implementing the program in Government rests with the Ministry of Planning and International Cooperation (MoPIC). The MoPIC i s responsible for the implementation of the DPL operation as well as for coordinating the actions among the concerned institutions (such as Ministry o f Finance, Central Bank, Ministry of Industry and Trade, Ministry o f Justice, Ministry o f Social Development and Social Security Corporation). Together with MoPIC, these institutions collect the necessary data for the identified monitoring indicators. The MoPIC and the Bank have agreed to monitor the progress in the program supported by the DPL and its evaluation will serve to inform preparation o f a new Country Assistance Strategy (scheduled for FY2011). D. Fiduciary Aspects 96. The overall fiduciary risk rated as "Moderate" based on the Country Financial Accountability review conducted during the preparation o f the proposed DPL.46 This rating reflects existing sound legislative framework in the Public Financial Management (PFM) area, the Government's implementation track record with the PFM reforms so far and its strong commitment to complete the implementation o f ongoing major PFM reforms. Among the key reforms with importance in the fiduciary context, notable progress has been achieved in particular: towards increased coverage o f the treasury single account (TSA); transfer o f donor-financed projects to the respective budgets of implementing ministriedagencies; towards integrated computerization of the accounting and reporting system; the enhancement o f debt management; and, the introduction of the GFMIS, which paves the way for modernizationof the internal control framework. 97. Looking forward, the Government aims at sustaining implementation progress in the PFM reforms agenda. In areas with importance in the fiduciary context, the Government has time-bound action plans and aims to advance key reforms as follows: e Treasury Single Account (TSA): At present, the TSA covers 80 percent o f Central Government (CG) expenditure and 60 percent of the larger General Government. To increase coverage, the Treasury i s currently finalizing the bidding process with the banking sector in order to transfer the remaining CG deposits from commercial banks to the TSA. The selected candidate bank will be able to act in regions where the Central Bank has no offices thus allowing the implementation o f zero balance accounts for ministries and agencies located in these regions. The treasury objective i s to include in the future also the deposits o f all independent agencies once the necessary legislative framework to this end i s in place. Three regions have been selected to be pilots for the daily fund transfers before the zero balance accounts are applied on a country-wide basis. The pilot phase i s expected to last six-months, with full TSA implementation i s expected by mid- 2010. The Government Financial Management Information System (GFMIS): The establishment of the GFMIS-which will automate 30 ministries and 15 fund centers when completed-is on track with minor delays vis-a-vis the original plan. The software has been developed and the final testing before going live in selected locations i s currently being performed. After testing the six pilot locations, the system will be rolled out to all users. Based on the existing implementation 46 Among the background documents reviewed were all the relevant assessments by the World Bank (Including n a Institutional Financial Management Capacity Assessment (IFMCA) for the Education, and Social sectors with an update o f the Government-wide PFM system), IMF, and other donors (including the 2007 PEFA); the field work validated the progress made under the treasury single account (TSA) and on the GFMIS implementation. 33 plan, the pilot locations are expected to be operational by November 2009 and the final rollout o f the system to all locations will take place during May 20 10-June 20 1 1. External Audit: To enhance i t s independence, the Audit Bureau phased out pre-audit activities in 2007, to the benefit o f ex-post controls and audit. Also, it entered into agreement through twining arrangements with the UK National Audit Office and the German SA1 to enhance i t s capacity through support and transfer o f knowledge from the two institutions. In parallel, an amendment to the audit law i s currently being examined by the Cabinet. The amendment will provide the Audit Bureau with greater financial autonomy, thus increasing independence. 98. Continued progress with implementation o f key PFM reforms will help contain fiduciary risk over the coming period. This particularly concerns the following areas: (i) more comprehensive a accounting and reporting system to cover extra-budgetary funds, quasi-fiscal activities, arrears and contingent liabilities and align with acceptable public sector accounting standards; (ii) greater coverage and improved GFMIS specifications to include the extension o f GMFIS to the whole o f the budget and central government accounts domain, and improved features for commitment control; (iii) enhanced cash management through full implementation o f the Treasury Single Account; (iv) the establishment and implementation o f a system o f modern internal audit; (v) enhancement o f the quality o f the external audit function by the Government Audit Bureau including compliance with the standards o f the International Organization o f Supreme Auditing Institutions (INTOSAI) for the conduct of audits - to support an opinion on the fairness of the presentation o f the government's financial statements. 99. The MoF i s monitoring progress with PFN reports through steering committees created to manage the reforms. Each department has an action plan in place with target dates and these are monitored through periodical meetings and updates to the minister and director general. Going forward, the attention should move gradually to enhancing the internal controls in line with the new control environment and modernization o f the internal audit function. Material progress in these areas would lead to a reduced fiduciary risk to "low-moderate" level in the horizon o f 20 10-2011. E. Disbursements 100. The proposed loan will follow the Bank's disbursement procedures for development policy support. Once the loan i s approved by the World Bank's board and becomes effective, the proceeds o f the loan will be disbursed in compliance with the stipulated release conditions as defined in the DevelopmentPolicy Loan Agreement and in a single tranche. 10 1. Flow o f funds (including foreign currency exchange) i s subject to standard public financial management processes. As the loan proceeds will be deposited into the government treasury deposit account in local currency (hereafter referred to as the TSA), it will be not possible to track the ultimate use o f the foreign exchange provided by the DPL proceeds. However, the proceeds o f the loan will flow into a dedicated foreign currency deposit account to be set up at the CBJ and from it to Government o f Jordan's budget account being the TSA opened at the CBJ. The loan proceeds, being deposited in the TSA, will be subject, when disbursed by the government, to standard public financial management processes and CBJ procedures. By way o f a letter, the Government will confirm to the Bank once the loan amount has been credited to the TSA which i s being used to finance budgeted expenditures. The diagram below depicts the envisaged flow of funds arrangements: World Bank - CBJ USD Dedicated Deposit Account MOF JD TSA Account - CBJ Budget Jordan PFM System 102. The CBJ will conduct a special transaction audit o f the dedicated account established in the CBJ to deposit the loan amount. The audit will cover the accuracy o f the transactions o f the dedicated account, including accuracy of exchange rate conversions; that the dedicated account was used only for the purposes o f the operation where no other amounts have been deposited into the account. Also the auditor will have to obtain confirmation from corresponding bank(s) involved in the funds flow regarding the transaction. The audit should be conducted three months after all funds are transferred to the dedicated account and then transferred out o f the dedicated account into the Government budget account (TSA). The time period for submission o f the audit report to the Bank i s 6 months after the date o f the Bank's request. F. Risks and Risk Mitigation 103. Economic risks. The global crisis continue to unfold, exposing Jordan's economic prospects to risks driving from further weakening o f global, and particularly Gulf, economy. At the source o f these risks are still high level of public debt, large twin deficits and heavy dependence on remittances and foreign aid. While the risk o f external instability arising from the capital account i s mitigated by the fact that external debt i s owed predominantly to official creditors, and reserves provide comfortable liquidity cover relative to short-term liabilities, heavy reliance on regional liquidity to sustain financing inflows translate into high external vulnerability. Exports, including tourism, and remittances could slow more sharply than anticipated as a result o f the regional economic slowdown, while tighter liquidity in the Gulf countries may lead to lower capital inflows and grants. Lower economic activity and lower international prices, on the other hand, checks the growth o f current account imbalance. If financing further dries, the contraction o f real GDP and the increase in unemployment would be more pronounced over the coming year than anticipated. This would strain the banks and the corporate sector and would also create difficulties for the achievement o f the fiscal targets. The risk of gradual economic recovery has been incorporated into the macroeconomic projections. The risk o f external financing difficulties i s mitigated by largely prudent policies supporting a measured external adjustment and adequate liquidity, Jordan's relative attractiveness to Arab investors, and significant donor support, including bilateral support from the US and Gulf states. 104. Weakening political support. A prolonged and deeper domestic slowdown could add to social pressures, lead to backsliding on resumption o f more disciplined approach to expenditure management policies, and adversely impact the health o f the financial sector. In 2008 a resumption of expansionary fiscal policy in response to price shocks has led to adverse public debt dynamics and increased reliance on donor grants. This risk i s addressed by the fact that key measures, such as control over excessive tax exemptions and capital spending, and elimination o f remaining key subsidies, which will reduce fiscal pressures, are already being implemented as prior actions. Furthermore, the Governments medium-term fiscal framework which establishes the expenditure ceilings for 20 10 budget and indicative ceilings for the next two years, constrains the room for excessive spending without matching revenues. The risks in the banking system have been further addressed through an active CBJ approach to identify risks and strengthen the supervisory powers. Similarly, major risks related to the implementation o f specific program components are not foreseen because the reforms are mature, supported by technical assistance and widely discussed within the Government and with key stakeholders and donors, 35 ANNEX 1 Page 1 o f 9 Hashemite Kingdom of Jordan Ministry of Planning and International Cooperation Office of the Minister October 18,2009 Mr. Robert Zoellick President World Bank Washington D.C. Ref.: Letter of Development Policy for the Recovery under Global Uncertainty Development Policy Loan Dear Mr. Zoellick: Over the last decade, Jordan's development process has been marked by the enormous progress made in economic liberalization-particularly in opening the trade regime and liberalizing private investment regime-in establishing modern regulation and institutions for the private sector development and privatization, in strengthening public financial management system, and in building human resources through a comprehensive education sector reform. The process of structural reforms has been accompanied by a painful fiscal consolidation that has steadily reduced government debt from above 200 percent of GDP in the early 1990s, to 62.4 percent by the end of 2008. A l l these achievements have helped our country establish a sound record as one of the lead reformer in MENA. Despite the difficult regional political environment and our limited natural resources, we have achieved above-average development outcomes within our income group. Underpinned by our strong trade links with the region, our economy has shown strong performance since 2000 with annual real GDP growth averaging 7.5 percent and per capita GDP more than doubling. Growth has been broad based, led by manufacturing, construction, real estate and services sectors. Commensurate with strong growth in investments and GDP, labor force growth in Jordan has been strong. However, the unemployment among nationals declined slowly (from 14.5 percent during 2000-05 to 12.7 percent in 2008). Inflation remained low (except for the surge in 2008 driven by international oil and food prices) and although the external deficit widened, sizable FDI inflows enabled a steady and sizable increase in international reserves. While this can be credited to sound development policies which attracted substantial capital inflows, Jordan i s vulnerable to adverse external events, such as the recent increase in world oil and food prices and the global recession as well as deterioration in external flows. Achieving sustained growth and reducing unemployment and poverty are the main development challenges and the key priorities of the Government. Since 2005, Jordan's National Agenda put i t s emphasis on transforming Jordan into a modern knowledge-based economy with higher value added, increased productivity, employment and welfare through sustained and broadly-shared growth, while achieving fiscal sustainability. Modernization of the country's ANNEX1 Page 2 of 9 economic, institutional and political infrastructure, reforming education, improving the business environment, and attacking deep poverty are at the core of this long-term development strategy. The National Agenda distinguished three consecutive phases: the first phase (2007-2012) i s focusing primarily on improving the business environment, creating employment opportunities, and building the skills needed for the knowledge economy. The second phase (2013-2017) focuses on strengthening the industrial base, and preparing the ground for the development of high value-added sectors in the knowledge economy. The final phase (2018-onward) would complete Jordan's transformation to a world class competitor in the global knowledge economy. The first phase of the National Agenda includes multi-ranging development areas. Among these areas are political development and inclusion, justice and legislation, investment development, financial services and fiscal reform, employment support and vocational training, social welfare, education, scientific research and innovation, and infrastructure upgrade. The Government programs approved since then, including the executive program for Kuluna a1 urdun (2007-2009)--"We are all Jordan" initiative-have been consistent with the goals of the National Agenda, and further defined and complemented i t s socio-economic objectives by setting up short- to medium-term implementation initiatives aiming also to increase participation and inclusiveness. In pursuing our development goals, we are now facing a harsh international environment marked by the increase and volatility in hydrocarbon and commodity prices over the past few years, and, more recently, the outbreak of the international financial crisis, which quickly triggered an economic recession, primarily in developed countries. Jordan's real economy has been subjected to the repercussions of this crisis through three channels: sharply lower global and regional growth outlook (which affect exports and remittances), declining global oil prices (which have a positive impact on trade deficit but a negative impact on transfers and capital account), and declining private capital flows to developing countries (which were a major source of growth for Jordan in the recent past). Reflecting these effects, domestic economic performance has worsened since September 2008. The collapse in commodity prices favored a reduction in expenditures through a decline in budgetary subsides but also generated a drop in tax revenues because of lower prices and lower economic activity, leading to increase in our financing requirement. Also, while improving the current account balance, the decline in international prices and more broadly global turmoil has reduced foreign inflows, and negatively affected growth. In light o f this, the Government of Jordan has responded to the global economic crisis by accelerating the structural reforms which have been under preparation over the last several years and by short-term policy actions aimed at addressing or preventing immediate adverse impact of the crisis on the economy. The main objectives o f our policy measures are to: (i) reduce the fiscal vulnerability by broadening tax base, and enhancing effectiveness of government expenditures; (ii)increase resilience of the financial sector by further strengthening regulation and supervision, and improving access to credit; (iii)improve the business climate to encourage more private sector investment; and (iv) facilitate access of vulnerable groups to a more effective and fiscally sustainable social protection system. These measures represent the continuation of past development policies and programs and are based on the achievements of previous years at the same time as they draw on goals for the future to achieve the established key objectives o f the National Agenda and to strengthen the adaptability and the competitive positioning of the national economy. ANNEX 1 Page 3 o f 9 I. Experience and Achievements to Date Fiscal Adjustment and Reforms Our National Agenda calls for radical fiscal reforms to improve budget performance and increase Government efficiency. It puts a particular emphasis on addressing expenditure pressures in order to control the budget deficit especially to address vulnerabilities due to the expected decline in foreign grants and increase in international oil prices over time. Among the key reforms to improve the budget performance were (i)phasing out oils subsidies by 2007 along with eliminating other subsidies; (ii) pension reform; (iii) reform o f civil service pay and grading system to improve productivity; (iv) accelerating privatization and channeling the proceeds to facilitate the fiscal reforms; (v) tax reform to simplify the procedures, ensure fairness, broaden the tax base and improve collection performance; and (vi) modernization o f customs administration. We have made a considerable progress in implementing and or initiating most o f these critical reforms, which will strengthen fiscal management. Gradual elimination o f the o i l subsidy significantly helped our fiscal position in recent years. As part o f our fiscal consolidation plan under the National Agenda, we took a decision to gradually eliminate the subsidy scheme: oil prices increased by almost 270 percent between July 2005 and April 2006 and the oil price subsidy eliminated as o f February 2008. Our budget deficit excluding grants declined from about 12.0 percent o f GDP in 2004 to 6.6 percent in 2006. However, in the face of sharp increase in hydrocarbon and commodity prices between 2007 and 2008, associated loss in real income for low and middle income groups, particularly in 2008, has largely been compensated by fiscal measures (including tax reductions and exemptions, various subsidies/transfers and substantial public sector pay increase). As a result, there has been an erosion o f fiscal gains achieved over the previous years with the budget deficit excluding grants increasing to 9.4 percent in 2008. Fiscal pressures further increased this year with lower tax revenues than expected under the 2009 budget law despite some savings from budgetary subsidies due to sharp decline in international commodity prices. In response, we are putting our emphasis in the near term on preventing further increase in the budget deficit over and above 2008 level by bringing the implementation rate of the capital budget close to the recent year's average o f about 85 percent, by rationalizing tax exemptions and by disciplining public consumption. Over the period ahead, our emphasis will be on both continued public financial management reform and key structural reforms that are critical to maintaining good economic performance, and achieving faster decline in poverty. We have made a substantial implementation progress in public financial management reforms. A number o f PFM reforms are currently underway, following the introduction of a three- year medium term expenditure framework (MTEF) with the 2008 budget, a new Chart o f Accounts, revision to the budget planning timetable to allow for the Budget to be promulgated prior to the start o f new fiscal year and revision o f Jordan's Organic Budget Law. These reforms include installation o f a Government Financial Management Information System (GFMIS), completion o f a Treasury Single Account, further development o f the MTEF, and implementation o f steps towards the introduction o f some results-orientation in the budget process. When it becomes operational, the GFMIS will significantly improve data reliability and will enable more timely and accurate centralized accounts reconciliation. Concerning the public expenditure management and the MTEF reforms that were initiated in 2007, significant progress has been achieved in a short time although we are still at an early stage o f these reforms. Among the achievements are: enhancement o f the macroeconomic and fiscal analysis underlying the Budget; extension o f the budget planning horizon to three years; adoption ANNEX 1 Page 4 of 9 o f improved procedures for setting ministry resource ceilings; introduction o f performance indicators into the budget documentation; and piloting o f new policy-led budgeting procedures in some ministries such as Health Care and Education. Looking forward, our emphasis will be on strengthening the linkages between planning and budgeting with stronger focus on the efficiency and impact of public spending (both current and capital) in budget analysis and preparation, including through enhancing the strategic phase of the MTEF/budget preparation. Financial Sector Reforms The National Agenda puts its emphasis on strengthening governance and structure o f financial services, facilitating funding to start-ups and SMEs, and developing the insurance sector. Through these reform, we aim at consolidating the substantial progress that the banking and insurance sectors made in updating the organizational frameworks and control procedures governing company operations as well as in introducing new financial instruments, and increasing competition and focus on retail banking. Over the last few years, the Central Bank o f Jordan (CBJ) has continued to carry forward the strengthening agenda through further development o f bank supervision and ongoing updating and issuance o f a number o f regulations which has brought Jordan more closely in line with international standards. Some o f the areas addressed through this effort include, inter alia: prompt corrective action, licensing, asset and liability management o f foreign currency, business continuity, asset classification, corporate governance, internal control, and liquidity requirements for Islamic banks. The CBJ has required banks to comply with the Basel I1 Capital Accord, effective 2008, while requiring much more focus by banks on risk identification, anticipation, and management processes. Preparation o f an annual Financial Stability Report has begun, increasing the transparency of banking sector condition as well as policy making. The CBJ has also taken a number of measures to promote financial sector stability in the wake o f the global financial and economic crisis. Banks are being encouraged to build capital buffers, both through increased profit retention and through capital injections by shareholders, and the CBJ continues its efforts to oversee the implementation o f the Basel I1 capital accord. The staffing of the supervisory function has recently expanded with the employment o f fifteen new staff and a new on-site supervisory manual i s in the final stages o f preparation. Global consolidated supervision i s also being pursued. The CBJ recently conducted examinations o f selected bank operations o f Jordanian banks abroad and intends to continue this program o f supervisory visits in the coming year. In this context, it has increased contacts with foreign supervisory agencies and has established memorandums o f understanding with thirteen foreign financial sector regulators and two domestic regulators. Furthermore, plans for a formal consolidated supervisory approach are being prepared which will include, inter alia, continuation o f supervisory reviews o f Jordanian banking operations abroad, periodic supervisory monitoring o f consolidated banking entities, and further interaction with other supervisors. A review o f the existing legal framework to determine if it provides adequate scope to execute comprehensive consolidated supervision will also be conducted. Currently, the CBJ i s in the process o f enhancing the implementation of stress testing o f banks and indentifying follow up actions. Going forward, the exercise will be conducted annually and will be used to assist in identifying and analyzing various forms o f banking risk, to contribute to the analysis of capital adequacy under different scenarios, and when necessary, to identify the possible need to require remedial actions from banks. Likewise, it will provide banks' and the ANNEX1 Page 5 of 9 CBJ an additional tool with which to identify developing systemic trends. The CBJ and banking sector are also in the process of undergoing a complete revamp of their statistical and regulatory reporting. Through this initiative we aim to upgrade and automate regulatory reporting so that it feeds into the Early Warning System; provide additional granularity needed to accumulate data 1 series to measure compliance with Base1 1 ; meet the (standardized) statistical data reporting configurations prescribed by IMF; and present the monetary and banking statistics on the website (and elsewhere) with more depth and accuracy. The first run pilot test for system-wide reporting i s currently scheduled for the end of 2009. The National Agenda emphasizes the importance of access to financial services for socio- economic development, in particular for SME development and for the poor and marginalized. The National Microfinance Strategy that i s adopted in 2005 sets out a market-oriented vision for microfinance, with the public sector providing an enabling policy and legal framework, and not directly providing financial services. Jordan has one of the highest rates of market coverage (46 percent) for microcredit in the region. Microfinance institutions lend to low income borrowers (average loan balance i s less than one-third of GDP per capita) and to women, who constitute 84 percent of microfinance institution clients. Microfinance institutions are not allowed to also directly offer savings and payment services, so broader microfinance access i s much more restricted. More recently we initiated wide ranging legal and financial infrastructure reforms to broaden access to financial services. The CBJ has embarked on lowering the threshold on credit reporting by banks, while improving the timeliness and quality o f the reported data in the public credit registry. The Ministry of Industry and Trade has led the preparation of a draft law to allow the creation of a private credit bureau, which would further reduce credit risk by including information on all borrowers, by including non-bank lenders such as financial and leasing companies, and by enabling banks to expand SME and consumer lending safely using credit rating and scoring techniques. Collateral constraints to increased access to finance have also been eased alongside credit information deficiencies, through the 2008 Financial Leasing Law. We expect to achieve further progress through a Secured Transactions Law that would allow the use of movable assets as collateral and out-of-court collateral enforcement. Finally, we consider telecoms and payments innovations as another avenue for improving access to finance in Jordan. Business Environment Reforms A key element of our development strategy i s to make Jordan an attractive location for knowledge-based private investment in order to support further job creation. This rests on the fact that the earlier waves of structural reform initiated in the mid 1990s did not trigger a sufficient private sector response to significantly affect unemployment. To complement these reforms, we broadened our free trade agreements (in the region, with EU and the USA) and engaged in an extensive privatization program. By 2006, cumulated privatization receipts reached above 13 percent of annual GDP, and above 10,000 new direct and indirect job opportunities were created owing to privatization and opening up the sectors to private investments. In order to further expand these gains we adopted a more strategic approach to capital formation in 2008, combining efforts to improve the investment climate and attracdencourage private business investment, which involves promoting Public Private Partnerships (PPPs) for selected infrastructure investments, and reserving the Government-only investment for general public goods. In parallel, we increased our emphasis on the depth and pace of reforms to enhance the ANNEX 1 Page 6 of 9 business environment. In 2008, we established a Committee to coordinate and facilitate faster improvement in the business environment headed by the Ministry of Planning and International Cooperation. The Committee, which includes representatives of ministries and agencies concerned, devised a strategy to improve the business environment in Jordan on the basis of the framework provided by the World Bank's Doing Business report, and key areas of concern underlined by the 2007 Investment Climate Report. Key areas in this plan include: Improving entry and exit regulations to foster competition, In mid-2008, we reduced the minimum required capital to establish an LLC (from 795 percent o f GDP per capita in 2007 to 24 percent in 2008) to encourage businesses to enter the formal sector. We are now aiming at abolishing both the minimum capital requirements for LLC and the requirement for depositing 50 percent o f the capital of LLCs in commercial banks within the upcoming new Companies Law. Other measures in motion include expanding facilities for e-payment of registrations fees and taxes, expanding the one-stop-shop with specialized offices (municipality office, public notary, chamber o f commerce, chamber of industry, Income and Sales tax office) for company registration in additional locations and introducing a new Bankruptcy and Insolvency Law. Improving the tax administration process. A l l tax forms has been simplified since late 2008 and an investor's guide to all taxes in Jordan has recently been prepared (April 2009). In early 2009, an online filing system for Income Tax has become operational and, following a 2008 amendment o f the relevant legislation, limited electronic payment facilities have been made available through the proprietary I T system of the Income and Sales Tax Department. While this i s a major improvement, the system i s still in i t s infancy. In the coming period, we plan to significantly improve and expand the system. Improving further the working o customs in order to facilitate trade. The introduction of the f ASYCUDA World System and i t s integration with the Single Window system currently operational in Aqaba, the Comprehensive Integrated Tariff System, and many other Customs systems since April 2009 will increase the efficiency of the Customs clearance process and therefore greatly facilitate trade. Improving contract enforcement procedures. Since early 2009, specialized sections (Maritime Law, Companies and Commercial Agencies, Intellectual Property, Liquidation and Bankruptcy, Documentary Credit and Letter of Guarantee) have been created in the first court of Amman which handles roughly 80-85 percent o f the civil cases (incl. business disputes) in the country. In addition, a computerization of case management and an electronic filing system are now being implemented in all courts. In the upcoming year, we plan to create similar specialized sections in the remaining 16 first instance courts of the country outside Amman. This new system should better facilitate the resolution of business disputes once it i s fully operational. We have also increased our emphasis on strengthening the framework for investment development and growth across regions. A new draft Economic Zones Law has been prepared. In order to rationalize the management of the zones and the incentives which are provided for investors, this law proposes the establishment of a single authority that will merge the tasks of overseeing the activities of three existing categories of zones (development, free and industrial zones). This new authority will be autonomous, and will have the ability to conduct management of the zones and establish other contracts (including contracts related to selling and renting land). In addition, a new Investment Promotion Law i s being drafted for discussion in the upcoming session o f the Parliament. I t aims to transform Jordan Investment Board into a pure investment promotion agency without any kind of registration activities. ANNEX 1 Page 7 o f 9 Social Insurance and Social Safe@ Net Reform Among the core themes of our National Agenda i s social welfare which consists o f three priority areas: (i) public health care, (ii)social security and (iii) poverty alleviation. In public health care, the main challenges being addressed are developing a cost effective medical insurance system to cover all Jordanians, reforming health sector policies and improving the institutional framework, and enhancing the operational efficiency o f the public health care system. In social security, we embarked on a reform plan to expand coverage, revise benefits and eligibility criteria, and ensure financial sustainability of the Social Security Corporation (SSC). In the poverty alleviation area, our priorities have been to reduce poverty rates via a series o f strategic and institutional reforms, including renewal of the National Aid Fund (NAF), providing assistance to the unemployed poor to integrate in the workforce, increasing penetration o f microfinance services in poor communities, among others. The social security system o f Jordan provides old age, disability and survivors' pensions but i s not financially sustainable as currently structured. It covers 36 percent o f the labor force at a cost o f 5.7 percent o f GDP-among the highest in the region. The conclusions o f different analysis conducted jointly by the SSC and World Bank reaffirmed the urgent need to introduce reforms to make the system sustainable in the long term. In addition to this, there i s a need to substantially increase the scope o f the social security programs in areas such as maternity benefits, unemployment and health insurance. The SSC has prepared an ambitious reform proposal addressing the most critical issues embedded in a new draft Social Security law. I t includes the following: (i) adjusting pension benefit formulas and eligibility conditions to ensure financial sustainability and equity; (ii) expanding coverage by extending the mandate to contribute to firms o f less than five employees; (iii) introducing savings mechanisms to protect workers against the risk o f income loss due to unemployment; (iv) introducing maternity benefits to finance maternity leave currently paid by employers to eliminate a significant disincentive to hire women; and (v) introduce social health insurance mechanisms. The Government has approved this law in June 2009, the discussion of which was initiated in the July-August 2009 extraordinary session o f the parliament. As part o f the reform process, the SSC also developed a comprehensive program to build institutional capacity with the support of the World Bank and other partners. The reform o f the social safety net and the renewal o f the National Aid Fund i s another area o f top priority. Overall, Jordan has most o f the programs commonly found in a relatively well developed and diversified social safety net system. The objective o f the safety net reform i s to improve the operations and management, coverage of the targeted poor population, and targeting efficiency and effectiveness o f the cash assistance extended to the population through the NAF. Total public spending on safety nets i s estimated at more than 1.O percent of GDP, with two- thirds (0.6 percent) spent through the NAF. The total number o f beneficiaries i s estimated at about 8-10 percent o f the population, with NAF reaching 4.0 percent of the population. While the total amount o f benefits would be more than sufficient to eliminate chronic poverty, recently completed studies suggest that this requires addressing factors that limit the relative efficiency and effectiveness o f the NAF, including improving the targeting method and strengthening NAF administration, with emphasis on increased use o f Management Information System in managing and monitoring programs. We aim to address both o f these issues through implementation of the NAF Renewal Plan in partnership with the World Bank, which i s expected to increase NAF coverage o f the target poor population and reduce the error of inclusion. ANNEX 1 Page 8 o f 9 11. Objectives and Components of the Program In this context, we consider the support o f the World Bank though the Recovery under Global Uncerfainty Development Policy Loan to be important. The aim o f the loan is to support polices adopted by the Government to promote economic recovery and improve the resilience o f the Jordanian economy through the following actions: Reducing tax exemptions that distort relative prices and create inequity, and scrutinizing tightly introduction of future preferential tax rates via Cabinet decision threby: (i) eliminating all tax exemptions without specific duration or amount and issued through its authority; (ii)making Cabinet consideration o f any new exemption conditional on an explicit framework that identifies the rationale, costs in foregone revenues, and establishes a specified duration; and (iii) clarifying that no tax exemptions will be proposed through non-tax legislation. Enhancing fiscal sustainability through (i) a revised 2009 budget as a baseline for the medium-term fiscal framework (2010-12) in which 2009 public expenditures, other than subsidies, were reduced by at least 4.0 percentage points o f GDP compared to original 2009 budget; and (ii)2010 Budget Circular with a comprehensive policy framework-including stable wage and salary expenditures in terms of GDP compared to 2008-09 and termination o f remaining subsidies for oil derivatives and barley-and resulting expenditure ceiling, which translates into a lower budget deficit before grants by at least 1 .O percentage point of GDP over 2009. Enhancing budget calendar to strengthen the initial strategic phase of budget preparation, during which budget performance, strategies and priorities are reviewed and medium-term spending requirements evaluated, This decision i s important as the new calendar includes a Cabinet level consultation in the first quarter of each year on the key parameters and issues underlying the development o f the MTEF based on a Budget Policy and Priorities Paper. Expanding analysis o f banking sector risks through issuing guidelines on stress testing to individual banks, and completing stress testing of selected banks, which, in turn, will inform our follow-up approach. Initiating a process o f broadening and strengthening the CBJ's consolidated supervision procedures through a plan to conduct consolidated supervision o f the relevant banks in the sector. Among the steps we plan are ensuring that the CBJ has adequate legal scope to effectively conduct comprehensive consolidated supervision; undertaking targeted examinations of inaterial foreign operations of Jordanian banking entities to infonn design of the relevant supervisory strategy(s); securing MOUs with the relevant host countries o f Jordanian banking operations; and regular update o f supervisory strategies to include documentation and oversight of banking group(s) overall organizational configuration, governance structures, group risk profiles and the like. Government commitment to address the lack o f information on potential borrowers that constrains S M E and individual lending in Jordan via approval by the Cabinet o f a draft Credit Bureau Law that provides a framework for sharing borrower credit information and history for both bank and non-bank borrowers, and that gives borrowers the right t o verify their data. Increasing the CBJ's ability to effectively monitor risk in bank lending while providing aggregate portfolio information for banks to enhance their credit scoring models via reducing the reporting threshold to the public credit registry initially from JD30,OOO to JD20,000, thereby doubling the number o f bank borrowers covered. ANNEX1 Page 9 o f 9 Government commitment to eliminate high costs o f creating a company via approval by the Cabinet o f a draft Company Law, thereby (i) abolishing the minimum capital requirements for limited liability's companies and (ii) eliminating the requirement for depositing 50 percent o f the capital o f limited liability's companies in commercial banks. Fostering firm's entry and job creation through expanding the one-stop-shop and representative offices setting (already existing in Amman and five other locations in the country) to the four locations which have not yet any representative offices, with offices for municipalities and the Income and Sales Tax Department are fully operational. Government commitment to improve the bankruptcy and insolvency regime in Jordan and provide clarity for stakeholders, hence, allowing for easier market exit via approval by the Cabinet o f a draft Bankruptcy and lnsolvency Law thereby defining secured creditor priority order in bankruptcy cases. Improving the resolution of business disputes and contributing to reducing the operating cost of firms through instituting fully operational specialized commercial sections at eight courts outside Greater Amman. Improving tax administration for the benefit o f Jordanian firms by contributing to reduction in their operating costs through initiating the implementation o f (i)an online filing system for general sales tax return; and (ii)an electronic payment system for corporate income tax and general sales tax connected to the e-government gateway. Government commitment to establish mechanisms t o respond to adverse labor market consequences of shocks to the economy via approval by the Cabinet of a draft program to provide unemployment insurance benefits to the members o f Social Security Corporation, as part o f the new draft Social Security Law. Initiating the process towards improving the effectiveness o f the NAF by testing (on a nationwide sample) the new targeting mechanism that is envisaged under the NAF Renewal Government o f the Hashemite Kingdom o f Jordan requests the e Yours sincerely, Suhair AI Ali Minister I w h n 2 5 E -1 M .- * e v) P $ id - - h: 8 0 0 9 - \o m Y 0 Y B - e c i 0 Y a 0 0 e, 5 ANNEX3 Jordan at a glance 9/8/09 M. East Lower Key Development Indicators & North middle Jordan Africa Age distribution, 2007 income (2008) Mala Female Population, mid-year (millions) 5.9 313 3,435 75.79 Surface area (thousand sq. km) 89 8,778 35,510 60-64 Population growth (%) 2.2 1.7 1.o Urban population (% of total population) 80 57 42 45.49 30-34 GNI (Atlas method, US$ billions) 20.5 683 6,543 15-19 GNI per capita (Atlas method, US$) 3,510 2,820 1,905 GNI per capita (PPP, international $) 5,150 7,402 4,585 0.4 a 6 4 2 o 2 4 6 a GDP growth (%) 7.9 5.9 10.2 percent of total population GDP per capita growth (%) 5.6 4.1 9.1 (most recent estimate, 2003-2008) Poverty headcount ratio at $1.25 a day (PPP, %) <2 4 Under-6 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) 3 17 Life expectancy at birth (years) 70 69 Infant mortality (per 1,000 live births) 32 36 Child malnutrition (% of children under 5) 25 70 60 n Adult literacy, male (% of ages 15 and older) 95 82 88 50 Adult literacy, female (% of ages 15 and older) 87 65 77 40 Gross primary enrollment, male (% of age group) 94 108 112 30 Gross primary enrollment, female (% of age group) 59 103 109 20 10 0 Access to an improved water source (% of population) 89 88 Access to improved sanitation facilities (% of population) 77 55 II OJotdan 1990 1995 2000 OMiddic East 6 Nom Atrica 2007 Net Aid Flows 1980 1990 2000 2008 a (US$ millions) Net ODA and official aid 1,275 886 552 1,014 Growth of GDP and GDP per capita (Oh) Top 3 donors (in 2007): United States 50 58 188 260 I 2 5 r European Commission 11 7 81 55 20 Germany 24 174 44 28 15 10 Aid (%of GNI) 32.3 22.5 6.4 4.6 5 0 Aid per capita (US$) 585 279 114 173 5 -to Long-Term Economic Trends I -15 95 05 Consumer prices (annual % change) 11.0 16.1 0.6 14.9 GDP implicit deflator (annual % change) -0.4 12.7 -0.4 16.0 I +GOP -GDPpercapila Exchange rate (annual average, local per US$) 0.3 0.7 0.7 0.7 Terms of trade index (2000 = 100) 88 93 100 118 1980-90 1990-2000 2000-08 (average annual growth %) Population, mid-year (millions) 2.2 3.2 4.9 5.9 3.7 4.3 2.3 GDP (US$ millions) 3,910 4,160 8,470 21,301 2.5 5.0 7.2 (% of GDP) Agriculture 7.9 7.7 2.3 2.9 6.8 -3.0 8.5 Industry 24.1 26.2 25.5 34.0 1.9 5.2 8.8 Manufacturing 8.9 13.6 15.7 20.4 0.5 5.6 10.1 Services 68.0 66.0 72.1 63.1 2.3 5.0 6.4 Household final consumption expenditure 76.5 74.9 80.6 81.4 1.9 5.0 7.0 General gov't final consumption expenditure 29.2 24.0 23.7 25.4 1.9 4.7 6.5 Gross capital formation 37.2 30.8 22.4 25.6 -1.9 0.3 11.0 Exports of goods and services 40.4 59.8 41.8 58.1 4.8 2.6 7.0 imports of goods and services 85.3 89.6 68.5 90.5 1.2 1.5 6.0 Gross savings 31.1 21 .o 23.1 14.3 Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available. a. Aid data are for 2007. Development Economics, Development Data Group (DECDG). Jordan B a l a n c e of P a y m e n t s a n d T r a d e 2000 2008 (US$ millions) Total merchandise exports (fob) 1,901 7,954 I Governance indicators, 2000 and 2007 Voice and accountability Total merchandise imports (ci9 4,602 17,030 Net trade in goods and services -2,259 -6,889 Politicalstability Current account balance 60 -2,397 as a YOof GDP 0.7 -1 1.3 Regulatoly quality Rule of law Workers' remittances and compensation of employees (receipts) 1,845 3,802 Control of corruption Reserves. including gold 3,434 8,925 0 25 50 75 100 Central Government Flnance 02007 Country's percentile rank (0-100) 02000 higher Ysluel imply betler rabngs (% of GDP) Current revenue (including grants) 32.2 31.1 I Source' Kaufmann-Kraay-Martrurrl.Wodd Bank Tax revenue 16.0 18.3 Current expenditure 29.5 29.7 Technology a n d Infrastructure 2000 2007 Overall surplusldeficit -2.0 -4.6 Paved roads (YOof total) 100.0 100 0 Highest marginal tax rate (%) Fixed line and mobile phone Individual subscribers (per 100 people) 21 94 Corporate High technology exports (% of manufactured exports) 8.0 11 External D e b t a n d Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 7,355 6,088 Agricultural land (% of land area) 12 11 Total debt service 740 959 Forest area (% of land area) 1.o Debt relief (HIPC, MDRI) - - Nationally protected areas ( h of land area) O 3.4 34 Total debt (% of GDP) 66.8 28.6 Freshwater resources per capita (cu. meters) 135 119 Total debt service (% of exports) 12.6 5.7 Freshwater withdrawal (billion cubic meters) 09 Foreign direct investment (net inflows) 614 1,956 C 0 2 emissions per capita (mt) 3.2 38 Portfolio equity (net inflows) -186 563 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.4 35 Composition of total external debt, 2008 Energy use per capita (kg of oil equivalent) 1,082 1,294 2000 2007 (US$ millions) IBRD Total debt outstanding and disbursed 798 910 u BilaferaI, 2,776 Disbursements Principal repayments Interest payments 38 53 53 27 91 51 US$ millions IDA Total debt outstanding and disbursed 57 39 Disbursements 0 0 Private Sector Development 2000 2008 Total debt service 3 3 Time required to start a business (days) - 14 IFC (fiscal year) Cost to start a business (YOof GNI per capita) - 60.4 Total disbursed and outstanding portfolio 77 34 Time required to register property (days) - 22 of which IFC own account 77 34 Disbursements for IFC own account 4 15 Ranked as a major constraint to business 2000 2007 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 26 5 n.a. n.a. MlGA Gross exposure 40 4 Stock market capitalization (% of GDP) 58.4 242.1 New guarantees 39 0 Bank capital to asset ratio (%) 7.0 6.7 Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 9/6/09 .. indicates data are not available. -indicates observation is not applicable. Development Economics, Development Data Group (DECDG). Millennium Development Goals Jordan With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years) G o a l 1: halve the rates for extreme poverty and malnutrition __ 1990 1995 2000 2007 Poverty headcount ratio at $1.25 a day (PPP, % of population) 2.8 <2 <2 Poverty headcount ratio at national poverty line (% of population) 15.0 11.7 Share of income or consumption to the poorest qunitile (%) 7.6 Prevalence of malnutrition ( h of children under 5) O 6.4 6.4 G o a l 2 : ensure that children are able to complete primary schooling Primary school enrollment (net, %) 66 67 91 Primary completion rate (% of relevant age group) 101 98 97 99 Secondary school enrollment (gross, %) 82 86 89 89 Youth literacy rate (% of people ages 15-24) G o a l 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 93 102 101 Women employed in the nonagricultural sector (% of nonagricultural employment) 23 22 21 Proportion of seats held by women in national parliament (%) I 6 G o a l 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 43 37 34 Infant mortality rate (per 1,000 live births) 35 31 26 Measles immunization (proportion of one-year olds immunized, %) 07 92 94 G o a l 5 : reduce maternal mortality by three-fourths - Maternal mortality ratio (modeled estimate, per 100,000 live births) 41 Births attended by skilled health staff (% of total) 07 97 100 Contraceptive prevalence (% of women ages 15-49) 35 50 56 G o a l 6 : halt and begin to reverse the spread of HIWAIDS and other major diseases Prevalence of HIV (% of population ages 15-49) Incidence of tuberculosis (per 100,000 people) IO Tuberculosis cases detected under DOTS (%) 76 40 G o a l 7 : halve the proportion o f people without sustainable access to basic needs O Access to an improved water source ( h of population) 97 96 Access to improved sanitation facilities (% of population) 98 99 Forest area (YOof total land area) 1.0 1.0 Nationally protected areas (% of total land area) 3.4 3.4 3.4 C 0 2 emissions (metric tons per capita) 3.2 3.2 3.2 3.8 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 3.0 3.3 3.4 3.5 Telephone mainlines (per 100 people) 7.8 7.6 12.9 10.2 Mobile phone subscribers (per 100 people) 0.0 0.3 6.1 63.4 Internet users (per 100 people) 0.0 0.0 2.7 19.7 Personal computers (per 100 people) 0.6 3.1 6.7 ~ ~~~~~ Education indicators (%) Measles immunization (% of 1-year olds) ICT indicators (per 100 people) :iL too 7 100 90 80 70 60 50 40 25 30 20 10 2000 2002 2004 2OM 2007 0 1990 1995 2000 2007 2000 2002 2004 2006 20C --O- Primary net enrollment r i b 0 Rabo of girls l o boys tn pnmary L secondary OJordan UMiddlE East (L North Ahica OFlred + mobile subscribers Dlnlernet YPBR education Note: Figures in italics are for years other than those specified. .. indicates data are not available. 9/8/09 Development Economics, Development Data Group (DECDG) MAP SECTION IBRD 33424 35°E 36°E 37°E 38°E 39°E 34°N 34°N n Se anea r a er dit JORDAN Me 33°N 33°N To To Zefat Damascus Lake To Tiberias Baghdad Um Qais Irbid IRBID Ar Ruwayshid AJLUN Ajlun Al Mafrak River JARASH Jarash MAFRAK n Arda Mahattat al Halif Jorda BALQA Az As Salt 32°N 32°N Zarka AMMAN ZARKA Azraq ash - - Shishan Madaba To Jerusalem MADABA AMMAN Dead Sea To Al Jawf Al Mazra'ah - Al Qatranah To Al Karak Beersheba KARAK -- As Safi 31°N 31°N Ard TAFILAH as At Tafilah Sa w - Al Rashadiyah - Ba'ir aa n Ash Shawbak MA'AN Petra Al Jafr 0 0 50 Kilometers Ma'an 0 25 50 Miles 30°N Ra's an Naqb 30°N 38°E 39°E AQABA Ad Disi To Nuweiba JO R D A N Jabal Ram Aqaba (1,734 m) SELECTED CITIES AND TOWNS aba GOVERNORATE CAPITALS Al Mudawwarah of Aq This map was produced by NATIONAL CAPITAL To the Map Design Unit of The World Bank. The boundaries, Al B'ir RIVERS Gulf colors, denominations and any other information shown 29°N on this map do not imply, on MAIN ROADS the part of The World Bank To Group, any judgment on the RAILROADS Al B'ir legal status of any territory, or any endorsement or acceptance of such GOVERNORATE BOUNDARIES boundaries. INTERNATIONAL BOUNDARIES 35°E 36°E 37°E JANUARY 2005