JORDAN ECONOMIC MONITOR THE GREEN ECONOMIC BOOST Spring 2017 Global Practice for Macroeconomics & Fiscal Management MIDDLE EAST AND NORTH AFRICA REGION The World Bank JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST PREFACE The Jordan Economic Monitor provides an update Bank staff and do not necessarily reflect the views on key economic developments and policies over of the Executive Board of the World Bank or the the past six months. It also presents findings from governments they represent. recent World Bank work on Jordan. It places them in a longer-term and global context, and assesses For information about the World Bank and its the implications of these developments and other activities in Jordan, including e-copies of this changes in policy on the country’s outlook. Its publication, please visit www.worldbank.org.jo coverage ranges from the macro-economy to financial markets to indicators of human welfare To be included on an email distribution list for and development. It is intended for a wide this Jordan Economic Monitor series and related audience, including policy makers, business publications, please contact Nada Abou Rizk leaders, financial market participants, and the (nabourizk@worldbank.org). For questions and community of analysts and professionals engaged comments on the content of this publication, in Jordan. please contact Léa Hakim (lhakim1@worldbank. org) or Eric Le Borgne (eleborgne@worldbank. The Jordan Economic Monitor is a product of the org). Questions from the media can be addressed World Bank’s Global Practice for Macroeconomics to Mona Ziade (mziade@worldbank.org). & Fiscal Management, (GMFDR) team. It was prepared by Léa Hakim (Economist) and Zeina Hasna (Economic Analyst), under the general guidance of Eric Le Borgne (Lead Economist and Acting Practice Manager). The Special Focus ‘A Time for Green Growth and Climate Action’ was prepared by Léa Hakim (Economist), Monali Ranade (Senior Operations Officer) and Concepcion Aisa Otin (Senior Financial Officer); World Bank. The Special Focus on the Welfare Impact of Recent Price Changes in Energy and Water was prepared by Caroline van den Berg (Lead Economist), Joern Huenteler (Energy Specialist), Amr Moubarak (Social Protection Specialist), and Jon Jellema (Consultant); World Bank. Zeina El Khalil (Communications Officer) print-produced the report. Macroeconomic projections are as of 15 April 2017. Data is as of 1 June 2017. The findings, interpretations, and conclusions expressed in this Monitor are those of World Preface | 1 THE WORLD BANK TABLE OF CONTENTS PREFACE........................................................................................................................................................ 1 EXECUTIVE SUMMARY ............................................................................................................................... 6 …ò«ØæàdG ¢üî∏ªdG .............................................................................................................................................. 9 RECENT ECONOMIC AND POLICY DEVELOPMENTS ......................................................................... 10 Output and Demand ..................................................................................................................................... 10 Labor and Employment ................................................................................................................................. 14 Fiscal Policy................................................................................................................................................... 17 External Position............................................................................................................................................ 18 Monetary Policy and Finance ........................................................................................................................ 20 PROSPECTS ................................................................................................................................................ 24 SPECIAL FOCUS ......................................................................................................................................... 25 I. A Time for Green Growth and Climate Action ......................................................................................... 25 A. Context ..................................................................................................................................................... 25 B. Jordan’s Climate Change and Green Economy Commitments .................................................................. 26 C. The Economic Case for Climate Action ..................................................................................................... 30 D. A Role for Climate Finance and Climate-Smart Fiscal Policy ..................................................................... 32 E. Moving from Plan to Policy Action ............................................................................................................ 34 F. Considerations for Transformation to a Low-Carbon and Green Economy ................................................ 36 References .................................................................................................................................................... 38 II. Welfare Impact of Recent Price Changes in Electricity and Water .......................................................... 40 A. Context ..................................................................................................................................................... 40 B. Empirical Methodology & Data ................................................................................................................. 41 C. Results ...................................................................................................................................................... 42 Electricity.................................................................................................................................................. 42 Water ....................................................................................................................................................... 45 Combined Effects ..................................................................................................................................... 48 D. Policy Implications ................................................................................................................................... 49 Electricity.................................................................................................................................................. 49 Water ....................................................................................................................................................... 49 Linkages to Social Protection .................................................................................................................... 50 E. Conclusions .............................................................................................................................................. 51 References .................................................................................................................................................... 51 DATA APPENDIX ........................................................................................................................................ 52 SELECTED RECENT WORLD BANK PUBLICATIONS ON JORDAN .................................................... 53 LIST OF FIGURES FIGURE 1. Jordan’s lower growth plateau .................................................................................................. 11 FIGURE 2. Quarterly growth slows in seasonally adjusted terms .............................................................. 11 FIGURE 3. As Jordan’s growth rate underperforms the MENA average ...................................................... 11 FIGURE 4. Industry’s slowdown largest impact on overall supply-side growth .......................................... 11 FIGURE 5. Output gap turned negative in 2015. ........................................................................................ 12 FIGURE 6. Output gap widened further in 2016 ........................................................................................ 12 FIGURE 7. Industrial price index reflects the slowdown for mining and quarrying... .................................. 13 FIGURE 8. Tourism is picking up in 2017 albeit from a low base… . .......................................................... 13 FIGURE 9. …while construction indicators improved as of 2016 .............................................................. 13 FIGURE 10. Private demand has been subdued since 2014… ..................................................................... 13 2 | Table of Contents JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST FIGURE 11. The three main labor market indicators continue to worsen ..................................................... 15 FIGURE 12. Maan exhibits highest unemployment rate per governorate by far ........................................... 15 FIGURE 13. Net jobs created on a decline especially by the formal private sector ...................................... 16 FIGURE 14. New minimum wage as a share of income per capita surpasses OECD and MENA ratios ........ 16 FIGURE 15. Fiscal situation has improved… ................................................................................................. 17 FIGURE 16. …while the gross debt-to-GDP ratio rises ................................................................................ 17 FIGURE 17. The trade in goods balance narrowed despite lower exports of phosphates and potash… ........ 19 FIGURE 18. …and as Jordan’s exports to the GCC, Iraq and Syria continue to suffer ................................... 19 FIGURE 19. The current account widened despite an improved trade balance… ......................................... 19 FIGURE 20. …as affected by slower remittances .......................................................................................... 19 FIGURE 21. Stock of foreign currency reserves decline ................................................................................ 20 FIGURE 22. Inflationary pressures appear since late 2016 ........................................................................... 20 FIGURE 23. Tobacco, cigarettes and ‘other’ items drive core inflation .......................................................... 21 FIGURE 24. Dollarization rising since October 2016 partly due to several one-off factors ........................... 21 FIGURE 25. Real interest rates at recent low due to inflation. ...................................................................... 21 FIGURE 26. Commercial bank lending to both private and public sector continues to grow… .................... 22 FIGURE 27. …SMEs benefitting from new credit channels across sectors .................................................... 22 FIGURE 28. Stock Exchange makes headway in 2017 .................................................................................. 23 FIGURE 29. Jordan’s Sectoral Breakdown of Total GHGs in 2006 ................................................................ 27 FIGURE 30. Jordan Energy Sector Climate Change Action ............................................................................ 28 FIGURE 31. Jordan National Green Growth Plan Clusters ............................................................................ 29 FIGURE 32. Proxy to Climate Relevant Expenditures .................................................................................... 32 FIGURE 33. Jordan - Climate-related Development Finance in 2014 from OECD DAC Statistics ................. 33 FIGURE 34. Total Commitments to Jordan by Sector, USD million .............................................................. 33 FIGURE 35. Nominal electricity tariffs 2010-2016........................................................................................ 43 FIGURE 36. Household electricity consumption by quintile mapped onto tariff block structure, indicating households exempt from tariff increases 2010-2016. ................................................................................... 43 FIGURE 37. Household water consumption by quintile mapped onto tariff block structure ........................ 45 LIST OF TABLES TABLE 1. Financial Soundness Indicators ................................................................................................. 23 TABLE 2. Household Size, Tariff Block, and Mean Electricity Share ......................................................... 43 TABLE 3. Cumulative real total cost increase for household/domestic electricity consumption 2010-2016 43 TABLE 4. Cumulative welfare losses (per capita) from electricity tariff increases between 2010 and 2016 (in constant 2013 JD and percent of pre-reform welfare) .............................................................................. 44 TABLE 5. Description of scenarios for future electricity tariff adjustments ............................................... 44 TABLE 6. Welfare losses (per capita) from the electricity tariff increase needed to cover a (hypothetical) US$10/bbl oil price increase in 2017 under two scenarios (S1, S2) .............................................................. 45 TABLE 7. Cumulative real total cost increase for household/domestic water consumption between 2010 and 2017 ................................................................................................................................................. 46 TABLE 8. Median marginal tariff block and mean water share in budget.................................................. 46 TABLE 9. Description of scenarios for welfare impacts from water tariffs ................................................ 47 TABLE 10. Welfare losses (per capita) from cumulative water tariff increases between 2010 and 2017 (Scenario A: including groundwater tariff increases for industry) .................................................................. 47 TABLE 11. Welfare losses (per capita) from cumulative water tariff increases between 2010 and 2017 (Scenario B: excluding groundwater tariff increases for industry) ................................................................. 47 TABLE 12. Direct and indirect welfare losses (per capita) from water and electricity tariff increase in 2010–2017 ................................................................................................................................................. 48 Table of Contents | 3 THE WORLD BANK TABLE 13. Total welfare losses (per capita) from water and electricity tariff increase in 2010–2017 ......... 48 TABLE 14. Selected Economic Indicators ................................................................................................... 53 LIST OF BOXES BOX 1. Potential Output Gap Analysis .................................................................................................. 12 BOX 2. Jordan Economic Growth Plan (2018-2022).............................................................................. 14 BOX 3. Population Effect on Water Demand ......................................................................................... 26 BOX 4. Snapshot Jordan’s Nationally Determined Contributions (NDCs) ............................................. 27 BOX 5. Potential Positive Economic Spillover Effects from Climate Smart Investments......................... 31 BOX 6. Jordan’s New Electricity Tariff Adjustment Mechanism ............................................................. 46 LIST OF KEY ABBREVIATIONS USED bps: Basis points H1, H2: First half of the year, second half of the year. 3mma: Three-months moving average pp: Percentage points Q1 (Q2, Q3, Q4): First (second, third, fourth) quarter of the year qoq: Quarter-on-quarter sa: Seasonally adjusted saar: Seasonally adjusted, annual rate yoy: Year-on-year lhs, rhs: Left hand side, right hand side (for axis of figures) EE: Energy Efficiency EMRC: Energy and Minerals Regulatory Commission GHG: Greenhouse Gases IMF: International Monetary Fund MOPIC: Ministry of Planning and International Cooperation NEPCO: National Electric Power Company NDC: Nationally Determined Contribution RE: Renewable Energy SME: Small and Medium Enterprise USD: United States Dollar WAJ: Water Authority of Jordan 4 | Table of Contents JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Table of Contents | 5 THE WORLD BANK EXECUTIVE SUMMARY i. Jordan’s economy remains sluggish. (excluding fuel, transportation and food) averaged Growth slowed down in 2016 for the second year 2.2 percent. Inflation has picked up since November in a row—to 2.0 percent from 2.4 percent in 2015— 2016 and is expected to accelerate into 2017, due to further diverging from its potential and below the higher oil prices’ impact on transportation and fuel 2.7 percent MENA average. This is largely due to a prices, and fiscal measures introduced to reduce the weaker mining and quarrying sector, partly related fiscal deficit. to downward pressures on global potash prices. Growth was also affected by a confluence of factors iv. The fiscal deficit narrowed in 2016 and related to repercussions from the Syrian crisis, further into 2017 (excluding grants), yet debt notably the closure of export routes to Iraq and Syria remains elevated. The fiscal deficit contracted to and lower tourism amid regional instability, despite 3.2 percent of GDP in 2016 following a number of a recovery in construction in 2016. The sectors that measures introduced that year including the removal contributed the most to growth in of 2016 were of 2015 Goods and Sales Tax exemptions, reduction ‘finance and insurance services,’ ‘transport, storage of tax exemptions on imported used cars, increasing and communications’ and ‘real estate’. taxes on cigarettes and alcohol, and raising the transfer fees on car sales. Excluding grants, the ii. The labor market faces significant stress. fiscal deficit continued to improve by 21 percent A new methodology adopted by the Department in Q1-2017 yoy to 0.26 percent of estimated GDP. of Statistics as of the first quarter of 2017 (Q1- Debt however remains elevated at 95.4 percent of 2017) reveals that unemployment reached 18.2 adjusted GDP as of end-March 2017, with further percent in Q1-2017, with labor force participation pressures stemming from the financing needs of the and employment rates of 40.5 percent and 33.1 Water Authority of Jordan whose debt is government- percent, respectively, with women worse off across guaranteed. these. These figures are not comparable with the previous methodology. Labor market indicators had v. The current account deficit slightly appeared to be worsening through 2016. Up until widened in 2016 due to lower current transfers. then, higher levels of unemployment and continued The current account deficit widened from 9.1 percent trend declines in the labor force participation and to 9.3 percent of GDP due to lower current transfers employment rates had been observed, particularly for including a 2.4 percent contraction of remittances, youth. This could have stemmed from discouraged and decreased tourism receipts (albeit at a slowing workers given perceived competition from refugees, rate). The trade in goods deficit narrowed led by limited job creation and the overall weakness of the 6.2 percent decline in imports (due to declining economy that constrains overall job creation. energy imports) which overweighed the 4.1 percent deterioration of exports of goods which continued iii. Inflationary pressures appear after two to be affected by land trade route closures with Iraq years of deflation. Jordan witnessed deflation for the and Syria. second year in a row in 2016 with Consumer Price inflation averaging -0.8 percent (period average) vi. Monetary policy swiftly tightened as of largely due to an average decline in international oil December 2016 following the Fed’s lead and in prices and lower food prices, while core inflation support of the exchange rate peg. The Central Bank 6 | Executive Summary JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST of Jordan raised key policy rates three times since donors will continue to prove difficult as reflected for a cumulative 100 bps to maintain the JD-USD in the 2017 budget debates and recent austerity deposit rate spread, and tackle rising dollarization protests. and falling reserves. Dollarization of deposits (share of deposits in USD/total deposits) reached ix. Jordan has an opportunity to vitalize green 19.5 percent by end-March 2017, its highest rate growth and undertake climate action as part of a since December 2013; partly due to one-off factors. sustainable solution to addressing Jordan’s fiscal, The stock of foreign currency reserves held at the economic and climate vulnerabilities. Climate central bank has been declining to US$11.4 billion action needs to be coordinated across government by end-April 2017 yet reserves still cover a solid 7.8 and includes introducing climate-smart fiscal months of imported goods (excluding re-exports). policy and strengthening the energy grid. Such action could boost the economy and result in job vii. Jordan’s economic growth prospects are creation, reduced dependence on commodity expected to remain tepid over the medium-term. imports, attraction of Foreign Direct Investment Assuming no change in the geopolitical situation, and mobilization of international climate finance. growth is forecasted to improve to 2.3 percent in Further analysis and policy coordination is required 2017 on account of improvements in tourism and to fully optimize Jordan’s potential for low-carbon exports. In the medium-term, growth is expected to economic transformation and to address the short average 2.6 percent over 2017-2019 as the impact run transition costs (Special Focus 1). of some business climate reforms materialize. The current account is expected to narrow in 2017 x. While the short-term welfare impacts due to higher current transfers offsetting a wider of electricity and water tariff reforms on trade balance, the latter due to higher oil imports, households have so far been limited, targeted before tending to 6 percent of GDP by 2019. As social protection measures to accompany any Jordan adheres to the IMF Extended Fund Facility future price increases would limit future impact Program, the fiscal balance and debt-to-GDP on the poor. Analysis of the short-term welfare ratio are bound to improve despite higher cost of impacts on households of the electricity and water borrowing stemming from higher interest rates. tariff reforms implemented between 2010 and 2016 suggest that welfare impacts so far have been viii. A major challenge for the Jordanian limited. Household expenditures on electricity and authorities remains stimulating growth and water are still modest by international standards, job creation, while reining in the fiscal deficit but the Government should consider combining and hosting more than 660,000 registered further tariff reforms with targeted social protection Syrian refugees. This is even more imperative as measures to limit the impact on the poor (Special security threats manifest, labor market indicators Focus 2). deteriorate and inflationary pressures appear. However, short of a positive shock such as the reopening of trade routes with Iraq or a peaceful conclusion to the Syrian conflict, and in light of fiscal and monetary policy tightening, it is difficult to foresee an impactful jumpstart to growth unless strategic structural reforms are implemented at a quicker pace. The Economic Policy Council’s newly launched Jordan Economic Growth Plan 2018-2022 bodes well to stimulate some of these reforms. 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®ÉØë∏d ᫪cGôJ ¢SÉ°SCG á£≤f 100 ¤EG π°üàd ∑GP òæe äGôe çÓK q ºî°†àdG q ≠∏H ÚM ‘ ,»°ù«FQ πμ°ûH á«FGò¨dG OGƒŸG QÉ©°SCG §°Sƒàe Q’hódG-ÊOQC’G QÉæjódÉH ™FGOƒdG ≈∏Y IóFÉØdG ô©°S ¢ûeGƒg ≈∏Y ™ØJQG óbh .áÄŸG ‘ 2^2 (AGò¨dGh π≤ædGh OƒbƒdG AÉæãà°SÉH) »°SÉ°SC’G .äÉ«WÉ«àM’G ¢VÉØîfGh Q’hódG ᪫b ´ÉØJQG á÷É©eh ,»μjôeC’G q ƒàjh ,2016 Ȫaƒf/ÊÉãdG øjô°ûJ òæe ºî°†àdG ΩÉY ‘ ´QÉ°ùàj ¿CG ™b q …ò«ØæàdG ¢üî∏ªdG | 9 THE WORLD BANK RECENT ECONOMIC AND POLICY DEVELOPMENTS 1. Security incidents have escalated in and double economic growth over 2018-2022. The EPC around Jordan further unveiling threats and was established by the King in June 2016 and the fueling unease. Three incidents occurred on the JEGP is the second main set of recommendations Rukban area on the northeast Jordan border with from the EPC. The government also launched its Syria and Iraq since December 20161 in addition to Green Growth Plan which identifies a green growth an IS-attack in February 2017 on the Iraqi border corridor, smart urban transformation and rural with Jordan. An attack claimed by the Islamic resilience as representing the convergence between State in the southern city of Al-Karak within Jordan climate action, sustainable local development and claimed 10 lives and wounded at least 30 others on macroeconomic considerations with a focus on 18 December 2016 followed by clashes. the energy, water, waste, transport, tourism and agriculture sectors. 2. The 2017 Budget debates were heated and resulting reforms proved contentious. Heated discussions over the draft 2017 Budget tax hikes and spending cuts, prepared in line with meeting the IMF Extended Fund Facility program targets which Jordan Output and Demand embarked on last August, resulted in the watering down of some revenue-enhancing measures to 4. Jordan’s economy continued to decelerate protect low and middle-income households. The as geopolitical repercussions take a toll. Growth introduction of a number of expenditure-reducing in 2016 slowed for the second year in a row to 2.0 and revenue-enhancing measures that took effect percent compared to 2.4 percent in 2015 (Figure early February 2017 were met by protests a 1). The growth slowdown was driven by a number couple of weeks later across Amman, Salt, Karak of factors mainly related to the precarious regional and Madaba, despite an increase in the minimum situation that suppressed investor sentiment, monthly wage from JD 190 to JD 220.2 On the handicapped tourism, and led to the closure of trade local governance front, municipal and governorate routes with Iraq and Syria severely affecting Jordanian elections are scheduled for 15 August 2017. This exports to the region (both as final destinations will be the first governorate elections held in light of and transit routes). Jordan’s hosting of more than the 2016-enacted Decentralization Law. 660,000 Syrian refugees has hiked demand for goods and services and strained public finances.3 3. The Government has announced two Data for the fourth quarter of 2016 (Q4-2016) of 2.0 cross-cutting plans to stimulate the sluggish percent year-on-year (yoy) brought down the annual economy. In light of a slowing macroeconomic growth to 2.0 percent compared to 2.4 percent in environment and high unemployment, the 2015. On a seasonally adjusted basis, Q4-2016 Government adopted a Jordan Economic Growth resumed the declining trend of quarterly economic Plan (JEGP) as recommended by the Economic growth revealing further weakness although there Policy Council (EPC) (Box 2). The JEGP aims to was an improvement in the fourth quarter of 2016 compared to Q4-2015 (Figure 2). As spare capacity 1 These three incidents occurred on 17 December 2016, 21 January 2017, and 3 May 2017. 3 UNHCR records 660,315 registered Syrian refugees since 1 2 Refer to paragraph 14 for details of these measures. June 2017. 10 | Recent Economic and Policy Developments JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST GDP Growth 2000-2016 GDP Growth in MENA Percent (%) 10 Percent (%) 9 10 8 8 7 6 Period average: 6 2000 - 2009: 6.5% 5 Period average: 4 4 2010 - 2016: 2.6% 3 2 2 0 1 -2 03 04 05 06 07 08 09 10 11 12 13 14 e p 15 16 20 20 20 20 20 20 20 20 20 20 20 20 20 20 0 -4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 EGYPT JORDAN LEBANON MENA FIGURE 3. As Jordan’s growth rate underperforms the FIGURE 1. Jordan’s lower growth plateau MENA average Source: Department of Statistics and World Bank staff calculations Source: World Bank Economic Prospects, January 2017 Annualized Qoq Seasonally Adjusted GDP Growth Rate Supply Side Contribution to Real GDP Growth (yoy) Net Taxes On Product Services Percent (%) Industry Agriculture 12 GDP 10 Percent (%) 3.50 8 3.00 6 2.50 4 2.00 2 1.50 0 1.00 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 0.50 -2 2009 2010 2011 2012 2013 2014 2015 2016 0.00 -4 -0.50 Annualized sa GDP growth rate 2010 2011 2012 2013 2014 2015 2016 -1.00 FIGURE 2. Quarterly growth slows in seasonally FIGURE 4. Industry’s slowdown largest impact on overall adjusted terms supply-side growth Source: Department of Statistics and World Bank staff calculations Source: Department of Statistics and World Bank calculations in the economy increases, it is estimated that 2016 industrial price index in 2016 (Figure 7).4 The Jordan’s output gap as a share of its potential output largest contributors to growth in 2016 were ‘finance for 2016 was negative 1.12 percent (Box 1). As of and insurance services’ and ‘transport, storage and 2015, Jordan is lagging MENA’s average estimated communications’, each contributing by 0.52 pp and growth of 2.7 percent for 2016 (Figure 3). 0.45 pp to real GDP growth, respectively; followed by ‘real estate’ (contributing 0.23 pp), ‘electricity 5. On the production side, and despite and water’ (0.2 pp), ‘manufacturing’ (0.19 pp), and sluggish growth in 2016, only three sectors ‘community, social and personal services’ and ‘net were drags on growth (Figure 4). The sectors that taxes on product’ that each contributed by 0.17 retrenched over 2016 were ‘mining and quarrying’, pp to real GDP growth. Although ‘restaurants and ‘imputed bank service charge’ and ‘restaurants and hotels’ slightly regressed by 1 percent in 2016 yoy hotels’ by 0.2, 0.19, and 0.01 percentage points (pp), compared to 2015, and ‘construction’ witnessed a respectively. In growth terms, ‘mining and quarrying’ tempered rebound of 1.1 percent yoy in 2016, both contracted by 12.1 percent in 2016 yoy reflecting sectors maintained negligible effects on real growth pressure on potash prices that affected international in 2016. Early indications in 2017 reflect a pickup demand for Jordan’s potash as also reflected in the in some real sector indicators, albeit from the low drop of the mining and quarrying component of the 4 The average of the mining and quarrying component of the IPI index dropped by 9 percent in 2016 compared to 2015. Recent Economic and Policy Developments | 11 THE WORLD BANK BOX 1. Potential Output Gap Analysis. The potential output gap is often considered a good proxy of an economy’s wellbeing. By measuring how far off the economy is from its potential output (output generated at full capacity), the potential output gap is funda- mental to the conduct of sound macroeconomic policy. Two basic methods are applied for estimating potential output gap: statistical filtering and structural estima- tions. Statistical filtering includes the Hodrick-Prescott (HP) filter, a de-trending statistical method, which is em- ployed in this analysis using three standard smoothing parameters (1600, 1000, 500). The application of different smoothing parameters serves as a robustness check of the estimation process. Further, the statistical filtering is ap- plied on annual data (sample period 1975-2019) and quarterly data (1992Q1-2017Q4).* Annual data post 2016 and quarterly data post 2016Q4 are obtained from World Bank staff projections. As for the second estimation method, structural estimations are based on a Production Function Model which incorporates economic theory that relates output to total factor productivity and production inputs. The structural estimations are only applied on annual data post 1990. After nine years of operating above potential, Jordan suffered from a negative output gap in 2015. Throughout 2006-2014, Jordan witnessed high growth rates that led to positive deviations from its potential and thus report positive output gaps. During that period, the output gap averaged +2.3 of potential output. However, in 2015, Jordan’s output dropped below its potential with the output gap turning negative to reach -0.44 percent of potential GDP (on average across the four estimation techniques employed). The gap widened further to -1.12 percent of potential output in 2016 as growth continued to be subdued (Figure 5). At the quarterly level, the three HP filters yield similar results further asserting the expectations of a widening output gap in 2016. In 2016, the output gap is estimated to be negative in each of the quarters with all parameters employed. The output gap is estimated at -0.36, -0.12, -0.03 and -0.06 percent of potential output (on average across the three HP filters) in 2016Q1, 2016Q2, 2016Q3 and 2016Q4, respectively (Figure 6). The various estimation techniques employed, at the annual and quarterly levels, consistently conclude that the Jordanian economy has been deviating away from its potential in the negative direction. This is not surprising given that the country’s economy has been plagued by a turbulent regional setting that slowed down many important pillars of the economy, including: trade, industry, tourism, investment, consumption, employment, among others. Output Gap Output Gap (percent of potential output) (percent of potential output) Percent (%) Percent (%) 5.00 8.00 4.00 5.00 3.00 2.00 2.00 -1.00 1.00 1 p 2017p 2018p p 18p 2019p 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 9 2 -4.00 0.00 Q1p Q3p Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 -7.00 -1.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017p -2.00 -10.00 Output gap as a % of potential output, Production Function Output gap as a % of potential output, HP filter, ƪ=100 -3.00 -13.00 Output gap as a % of potential output, HP filter, ƪ=6.25 Output gap as a % of potential output, HP filter, ƪ=1600 -4.00 Output gap as a % of potential output, HP filter, ƪ=1000 -16.00 Output gap as a % of potential output, HP filter, ƪ=400 Output gap as a % of potential output, HP filter, ƪ=500 FIGURE 5. Output gap turned negative in 2015. FIGURE 6. Output gap widened further in 2016. Source: Department of Statistics and World Bank staff calculations Source: Department of Statistics and World Bank staff calculations * It is noteworthy that the HP filter is normally prone to end-point bias hence annual data was extended to 2019 and quarterly data extended to 2017Q4. 12 | Recent Economic and Policy Developments JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Mining, Quarrying and Manufacturing Construction Sector Manufacturing Area Number of Permits, rhs Index Mining and Quarrying Mining of chemical and fertilizer minerals Thousands of Square Meters Number 140 16,000 45,000 120 14,000 40,000 100 35,000 12,000 80 30,000 10,000 25,000 60 8,000 20,000 40 6,000 15,000 4,000 10,000 20 2,000 5,000 0 0 0 10 13 14 15 16 00 01 02 03 04 05 06 07 08 09 11 12 2010 2011 2012 2013 2014 2015 2016 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 FIGURE 7. Industrial price index reflects the slowdown FIGURE 9. …while construction indicators improved as for mining and quarrying of 2016 Source: Central Bank of Jordan and World Bank staff calculations Source: Central Bank of Jordan and World Bank staff calculations Tourism Sector Demand Side Contribution to Real GDP Growth (yoy) Private Demand Net Exports Tourist Receipts (yoy growth, %) Public Consumption Public Investment Percent (%) Tourist Arrivals (yoy growth, %) GDP Growth, rhs 40 Percent (%) Percent (%) 10.0 3.5 30 3.3 20 7.5 3.0 2.8 10 5.0 2.5 2.3 0 2.5 2.0 Oct-13 Oct-14 Oct-16 Jan-13 Apr-13 Jul-13 Jan-14 Apr-14 Jul-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Jan-17 Apr-17 -10 1.8 0.0 1.5 -20 2011 2012 2013 2014 2015 2016 1.3 -2.5 1.0 -30 0.8 -40 -5.0 0.5 0.3 -50 -7.5 0.0 FIGURE 8. Tourism is picking up in 2017 albeit from a FIGURE 10. Private demand has been subdued since low base… 2014 Source: Ministry of Tourism, Central Bank of Jordan and World Bank Source: World Bank staff calculations 2016 base. Tourist receipts only contracted by 0.5 contractions from private demand and public percent in 2016 yoy compared to a 7.1 percent investment in 2016 (Figure 10). In real terms, contraction in 2015 yoy (Figure 8) and the pickup while exports deteriorated by 4.7 percent in 2016 has continued through to the first four months of yoy compared to the previous year, net exports 2017.5 Meanwhile, construction permits and area are estimated to have contributed by 1.7 pp to real both rebounded in 2016 (Figure 9) and improved GDP growth in 2016, the main driver of growth further in the first quarter of 2017.6 from the demand side. Public consumption was also a driver of growth in 2016 with an estimated 6. Net exports and public consumption contribution of 1.2 percentage points. On the other drove growth from the demand side offsetting hand, private demand (private consumption and private investment) is estimated to be the largest 5 In the first four months of 2017, tourist receipts and arrivals increased by 17.9 percent and 12.5 percent respectively drag on growth in 2016, contracting growth by compared to contractions of 2.6 and 5.2 percent in the same 0.6 percentage points representing weakened period in 2015, respectively, although reflecting low-base effect investment and consumption sentiment amidst given the weak tourism performance in 2015. continued turbulence in the region. Even though 6 Construction permits and area improved by 10.2 and 1.4 percent in 2016, a substantial rebound from the 9.6 and credit growth and personal loans from commercial 12.5 percent contractions in 2015, respectively, and further banks to the private sector increased by 10 percent improved by 19.4 and 18.0 percent during the first quarter of and 3.1 percent in December 2016 yoy, personal 2017 compared to the same period in 2016, respectively. Recent Economic and Policy Developments | 13 THE WORLD BANK BOX 2. Jordan Economic Growth Plan (2018-2022). In effort of reigniting growth, the Jordanian government and the Economic Policy Council (EPC) collabo- rated on producing the second set of economic reforms* which took the form of a five-year Jordan Economic Growth Plan (JEGP). The JEGP aims at doubling economic growth over 2018-2022, reducing debt burden, creating jobs and increasing income levels notwithstanding the challenging regional situation. A series of international and regional, economic and political, setbacks (such as: the 2009 global financial crisis, the wave of Arab uprisings, the closure of trade routes with major trade partners and the recent surge in food and oil prices) have caused Jordan to fall off track to reaching the growth targets previously set in Jordan’s 2025 Vision. Therefore, the JEGP aims at jumpstarting growth in the next few years such that growth forecasts for 2021-2025 would be in line again with the Jordan 2025 Vision. According to EPC, a doubling of economic growth would require at least a 5 percent growth rate annually, equivalent to US$ 1.8 billion annually. However, almost 50 percent of the economy is strained and cannot grow further. For instance, government services growth is limited as the government is bounded to a rationalized fiscal policy over the medium term. This in turn leaves it up to productive sectors to generate the additional US$ 1.8 billion required. Analysis carried by EPC suggests the following increases in value added of the productive sectors, and the corresponding growth rate of each sector needed to bring forward its suggested increase in value added: Sector Increase in Value Added ($US mln) Corresponding Growth Rate (%) Agriculture 113 10 Manufacturing 530 10 Electricity & Water 128 13 Construction 254 15 Hospitality and Tourism 169 5 Transport 334 12 Information & Communication Technology 222 12 The JEGP adopts a holistic approach to identifying the reforms needed for 19 sectors. In total, the JEGP clas- sifies 95 policy actions (total value of US$ 894 million), 85 government projects (total value of US$ 8.8 billion) and 27 private sector investment opportunities (total value of US$ 13.3 billion), which are meant to help stimulate growth and revive the Jordanian economy. *For more on the first set of economic reforms by EPC, refer to Box 2 of World Bank. Jordan Economic Monitor – Reviving a Slowing Economy. Fall 2016. Source: “Jordan Economic Growth Plan 2018-2022”, The Economic Policy Council. loans had recorded a 16.8 percent growth by end- 2015 yoy. While the Jordan Investment Confidence Labor and Employment Index (JICI) reported a 7.2 percent decline between February 2016 and September 2016, signs of 7. The labor market faces significant stress, recovery have been evident since October 2016 to with worsening unemployment, employment March 2017. Moreover, public investment was also and labor force participation rates. In 2016 a drag on growth contracting it by 0.3 percentage structural unemployment reached a high averaging points in 2016, partly reflecting the government’s 15.3 percent, 2.3 percentage points worse than rationalized expenditure policy. 2015 affecting the high skilled more predominantly (Figure 11). Gender-based heterogeneity persists as female unemployment rate reached 24.1 percent while the male unemployment rate reached 13.3 percent, both increasing from 22.5 and 11 percent in 2015, respectively. The labor force participation 14 | Recent Economic and Policy Developments JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Jordan Labor Market Dynamics Unemployment Rate by Governorate in 2016 (%) Employment Rate (ER) Labor Force Participation Rate (LFPR) Unemployment Rate (UR), rhs Aqaba 15.8 Maan 19.1 Percent (%) Percent (%) Tafiela 15.4 38 16 Karak 15 37 15 Ajloun 16.7 36 Jarash 15.5 35 14 Mafraq 16.3 Irbid 17.4 34 13 Madaba 14.8 33 12 Zarqa 14.7 32 Balqa 14.8 31 11 Amman 14.1 30 10 2013 2014 2015 2016 FIGURE 11. The three main labor market indicators FIGURE 12. Maan exhibits highest unemployment rate continue to worsen per government by far Source: Department of Statistics and World Bank staff calculations Source: Department of Statistics and World Bank staff calculations rate and the employment rate (i.e., employment to previous statistics reflecting vulnerabilities for women population ratio) both further declined in 2016 to (33 percent unemployed vs. 13.9 percent for men) 36 and 30.5 percent from 36.7 and 31.9 percent and youth with the highest rate of unemployment in 2015, respectively. Both declines stemmed from for those aged 15-19 years old at 39.5 percent and worse labor dynamics for males. The labor force those 20-24 years old at 35.4 percent unemployed. participation rate and employment rate for males Also consistent, is the high level of unemployment dropped by 1.3 and 2.5 pp between 2015 and 2016, amongst those holding university degrees, at 21.4 while those for females remained more or less flat. percent. The governorate with the highest level of Youth remain the most vulnerable fraction of the labor unemployment is also Maan at 26.2 percent. force with youth unemployment rising to 35.6 percent in 2016, also a historical high, from 30.8 percent in 9. Net job creation in Jordan has been on 2015. On a governorate basis, Maan registered the a declining trend between 2007 and 2015. The highest unemployment rate for 2016 at 19.1 percent, Jordanian economy created a net of 48,309 jobs in 5 percent higher than the rate recorded in the capital 2015, almost 3.3 percent less than the total net jobs Amman; while Jarash suffered from the largest surge created in 2014 and 31.3 percent less than those in unemployment rate, a 3.6 pp increase from 2015 created in 2007 (Figure 13). Between 2007 and to reach 15.5 percent in 2016. All governorates 2015, 64 percent of the average net jobs created witnessed increasing unemployment rates except were in the formal private sector, while 33.9 for Tafiela and Madaba where unemployment rates percent were in the public sector and 2.1 percent dropped by 0.3 and 0.9 pp to 15.4 and 14.8 percent, were in nongovernmental organizations and the respectively (Figure 12). informal private sector. However, while the private sector created the majority of new jobs, the private 8. New methodology points to more stark sector itself has been generating less net jobs over labor market results. A new methodology adopted time. The number of net jobs created in the private by the Department of Statistics as of the first quarter sector in 2015 were 14.3 percent less than those of 2017 (Q1-2017) seeks to expand the sample size in 2014 and 43.3 percent less than those created used in measuring employment indicators and refines in 2007. Meanwhile, net jobs created in the public the calculation of those employed. The methodology sector in 2015 depict a 24.8 percent increase since is not comparable to previously published data but 2014, compared to a slight decline of 3.7 percent reveals that unemployment reached 18.2 percent since 2007. in Q1-2017, with labor force participation and employment rates of 40.5 percent and 33.1 percent, 10. In addition to weak job creation, the respectively. The new methodology is consistent with increase in the number of labor protests further Recent Economic and Policy Developments | 15 THE WORLD BANK Breakdown of Net Jobs Created Minimum Wage as a Share of Income Per Capita Total number of net jobs created in nongovernmental organizations and informal private sector Total number of net jobs created in private sector Total number of net jobs created in public sector Total number of net jobs created OECD 34.1% Linear (Total number of net jobs created) 79,500 74,500 MENA 48.8% 69,500 64,500 59,500 Comparator Countries 69.1% 54,500 49,500 44,500 Synthetic Control (Weighted average) 47.3% 39,500 34,500 29,500 Jordan (Minimum Wage at 190 JD) 65.0% 24,500 19,500 14,500 Jordan (Minimum Wage at 220 JD) 75.3% 9,500 4,500 -500 2007 2008 2009 2010 2011 2012 2013 2014 2015 FIGURE 13. Net jobs created on a decline especially by FIGURE 14. New minimum wage as a share of income the formal private sector per capita surpasses OECD and MENA ratios Source: Department of Statistics and World Bank staff calculations Source: International Labor Organization, World Bank Development Indicators and World Bank staff calculations. The comparator countries are in line with those selected with Find my Friends Tool for the Jordan Systematic Country Diagnostic: Synthetic Control countries are Bulgaria, Guatemala, Paraguay, and Romania; in line with “Synthetic Jordan” and comprise China, Djibouti, Grenada, Guyana, Hong Kong, Moldova, Zimbabwe. For more, refer to Special Focus of Fall 2016 Jordan Economic Monitor. asserts the fragile status of the Jordanian labor effective for 10 years as of July 2016. Additionally, market. Labor protests increased by 22 percent time and support are required for industry to comply in 2016 compared to the year before according to with EU standards and understand opportunities the annual report on labor protests published by from the trade deal.8 Separately, the government the Phenix Center for Economic and Informatics approved a 16 percent minimum wage increase to Studies, with the majority of the protests being 220 JD/month. This is mainly expected to affect the staged by the private sector (185 out of a total of private sector. The Ministry of Finance estimated the 288 protests in 2016). This result echoes mounting impact on the Treasury to be limited to JD 3 billion. economic pressures on the Jordanian labor market, At 75 percent of income per capita, Jordan’s new particularly in the private sector, partially explaining minimum wage surpasses the same ratio for OECD the unprecedented elevation in the Jordanian and MENA (Figure 14). Too high of a minimum unemployment rates. wage can negatively impact the formal labor market as workers with a marginal productivity below that 11. Job creation due to the Jordan Compact threshold are effectively priced out. Given the high has progressed slowly while the minimum and rapidly worsening unemployment situation wage is raised.7 Job creation and the take up of in Jordan, the large increase in the minimum work permits by Syrian refugees - toward the wage might be expected to further complicate the government’s 200,000 target - have been slow recovery of the labor market, especially for lower to materialize. By end-2016, about 37,000 work skilled workers. permits (free of charge until end-2017) had been issued. Industry is finding it difficult to attract the 15 percent Syrian labor required to produce goods in designated development zones that benefit from 8 The Jordan Compact was expected to create 50,000 jobs the European Union’s relaxation of Rules of Origin for Syrians outside the 18 designated development zones covered by the European Union’s relaxed rules of origin in 7 For more on the Jordan Compact, refer to Box 1 and addition to hundreds of thousands of jobs for Jordanians and paragraph 9 of World Bank. Jordan Economic Monitor – The Syrians inside development zones. The latter requires strong Challenge Ahead. Spring 2016; and paragraph 9 of World Bank. support from the Government of Jordan and different donors for Jordan Economic Monitor – Reviving a Slowing Economy. Fall existing manufacturers and to attract new investments into the 2016. development zones. 16 | Recent Economic and Policy Developments JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Fiscal Deficit (Excluding Grants, % of GDP) Jordan Debt to GDP Ratio (end of period) Domestic Revenues Budget Balance (excl. grants), rhs Total Expenditures Budget Balance (incl. grants), rhs Percent (%) External Internal Total Percent (%) Percent (%) 120 45 16 40 100 14 35 12 80 30 10 60 25 8 20 40 6 15 4 20 10 5 2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar-17 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FIGURE 15. Fiscal situation has improved… FIGURE 16. …while the gross debt-to-GDP ratio rises Source: Ministry of Finance and World Bank staff calculations Source: Ministry of Finance and World Bank staff calculations 13. Despite the tighter deficit and cost Fiscal Policy recovery by NEPCO, gross debt continued to grow to 95.1 percent of GDP by end-2016. This 12. The central government’s fiscal aggregates reflects muted economic growth coupled with improved in 2016 backed by introduced measures a higher debt stock. The debt stock increased and limiting spending. The budget deficit improved by 4.9 percent to US$ 36.8 billion by end-2016 by 0.3 pp in 2016 to an estimated -3.2 percent of compared to end-2015 with 60.5 percent of the debt GDP (compared to -3.6 percent in 2015), despite denominated in local currency (Figure 16). Higher a 0.3 pp reduction in grants. The primary deficit borrowing needs by the Water Authority of Jordan slightly widened however to 0.2 percent of GDP (WAJ), whose debt is government-guaranteed, was on account of a 0.4 pp fall in interest payments a factor. WAJ’s higher financing needs stem from in 2016 yoy (Figure 15). Both fiscal and primary the impact of higher electricity tariffs and increased balances improved however by 0.6 pp and 0.2 pp of demand for water from Syrian refugees.9 NEPCO estimated GDP respectively when excluding grants. which had posed debt pressures since 2013, due to The improved budget deficit was a result of a 0.5 importation of oil versus cheaper gas supply from pp increase in domestic revenues coupled with a Egypt with unchanged tariffs, achieved cost recovery 0.1 pp reduction in expenditures. The cutback in in 2015 (Refer to paragraphs 60 and 76). Debt held expenditures was mainly due to a 0.4 pp reduction by WAJ and NEPCO combined (including advances in capital expenditures that outweighed a 0.3 pp from the treasury and on-lending loans) constitute increase in current expenditures which itself resulted about 25.7 percent of Jordan’s gross debt. The Tariff from a 0.6 pp rise in expenditure on defense and Adjustment Mechanism introduced as of 1 January security. Permanent measures contributed to the 2017 and activated as of 1 April 2017 is expected improvement in fiscal balance, including: (i) An to at least maintain cost recovery for NEPCO.10 To increase in: a. cigarettes prices by JD 0.05/packet; b. meet financing needs, the government issued a US$ cigarettes prices by JD 0.10/packet in Aqaba zone; 1 billion 10-year Eurobonds on October 24th, 2016, c. diesel, kerosene and gasoline prices by JD 0.025/ its only tap of international capital markets that year. liter; d. the special sales tax on wines and spirits; While the issuance was not guaranteed by the US (ii) The removal of 2015 GST exemptions including Treasury, at a yield of 5.8 percent and coupon rate on clothes, shoes, watches, jewelry; (iii) Adding an 9 Refer to paragraph 59 of Special Focus 2 “Welfare Impact of extra fee for “transfer of titles” on used vehicles; and Recent Price Changes in Electricity and Water” featured in this (iv) Reducing the depreciation allowance on used Jordan Economic Monitor. imported cars. 10 As of 1 June 2017, the Fuel Clause was kept at zero because the three-month moving average of the Brent oil price has remained below the threshold of $55/bbl. Recent Economic and Policy Developments | 17 THE WORLD BANK of 5.75 percent, rates were more favorable to the exemptions from a larger set of products (effectively government than the US$ 500 million Eurobond raising the Good and Services Tax to 16 percent issued 11 months prior for the same tenor at 6.125 on selected goods and services including internet percent coupon. The government issued JD 5.46 (from 8 percent)), increasing custom duties on non- billion worth of Treasury bills and bonds in 2016 essential imported goods by 5 percent, increasing diversifying its instrument mix by re-introducing fuel prices by 3-8 percent, increasing taxes on 6-month Treasury bills, 2 and 3-year Treasury telecom services from 8 to 16 percent, increasing bonds, and 5-year floating rate Treasury Bonds at fees on passports from JD 20 to JD 50, adding limited sizes and inaugurating its 10-year Treasury further taxes on cigarettes, and introducing a 10 Bond issue in September 2016. Issuances of ten- percent tax on soda beverages. Expenditure-limiting year Treasury Bonds accounted for about 21 percent measures include deducting 10 percent from civil of the total value of securities issued, the highest of servants’ monthly salaries that exceed JD 2,000 and any instrument. The Ministry of Finance sought to setting a cap of JD 3,500 on public sector salaries. further diversify its debt instruments. After years of Expenditure allocations to current and capital setting up the legislative framework, Jordan issued expenditures for 2017 were reduced by JD 133 its first sovereign Sukuk in October 2016 for JD 34 million and by a further JD 204 million in May 2017. million with 5-year tenor with a 3.3 coverage issue. Cabinet indicated that capital expenditure projects This followed the May 2016-issued 5-year Sukuk that were reduced in the latter cut would be financed for NEPCO priced at 3.5 percent. A second 5-year by Public Private Partnerships (PPPs) and announced NEPCO Sukuk was issued in March 2017 priced at the adoption of some PPP projects. The Government 4.1 percent (Murabaha rate). Additionally, in a deal of Jordan started a Train the Trainers (TTT) Program that was more than three times oversubscribed, for Public Investment Management (PIM) and PPP, the Ministry of Finance issued a US$ 500 million a prerequisite towards implementation of the PIM Eurobond (not guaranteed by the US Treasury) governance framework and enhanced efficiency in on April 26th 2017 with a yield of 5.875 percent public resource allocation. Further, the authorities maturing in 2026. adopted an electricity Tariff Adjustment Mechanism to take effect as of 1 January 2017 to mitigate against 14. The fiscal deficit (excluding grants) further losses by NEPCO. A tariff increase would be improved in Q1-2017 although debt remains triggered should the oil price exceed NEPCO break- elevated, as new fiscal measures are adopted. even point (Box 6). Future policy changes include Excluding grants, the overall central government’s amending the income tax law. fiscal and primary deficits aggregates improved in line with the fiscal consolidation program in the first quarter of 2017 narrowing by 0.26 and 0.19 percentage points of estimated GDP respectively compared to Q1-2016. With a 62 percent reduction External Position in grants received in this period, the fiscal and primary deficits including grants widened by 0.04 and 0.11 15. Despite falling exports, the trade in goods percentage points of estimated GDP respectively. deficit narrowed for the second year in a row The non-grant fiscal balances improved due to lower buttressed by lower energy imports. The trade expenditures as revenues slightly underperformed in goods deficit receded by 7.5 percent in 2016 Q1-2016 levels (as a share of GDP). Debt increased yoy reflecting 6.2 percent lower imports of goods to US$ 37.3 billion by end-March 2017 (95.4 offsetting a 4.1 percent decline in total exports of percent of adjusted GDP). Fiscal measures adopted goods (Figure 17). The contraction in imports was earlier in the year aimed to improve Jordan’s fiscal driven by a 23.4 percent drop in energy imports standing with more planned in the medium-term reflecting the combined effects of lower international in line with the IMF program. Revenue-raising oil prices on average in 2016 compared to 2015, measures introduced in 2017 include removing tax and some impact from the diversification of energy 18 | Recent Economic and Policy Developments JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Trade in Goods Balance Current Account Balance Imports Exports Current Transfers Income Account Trade Deficit Energy Imports (rhs) US$ million Trade Balance Current Account Exports of Phosphates (rhs) Exports of Potash (rhs) US$ bln US$ bln 10,000 25.0 7.0 8,000 6.0 6,000 20.0 4,000 5.0 2,000 15.0 4.0 0 -2,000 2009 2010 2011 2012 2013 2014 2015 2016 10.0 3.0 -4,000 2.0 5.0 -6,000 1.0 -8,000 0.0 0.0 -10,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 -12,000 FIGURE 17. The trade in goods balance narrowed despite FIGURE 19. The current account widened despite an lower exports of phosphates and potash… improved trade balance… Source: Central Bank of Jordan and World Bank staff calculations Source: Central Bank of Jordan and World Bank staff calculations Annual Domestic Exports to Top Destinations Total Workers Remittances (yoy growth) U.S.A. Saudi Arabia India UAE Iraq Kuwait Syria GCC Percent (%) 15.0 JD Thousand 1,600,000 10.0 1,400,000 1,200,000 5.0 1,000,000 0.0 800,000 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 600,000 -5.0 400,000 -10.0 200,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 -15.0 FIGURE 18. …and as Jordan’s exports to the GCC, Iraq FIGURE 20. …as affected by slower remittances and Syria continue to suffer Source: Central Bank of Jordan and World Bank staff calculations Source: Central Bank of Jordan and World Bank staff calculations sources towards renewable energy and cheaper potash exports while those of phosphates declined liquefied natural gas (LNG). Domestic exports of by 17 percent. Exports of food and live animals also goods on the other hand, 8.9 percent lower than faced significant decline of 19.9 percent. While 2015, continued to be challenged by land route domestic exports contracted, re-exports surged closures to Iraq and Syria that remained closed by 26 percent in 2016 yoy due to the re-export of throughout 2016 despite high-level discussions high-value aircraft parts. Trade-in-goods results for to potentially reopen. As such, exports to Iraq and the first two months of 2017 (2M-17) also reflect Syria fell by 32 and 64 percent, respectively. Exports a narrowing trade balance of 4.4 percent compared to Saudi Arabia reversed trend in 2016 declining to the same period in 2016 led by a 12.5 percent by 18 percent (mainly due to lower exports of live pick-up in total exports that offset 3.4 percent higher animals and fruits and vegetables in the first half of imports. The rise in exports was mainly driven by 2016 due to price effect). Kuwait’s exports, partly an 8.1 percent surge in domestic exports despite capturing demand from the Iraqi market, rose by downward pressures generated from closure of 9.8 percent. However, overall growth of exports to trade routes with Iraq and Syria. Exports to GCC the GCC market contracted by 7.3 percent as did and Syria dropped by 20 and 23 percent yoy during India’s (Figure 18). From a product perspective, 2M-2017, respectively, while exports to Iraq reveal lower international prices of potash due to global a tempered rebound of 10 percent yoy although oversupply resulted in a 30.6 percent decline in largely reflecting a low-base effect. Recent Economic and Policy Developments | 19 THE WORLD BANK Reserves and Import Coverage Ratio Headline and Core Inflation - yoy growth Foreign Reserves in JD Reserves as months of imports, excluding re-exports, rhs Headline Inflation Core Inflation Percent (%) Foreign Reserves in JD Reserves as Months of Imports 8 12,000 12.0 6 10,000 10.0 8,000 8.0 4 6,000 6.0 2 4,000 4.0 2,000 2.0 0 Jan-15 Jan-16 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 0 0.0 Dec-16 -2 Sep-16 Oct-16 Nov-16 May-16 Feb-16 Feb-17 Mar-16 Mar-17 Jun-16 Jan-16 Jan-17 Apr-16 Apr-17 Aug-16 Jul-16 -4 FIGURE 21. Stock of foreign currency reserves decline FIGURE 22. Inflationary pressures appear since late 2016 Source: Central Bank of Jordan and World Bank staff calculations Source: Department of Statistics and World Bank staff calculations 16. The current account deficit widened of donor financing including the second tranche of a slightly to 9.3 percent of GDP in 2016 led by lower US$ 250 million Development Policy Loan from the current transfers. Compared to 9.1 percent of GDP World Bank, with $1.63 billion (61 percent) of the in 2015, the current account deficit widened due 2016-2018 Jordan Response Plan funded in 2016.11 to 0.8 and 2.7 pp of GDP declines in the services Reserves further declined in early 2017 dropping account and current transfers despite 0.4 and 2.9 a further 11.7 percent to US$ 11.4 billion by- end- pp improvements in the income account and trade- April 2017, the lowest since October 2013, but still in-goods deficits, respectively (Figure 19). The covering 7.8 months of imported goods (excluding narrowing of the income account deficit was led by re-exports). The decline in reserves is partly due to a 0.4 pp pickup in investment income. Meanwhile, an Arab Bank deal for which local investors bought the decline in the services account was mainly USD from the Central Bank (Figure 21). due to 0.5 and 0.6 pp decreases in travel (net) and government services (net), respectively, with the former representing tourists’ reluctance at visiting Jordan amidst rising security concerns during the period captured. However, since November 2016, Monetary Policy and tourist arrivals and receipts have improved through April 2017 yoy. The decline in current transfers in Finance 2016 was mainly a result of a 2.8 pp drop in inflows. Of these, remittances regressed 2.4 percent (or 18. After two years of deflation, Consumer 0.5 pp of GDP) affected by lower oil prices which Price inflation has resumed. Jordan witnessed impacts Jordanians working in the GCC but on an deflation for the second year in a row in 2016 largely improving trend since November 2016 (Figure 20). due to an average decline in international oil prices and lower food prices with Consumer Price inflation 17. A combination of lower inflows, exchange averaging -0.8 percent (period average) compared rate pressure and rising dollarization weighed on to -0.9 percent (p.a.) in 2015.12 Core inflation the stock of reserves held at the Central Bank. By (excluding food, transportation and fuel) abated end-2016, the stock of foreign currency reserves closer to its long run average due to lower rents reached US$ 12.9 billion reflecting a tempered 11 For more on the Development Policy Loan, refer to rebound compared to the past six months, although paragraph 60 of Special Focus 2 “Welfare Impact of Recent still lower than end-2015 by 9 percent, partly due to Price Changes in Electricity and Water” featured in this Jordan Economic Monitor. several one-off factors. This is despite the issuance of a US$ 1 billion Eurobond in October and receipt 12 The average crude oil spot price in 2016 was 42.8 $/barrel compared to an average of 50.8 $/barrel in 2015. 20 | Recent Economic and Policy Developments JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Drivers of Core Inflation Interest Rates Percent (%) 7 Average Lending Rates (%), Nominal Policy Lending Rate (%), Nominal 6 Average Lending Rates (%), Real Policy Lending Rate (%), Real 5 4 12 3 10 8 2 6 1 4 0 2 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 -1 0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 -2 -2 Other Personal Effect Personal Care Education Home Maintenance Rents -4 Clothing and Footwear Tobacco and Cigarettes Core Inflation growth Communication FIGURE 23. Tobacco, cigarettes and ‘other’ items drive FIGURE 25. Real interest rates at recent low due to core inflation. inflation Source: Department of Statistics and World Bank staff calculations Source: Central Bank of Jordan and World Bank Deposit Dollarization Rate (%) tariffs would also contribute.14 By March 2017, and at 3.8 percent average for Q1-2017, headline inflation 30.0 reflected the highest period average recorded value 25.0 since December 2013; although it declined slightly 20.0 to 3.7 percent by April-2017. Inflation was fueled 15.0 by higher prices of transportation costs and fuel 10.0 5.0 and lighting (both related to oil prices) followed by 0.0 tobacco and cigarettes and rents.15 Jan-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Jan-17 Mar-17 Mar-11 Nov-12 Nov-13 Mar-15 Nov-16 19. Dollarization rates reached 19.5 percent by end-March 2017. The dollarization rate of FIGURE 24. Dollarization rising since October 2016 deposits (share of deposits in USD/total deposits partly due to several one-off factors in the money supply) rose by 100bps in December Source: Central Bank of Jordan and World Bank 2016 alone to 18.9 percent end-2016 compared to its end-2015 rate of 17.0 percent (Figure 24). The and miscellaneous items that fueled the reduction consequent rise of dollarization rate in March 2017 averaging 2.2 percent in 2016 from 3.4 percent in to 19.5 percent was partly due to JD 442 million of 2015 (Figure 22 and Figure 23).13 Headline inflation data reclassification of bank deposits and to the Arab has picked up since November 2016 and is expected Bank share deal. to accelerate into 2017, due to higher oil prices’ impact on transportation and fuel prices, the impact 20. The Central Bank responded to the decline of raising the minimum wage, and higher costs in reserves and rising dollarization with raising related to the government’s introduction of fiscal interest rates on monetary policy tools, ending measures of taxes, fees and custom duties in 2016 a three-year expansionary monetary policy. The and 2017 (Refer to paragraphs 12 and 14). Potential Central Bank of Jordan raised its overnight dinar electricity tariff increases and their impact on water deposit rate, one-week repurchase and deposit rates 14 For a discussion on tariff changes in electricity and water, refer to Special Focus 2 “Welfare Impact of Recent Price Changes in Electricity and Water” featured in this Jordan Economic Monitor. 13 This miscellaneous aggregate category includes alcoholic beverages, water and sanitation, household furnishings, health, 15 Headline and core inflation reached 0.8 percent yoy and culture and recreation, restaurants and hotels, insurance 3.1 percent yoy in December 2016. By April 2017, headline connected with transportation, contribute to other unions, other and core inflation had risen further to 3.5 percent yoy and 3.6 services. percent yoy, respectively. Recent Economic and Policy Developments | 21 THE WORLD BANK Commercial Bank Lending Credit Extended to SMEs Loans Total Lending to Private Sector Number of Project SMEs, rhs Total Lending to Public Sector JD million Jordanian Dinar Number Total Lending 35,000,000 80 25,000 30,000,000 70 70 20,000 25,000,000 60 50 20,000,000 15,000 40 15,000,000 36 37 30 10,000 10,000,000 22 25 20 15 5,000,000 13 12 12 10 5,000 6 8 9 2 3 0 0 0 0 0 0 0 0 0 0 0 0 0 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 0 Oct-13 Oct-14 Oct-15 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Jan-14 Apr-14 Jul-14 Jan-15 Apr-15 Jul-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Industrial Renewable Tourism Agriculture Information Sector Energy Sector Sector Sector Technology Sector FIGURE 26. Commercial bank lending to both private FIGURE 27. …SMEs benefitting from new credit channels and public sector continues to grow… across sectors Source: Central Bank of Jordan and World Bank Source: Central Bank of Jordan and World Bank by 25 basis points each, effective from 18 December alternative sources of financing including Sukuks 2016, in light of the Fed’s recent monetary tightening and concessional borrowing from multilateral and to maintain the JD-USD deposit rate spread. CBJ bilateral organizations. CBJ’s September 2016 kept its rediscount rate and the overnight purchase circular announced a subsidized 1.0 percent interest agreement intact in order to stimulate domestic rate for extended advances to all targeted economic credit. However, in response to rising dollarization sectors (industry, tourism, agriculture, and IT which and pressures on the peg, CBJ increased its four was added in 2016) for a period of 10 years for key rates by 50 bps each on 22 February 2017.16 projects outside of Amman especially for Small and The third interest rate hike of 25 bps transpired in Medium Enterprises.18 Credit extended to SMEs via direct response to the Fed’s equivalent rate hike the CBJ’s financing program grew by 29 percent announcement on 19 March 2017, only the Fed’s in value terms and with 76 percent more projects third in 10 years (Figure 25).17 Despite these rises, benefitting in 2016 yoy (Figure 27). More broadly, real interest rates are at a recent low given rising the CBJ announced its 2018-2020 financial inclusion inflation. strategy in November 2016 which includes further measures to improve financing options for SMEs, 21. Commercial banks’ lending to the private micro-finance services, support financial literacy and sector markedly improved in 2016 in part due enhance consumer protection in the financial sector. to dividends from improved access to finance The CBJ had already supported efforts at improving measures. Commercial banks’ lending to the access to finance such as through supporting the private sector averaged 8.3 percent monthly yoy establishment of Jordan’s first credit bureau, licensed growth in 2016 compared to 2.6 percent in 2015 in December 2015. (Figure 26). Lending to the private sector rose to 10 percent yoy in December 2016 and further to 22. Jordanian banks continue to be broadly in 10 percent yoy in March 2017. However, lending sound standing. Banks’ nonperforming loans (NPL) to the public sector receded from 50.4 percent ratio improved for the fifth consecutive year to 4.4 average monthly yoy growth in 2015 to 15.9 percent percent by end-2016 from 8.5 percent end-2011 in 2016, and 1.9 percent in the first three months and the lowest since 2008 (4.2 percent) (Table 1). of 2017, reflecting the public sectors’ resorting to However, banks’ Return on Equity (ROE) and Return on Assets (ROA) both declined to 8.8 percent and 16 The CBJ weekly repo rate, re-discount rate, interest rate on repurchase agreements (overnight), and the overnight deposit 1.1 percent by end-2016 (compared to 10.3 percent window rate. and 1.3 respectively by end-2015), respectively. 17 The Fed’s and CBJ’s announcements of 25 bps increases each occurred on 17 March 2017. The CBJ’s rate hikes took 18 Circular to Licensed Banks number 4/11843 dated 7 effect on 19 March 2017. September 2016. 22 | Recent Economic and Policy Developments JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Amman Stock Exchange Weighted Index 23. While the Amman Stock Exchange Index Point (ASEI) retracted in 2016 reflecting general 4,800 investor sentiment, its performance is off to an 4,700 4,600 encouraging start in 2017. The ASEI declined by 3.8 4,500 4,400 percent yoy by end-2016 as a result of drops in the 4,300 4,200 banking, industry and services sector components 4,100 by 0.2, 3, 16.3 percent, respectively (Figure 28). 4,000 3,900 The Amman Stock Exchange’s total value traded 3,800 also shrunk in 2016 although by 31.8 percent yoy 2-1-2014 27-1-2014 18-2-2014 12-3-2014 3-4-2014 27-4-2014 20-5-2014 12-6-2014 6-7-2014 3-8-2014 25-8-2014 16-9-2014 13-10-2014 04-11-2014 26-11-2014 18-12-2014 1/18/2015 2/9/2015 3/4/2015 3/26/2015 4/19/2015 5/12/2015 6/4/2015 6/28/2015 7/22/2015 8/13/2015 9/6/2015 10/1/2015 10/26/2015 11/17/2015 12/10/2015 1/4/2016 1/26/2016 2/17/2016 3/10/2016 4/3/2016 4/25/2016 5/18/2016 6/13/2016 7/10/2016 8/1/2016 8/22/2016 9/21/2016 10/13/2016 11/6/2016 11/28/2016 12/21/2016 16-01-2017 07-02-2017 01-03-2017 23-03-2017 16-04-2017 compared to a 51 percent yoy increase in 2015. These results reflect the Jordan Investor Sentiment FIGURE 28. Stock Exchange makes headway in 2017 Index published by the Jordan Strategy Forum that broadly revealed a decline every month since March Source: Amman Stock Exchange and World Bank staff calculations to September 2016, albeit recovered slightly since to March 2017. The ASE activity rebounded in the The capital adequacy according to Basel III was first five months of 2017 recording a 1.6 percent 19.0 percent by end-2016 while the leverage ratio improvement from end-2016 to end-May 2017. The increased to 13.0 percent compared to 19.1 and 12.7 pick-up was mainly led by 0.3, 1.4 and 3.3 percent percent by end-2015, respectively. Banks’ exposure increases in the services, banking and industry to sovereign debt was lower for the second year in sectors, respectively, offsetting a 5.4 percent drop a row accounting for 36.2 percent of total assets in the insurance sector. The cumulative total value (and further to 35.5 percent by end-March 2017) traded at ASE by end-April 2017 increased by 114 compared to 40.6 percent end-2015. The net foreign percent compared to the same period last year, due asset position of commercial banks stood at minus to a 168 percent increase yoy in total value traded in US$ 1.4 billion by end-2016 compared to minus the financial sector which offset 11 and 26 percent US$ 2.8 billion end-2015. decreases in the total value traded in the services and industrial sectors, respectively. Table 1. Financial Soundness Indicators. (in percent unless otherwise stated) 2010 2011 2012 2013 2014 2015 2016 Nonperforming Loans/Total Loans 8.2 8.5 7.7 7.0 5.6 4.9 4.4 Provisions (in percent of classified loans) 52.4 52.3 69.4 77.0 77.6 74.7 78.2 Risk-weighted Capital Adequacy Ratio 20.3 19.3 19.0 18.4 18.4 19.1 19.0 Leverage Ratio 13.1 13.1 13.3 12.9 12.5 12.7 13.0 ROE 8.8 8.3 8.6 9.9 11.0 10.3 8.8 ROA 1.1 1.1 1.1 1.2 1.4 1.3 1.1 Net Profits Before Taxes (in JD million) 523.0 517.0 588.0 719.0 822.0 862.0 750.3 Liquidity Ratio 161.4 152.9 143.5 149.1 152.2 149.0 138.1 Growth Rate of Total Assets 9.6 7.9 4.3 9.1 4.9 5.1 2.8 Growth Rate of Customer Deposits 10.9 8.3 2.4 10.5 9.3 7.7 0.9 Growth Rate of Credit Facilities 8.6 9.8 12.5 6.3 5.2 9.6 8.7 * Preliminary and not annualized. Source: Central Bank of Jordan Recent Economic and Policy Developments | 23 THE WORLD BANK PROSPECTS 24. While sluggish, Jordan’s economy is monetary policy rates are also expected to continue anticipated to remain resilient yet demonstrate rising in line with the Fed’s expected rate hikes. slow adjustment. Jordan’s economy is expected With both fiscal and monetary policy tightening, and to pick-up marginally to 2.3 percent growth in given subdued growth, and limited fiscal space, the 2017 with a slightly higher uptake forecasted in the only viable option to kick start growth is through medium-term to average 2.6 percent over 2017- credible and decisive structural reforms, especially 2019 (Refer to Data Appendix). These projections are supply side ones to remove bottlenecks to growth. based on a status quo of geopolitical situation and The Economic Policy Council’s newly launched assume the realization of impacts of reforms related Economic Growth Plan for 2018-2022 bodes well to to stimulating private sector investments (such as stimulate some of these reforms. through improving predictability of regulations, improving access to finance for small and medium 27. A major challenge for the Jordanian enterprises, and trade facilitation) and higher exports authorities remains stimulating growth and job due to the European Union’s relaxation of Rules of creation while reining in the fiscal deficit – even Origin kicking-in, and as sectors such as tourism, more imperative as labor market indicators mining and construction improve. deteriorate and living conditions become more expensive as inflationary pressures appear. 25. The current account deficit is expected However, short of a positive shock such as the to narrow over the medium-term. In 2017, the reopening of trade routes with Iraq or a peaceful current account deficit is expected to narrow to 8.7 conclusion to the Syrian conflict, it is difficult to percent of GDP while energy imports are anticipated foresee an impactful jumpstart to growth unless to rise on account of higher forecasted oil prices. structural reforms are implemented at a quicker pace. In the medium-term, the current account deficit is Given the difficult socio-economic environment, the forecasted to tighten to an average of 7.3 percent introduction of fiscal adjustment measures to contain (2017-2019) due to stronger exports of garments the deficit and ease reliance on grants from donors and potash, and a turnaround in exports of services, will continue to prove difficult as reflected in the notably anticipated positive growth in tourism 2017 budget debates and austerity protests. Another receipts, and positive inflows of remittances from primary challenge to Jordan remains navigating the GCC given higher oil prices. the storm of implications from the Syrian crisis, including hosting more than 660,000 registered 26. Fiscal and monetary policies are expected Syrian refugees, a situation that is becoming even to remain contractionary. Fiscal consolidation more protracted. Securing donor support in the way will continue to predominantly focus on revenue- of budget support grants and concessional financing enhancing measures. While financial viability of the is critical both vis-à-vis Jordan’s external position energy sector has improved, financing needs in the and to strengthen Jordan’s prosperity and resilience water sector continue to pressure the debt situation as it implements its reform agenda, Jordan Economic as operation and maintenance cost recovery is not Growth Plan and Jordan Compact. expected until 2021.19 Given Jordan’s peg to the USD, 19 Refer to paragraph 78 of Special Focus 2 “Welfare Impact of Recent Price Changes in Electricity and Water” featured in this Jordan Economic Monitor. 24 | Prospects JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST SPECIAL FOCUS reaching an average of 15.3 percent in 2016. While I. A TIME FOR GREEN the fiscal deficit was reined in to 3.2 percent in 2016, the gross debt-to-GDP ratio rose to 95 percent, GROWTH AND CLIMATE overstepping the 60 percent legal guidance. About 25 percent of that debt is due to debt incurred by ACTION20 National Electric Power Company of Jordan (NEPCO) and the Water Authority of Jordan (WAJ) whose debt Climate action is an important part of a sustainable is government-guaranteed. This reveals how the solution to addressing Jordan’s notable fiscal, Jordanian economy is dependent on international economic and climate vulnerabilities. Jordan’s energy markets and vulnerable to any uncertainties Vision 2025, the recently launched National Green such as oil prices and energy imports, though these Growth Plan and Jordan’s Nationally Determined are now to a larger extent mitigated in the energy Contribution (NDC) on Climate Change outline sector due to a number of implemented reforms.21 such a pathway. While some building blocks are in place, in order to fully optimize Jordan’s potential 29. Dependence on imported fossil fuels for low-carbon economic transformation, further to serve the growing demand for electricity, analysis is required to design public policy in water and transportation by industrial and non- line with macroeconomic and fiscal objectives, industrial consumers has a direct fiscal, climate mobilize climate finance and strengthen private and environmental impact. The former caused by sector engagement. Such an endeavor will require energy subsidies and the latter by greenhouse gas coordinated efforts of all ministries with a leading emissions and local pollution. These impacts can role by the Ministries of Finance, Environment, and be reduced and fiscal resilience can be increased Planning and International Cooperation. through policies and investments to promote clean technologies, energy efficiency and resource conservation in energy, water, transport and Context industrial sectors. 28. Jordan’s economy has been recently 30. Since 2011, Jordan’s energy sector has characterized by sluggish growth, high undergone major structural transformation. The unemployment, and fiscal and debt vulnerabilities Government of Jordan continues to implement which are impacted by the energy and water a number of major reforms, including full sectors. The economy has lost momentum in the past liberalization of fuel prices over time, a gradual and couple of years due to spillovers from the neighboring ongoing increase in electricity tariffs towards full security situation in Syria and Iraq. Economic growth cost recovery, the construction of infrastructure to has averaged 2.6 percent over 2010-2016 reflecting import natural gas with the LNG terminal operational this and other exogenous shocks such as the halting since mid-2015, and the introduction of a number of gas supplies from Egypt in 2012, slowing to 2.0 of measures to attract private capital into renewable percent in 2016. Unemployment is structurally high, 21 In 2013 and 2014, the central government transferred 6.0 percent of GDP and 7.0 percent of GDP respectively to NEPCO 20 Authored by Léa Hakim (Economist), Monali Ranade and WAJ combined. As of 2015, NEPCO achieved cost recovery (Senior Operations Officer) and Concepcion Aisa Otin (Senior and resorted to commercial bank borrowing and government Financial Officer); World Bank. transfers to WAJ have been limited. Special Focus | 25 THE WORLD BANK BOX 3. Population Effect on Water Demand. Jordan has faced a steep increase in water demand in recent years as a result of rapid population growth (the Syrian refugee influx led to an increase in demand by 21 percent throughout the country and a 40 percent increase in demand in the northern governorates), income growth, and urbanization. Future climate projec- tions are likely to show an increase in mean annual temperature of about 2oC by 2050 with the country becoming warmer and drier with frequent heat waves and fewer days of frost. Water availability in this scenario is likely to continue to decrease and the demand for energy to treat and transport water likely to increase. Source: World Bank Jordan 2nd Programmatic DPL energy. Initial assessment indicates that total carbon 32. Sustainable economic growth, human emissions from the power sector in Jordan has development and climate action in Jordan need decreased by 31 percent during 2014-16 (carbon to be achieved in the context of scarce water intensity decline of 35 percent) while reducing and arable land resources, complex regional losses in the National Electric Power Company and geopolitics, dependence on fossil fuel imports continuing to absorb a large influx of refugees. This and a growing young population. The Jordan World exemplifies the convergence of fiscal strengthening Bank Systematic Country Diagnostic underscores and climate change mitigation. water and climate change as the main constraints to eradicating extreme poverty and promoting shared 31. While Jordan has been and is prosperity in a sustainable way in addition to energy, implementing structural and fiscal reforms, natural resources and the environment.24 (Box 3) more can be done to move to a transformational Rainfall variability, which causes both droughts and low-carbon and green economic growth path. floods, is likely to increase extreme precipitation, The Government of Jordan delivered a number of which causes flash flooding and landslides, can reforms to improve Jordan’s fiscal position in the have a severe impact through loss of lives, land wake of the International Monetary Fund Stand-by and infrastructure. Increasing temperatures, with Arrangement (2012-2015) and current Extended frequent heat waves, are likely to increase demand Fund Facility. These have included removal of fuel for electricity for cooling and dependence on subsidies in 2012 while introducing a cash transfer groundwater. for vulnerable households.22 Specific to the water and energy sectors, the government has also implemented measures to enhance the financial Jordan’s Climate Change viability and enhance energy efficiency in the sectors including as part of the World Bank’s Programmatic and Green Economy Development Policy Loans.23 However, there is untapped potential for Jordan to move towards a Commitments green economy and reap environmental, social and financial rewards, including from tapping into global 33. Jordan is a party to the UN Framework climate finance funds. Jordan also has the opportunity Convention on Climate Change (UNFCCC) and is to attract private financing to further benefit from its one of the most active and pioneering countries renewable resources. Due to its geographic location, in the region. Jordan has submitted three National Jordan is one of the best places in the world to invest Communications on Climate Change (1997, 2009 in solar energy projects (PwC 2016). and 2014). Jordan was amongst the first group of developing countries to join the Kyoto Protocol in 22 Refer to paragraphs 12 and 14 for some EFF fiscal reforms and footnote 42 on the cash transfer program. 2003 and proactively supported innovation in the 23 For a more extensive discussion of reforms in the water and energy sectors, refer to Special Focus 2 “Welfare Impact 24 World Bank. 2015. Jordan - Promoting Poverty Reduction of Recent Price Changes in Energy and Water” featured in this and Shared Prosperity: Systematic Country Diagnostic. Jordan Economic Monitor. Washington, DC: World Bank Group. 26 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Jordan's Sectoral Breakdown of Total GHGs in 2006 than 0.06 percent of global emissions. The total GHG (TNC Report 2014) emissions in Jordan were 28.72 million tCO2e with the share of emissions from fossil fuels for energy LULUCF 3% Others related activities (including transport) accounting Manufacturing Agriculture industries 9% 10% Other sectors (Commercial, for 73 percent of the total emissions in 2006 5% Energy (incl. Transport) residential and (Figure 29). The modeled impact of climate change Industrial Processes 73% agricultural) 9% Transport 16% 10% on Jordan notably affects the already scarce water Waste Energy 10% industries resources and consequently, the agricultural sector, 28% Breakdown of Energy biodiversity and ecosystems, coastal areas, urban (incl. Transport) areas, the health sector, all of which have socio- Compiled figure courtesy A. Abdelfattah economic repercussions on local communities. FIGURE 29. Jordan’s Sectoral Breakdown of Total GHGs The NDC includes specific commitments to reduce in 2006 GHG emissions (mitigation) and to reduce the Source: Jordan Third National Communication, 2014. vulnerability to climate change impacts (adaptation). Box 4 provides a snapshot of Jordan’s NDC. carbon markets. Jordan’s National Climate Change Policy of 2013 is also the first comprehensive policy 35. Despite Jordan’s vulnerability to climate in the Arab region and the Middle East. Continuing change, the economic cost has not been quantified this leadership, the Government of Jordan has ratified which constrains the fiscal and economic urgency its Nationally Determined Contributions (NDC) of action today. There has not yet been a concrete under the Paris Agreement in November 2016. calculation of the negative impacts of climate change on the country’s economy based on global GHG 34. While Jordan is not a major global emitter trends. Such an assessment would need to estimate of Greenhouse Gases (GHG), it is highly vulnerable the direct costs from climate change across sectors to impacts of climate change, especially on water such as the environment, agriculture, human health, resources. Jordan’s GHG emissions represent less and indirect costs resulting from these effects BOX 4. Snapshot Jordan’s Nationally Determined Contributions (NDCs). The Government of Jordan has submitted a comprehensive Nationally Determined Contribution (NDC) to- wards climate change mitigation and adaptation to the Paris Agreement. The energy sector is a priority for Jor- dan, from economic, social and environmental perspectives; accounting for the largest share of Jordan’s emissions. This is reflected in the large share of energy related projects, which collectively add more than 1500MW renewable energy; reach more than 100,000 households, improve industrial processes in cement, chemical, food and steel, among others and increase share of public transport and efficient vehicles. Water is a major climate mitigation and adaptation concern from multiple perspectives including: access; utilization, such as climate smart agriculture practices; energy consumption for water pumping; conservation in all sectors, and waste water treatment. Forestry sector projects include both plantations in urban and northern areas and rangeland protection. As transportation is also a major emitter, public transport is important for the urban centers to reduce congestion from fast-growing vehicle population and projects include a Bus Rapid Transit (BRT) project and promotion of hybrid public vehicles. The expected cost of achieving Jordan’s NDC target of reducing GHG emissions by 14 percent over the baseline scenario by 2030 is USD 5.7 billion. The NDC target includes an unconditional target of 1.5 percent compared to business as usual scenario levels which the government commits to achieving with its own resources, and a conditional target of 12.5 percent contingent upon external support including access to financing, technology and capacity building. This 14 percent target is based on expected implementation of around 70 sectoral projects and relevant policy measures. The Government of Jordan has secured USD 542.75 million through its own means to meet the unconditional target. Accordingly, Jordan now requires at least USD 5.157 billion to achieve its con- ditional target. The cost of achieving the mitigation target is based on estimates articulated in the 2014 National Communication report to the UNFCCC and projects identified subsequently and will benefit from development of a fully costed and comprehensive strategy to align with broader development goals in Jordan. Source: Jordan NDC Special Focus | 27 THE WORLD BANK Jordan 2025- A National Vision and Strategy Ministry of Energy & Mineral Resources Ministry of Environment National Energy Strategy, 2007-2020 Environmental Law 2017 Renewable Energy JEF bylaw 66 in 2009 National Energy Efficiency National Climate Change Policy Action Plan (NEEAP), 2013 2013-2020 Jordan INDC 2015 I Ministry of Transport MoMA & Other Ministry of Water & Transport National Ministries Irrigation Strategy, 2014 Waste Strategy, 2015 RE and EE Policy 2015 Greater Amman Ministry of Ministry of Finance Authority Agriculture PPP Law 2015 Amman Investment Law Sustainable Action 2003 plan, 2012 Amman 2025 Master Plan, 2008 FIGURE 30. Jordan Energy Sector Climate Change Action Source: PMR 2016 slowing Jordan’s economic growth. These changes and programs. Figure 30 presents an overview of would impose damages on different segments the relevant policies and strategies that provide of Jordan’s economy and society. Without this the overall enabling framework for Energy Sector- information, analysis to compare the cost of action specific Climate Action in Jordan. The common factor versus inaction is incomplete. that binds them is the National Vision and Strategy for Jordan 2025. While the government is cognizant 36. In Jordan, the National Climate Change of the challenges surrounding climate change and Policy and related interventions rely on a has supported specific efforts, there is a need for framework of the laws, and strategies developed more holistic efforts towards implementation and by sectoral line Ministries and relevant authorities. achieving “positive externalities” such as job creation. Jordan has many of the building blocks in place and On the implementation level, a lack of coordination the time is ripe to build on existing sector-specific and cohesion across ministries, agencies and strategies and experiences. As a country keen to development partners can be the source of mixed transform its economy, to some extent, Jordan is signals regarding short term needs and longer also a casualty of its own success. A quick review term development priorities, which is particularly reveals a vast number of sectoral plans, strategies challenging for private sector participation. Enhancing 28 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Cluster 1: Green Growth Corridor The green growth corridor is focused on NEPCO’s Green Corridor project which runs along the backbone of Jordan between Aqaba and Amman. This provides a framework for a number of interlocking projects. The focus is on improv- ing Jordan’s energy resilience as well as providing new economic growth opportunities along the route. Acknowledging the long term need to move away from fossil fuels to provide baseload energy, solar technologies such as Concentrated Solar Power (CSP) is recommended for exploration along the route Key Cluster 3: Rural Resilience Rural Area The rural resilience cluster aims to strengthen rural communities Urban Area and their surrounding ecosystems Green Growth Corridor by diversifying incomes, ensuring resource availability and reduc- Cluster 2: Smart Urban ing environmental impacts. Job The urban cluster aims to trans- provision is an important aspect form Jordan’s urban areas into of this rural cluster to encourage green cities that are attractive equitable distribution of the refu- to both investors and residents gee inflows across the Kingdom. through a series of flagship green Tourism is also introduced, on the growth projects. The cluster se- basis that the other interventions lects a group of interventions can help to boost the perceived which can be used to publicise stability of the area- this is of the urban area as ‘green’ to po- crucial importance given current tential investors while also creat- challenges in the tourism sector ing an improved urban space to around international perceptions live in. of Jordan’s safety. FIGURE 31. Jordan National Green Growth Plan Clusters Source: The National Green Growth Plan, 2016 the complementarity of reforms across sectors and investors through a “direct submission proposal” coordination among agencies would improve the procurement scheme, a competitive tender; and ability of the government to align climate change and public procurement under “turnkey” contracts. In development priorities, articulate expectations from 2014, Jordan established net metering and wheeling the private sector, define specific climate-related arrangements to encourage small and distributed RE financing needs and opportunities, and strengthen located on industrial, commercial or residential sites. the role of citizens and civil society. In addition, the Government has set tax exemptions for RE systems and equipment from customs duties 37. Jordan holds a pioneering position in the and sales tax. As a result, Jordan has one of the MENA region on renewable energy. This reflects most advanced regulatory and policy frameworks the leading role played by the Ministry of Energy for RE investment in the MENA region.” This and Mineral Resources in achieving green growth policy framework has shown strong results, with in Jordan. “The Renewable Energy (RE) and Energy investments rising from zero in 2012 to, according Efficiency (EE) Law 2012 is at the core of Jordan’s to the Government, over USD 1.6 billion in 2016 RE Investment Policy framework. Under this and (OECD 2016). associated by-laws, Jordan has implemented incentive schemes and procurement methods for 38. Building on the strong linkages between awarding long-term power purchase agreements climate change, national development priorities to grid-connected RE projects, including: a feed- and the urgent need to create economic in-tariff (the first to be implemented in the Middle opportunities, the Government of Jordan intends East), unsolicited expressions of interest from to pursue a Green Economy pathway. The National Special Focus | 29 THE WORLD BANK Green Growth Plan for Jordan was launched in May Foreign Direct Investment (FDI) for the development 2017 and focuses on energy, water, waste, transport, of infrastructure projects, which would in turn tourism and agriculture sectors. The World Bank contribute to the involvement of the local workforce definition of Green Growth is growth that is efficient in and the development of human capital. While its use of natural resources, clean in its minimization such effects need to be modeled and quantified, of pollution and environmental impacts, and resilient investment in sustainable energy and climate positive in its consideration of physical disasters and natural related interventions could have a sizeable potential hazards in the face of a changing climate. The Green with spillover effects across Jordan’s economy (Box Growth Plan has identified three clusters: a green 5). The transition towards a low-carbon, green growth corridor, smart urban transformation and economy typically entails high short term costs. rural resilience (Figure 31). These three clusters These costs need to be appropriately quantified to represent the convergence between climate action, assess the impact on fiscal and debt sustainability. sustainable local development and macroeconomic considerations. The ‘Smart Urban’ cluster, for 40. Further analysis is essential to quantify instance, would include implementation of project the economic and job-generating impact from and policy interventions such as public transport, pursuing a green growth agenda. However, waste management and clean energy service sand preliminary indications and global assessment is building, vehicle and appliance standards. These positive: interventions would not only improve the quality of service delivery and the financial sustainability of • The National Green Growth Plan (NGGP utilities/service providers, it would also improve the 2016) notes that “despite high growth rates, quality of life of local residents. the Jordanian economy has created relatively few new skilled jobs, meaning many people of working age are still economically inactive or The Economic Case for have emigrated. The majority of jobs created by growth to date have been low-paid, low-skilled Climate Action jobs and have largely been taken by migrant workers due to the large proportion of skilled 39. Jordan has a strong economic argument Jordanians.”25 ILO survey26 results show that the to become more efficient in the use of its incidence of job informality among youth reaches energy resources, move towards climate friendly above 50 per cent in Jordan, with refugee crisis investments and contribute to reducing the increasing informality alongside deteriorating fiscal burden and enhancing economic growth wage levels and working conditions. The need although transition costs are likely to be high and for skills development and job creation presents will have to be carefully managed. Beyond the an opportunity to enable development of positive effects on the environment, including from skills for green jobs. Through a combination reducing GHG emissions, climate friendly policies of green growth and sustainable consumption and investment could support a reduction in the and production efforts, the six sectors, namely fiscal burden of the sector and higher economic energy, transport, water, agriculture, waste and growth. On the fiscal front, further reduction in tourism, have the “collective potential to attract dependence on commodity imports (oil and gas) sustainable green investments amounting to 1.3 in international markets. This, in turn, would bring billion U.S dollars and creating 51,000 new jobs additional stability to the budget due to a lower in the next 10 years” (SCP 2016). exposure to the fluctuation of commodity prices. • “The Jordanian Government has estimated In turn, this could support better debt management that RE and EE projects in Jordan could create leading to an enhanced credit rating for Jordan and around 2000-3000 jobs in remote and less a reduction in its cost of funding. The stimulation of 25 Jordan - National Green Growth Program, December 2016 economic growth could stem from the attraction of 26 ILO 2015 30 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST BOX 5. Potential Positive Economic Spillover Effects from Climate Smart Investments. Climate Smart Investment has the potential to support growth and sustainable development in Jordan. Some positive spillovers, additional to environmental impacts, include effects on: i. Debt management: The diversification of the energy matrix renders Jordan less dependent on foreign oil/gas imports thus creating its own market and making it less exposed to the volatility of energy prices. This brings stability and reliability to the Government’s fiscal balance and much less subject to “last minute” calls to the Ministry of Finance in order to issue funds for the utilities. ii. Labor market: Climate smart investments could result in a shift towards “green jobs” to the country. The shift needs to be managed to support net job creation. iii. Private sector development: Climate smart investments would reinforce and help the development of an incipient private sector in the area of sustainable energy and the development of their own technologies customized for Jordan needs. iv. International political positioning and additional funding: Positions Jordan as a serious actor in attracting climate change finance. developed areas in Jordan.” (OECD 2016) 41. Jordan’s renewable energy experience This does not include potential for increasing exemplifies the transformational role of concerted domestic manufacturing of solar PV or other government action that delivers multiple potential jobs across the renewable value chain. benefits, improving sustainability of the energy Initiatives such as the Jordan Renewable Energy sector, effectively engaging the private sector, and Energy Efficiency Fund (JREEEF) of the creation of local jobs, contribution to the global Ministry of Energy and Mineral Resources are climate agenda and moving towards a green helping create and address consumer demand economy. Continuing on this tremendous progress for RE and EE products. The Government of and undertaking key priority actions, particularly Jordan is also encouraging local manufacturing enhancing the energy grid to absorb more RE, will of efficient products in Jordan, which is likely to place Jordan on a low-carbon, green energy pathway. create additional green jobs across the energy This experience is also valuable for the overall efficiency value chain. Green Economy vision of Jordan. Climate mitigation • Every job needs to become greener to ensure goals in transport, waste, buildings and agriculture sustainable transformation towards a green sectors can further enhance the green economy economy. An ILO report identifies three sources agenda. Transport sector policies to encourage of change that contribute to creation of green public transport, fuel economy, electric vehicles skills and jobs – shifts between industries, and improved transportation services also provide development of new occupations and changing multiple benefits including: limiting fuel imports, skill profiles within occupations (ILO 2011). As improving local air quality, reduced commute/travel noted in Jordan’s Third National Communication times, creation of jobs in the transport system and to the UNFCCC, “with over 70 percent of its reduced carbon emissions. The buildings sector population under 30 years of age, Jordan’s big is another example where ‘enhancing building investment needs to be in its talent.” Skilled codes for newly established residential complexes Jordanians are the invaluable asset that Jordan targeting poor families’ would not only ensure proper needs to achieve transformation towards a insulation but through a link with the green building sustainable, low-carbon, climate resilient and codes also support efficient water and waste water green growth pathway. management and overall energy consumption. Special Focus | 31 THE WORLD BANK Proxy to Climate Relevant Expenditures A Role for Climate Total expenditures by climate relevant agencies (excl. salaries, wages, pensions) Total expenditures by climate relevant ministries (excl. salaries, wages, pensions) Share of total central budget expenditure (excl. salaries, wages and pensions), rhs Finance and Climate- Share of total central budget and unit agencies' expenditures (excl. salaries, wages and pensions), rhs USD Million Percent (%) 2,500 0.25 Smart Fiscal Policy 2,000 0.2 1,500 0.15 42. Jordan estimates the cost of meeting its 1,000 0.1 NDC targets at US$ 5.7 billion, however, detailed 500 0.05 assessment regarding the cost breakdown and 0 0 alignment with macro-fiscal targets need to be 2010 2011 2012 2013 2014 2015 2016e 2017p 2018p 2019p assessed. Mitigation actions in the NDC related FIGURE 32. Proxy to Climate Relevant Expenditures* to “developing and utilizing the local conventional Source: World Bank calculations based on General Budget and renewable sources of energy” or “rationalizing Department Budgets (2017 Budget Law and previous Budget Laws). energy consumption in all sectors” may require fiscal * Refer to footnotes 28 and 29 for list of included ministries and agencies. incentives, tax credits, tax relief or other instruments to incentivize achievement of the targets. Such instruments have a cost for the government in the relevant ministries’ current and capital expenditures short term until the longer run benefits materialize. excluding salaries, wages and pensions. If climate- As such, a comprehensive assessment of the cost relevant unit agencies’ budgets are included, the of mitigation and adaptation measures needs to total figure rises to an average of USD 1,948 million be undertaken in line with Jordan’s sustainable over 2000-2016 which is about 17 percent of development targets. total expenditures (excluding salaries, wages and pensions).29 These figures illustrate the scale that 43. Jordan is already spending considerable Jordan is already spending in terms of domestic sums on domestic climate change related finance climate finance and the projected increase in the and is a recipient of international sources of climate medium term. However, caution must be exercised finance. Climate finance encapsulates financing as the Ministry of Finance climate-relevant figures for climate change mitigation and adaptation are not included, and these proxy figures are likely actions that can stem from national, regional and to overestimate the total figure as all expenditures international sources. Despite spending an average are treated equally whereas in a proper CPEIR, each of USD 42.8 million per year (0.1 percent of GDP) on expenditure is evaluated based on how strongly it environmental protection from 2010-2015, Jordan is climate relevant. In terms of international climate spends a much higher share of its budget on climate finance, OECD DAC Statistics indicate that in 2014 relevant expenditure.27 On the domestic front, and Jordan received over USD 300 million towards short of conducting a full Climate Public Expenditure climate change related activities. Another form of and Institutional Review (CPEIR), Jordan is already domestic and international climate finance relates spending about USD 808 million per year on current to the Central Bank of Jordan’s financing program climate-relevant expenditure (2000-2016) with an for Small and Medium Enterprises (SMEs) for average of USD 1,002 million per year projected over Renewable Energy and Energy Efficiency projects. 2017-2019.28 This is a proxy only based on climate- The Jordan Renewable Energy and Energy Efficiency 27 Calculated based on Ministry of Finance General Finance 29 Climate-relevant unit agencies identified as: the Water Bulletin December 2016. Authority, Aqaba Railway Corporation, Housing and Urban 28 Climate-relevant ministries/agencies as identified from Developing Corporation, Jordan Hejaz Railways, Jordan the central government budget used here were the Ministry of Standards and Metrology Organization, Land Transport Industry and Trade, Ministry of Energy and Mineral Resources, Regulatory Commission, Jordan Maritime Authority, Aqaba Ministry of Agriculture, Ministry of Water and Irrigation, Ministry Development Corporation, Jordan Water Company (Miyahuna), of Environment, Ministry of Health, Ministry of Transport, Aqaba Water Company, Samra Electric Power Company, Ministry of Transport/Metereology Department, and the Jordan Jordanian Airports Company, Yarmouk Water Company, and the Royal Geographic Center. Energy and Minerals Regulatory Commission. 32 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Top Ten Donors for Jordan, Commitments, USD million Water Supply & Sanitation Climate Mitigation Both Mitigation and Adaptation Climate Adaptation 69.6 Total commitments by Climate Objective, USD million 0 50 100 150 200 250 300 Agriculture, Energy European Bank for Unallocated Forestry, Reconstruction and Development Germany /Unspecified Fishing 33.0 International Finance Corporation 81.1 28.5 Gal Envt EU Institutions Protection 7.0 Global Environment Facility Government & Korea Civil Society Sweden 19.3 0 20 40 60 80 100 120 FIGURE 33. Jordan - Climate-related Development FIGURE 34. Total Commitments to Jordan by Sector, USD Finance in 2014 from OECD DAC Statistics million Source: OECD DAC Statistics 2014 Source: OECD DAC Statistics 2014 Fund (JREEEF) channels funding from national and financing needs. While Jordan is working towards international sources to all sections of society. further improving its fiscal position, its historical dependence on grants and current high debt-to-GDP 44. Jordan enjoys strong relationships with ratio reflect its exposure with respect to mobilizing development partners, donors and multilateral external financing. More efficient fiscal spending institutions and these could be further leveraged. coupled with enhanced revenue mobilization and According to the OECD DAC statistics for 2014 the financial sustainability of the energy and water largest funders for projects that address climate sectors is required to improve the fiscal deficit and change include the EBRD, Government of Germany, limit further increases in debt. the International Finance Corporation and the EU. A majority of this funding is committed to 46. Jordan could tap a myriad of financial priority sectors such as Water and Energy and to instruments to finance green projects, although government and civil society activities. In addition, debt instruments need to be used cautiously development partners including the Agence bearing in mind Jordan’s high level of indebtedness. Française de Développment (AFD), United States Instruments include debt instruments stemming Agency for International Development (USAID), from domestic or international debt issuances, United Nations Development Program (UNDP), guarantees or syndicated loans. Jordan could also United Nations Environment Program (UNEP), leverage the legal and financial infrastructure in place Global Green Growth Institute (GGGI) and the since 2016 to be able to issue Sukuk bonds, Islamic World Bank continue to support development of finance bonds that are Shariah compliant, and also policies, projects and institutional mechanisms that meet a lot of the criteria of sustainable/responsible support climate change mitigation and adaptation investments. The main challenge would be identifying action. With stronger coordination and planning the underlying asset. Additionally, Jordan could also between the ministries of Planning and International explore tapping into additional instruments that Cooperation, Environment and Finance, and with attract a community of socially responsible investors leadership of Ministry of Finance (MOF) in leveraging or to finance green projects. Socially responsible financing, further international climate finance could investors are interested to invest in green bonds, become available to support climate action in Jordan. notes linked to ‘green indices’, Asset Backed Securities (ABS structures) using energy savings for 45. The mobilization of further climate finance example as assets. These kinds of structures have to implement the NDCs and Green Growth Plan the potential of providing additional confidence to would support multiple environmental, social investors since they have an asset backing them. and economic targets especially given Jordan’s This can be translated in a price decrease thus Special Focus | 33 THE WORLD BANK potentially improving the funding cost of the entity a monitoring, reporting and verification (MRV) behind the structure/issuance. In other words, the mechanism to capture climate action across all effect could be seen as a guarantee. Development sectors, and exploring matchmaking mechanisms to of reporting systems would support the overall debt enhance the ability of the public and private sectors management framework. Other instruments related to access existing and new financing sources. to concessional sources of finance are the Climate Adaptation and mitigation interventions in Jordan’s Investment Funds such as the Global Environmental NDC can be clustered geographically, and can also Facility (GEF), and from bilateral agencies including be clustered as projects and policy interventions (as AFD, KfW Development Bank, and USAID. Finally, per Figure 34). Building on the growing success of Jordan could benefit from guarantees and lines for the renewable energy sector, particularly private RE/EE through private commercial banks and partial sector participation, there is significant potential for risk sharing facilities. rationalization of energy consumption in all sectors. Energy efficiency improvement can be supported 47. Many of Jordan’s current investment through (a) projects, such as water pumping and needs are already in the Green Growth arena. street-lighting, (b) improved standards for appliances The Greater Amman Municipality has been and equipment, and (c) stronger building codes. The pursuing a Green Growth Program, which provides transport sector is a major and fast growing fuel a foundation for cross-sector action for green consumption sector, which can be supported through economic development in the largest urban center (a) projects such as, improved public transport and in Jordan. Nationally, many of Jordan’s investments introduction of zero emission electric vehicle (ZEV) relate to RE, EE, wastewater treatment plants, and and (b) improved vehicle efficiency and emission green transport corridors. Given that these are standards. NDC adaptation related activities include investments already in the pipeline would imply that (a) projects such as afforestation of rangelands and Jordan would not incur additional debt for pursuing forest areas and (b) strengthening climate-informed a green or sustainable path. A second implication disease control programs and surveillance systems from implementing these initiatives relates to and promote climate smart agricultural practices. reduced dependence on fuel imports which would These activities can be further aggregated, within reduce volatility of Jordan’s fiscal stance related to clusters or across project or policy interventions, fluctuations in the fuel price or exchange rate. for efficiently identifying financing resources and improving pace of implementation. Moving from Plan to 49. A just transition in the labor market is encouraged in moving towards a Green Economy Policy Action transformation. Both the International Labour Organization (ILO) and the Paris Agreement on 48. Achieving Green Growth in Jordan Climate Change highlight and call for the transition requires an alignment of policy, planning for workers to be just to ensure no one is left and financing frameworks, enabling financial behind, with the Paris Agreement recognizing the mechanisms, building institutional capacity opportunity and creation “of decent work and and effectively engaging all government and quality jobs in accordance with nationally defined non-government stakeholders. As one of the development priorities.” Furthermore, the ILO’s recommendations, the Green Growth Plan suggests Guidelines support the need for assessment of labor clustering of interventions to ensure coordination market implications at macro and sector level, policy between policies and implementing partners, coherence and ongoing social dialogue (ILO 2016). ensure the intervention are mutually reinforcing, and combine investments from both the public and 50. Adaptation to climate change is a private sector. Through the Partnership for Market significant undertaking yet an adaptation and Readiness (PMR) initiative, Jordan is establishing related financing strategy is not yet developed. 34 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST An adaptation strategy requires multiple pillars. responsible investors that otherwise may not get Jordan’s NDC actions includes examples of some of into the market. these. Key pillars include: (a) the provision of public goods to reduce risk exposure, for example related to 52. The government has exhibited a strong infrastructure, water services, awareness campaigns interest in engaging the private sector although ex. the NDC action “Developing emergency and higher engagement requires greater policy fast response plan to providing emergency relief certainty, particularly long range infrastructure and aid to those affected by impacts of seasonal planning and effective communication. The RE severe cold (mainly during snow storms) and hot and EE Law has attracted private sector interest conditions and support programs for incomes of and investment in utility scale RE projects. The families impacted by drought”; (b) public policies Government and development partners are actively such as Jordan’s Water and Wastewater Strategy; supporting private sector development, particularly (c) standards and regulations that integrate climate in the sectors pertaining to green economy and change consideration such as building codes ex. clean energy. However, emphasis on providing the NDC action “Enhancing codes of buildings for concessional finance to end-users of clean energy newly established residential complexes targeting technologies has an unintended consequence of poor families to include proper insulation”; and (d) limiting the ability of intermediaries and enterprises, financial instruments such as insurance, microcredit, including Energy Service Companies, to engage with and catastrophe bonds. This latter instrument is the the market. This reduces the potential multiplier least developed in Jordan’s climate change strategy effect that intermediaries can have as they can reach and related documentation and a comprehensive a larger number of small customers, particularly adaptation plan could further set a sound financial MSMEs and households. Aligning financing strategy. mechanisms with private sector led delivery mechanisms could accelerate the pace of clean 51. Access to finance is central to Jordan’s technology adoption in Jordan. vision for green growth and climate action and for achievement of national priorities and sector 53. The government particularly recognizes strategies. The Green Growth Plan identifies the potential for greater reliance on private the availability of finance as a key component of sector participation for large investments Jordan’s green growth strategy, highlighting the across all sectors and implementation of the new opportunities to attract more private financing Public Investment Management (PIM) - Public in addition to the more traditional concessionary Private Partnerships (PPP) Framework. The funding and grants. The Jordan NDC identifies the government approved the PIM 2017-2019 Action need for US$ 5.7 billion, which will have to come Plan. Implementation of this plan would result from a combination of domestic and international in a qualitative improvement in Jordan’s public resources. Jordan’s efforts to attract financing for investments and the selection of projects facilitating Green sectors could be further leveraged with a growth. Private sector participation could be further conducive policy environment and if Jordan were to enhanced through improved coordination among take a more prominent position in the international agencies, aggregation of investment opportunities arena of Green financing. Jordan has the potential within a sector and active, ongoing private sector to get funds from international sources of finance, dialogue. In addition, and as also noted by the such as the Global Environment Facility (GEF) and IMF staff concluding statement, “there is a need to Green Climate Fund (GCF). All traditional financial promptly tackle red-tape. Discussions with business instrument could be used to finance green projects sector representatives indicate a pressing need to including, from debt coming from a domestic or simplify regulatory process, improve legal stability, international debt issuance, guarantees, syndicated predictability, and the rule of law, and enact loans. There is also the possibility to use additional the inspection law.” (IMF, 2016) These actions, instruments to attract a community of social combined with the ongoing efforts to improve the Special Focus | 35 THE WORLD BANK enabling environment for small and medium scale to provide complementary support to embed Green enterprises such as through the credit bureau and Growth into government operations. For example, efforts to strengthen financial inclusion, could given Jordan’s large annual procurement volumes, accelerate the pace towards green economy in Jordan could consider developing a Sustainable Jordan. Public Procurement strategy. Third, strengthened coordination between government entities and 54. The Ministry of Finance has a crucial development partners, to facilitate an alignment role in designing policies and attracting climate of policy signals to the private sector, for example finance for both mitigation and adaptation. on application of feed-in-tariffs, strengthening the Fiscal policies can be considered that both address energy grid, and attracting private sector investment. pollution and other externalities that contribute to Fourth, conducting a comprehensive assessment climate change and are revenue-generating for the and costing of fiscal and other policies required Treasury which further supports the fiscal position. to meet Jordan’s mitigation and adaptation targets On the expenditure side, climate change needs to and green growth aspirations. Based on this, Jordan be mainstreamed in budget processes. Jordan could can select and ensure that implementation and consider undertaking a Climate Public Expenditure movement towards a green economy is in line with and Institutional Review (CPEIR) to define the current macroeconomic stability, fiscal and debt targets and status of Jordan’s public spending from a climate objectives especially given the expected short run change lens and to identify a suitable approach costs of transition for the budget and given Jordan’s to incorporate climate change into the planning target to improve its fiscal balance and reduce its and budgeting process. This CPEIR can in turn debt-to-GDP ratio to 77 percent by 2021 (in line serve as a building block to then develop a climate with the current IMF program). fiscal framework for Jordan which would through delivering a CPEIR and implementation of the NDC 56. Attracting investment to support climate which would further support efficient spending, job action and green growth requires a number of creation, and fiscal resilience in the face of climate prerequisites: change related fiscal risks. • Coordination between key government agencies (MOPIC, Ministry of Environment, Ministry Considerations for of Energy and Mineral Resources, Ministry of Water and Irrigation, Central Bank, Ministry of Transformation to a Finance). The Minister of Finance has a leading role in development and implementation of the Low-Carbon and Green Climate Change and Green Growth financing strategy to enable investments that will help Economy the economy grow while better managing its debt. This would require leveraging public, 55. In order to enable achievement of the NDC concessional, commercial and private financing, and the Green Growth Plan, the following next in addition to international climate financing. steps could be considered. First, further analysis • Alignment of policy signals, financing and macroeconomic modeling is required to quantify instruments, and capacity support across savings from energy and water related mitigation and government and the donor community. For adaptation actions across all sectors, contribution to instance, promotion of zero emission, electric green economic development, related job-creation vehicle transport may be inhibited if “subsidies potential and identification of comprehensive amount reduce the price of vehicle fuel more than they of financing (from all sources) needed. Second, reduce the price of electricity. As the cost of plan a just and fair transition towards this new electric vehicles falls, such subsidy imbalances pathway (ILO 2016) and identify recommendations might begin to have major implications 36 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST for competitiveness, pollution, household consumption, and affordability.” (OEF, 2017) • A plan aligned with Jordan Vision 2025 to encourage and proactively engage domestic and international financing sources, investors and private sector interested in climate change, sustainability and green growth. For instance, Jordan could consider a series of green bonds or green Sukuk, which by itself would not reduce Jordan cost of funding but would attract a more diverse group of investors. 57. Sustainable solutions to addressing Jordan’ fiscal, economic (growth) and climate vulnerabilities can pave the way towards achieving low-carbon and green societal transformation. Jordan has begun its journey towards a low-carbon, green economy despite the challenges facing the region and the country and is also committed to achieving the sustainable development goals (SDGs). Climate change is being mainstreamed into the policies and strategies of key sectors and the National Green Growth Plan has identified a pathway to transform the economy in line with the Jordan Vision 2025. Scaling up climate action can support Jordan’s fiscal and macroeconomic objectives, proactively support the creation of green decent jobs and, strengthen resilience of the society and economy. This will require further analysis and consultation with stakeholders including civil society and the private sector, assessment of the short run costs of the transition, and identification of mechanisms for collaboration across the government and the private sectors. The role of the Ministry of Finance, in collaboration with the Ministries of Environment and Planning and International Cooperation, is crucial in realizing Jordan’s Green Growth and sustainable development aspirations. Special Focus | 37 THE WORLD BANK Multiple Benefits of Energy Efficiency. Paris References http://www.iea.org/publications/freepublications/ publication/capturing-the-multiple-benefits-of- American Council for an Energy-Efficient Economy energy-efficiency.html (ACEEE) Factsheet How Does Energy Efficiency Create Jobs? International Finance Corporation, 2016. Climate http://aceee.org/files/pdf/fact-sheet/ee-job-creation. Investment Opportunities in Emerging Markets: An pdf IFC Analysis. Washington DC: World Bank Group http://www.ifc.org/wps/wcm/connect/51183b2d- Agence Française de Développement, 2015. c82e-443e-bb9b-68d9572dd48d/3503-IFC- Facilitating Green Skills and Jobs in Developing Climate_Investment_Opportunity-Report- Countries. FINAL-11_6_16.pdf?MOD=AJPERES http://www.afd.fr/webdav/site/afd/shared/Notes%20 techniques/09-notes-techniques.pdf International Labour Organization (ILO), 2011. Skills for Green Jobs: A Global View. Geneva The Hashemite Kingdom of Jordan, 2014. Jordan http://www.ilo.org/wcmsp5/groups/public/--- 2025: A National Vision and Strategy. dgreports/---dcomm/---publ/documents/publication/ Ministry of Environment wcms_159585.pdf --- (NGGP 2016) National Green Growth Plan ILO, 2015. World Employment Social Outlook for Jordan http://www.ilo.org/wcmsp5/groups/public/--- --- (INDC 2015) Nationally Determined dgreports/---dcomm/---publ/documents/publication/ Contributions, ratified Nov. 4, 2016 wcms_337069.pdf --- (TNC 2014) Third National Communication on Climate Change ILO, 2016. A Just Transition to Climate-Resilient --- (NCCP 2012) National climate change Economics and Societies: Issues and Perspectives policy (NCCP) for 2013-2020 for the World of Work. http://www.ilo.org/wcmsp5/ --- (SCP 2016) National SCP Strategy & Action groups/public/---ed_emp/---gjp/documents/ Plan publication/wcms_536552.pdf (https://www.switchmed.eu/en/documents/ scp-action-plan-jordan.pdf) International Monetary Fund, November 2016. --- (PMR 2016) Jordan Market Readiness Jordan: Staff Concluding Statement of the 2016 Proposal Article IV Mission and First-Review under the (https://www.thepmr.org/country/jordan-0) Extended Fund Facility (https://www.imf.org/en/ News/Articles/2016/11/14/MS111416-Jordan-Staff- Ministry of Energy & Mineral Resources Concluding-Statement-of-the-2016-Article-IV- --- Updated Master Strategy of Energy Sector Mission-First-Review-Under-EFF) for 2007-2020 --- Renewable Energy and Energy Efficiency Organisation for Economic Co-operation and Law, 2012 Development (OECD). Development Assistance --- National Energy Efficiency Action Plan, Committee Statistics https://public.tableau.com/ 2013 views/Climate-Related-Aid_new/Recipientperspecti ve?:embed=y&:showTabs=y&:display_count=no? Ministry of Water and Irrigation &:showVizHome=no#1(Accessed March 8, 2017) --- (2012) Water for Life: Jordan’s Water Strategy 2008–22 Updated OECD, 2016. OECD Clean Energy Investment Policy Review of Jordan. Green Finance and Investment, OECD Publishing, Paris (DOI:10.1787/9789264266551- International Energy Agency, 2014. Capturing the en)(http://www.keepeek.com/Digital-Asset 38 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Management/oecd/finance-and-investment/ oecd-clean-energy-investment-policy-review-of- jordan_9789264266551-en#page93) Oxford Energy Forum, 2017. Oxford Energy Forum, Issue 108, March 2017. Oxford Institute for Energy Studies, University of Oxford, UK. PricewaterhouseCoopers (PwC), 2016. Developing Renewable Energy Projects: A Guide to Achieving Success in the Middle East, 3rd edition https:// www.pwc.com/m1/en/publications/documents/ eversheds-pwc-developing-renewable-energy- projects.pdf United Nations Framework Convention on Climate Change, 2015. Paris Agreement. http://unfccc.int/ files/meetings/paris_nov_2015/application/pdf/ paris_agreement_english_.pdf World Bank, 2015. Jordan - Promoting Poverty Reduction and Shared Prosperity: Systematic Country Diagnostic. Washington, DC: World Bank Group. Special Focus | 39 THE WORLD BANK some extent, they mostly benefit the better off, who II. WELFARE IMPACT OF often consume more energy and water per person. The IMF estimated that 26 percent of electricity RECENT PRICE CHANGES subsidies in Jordan benefit the richest quintile of the income distribution, compared to 19 percent for the IN ELECTRICITY AND poorest quintile (Sdralevich et al., 2014). WATER30 59. Electric and water subsidies in Jordan reached fiscally unsustainable levels after 2010 Over the past seven years, Jordan has repeatedly when the cost of service for the state-owned reformed its electricity and water tariffs to reduce utility companies in the two sectors escalated. In government subsidies and reduce the vulnerability the electricity sector, rising oil prices and the abrupt to price shocks. This section evaluates the short-term decline of gas imports from Egypt since 2010 had welfare impacts on households of the electricity and raised fuel costs for the National Electric Power water tariff reforms that were implemented between Company (NEPCO), causing financial losses of over 2010 and 2016. The results suggest that welfare JD 1 billion per year between 2011 and 2014. In 2013 impacts so far have been limited and household and 2014, the central government transferred 6.0 expenditures on electricity and water are still modest percent of GDP and 7.0 percent of GDP respectively by international standards, but the Government to NEPCO and WAJ combined.31 The water sector should consider combining further tariff reforms with has seen costs escalating due to the impacts of the targeted social protection measures to limit the impact Syrian refugee crisis and—as a major consumer on the poor. In the electricity sector, which reached of electricity— is directly affected by the increase full cost recovery at the end of 2015, further tariff in electricity tariffs charged to the two main water reforms will be needed to sustain cost recovery amid supply agencies, the Water Authority of Jordan fuel price fluctuations, and to reduce cross-subsidies (WAJ) and the Jordan Valley Authority (JVA), from to keep large consumers from ‘leaving the grid’. In JD 79 million in 2012 to JD 156 million in 2015. the water sector, where operation and maintenance In 2015, the Government’s transfers to the water cost recovery has not yet been achieved, further tariff sector were reduced to JD 20 million, and further reforms will be needed to ensure at least operation reduced to zero in 2016 (compared to JD 203 million and maintenance cost recovery by 2021. in 2013 and JD 206 million in 2014), while capital expenditure increased. In 2016, WAJ’s net borrowing reached JD 394 million. By 2016, total debt held by Context NEPCO and WAJ had reached around JD 7 billion equivalent to 24 percent of estimated 2016 GDP 58. Evidence is mounting that energy and water and 26 percent of Jordan’s gross debt. Accumulating subsidies in the MENA region are associated with such large amounts of debt on the utilities’ balance slow economic growth and high unemployment sheets reduces their ability to operate as commercial as they shift investment from labor-intensive entities and poses significant fiscal risks for the to resource-intensive sectors (Devarajan et al., Government, as all debt of NEPCO and WAJ is 2014). These subsidies limit the ability of utilities guaranteed by Jordan’s Ministry of Finance. to operate as commercial entities and impact their ability to finance their operation, maintenance and 60. Jordan has reduced cost and reformed investments. Moreover, tariff subsidies are often tariffs to improve cost recovery of electricity and neither well targeted nor cost-effective. Though water services. The Government’s reform program, subsidies may reach the poor and vulnerable to supported by the World Bank’s Energy and Water Sector Development Policy Loan Program (2015-17) 30 Authored by Caroline van den Berg (Lead Economist), Joern Huenteler (Energy Specialist), Amr Moubarak (Social Protection 31 In 2015, NEPCO resorted to borrowing from commercial Specialist), and Jon Jellema (Consultant); World Bank. banks and transfers to WAJ were limited. 40 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST as well as two IMF programs, includes a series of tariff reforms, policies to promote renewable energy Empirical Methodology & and energy efficiency in the electricity and water sectors, and measures to reduce system losses Data and other operating costs. In the electricity sector, a series of electricity tariff reforms, in combination 62. The analysis presented in this Special with the decline in international oil prices since Focus is based on estimates of direct and indirect33 mid-2014, the switch from oil to cheaper natural welfare effects of the proposed electricity and gas since mid-2015, and the commissioning of the water tariff increases between 2010 and 2017. The first large-scale renewable energy plants, allowed effect of the different policy measures was simulated NEPCO to reach cost recovery in the fourth quarter using the World Bank Subsidy Simulation Model of 2015. The water sector still has some way to go to (SUBSIM). Welfare impacts are approximated by the reach cost recovery, but the IMF estimates that the change in household expenditures. The direct welfare Government’s reforms will allow WAJ to generate a effects were calculated by applying the revised tariff positive operational margin by 2021. schedules to household expenditures for electricity and water. Household expenditures were taken 61. By ensuring that Jordan’s energy and water from the Household Income and Expenditure Survey sectors become more financially sustainable, the (HIES) 2010/201134 and adjusted for real wage Government’s recent pricing reforms are expected increases and consumer price inflation between to have a positive effect on economic growth and 2011 and 2017. To estimate these indirect welfare employment and a net positive impact on the impacts, an input-output table of the Jordanian poor and the bottom 40 percent. The reforms economy was used to estimate the price changes in would also reduce air pollution (and hence reduce all production sectors that use electricity and water its impact on public health) and reduce the effect of as an input either directly or indirectly. The estimate overexploitation of groundwater32, thus contributing was made under ‘cost push’ assumptions within a to achieve the Bank’s twin goals in a sustainable price-shifting model: producers pass on any increase manner. These positive effects, however, take time in input prices by increasing sales prices with a to materialize as the economy adjusts to changes in proportional amount. The HIES was then used to relative prices. In the short term, consumer welfare link household consumption expenditures to these will be affected by energy and water tariff increases. production sectors and program, for consumption This Special Focus of the Jordan Economic Monitor taking place in each sector, and for determining will estimate the short-term welfare impacts of how much the price of that consumption block is the recent electricity and water tariff changes in likely to rise when electricity and water subsidies electricity and water on household welfare. are reduced. The difference between a household’s expenditure on its consumption basket (excluding water or electricity) in 2010 and 2017 is equal to our measure of ‘indirect welfare losses’ brought about by the tariff increases (see Atamanov et al., 2015 for more details on the methodology). 33 Direct effects measure the impact of residential electricity and water tariff increases on household budgets. Indirect effects calculate the effect of electricity and water tariff increases in non-residential sectors that are passed through to households. 34 The HIES 2010/2011 survey, while the most recent data 32 The Syrian refugee crisis has increased the total use of available for research, precedes the influx of Syrian refugees groundwater because of the rapid increase in demand since and may therefore no longer be fully representative of Jordanian 2013; but the per capita water consumption has decreased households. The authors intend to repeat this analysis once the between 2013 and 2015. 2016/17 data is available. Special Focus | 41 THE WORLD BANK 63. Potential electricity tariff increases in 2017 were modeled using two different scenarios: Results A 11.25 fils per kWh increase for all tariff blocks (Scenario S1) and a 14.56 fils per kWh increase Electricity for tariff blocks below 500 kWh (Scenario S2). Both scenarios reflect the full pass-through of a 65. Jordan’s Electricity and Minerals and (hypothetical) cost increase equivalent to a US$10 Regulatory Commission (EMRC) revised electricity per barrel increase in the oil price in 2017 beyond tariffs nine times between 2010 and 201636 in order NEPCO’s break-even point, but assume a different to restore cost recovery in the electricity sector distribution of the additional cost across consumers (EMRC, 2016). Wholesale tariffs increased from an (more details below). In a next step, those real total average of 47 fils per kWh in 2010 to 81 fils per kWh cost increases in total cost (by tariff block) were in 2016, raising NEPCO’s revenues by around JD 650 applied to household expenditures (based on their million, according to World Bank estimates. marginal tariff block assignation). The difference between a household’s total electricity spending in 66. Tariff increases mostly affected industrial, 2010 and 2017 is equal to the measure of ‘direct commercial and large household consumers, welfare losses’ brought about by the tariff increases. leading to large build-up of cross subsidies between consumers groups. The term cross- 64. In the case of water, potential water tariff subsidies refers to the fact that, in a situation with increases were modeled using the forecasted unequal distribution of costs between consumer tariff increases as programmed in the Structural groups, those groups paying high tariffs effectively Benchmark Program (2013–2021) that the ‘subsidize’ those with lower tariffs. While such Government developed to increase sector cross-subsidies are relatively common across the revenues35 while reducing the costs of service developing world, they have reached an unusually delivery to improve O&M cost recovery in the high level in Jordan. Electricity tariffs for large water sector by 2021. Since 2013, the Government household consumers are more than eight times has implemented a series of tariff increases affecting larger than tariffs for small household consumers37. different types of water users. These include The development of household tariffs over this residential water and wastewater tariffs, water period is shown in Figure 35. and wastewater connection charges, industrial groundwater fees, agricultural groundwater tariffs, 67. While these tariff increases almost doubled and surcharges and penalties for illegal wells. The revenues in the power sector, these electricity tariff Government has finalized its update of the Structural reforms had relatively modest impacts on real Benchmark Program as part of the recently agreed household welfare, for three main reasons. First, Extended Fund Facility with the IMF. The updated most households were exempt from tariff increases program includes another series of tariff and on their direct consumption of electricity. As shown fee increases covering various groups of water in Figure 35, the four lowest tariff blocks (covering consumers forecasted to take place between 2017 consumption up to 600 kWh per month) were exempt and 2020. from tariff increases. Figure 36 shows that only very 36 Tariffs were raised in January 2010, July 2011, May/June 2012, August 2013, January 2014 and January/February 2015. Both in 2012 and in 2015, tariffs were revised twice in short succession. In November 2016 tariffs were lowered for large consumers. 37 Large cross-subsidies also exist between large and small 35 The National Water Strategy 2016–2025 reaffirms the commercial and industrial consumers. For example, banks pay Government’s commitment to rationalize the price structure of four times as much per kWh as small industrial consumers and water and wastewater services to ensure efficient use of water, seven times as much as charities. However, cross-subsidies improve the use of commercial practices, and reduce subsidies between non-residential consumers’ groups are beyond the to the sector. scope of this analysis, which is focused on households’ welfare. 42 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Nominal Electricity Tariffs in Fils/Kwh Electricity Usage Per Month By Quantile (Categorized by Tariff Blocks) 300 Above Above 1000 kWh 250 1000 kWh per month per month 751-1000 kWh 200 751-1000 kWh 601-750 kWh 601-750 kWh 150 Share of Households 501-600 kWh Tarrif 501-600 kWh Blocks 100 exempt 301-500 kWh 301-500 kWh from 161-300 kWh increases since 50 161-300 kWh 2010 1-160 kWh 0 1-160 kWh 2010 2011 2012 2013 2014 2015 2016 Poorest 2 3 4 Richest Quintiles FIGURE 36. Household electricity consumption by FIGURE 35. Nominal electricity tariffs 2010-2016. quintile mapped onto tariff block structure, indicating households exempt from tariff increases 2010-2016. Source: Energy and Minerals Regulatory Commission. Source: Authors’ calculations based on 2010/11 HIES. Table 2. Household Size, Tariff Block, and Mean Electricity Share. Income Quintile Median Household Size % in Block 2 % in Block 3 Electricity Share (161-300 kWh/month) (301-500 kWh/month) 1 (poorest) 7 62 28 1.7 2 6 53 40 1.5 3 6 51 38 1.5 4 5 42 45 1.3 5 (richest) 3.75 27 44 1.3 Source: Authors’ calculations based on 2010/11 HIES. Table 3. Cumulative real total cost increase for household/domestic electricity consumption 2010-2016. Block 1 2 3 4 5 6 7 kWh/month 1-160 161-300 301-500 501-600 601-750 751-1,000 Above 1,000 Real increase in tariff (%) 0 0 0 0 0.8 20.0 49.0 Source: Authors’ calculations. few, mostly rich households consume more than 68. Cumulative household welfare impacts 600 kWh of electricity per month. Second, electricity from electricity tariff increases between 2010 and represents only a relatively small share of household 2016 are estimated between 0.44 and 0.5 percent expenditure (1.7 to 1.3 percent on average for the of pre-reform welfare, with most effects coming poorest and richest quintiles, respectively, as shown from indirect effects. Table 4 provides estimates of in Table 2). Third, even for the higher tariff blocks, the direct and indirect impacts of these cumulative real tariff increases were dampened by inflation. The (2010–2016) real electricity cost increases. Table 4 cumulative increase in real total electricity costs (for indicates that the indirect effects of real increases households) by tariff block is listed in Table 3.38 in the industrial cost of electricity on household welfare are much more significant than the direct 38 Where cumulative inflation was greater than the nominal effects. Total electricity costs for industrial users increase in total electricity tariffs, the real increase was capped (not shown in Figure 35) are estimated to have risen at zero. Special Focus | 43 THE WORLD BANK Table 4. Cumulative welfare losses (per capita) from electricity tariff increases between 2010 and 2016 (in constant 2013 JD and percent of pre-reform welfare). Indirect Direct Total Quintile JD % JD % JD % Poorest 3.7 0.44 0.00 0.00 4 0.44 2 5.6 0.45 0.01 0.00 6 0.45 3 7.4 0.45 0.03 0.00 7 0.45 4 10 0.44 0.17 0.01 10 0.45 Richest 18 0.42 3.33 0.08 18 0.50 Source: Authors’ calculations based on 2010/11 HIES. Table 5. Description of scenarios for future electricity tariff adjustments. Description Scenario Total tariwff adjustment Distribution of tariff adjustment Scenario 1 Increase in total cost of electricity service by JD Fuel clause is applied uniformly to all tariff categories 162 million (equivalent to effect of increase in Fuel clause is higher for smaller consumers to reduce Scenario 2 (crude oil price by $10/bbl cross-subsidies Source: Authors’ assumptions. by 67 percent in real terms (after inflation) between 6 provides estimates of the marginal direct and 2010 and 2016. In contrast, direct effects are, on indirect impacts of a (hypothetical) electricity cost average, negligible, as most households (regardless increase under two different scenarios (S1 and S2). of income level) consume electricity volumes that Both scenarios capture tariff increases in response corresponded to tariff blocks that did not see any to escalating sector cost, assuming a cost increase real tariff increase. Table 4 also shows that while the equivalent to a US$10/bbl increase in the Brent oil total impact (direct and indirect) of electricity price price, beyond NEPCO’s break-even point (e.g., from increases is small, it is marginally larger (relative to US$55/bbl to US$65/bbl).39 This hypothetical cost income) for richer households. increase, which corresponds to a total cost increase by JD 162 million, could come from increasing 69. If fuel costs increase in the future, natural gas prices or from other cost items such electricity price increases under the new tariff as interest payments, capacity charges, etc. If adjustment mechanism would impact households passed on fully to consumers under the new tariff more directly, but welfare effects would most adjustment mechanism, such an increase in the oil likely still within an acceptable range (which is price (or an equivalent increase in other cost items) defined as less than 1 percent of total household would raise the fuel clause by 11.34 fils/kWh if, as expenditures) if oil prices remain below $70/bbl. currently envisioned, the clause is not differentiated While NEPCO reached cost recovery in 2015, future by consumer category (Scenario 1). This value would changes in fuel cost or electricity mix may require rise to 14.46 fils/kWh if the Government chooses to further adjustments to the electricity tariff. Sector 39 We estimate here the welfare effect of a hypothetical oil stakeholders in Jordan have put forward proposals price increase by US$10/bbl beyond NEPCO’s break-even price to share the burden of any future electricity tariff of oil in 2017, which the Government currently (as of October 2016) estimates at US$55/bbl. The welfare effect would be the increases more equally between consumer groups same if other cost items – such as interest payments, capacity (e.g., JSF, 2016). To estimate what such a policy charges for generators, or renewable energy payments – increase would mean for household expenditures, Table by an equivalent amount (JD 162.3 million p.a.) compared to the baseline. 44 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Table 6. Welfare losses (per capita) from the electricity tariff increase needed to cover a (hypothetical) US$10/bbl oil price increase in 2017 under two scenarios (S1, S2). See Table 5 for description of scenarios. Direct welfare effects Total effects Indirect welfare effects S1: S2: S1 S2 Uniform fuel clause for all consumers Higher fuel clause for smaller consumers to reduce cross-subsidies % % % % % Poorest 0.14 0.53 0.70 0.67 0.84 2 0.14 0.44 0.58 0.58 0.72 3 0.14 0.39 0.51 0.53 0.65 4 0.14 0.35 0.45 0.49 0.59 Richest 0.13 0.28 0.32 0.41 0.45 Source: Authors’ calculations based on 2010/11 HIES. reduce cross-subsidies and effectively applies the Water Usage Per Month By Quintile (Categorized by Tariff Blocks) tariff increase only to the lowest three (less than 500 kWh/month) tariff blocks (Scenario 2). Above 144 m3 70. Table 6 shows that the tariff adjustment 127-144 m3 91-126 m3 mechanism is mildly regressive in relative terms Share of 73-90 m3 in both scenarios. The poorest quintile would see Households 55-72 m3 an aggregate welfare impact of 0.67 percent and 37-54 m3 19-36 m3 0.84 percent in Scenarios S1 and S2, respectively, 0-18 m3 compared to 0.41 percent and 0.45 percent for the Poorest 2 3 4 Richest Quintiles richest. Table 6 indicates that the direct effect of real increases is more significant than the indirect effects FIGURE 37. Household water consumption by quintile mapped onto tariff block structure from the additional industrial cost of electricity on Source: Authors’ calculations based on 2010/11 HIES. household welfare. Table 6 also shows that while the total impact (direct plus indirect) of electricity price increases is small, it is larger (relative to income) for for different quintiles of the income distribution, smaller households. especially when seen in contrast to Figure 36. The fact that water rationing is widespread in Jordan as Water the country is one of the most water scarce countries in the world adds to the relatively small differences 71. Since 2011, the Government is not only in water consumption between poorer and richer reforming water tariffs of residential and non- households. Trying to exempt poor households from residential water and wastewater users, but also price increases by exempting lower consumption for agricultural and industrial groundwater users categories is therefore less effective than in the case through a combination of changes in tariffs and of electricity. Second, changes in the tariff structure fee structures. While total effects on household since 2015 have affected the poorer households more expenditures are smaller compared to the changes than richer households. The cumulative increase in in the electricity sector, these water tariff reforms real total water costs by tariff block (for households) had larger direct effects on households for two is listed in Table 7. For households, there are real reasons. First, unlike in the electricity sector, cumulative cost increases for each block, especially as water consumption is not very sensitive to income the Government has used a combination of increases (Komives et al., 2005). This fact is illustrated in Figure in variable costs and fixed charges to generate sector 37, which shows average water usage per month revenues. The real total cost increases for households Special Focus | 45 THE WORLD BANK BOX 6. Jordan’s New Electricity Tariff Adjustment Mechanism. Many countries around the world allow utilities to pass through fuel cost to consumers on a regular basis using a ‘fuel clause’ in the tariff. These fuel clauses come under different names, including “fuel surcharge”; “fuel and power purchase cost adjustment”; “fuel cost adjustment”, “fuel adjustment charges”, “fuel adjustment clause” or “power cost adjustment”. Examples of countries with such adjustment mechanisms include the United States, the UAE, Japan, South Korea, Thailand, Pakistan and many more. The different names notwithstanding, all the mecha- nisms share the same functionality: to pass through hard-to-control changes in power generation or purchasing cost— by adding one or more adjustable components to consumer electricity bills—in order to mitigate financial risks for the utilities and to encourage price-responses in consumption. Notably, the fuel cost adjustment is done in a process that is separate from the normal tariff review (which often happens annually or quarterly), and the base tariff remains the same during the tariff period. Since 2010, Jordan’s electricity tariff includes such a fuel clause that allows EMRC to adjust wholesale and end-consumer electricity tariffs on a regular basis to pass through variations in fuel cost. However, EMRC has so far kept the fuel clause at zero despite significant variations in fuel cost. On October 5, 2016, EMRC adopted a tariff adjustment mechanism (TAM) to activate the fuel clause. The objective of the TAM is to sustain NEPCO’s abil- ity to recover its cost through electricity sales. Under the new TAM, effective from January 1, 2017 onwards, EMRC will adjust the fuel clause on a monthly basis in case the total cost of electricity service is higher than the average selling price of electricity. The EMRC will determine the cost of the electricity system every month based on data submissions by NEPCO and the distribution companies. The required adjustment for each sector and category would then be calculated by EMRC’s tariff department and recommended for adoption to the Council of Commissioners of EMRC. Upon adoption, EMRC will communicate the fuel clause schedule to the distribution companies so that these would include the fuel clause in their billing. Due to lagged data availability, the revision for a specific month would be based on data from two months before (e.g., adjustment of the month of October would be based on actuals from August). EMRC will undertake a true up adjustment at the end of the year to ensure that these delays do not cause any net losses for NEPCO. Table 7. Cumulative real total cost increase for household/domestic water consumption between 2010 and 2017. Block 1 2 3 4 5 6 7 8 Per Quarter (m3) 0-18 19-36 37-54 55-72 73-90 91-126 127-144 >144 % increase tariff WAJ 28.0 36.0 6.6 3.7 8.1 7.1 8.6 10.0 % increase tariff water companies 22.0 23.0 2.2 1.7 6.6 6.4 7.6 9.2 Source: Authors’ calculations based on 2010/11 HIES. Table 8. Median marginal tariff block and mean water share in budget. Quintile Median Household Size % in Block 3 % in Block 2 or 4 Water Share in Budget Poorest 7.00 59 34 1.4 2 6.00 57 36 1.2 3 6.00 56 37 1.0 4 5.00 54 38 0.9 Richest 3.75 48 38 0.8 Source: Authors’ calculations based on 2010/11 HIES. 46 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST Table 9. Description of scenarios for welfare impacts from water tariffs. Description Scenario Direct effects Indirect effects Based on household water tariffs Based on industrial tariff increases, including those for Scenario A Based on industrial tariff increases, excluding groundwater Scenario B those for groundwater Source: Authors’ assumptions. Table 10. Welfare losses (per capita) from cumulative water tariff increases between 2010 and 2017 (Scenario A: including groundwater tariff increases for industry). Indirect Direct Total Quintile JD % JD % JD % Poorest 2.3 0.27 0.60 0.06 2.9 0.34 2 3.4 0.27 0.78 0.05 4.2 0.33 3 4.5 0.27 0.80 0.04 5.3 0.32 4 6.0 0.27 0.98 0.03 7.0 0.31 Richest 11 0.25 1.67 0.02 13 0.29 Source: Authors’ calculations based on 2010/11 HIES. Table 11. Welfare losses (per capita) from cumulative water tariff increases between 2010 and 2017 (Scenario B: excluding groundwater tariff increases for industry). Indirect Direct Total Quintile JD % JD % JD % Poorest −0.50 −0.059 0.60 0.06 0.10 0.01 2 −0.73 −0.059 0.78 0.05 0.04 0.00 3 −0.96 −0.059 0.80 0.04 −0.16 −0.01 4 −1.29 −0.058 0.98 0.03 −0.31 −0.01 Richest −2.41 −0.055 1.67 0.02 −0.74 −0.02 Source: Authors’ calculations based on 2010/11 HIES. served by the water companies (customers served groundwater (for industry) tariff increases are not by the regional water utilities of Miyahuna (Amman), included, total water costs for industrial users have Aqaba and Yarmouk) have been slightly lower than not risen in real terms between 2010 and 2017 and those for households whose water and wastewater estimated indirect effects on household welfare are services are provided by WAJ. in this scenario (defined as Scenario B) negligible. 72. The size of the indirect effects of water tariff 73. If groundwater tariffs are included in the increases on household expenditures depends estimation (Scenario A), indirect effects—while on assumptions about groundwater tariffs. Total still relatively modest in size—outweigh direct water costs for industrial users are estimated to effects. Table 10 provides estimates of the direct have risen 48 percent in real terms (after inflation) and indirect impacts of real water cost increases from 2010 to 2017 if groundwater (for industrial (including both groundwater and piped water). Table use) tariff increases are included (Scenario A). If 10 indicates that the indirect effects of real increases Special Focus | 47 THE WORLD BANK Table 12. Direct and indirect welfare losses (per capita) from water and electricity tariff increase in 2010–2017. Indirect Direct Water Scenario A: Water Scenario B: Electr. Scenario 1: Electr. Scenario 2: Quintile With GW tariff increase Without GW tariff increase Uniform fuel clause Reduced cross-subsidies % JD / % JD / % JD / % Poorest 0.91% 0.58% 0.08% 0.16% 2 0.92% 0.59% 0.07% 0.13% 3 0.93% 0.60% 0.06% 0.10% 4 0.91% 0.59% 0.06% 0.09% Richest 0.87% 0.56% 0.16% 0.16% Source: Authors’ calculations based on 2010/11 HIES. Table 13. total welfare losses (per capita) from water and electricity tariff increase in 2010–2017. Total Water scenario A / Water scenario A / Water scenario B / Water scenario B / Quintile Electr. Scenario 1 Electr. Scenario 2 Electr. Scenario 1 Electr. Scenario 2 % % % % Poorest 1.00% 1.08% 0.67% 0.75% 2 1.00% 1.05% 0.67% 0.72% 3 0.99% 1.03% 0.66% 0.70% 4 0.98% 1.01% 0.65% 0.68% Richest 1.03% 1.03% 0.72% 0.72% Source: Authors’ calculations based on 2010/11 HIES. in the industrial cost of water on household welfare water on household welfare are similar in magnitude are more significant than the direct effects. Table 10 (though of the opposite sign) to the direct effects. shows that piped water accounts for a small share of Table 11 also shows that the total impact (direct plus household budgets and also that most households indirect) of piped water price increases are near zero (regardless of income level) consume water volumes for every household independent of whether they corresponding to tariff blocks that have not seen are classified as rich or poor. moderate real increases in total costs. Table 10 also shows that while the total impact (direct plus Combined Effects indirect) of water price increases are small, they are larger (relative to income) for poorer households. 75. We estimate total effects of the electricity and water tariff increases in 2010-2017 on 74. If groundwater tariffs are not included household welfare in the range of 0.65-1.08 in the estimation (Scenario B), increases in real percent of pre-reform welfare. Table 12 and Table piped water costs for industry would be in fact 13 provide estimates of the joint direct and indirect negative. This means that the cumulative nominal impacts of water and electricity tariff increases in increase in total piped water costs over the period 2010-2017. Results are shown for four different from 2010 to 2017 was less than inflation over the scenarios for the total effects (A1, A2, B1 and B2). A1 same period, leading to a real decrease in the water and A2 combine Scenario A for the indirect effects costs for industry. Table 11 indicates that the indirect of water tariffs for industry with Scenarios 1 and 2, effect of real tariff decreases in the industrial cost of respectively, for the 2017 electricity tariff increases. 48 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST B1 and B2 combine Scenario B for the indirect put pressure on the Government to distribute the effects of water tariffs for industry with Scenarios burden of future tariff hikes more evenly across 1 and 2, respectively, for the 2017 electricity tariff consumer groups. increases (See sections above for a discussion of the individual scenarios for water and electricity). The 77. If oil prices rebound in 2017, there would joint consumption effect of energy and water tariff be scope for the regulator to increase tariffs increases are assumed to be additively linear. while reducing cross-subsidies, but targeted compensation mechanisms should be considered if oil prices approach $70/bbl. Tariffs were not Policy Implications increased in 2016 because revenues were sufficient at the end of 2015 to cover the sector’s full cost. Electricity However, the sector remains exposed to fuel price fluctuations for at least the coming 2-3 years due 76. Cost recovery of electricity services to the pricing structure of NEPCO’s LNG supply was achieved in 2015 without threatening contracts. The Government currently estimates that affordability for end-consumers, because almost NEPCO breaks even if oil prices average US$55/bbl all households were exempt from tariff increases. in 2017. While the overall impacts of a $10/bbl price Our results suggest that the welfare impact of increase would still be modest (<1 percent), any recent tariff increases for residential consumers, further increase would lead to significant welfare including the poor and vulnerable, was small (see losses for the poor under the new tariff adjustment Table 4). Cross-subsidies between electricity mechanism. This means that the pass-through of consumer groups have buffered the impact on the fuel costs and the intended gradual reduction of poor, which still pay only around 2 percent of their cross-subsidies between consumer groups must total household welfare for electricity, less than half be designed and monitored carefully to ensure that of the affordability threshold of 5 percent of total the economic benefits of tariff reforms outweigh the household consumption typically assumed in the impact on the poor. This could be achieved by linking literature (e.g., Briceño-Garmendia and Shkaratan, price increases directly to compensation measures 2011). These results are in line with the simulation for the most vulnerable customers (see below). done by Atamanov et al. (2015), which showed that the 2010-2015 electricity tariff reforms had little Water impact on the per capita welfare of households. However, going forward the Government is looking 78. Operation and maintenance cost recovery to reduce cross-subsidies between consumers in the water sector is not expected to be achieved groups, although the exact distribution of future until 2021 due to the sharp increase in electricity tariff increases is yet to be determined. Cross- rates in recent years. Water tariffs, charges and fees subsidies between consumer groups have reached have increased between 2010 and 2016, and more a limit and households may be more significantly are planned between 2017 and 2021. However, the impacted in the future. This is because tariffs for water tariff reforms have had so far little impact on large households or large commercial consumers, the per capita welfare of households, even poor which pay up to 2.5 times the average cost and eight and vulnerable households (see Table 10 and Table times as much per kWh as the smallest consumers, 11). The Government has ensured that all water are significantly affecting their cost competitiveness, consumers (not only households) have seen their especially in the case of firms competing in export prices increase, but it is worth noting that as of 2016, markets. Furthermore, tariffs have risen to levels no water consumer pays the full cost of water. Every where it is more economical for large commercial water user essentially receives a subsidized water users to produce their own electricity from solar rate, with the subsidies widely varying between or diesel sources, a scenario that over time would consumer categories. Between 2010 and 2016, deprive the sector of its revenue base. Both effects industrial groundwater users faced the largest tariff Special Focus | 49 THE WORLD BANK increases. This policy has significantly reduced the tariffs for groundwater use by industry41 are uniform price gap between industrial groundwater and piped across consumption quintiles. The combined direct water, but still provides incentives for industries to and indirect impacts of the water tariff increases in use groundwater instead of piped water. The effect 2010-2017 on household welfare are estimated to of these industrial groundwater tariffs, however, be small, but mildly regressive. affects residential households if it assumed that these cost increases are passed through to households. Linkages to Social Protection The indirect effect of the overall tariff increases has shown to be significantly larger than the direct 80. Future utility tariff reforms could be effects (see Table 10). The government uses cross- explicitly linked to targeted compensation subsidies in the sector. The use of cross-subsidies payments to protect the poor, but this would is widespread in the water sector between different require reforms to Jordan’s social safety nets and groups of consumers (agriculture, households, improved targeting mechanisms. The experience of industry and commerce), but also within these the fuel subsidy cash compensation scheme in 201242 consumer categories through the use of increasing shows that Jordan can mobilize broad, cash-based block rates (for residential and agriculture water use). compensation of households relatively quickly. Interestingly, the Government also used a decreasing However, social safety nets targeting the poor and block rates in the sector for non-residential piped vulnerable did not expand during the series of fuel, water users. This is rather surprising as a decreasing electricity and water price reforms in recent years block rate structure40 is usually applied in an despite expected increases in poverty headcount.43 environment where water resources are abundant, Although the National Aid Fund (NAF) reached over and industrial customers often impose lower average 100,000 households (little over 300,000 individuals) costs because they enable the utility to capture and disbursed JD 85 million in cash assistance in economies of scale (Whittington, 2002). The results 2016, this coverage amounts to less than half of the indicate that the reduction of subsidies and cross- poor in Jordan.44 To address the impact of any future subsidies in the water sector must be designed and fiscal adjustments (including future utility price monitored to ensure that the benefits between and reforms) on the most vulnerable, Jordan would need within water user categories are well distributed. improved mechanisms to target social protection services for the bottom quintiles. The Bank’s National 79. The Government has built into the water Unified Registry and Outreach project is currently tariff reforms measures to mitigate the impact being restructured to establish an integrated and on the poor and vulnerable by distributing tariff automated data-exchange system (as the National increases across all water consumers and by using Unified Registry system) connecting the NAF with cross-subsidies between residential and non- key participating institutions and data provider residential consumers. However, the cumulative impact of the reforms since 2011 has been modest. 41 It is assumed here that the water tariff increases are the same across sectors. In case the Government pursues cross- The same is true for the marginal impacts of the 2016 subsidy policies, the indirect effects may be larger. Price reforms, which focused on non-residential users, and elasticity effects in the water sector tend to be relatively low and hence have not been considered here. the planned reforms in 2017 (see Table 10 and Table 11). This reflects modest real tariff increases, the 42 The fuel cash compensation transfer program that was set up as an ad-hoc mechanism in 2012 to alleviate the effect smaller size of the proposed water tariff increases for of the subsidy reform for petroleum products. This temporary households compared to non-residential consumers compensation scheme covered 70 percent of Jordanian households, but became inactive in December 2014. and the smaller share of water expenses in the total household expenditure as compared to electricity. 43 Based on 2010 Household Income and Expenditure Survey (HIES), poverty headcount is estimated at 14.6 percent following The indirect welfare losses due to higher water fuel subsidy reforms (Atamanov et. al) 44 Assuming 2010 poverty headcount rate, Jordan’s NAF will 40 With decreasing block tariffs, the rate per unit of water is need to triple in size to cover all the poor in Jordan, requiring an high for the first (lower) block of consumption and decreases as additional JD 170 million assuming no increases in administrative the volume of consumption increases. costs to expand current programs or introduce new ones. 50 | Special Focus JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST agencies. If future investment in the expansion of the registry is prioritized, Jordan can have a unified References registry and an integrated case management system that can identify, compensate and refer services to Atamanov, A., Jellema, J., Serajuddin, U., 2015. Energy poor, vulnerable, and potential beneficiaries in the subsidies reform in Jordan: Welfare Implications of bottom two quintiles in an integrated approach. This Different Scenarios Energy Subsidies. World Bank approach will more accurately draw on administrative Policy Research Working Paper 7313, Washington, data and household visits (where needed) to improve DC. doi:10.13140/RG.2.1.4579.3126 decisions on eligibility and benefit delivery for current and future safety nets programs. Briceño-Garmendia, C., Shkaratan, M., 2011. Power Tariffs: Caught Between Cost Recovery and Affordability. World Bank Policy Res. Work. Pap. Conclusions 5904. doi:10.1596/1813-9450-5904 81. Many household and industrial Devarajan, S., Mottaghi, L., Iqbal, F., Mundaca, G., consumers have experienced real increases in Laursen, M., Vagliasindi, M., Commander, S., Chaal- the cost of water and electricity in recent years Dabi, I., 2014. MENA Economic Monitor: Corrosive as the Government has been taking measures Subsidies. The World Bank, Washington, DC. to restore cost recovery in the energy and water sectors, but short-term welfare losses for (poor) Electricity and Minerals Regulatory Commission households have so far been modest in view (EMRC), 2016. Distribution Tariffs 2010-2016. of the expected benefits from the reforms. This EMRC, Amman, Jordan. Special Focus estimates cumulative welfare effects of the price reforms between 2010 and 2017 on Jordan Strategy Forum (JSF), 2016. Position Paper households at approximately 0.65 to 1.08 percent, on Alternatives to Increasing the Electricity Tariffs in depending on the chosen scenario for 2017. With Jordan. Jordan Strategy Forum, Amman, Jordan. respect to both electricity and water tariffs, richer households have experienced greater absolute Komives, K., Foster, V., Halpern, J., Wodon, Q., 2005. welfare losses. However, as a share of income, total Water, Electricity, and the Poor: Who Benefits from (direct and indirect) welfare losses from electricity Utility Subsidies? The World Bank, Washington, DC. cost increases are relatively uniform across the income distribution. Therefore, while the overall Sdralevich, C., Sab, R., Zouhar, Y., Albertin, G., 2014. impacts are modest as a share of total expenditures, Subsidy Reform in the Middle East and North Africa: the results indicate that the reduction of subsidies Recent Progress and Challenges Ahead. International and cross-subsidies in electricity and water must be Monetary Fund (IMF), Washington, DC. designed and monitored carefully to ensure that the benefits, specifically improvements in the business climate and employment (which are not captured by the results presented here), outweigh the impact on the poor. Furthermore, as the window for price subsidization closes in Jordan, future utility tariff increases will require to be accompanied by more robust social safety nets interventions to protect the poor and vulnerable population beyond broad- based compensations. Special Focus | 51 THE WORLD BANK DATA APPENDIX TABLE 14. Selected Economic Indicators. 2014 2015 2016 2017 2018 2019 Act. Act. Act. Proj. Proj. Proj. Real sector (annual percentage change, unless otherwise specified) Real GDP 3.1 2.4 2.0 2.3 2.6 3.0 Real GDP per Capita 0.3 -0.0 -0.0 0.6 1.2 1.8 Agriculture (share of GDP) 3.3 3.3 3.4 3.4 3.3 3.3 Industry (share of GDP) 25.2 25.2 24.9 24.9 25.0 25.1 Services (share of GDP) 55.8 55.9 56.3 56.0 55.9 56.0 Net taxes (share of GDP) 15.7 15.6 15.4 15.8 15.8 15.7 Money and prices (annual percentage change, unless otherwise specified) CPI Inflation (p.a.) 2.9 -0.9 -0.8 3.0 2.1 1.9 Money (M2) 6.9 8.1 4.0 3.9 8.8 9.3 Investment & saving Total Investment 28.0 24.1 22.1 21.0 21.5 22.8 Gross National Savings 20.7 15.0 12.8 12.3 13.9 17.2 Government finance (percentage of GDP, unless otherwise specified) Total revenues and grants 28.6 25.5 25.8 27.1 27.9 28.1 Domestic Revenue (excluding grants and privatisation) 23.7 22.2 22.7 24.4 25.0 25.4 o/w. tax revenue 15.9 15.4 15.5 16.8 17.3 17.5 Foreign Grants 4.9 3.3 3.0 2.7 2.9 2.8 Total expenditure and net lending 37.9 29.1 29.0 30.0 30.5 30.4 Current1 33.4 24.9 25.2 25.8 26.0 25.8 o/w wages and salaries 4.9 4.7 4.6 4.9 4.7 4.6 o/w interest payment 3.6 3.4 3.0 3.4 3.4 3.4 o/w Transfer to utilities (NEPCO and WAJ) 7.0 0.1 0.0 0.0 0.0 0.0 Capital & Net Lending 4.5 4.1 3.8 4.3 4.5 4.6 Overall balance (deficit (-), excl. grants)2 -14.2 -6.9 -6.2 -5.6 -3.7 -3.0 Overall balance (deficit (-), incl. grants)2 -9.3 -3.6 -3.2 -2.9 -0.8 -0.2 Primary Balance (deficit (-), excl. grants)2 -10.5 -3.4 -3.2 -2.2 -0.3 0.4 Primary Balance (deficit (-), incl. grants)2 -5.7 -0.12 -0.2 0.5 2.6 3.2 External sector (percentage of GDP, unless otherwise specified) Current Account -7.3 -9.1 -9.3 -8.7 -7.6 -5.6 Net Exports -26.4 -22.9 -20.8 -21.2 -20.2 -18.7 Export FOB 43.3 37.6 35.1 36.6 39.5 42.5 Import FOB 69.7 60.5 55.9 57.8 59.6 61.2 Net Income and transfers 19.1 13.8 11.5 12.5 12.5 13.1 Net Private Investments (FDI and Portfolio) 9.1 7.7 7.1 7.3 7.7 8.2 Foreign Currency Reserves (US$ Millions) 14,079 14,153 12,883 13,293 13,966 14,238 Foreign Currency Reserves3/ (Months of Imports GNFS4/, exclud- 7.1 7.8 7.6 7.3 7.2 6.7 ing re-exports5/) Total Debt (in million US$, unless otherwise specified) Total Debt Stock 31,984 35,126 36,843 38,491 38,498 39,258 Debt to GDP Ratio (%)6/ 89.0 93.4 95.1 95.6 91.7 88.9 Memorandum Items: Nominal GDP (Billion JD) 25.4 26.6 27.4 28.5 29.7 31.3 GDP (in million US$) 35,917 37,612 38,752 … … … Source: Government Data and World Bank Staff Calculation. Macroeconomic projections are as of 15 April 2017. 1/ Includes adjustment to other receivables for 2012 (0.4% of GDP) and transfers to NEPCO and WAJ. As of 2015, NEPCO and WAJ reverted to government-guar- anteed borrowing from commercial banks. The government transferred 0.1% of GDP to WAJ in 2015. 2/ Includes fiscal gap of 1.8% of GDP in 2018 and 2.0% of GDP in 2019. 3/ Reserves exclude bank deposits in foreign currencies. 4/ GNFS: Goods and Non-Factor Services. 5/ As of January 2017, coverage ratio calculation for the series deducts re-exports from imports. 6/ Government and guaranteed gross debt. Includes WAJ estimated borrowing for 2017-2019. 52 | Data Appendix JORDAN ECONOMIC MONITOR | THE GREEN ECONOMIC BOOST SELECTED RECENT WORLD BANK PUBLICATIONS ON JORDAN (for an exhaustive-e list, please go to http://www.worldbank.org/en/country/jordan/research) Title Publication Date Document Type Tafila Region Wind Power Projects: Cumulative Effects Assessment 2017/03/01 Working Paper Jordan - Program for International Student Assessment 2015 2016/12/15 Brief Jordan - Second Programmatic Energy and Water Sector Reforms 2016/12/01 Loans & Credits Development Policy Loan Jordan Economic Monitor, Fall 2016:Reviving a Slowing Economy 2016/11/24 Report European Investment Bank & World Bank Group Partner to Support 2016/10/17 Press Release Entrepreneurs in the Middle East & North Africa Economic and Social Inclusion Helps Prevent Violent Extremism and 2016/10/5 Press Release Contribute to Growth in the Middle East and North Africa Jordan’s Economic Outlook - Fall 2016 2016/10/3 Publication Does Improved Local Supply of Schooling Enhance Intergenerational Mobility 2016/09/15 Working Paper in Education? Evidence from Jordan Jordan Economic Monitor, Spring 2016: The Challenge Ahead 2016/05/01 Report Jordan - As-Samra Wastewater Plant Expansion 2016/05/01 Brief Jordan - Queen Alia Airport 2016/04/07 Brief Jordan - Tafila Wind Farm 2016/04/06 Brief The Cost of Irrigation Water in the Jordan Valley 2016/04/01 Working Paper Learning or Leaning: Persistent and Transitory Spillovers from FDI 2016/03/02 Working Paper The Welfare of Syrian Refugees: Evidence from Jordan and Lebanon 2015/12/22 Publication Jordan Economic Monitor, Fall 2015: A Hiccup Amidst Sustained Resilience 2015/10/01 Report and Committed Reforms Jordan - Developing an Efficient Public Investment Management System 2015/10/01 Brief A Research Paper on the Impact of Gender Diversity on the Economic 2015/09/01 Working Paper Performance of Companies in Jordan Estimating Poverty with Panel Data, Comparably: An Example from Jordan 2015/07/21 Policy Research Working Paper Energy Subsidies Reform in Jordan: Welfare Implications of Different 2015/06/17 Policy Research Working Paper Scenarios Jordan Economic Monitor, Spring 2015: Persisting Forward Despite 2015/06/01 Report Challenges Selected Recent World Bank Publications on Jordan | 53 0.9375 cm The World Bank www.worldbank.org/jo