JORDAN ECONOMIC MONITOR Public Investment: Maximizing the Development Impact Fall 2022 Middle East and North Africa Region © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover photos used with the permission of Raad Adileh/World Bank. Publication design by The Word Express, Inc. and BigAD communication Preface The Jordan Economic Monitor (JEM) provides an update and from useful discussions with Smita Wagh (Senior on key economic developments and policies over the past Financial Sector Specialist), Mazen Alsad (Principle six months. It also presents findings from recent World Investment Officer, IFC) and Aurelie Arnaud (Investment Bank analytic work on Jordan. The JEM places them in a Officer, IFC). The Jordan Economic Monitor has been longer-term and global context and assesses the completed under the guidance of Eric Le Borgne (Practice implications of these developments and other changes in Manager), Norbert Fiess (Lead Economist), Holly Benner policy on the outlook for Jordan. Its coverage ranges from (Resident Representative), and Jean-Christophe Carret the macro-economy to financial markets to indicators of (Regional Director). human welfare and development. It is intended for a wide The findings, interpretations, and conclusions expressed in audience, including policymakers, business leaders, this Monitor are those of the World Bank staff and do not financial market participants, and the community of necessarily reflect the views of the Executive Board of The analysts and professionals engaged in Jordan. The data World Bank or the governments they represent. cut-off date for this Jordan Economic Monitor is December 1, 2022. For questions and comments on the content of this The Jordan Economic Monitor is a product of the Middle publication, please contact Hoda Youssef East and North Africa (MENA) unit in the (hyoussef@worldbank.org) or Anastasia Janzer Macroeconomics, Trade and Investment (MTI) Global (ajanzeraraji@worldbank.org). Nabeel Darweesh (External Affairs Officer) is the lead on communications, outreach, Practice in the World Bank Group. This edition was led by Hoda Youssef (Senior Economist, MTI) and Anastasia and publishing. To be included on an email distribution list Janzer (Consultant, MTI). The Special Focus: Public for this or other related publications and for questions Investment: Maximizing the Development Impact was from the media, please contact him at written by Hoda Youssef and Jad Mazahreh (Senior ndarweesh@worldbankgroup.org. For information about Governance Specialist). It has benefitted from comments the World Bank and its activities in Jordan, including e- and inputs from Roland Lomme (Senior Governance copies of this publication, please visit www.worldbank.org/en/country/jordan. Specialist), Lina Fares (Senior Procurement Specialist) and Aijaz Ahmad (Lead Public Private Partnerships Specialist), 1 Acronyms and Abbreviations 8M-2022 First eight months of 2022 MTI Macroeconomics, Trade and Investment H1-2022 First half of 2022 NDA Net domestic assets BoP Balance of Payments NEPCO National Electricity Power Company Bps Basis points NFA Net foreign assets CAD Current Account deficit PIM Public Investment Management CBJ Central Bank of Jordan PPP Public Private Partnership CG Central Government Q1 First Quarter CPI Consumer Price Index Q2 Second Quarter COVID-19 Coronavirus Disease 2019 Q4 Fourth Quarter DoS Department of Statistics T-bills Treasury bills EFF Extended Fund Facility T-bonds Treasury bonds e.o.p. End-of-period ToT Terms of Trade FCU Fiscal Cost Unit RHS Right-hand-side FDI Foreign direct investment SDR Special drawing rights f.o.b. Free on Board SMEs Small and medium-sized enterprises FY Fiscal Year SSC Social Security Corporation GDP Gross Domestic Product SOE State owned enterprise GoJ Government of Jordan SSIF Social Security Investment Fund GST General Sales Tax U.S. United States GNFS Goods and nonfactor services US$ United States Dollar IMF International Monetary Fund WAJ Water Authority of Jordan JEM Jordan Economic Monitor WB World Bank JD Jordanian Dinar WBG World Bank Group LFP Labor Force Participation UNHCR World Economic Outlook MENA Middle East and North Africa 2 Table of Contents Executive Summary................................................................................................................................................................................. 5 A. Recent Economic Development ............................................................................................................................8 1. Real Sector and Labor Market .....................................................................................................................................8 2. Fiscal and Debt Developments ....................................................................................................................................9 3. External Accounts .....................................................................................................................................................11 4. Monetary Policy and Inflation ...................................................................................................................................13 B. Outlook and Risks ..................................................................................................................................................19 C. Special Focus :Public Investment: Maximizing the Development Impact .................................................... 22 Annex 1. Selected Recent World Bank Publications on Jordan.......................................................................................30 Annex 2. Summary of Special Focuses from the Latest Jordan Economic Monitors ......................................................31 3 List of Tables and Figures Figure 1. The services sector is leading growth recovery ..................................................................................................................... 8 Figure 2. Almost all subsectors reached pre-pandemic levels ............................................................................................................. 8 Figure 3. Labor Force Participation remains sticky ............................................................................................................................... 9 Figure 4. Unemployment is gradually declining… ................................................................................................................................ 9 Figure 5. … but at slower pace compared to peers ............................................................................................................................... 9 Figure 6. Fiscal consolidation has slowed down .................................................................................................................................. 10 Figure 7. Revenue performance was good except for trade taxes .................................................................................................... 10 Figure 8. Subsidies exerted significant expenditure pressures ........................................................................................................... 10 Figure 9. An upward revision of GDP has lowered the public debt-to-GDP ratio ...................................................................... 11 Figure 10. Domestic borrowing was dominated by Treasury bills ................................................................................................... 11 Figure 11. The Current Account remains under pressure due to a rising import bill.................................................................... 12 Figure 12. Worsening terms of trade suggest Jordan needs to export more to cover the same amount of imports ............... 12 Figure 13. Exports benefitted from high prices for chemicals and fertilizers................................................................................. 12 Figure 14. Tourism is nearly reaching its pre-pandemic levels .......................................................................................................... 13 Figure 15. Financial flows could not keep up with the widening CAD… ...................................................................................... 13 Figure 16. … leading to a drawdown on Foreign Reserves ............................................................................................................... 13 Figure 17. Inflation accelerated on account of rising fuel prices. ..................................................................................................... 14 Figure 18. Despite its acceleration, inflation remains low in regional comparison ........................................................................ 14 Figure 19. Money Supply continues to be driven by domestic assets .............................................................................................. 15 Figure 20. Jordan’s infrastructure quality is on par with peer countries .......................................................................................... 23 Figure 21. Public investment spending has been steadily declining.................................................................................................. 23 Figure 22. Spending on nonfinancial assets is lower than the average spending in peer countries ............................................. 24 Figure 23. Capital spending has been consistently under-executed in the past decade ................................................................. 24 Figure 24. Recurrent spending leaves little room for capital spending ............................................................................................ 24 Figure 25. Capital spending happens when foreign grants are provided ......................................................................................... 25 Figure 26. Nearly half of total capital expenditure is allocated to five sectors................................................................................ 25 Figure 27. The year 2021 has seen large variations in sector allocations ......................................................................................... 25 Table 1: Jordan’s Central Government fiscal accounts in 8M-2022 ................................................................................................. 18 Table 2. Jordan – Selected Economic Indicators (2019-2024) .......................................................................................................... 21 Box 1. Quasi-fiscal operations of the Central Bank of Jordan .......................................................................................................... 16 4 Executive Summary The data cut-off date for this Jordan Economic Monitor is percent. In regional comparison however, average headline December 1, 2022. inflation in Jordan remained relatively contained helped by the (temporary) fuel subsidies and a number of other price Jordan was hit hard by the challenging global context, control measures introduced earlier in the year. Moreover, notably the increase in global commodity prices. The a high level of strategic wheat and fuel reserves along with war in Ukraine combined with COVID-19 aftershocks has favorable long-term import contracts for gas have to some led to a sharp rise in global food and energy prices, extent shielded consumers from high international exacerbating inflationary pressures and threatening food commodity prices. and energy security. To control rising inflationary pressures, many central banks in both advanced and The Central Bank of Jordan (CBJ) tightened its emerging economies, including Jordan, have reacted with monetary policy to safeguard the peg by closely monetary policy tightening, which is expected to exert an following U.S. Federal Reserves’ interest rate hikes. additional drag on global economic activity. The CBJ raised the policy rate six times since March 2022 to maintain the Jordanian Dinar’s anchor to the U.S. dollar, Despite this challenging environment, Jordan’s bringing the CBJ main rate to 6.00 percent at the end of growth during the first half of 2022 exceeded November. Despite this tighter monetary policy, broad expectations, buoyed by a strong rebound in tourism money supply grew by 4.9 percent in the first ten months and exports. Jordan’s real GDP accelerated to 2.7 percent of 2022, driven by an increase in credit to the private sector. in the first half of 2022 (H1-2022). This upswing was In contrast, a contraction in the banking system’s net propelled by a strong recovery of international tourism to foreign assets partially reflected the impact of the widening Jordan, the full reopening of the economy, the easing of trade deficit. COVID-related restrictions and improving exports. The services sector was the strongest contributor to growth The CBJ kept its refinancing programs with favorable with a robust rebound in contact-intensive services, interest rates unchanged. These programs provide followed by the industrial sector. targeted support to ten economic sectors deemed strategic and to SMEs (see Box 1). Such quasi-fiscal operations can However, the rebound in growth was only modestly have important allocative, financial and macroeconomic reflected on labor market indicators. The employment implications, by affecting the Central Bank’s financial rate increased to 26 percent in Q2-2022 led by the services balance and impeding the proper credit evaluation. Similar sector, but still stands 1.8 percentage points below its pre- to other taxes and subsidies, quasi-fiscal operations distort crisis level in 2019. Meanwhile, labor force participation is relative prices in the economy and can lead to a low especially for women; they remain below pre-pandemic misallocation of resources. They also mask the extent of levels, suggesting a continued discouragement between fiscal activity in the economy, thereby posing a workers resulting in exit from the workforce. The transparency and accountability issue. Those aspects stress unemployment rate has only marginally declined to 22.6 the importance of quantifying existing quasi-fiscal percent in Q2-2022 and remains particularly elevated for operations, which should remain a temporary instrument women (29.4 percent) and youth (46.0 percent). Jordan’s and be gradually phased out while including similar future unemployment rate also remains relatively sticky compared programs in the budget. to its regional peers, which have seen a much steeper decline in unemployment rates from the pandemic-induced Fiscal consolidation adjustments have slowed down highs. Long-standing structural rigidities such as a gender despite good tax performance. The Central Government divide and the weak business environment remain an fiscal deficit (excl. grants) reached 4.1 percent of GDP in impediment to job creation. 8M-2022, marginally above the deficit in the same period of 2021. The accelerated economic recovery, together with Inflation has reached its highest level since 2018 but tax administration reforms continue to improve direct tax remains contained compared to regional peers. revenue collection. On the expenditure side, spending Headline CPI inflation rate reached 5.4 percent in pressures from the re-introduction of fuel subsidies exerted September 2022 pushed by the increase io fuel and substantial pressure on recurrent spending. Capital transportation prices and reflecting the partial phasing out expenditure stood at 2.0 percent of GDP in 8M-2022 - a of fuel subsidies – with a small downtick in October to 5.2 significant increase compared to previous years – but is 5 unlikely to meet its ambitious budget target of 4.5 percent. global fuel and food prices on the import bill are likely to Despite the slower consolidation, a recent upward revision deteriorate the trade balance. of GDP numbers has lowered the central government Over the medium-term, growth is expected to debt-to-GDP ratio by 1.2 percentage points to a still moderate as the economic momentum fades and elevated 112.3 percent GDP in 2021. global growth declines. Uncertainty and risks Despite the improvement in merchandise exports and surrounding Jordan’s outlook remain high, as the looming tourism, the external sector remains under pressure, global economic downturn could negatively impact with the current account deficit widening to its demand for exports as well as tourism. On the fiscal front, highest level since 2012. The trade deficit substantially higher borrowing costs and widening (and mostly widened, driven by a surge in imports - mainly driven by structural) losses from state-owned water and electricity oil and grains imports - which was only partially offset by sectors pose substantial risks to debt dynamics. In addition, the considerable improvement in merchandise exports an intensification or prolongation of the food and energy (particularly those of potash, chemicals/fertilizers and crisis would pressure the already elevated external deficit phosphate) and tourism. In contrast, workers’ remittances and impact food security. Finally, with its scarce water remained relatively stable, growing by only 2 percent during supply, Jordan is highly vulnerable to climate change and the first half of 2022. As a result, the current account deficit extreme weather conditions. (CAD, incl. grants) widened in H1-2022 to 7.0 percent of Domestic policy constraints should focus on building projected GDP compared with 5.4 percent in H1-2021. resilience and cushioning the impact of global risk Capital and financial inflows did not keep up with the factors. The limited fiscal space and risks from state- widening CAD, resulting in a substantial widening of owned enterprises (notably the energy and water the BOP deficit. Although net foreign direct investments companies) could be exacerbated by global shocks. To (FDI) reached their highest level in five years at 1.1 percent increase resilience and support recovery, structural reforms of GDP in H1-2022, a large net outflow of portfolio need to be accelerated to address the long-standing investments and currency and deposits led to overall weak impediments to private sector-led growth. Deep labor private financial flows. Despite increased support from market reforms are also needed to overcome labor market multilateral and bilateral loans as well as IMF-EFF segmentation and unlock Jordan’s human capital potential. disbursements, capital and financial flows were not The Special Focus highlights the role of public sufficient to cover the widening CAD, which resulted in an investment as a driver of growth, with a particular increase of the overall BOP deficit to 2.6 percent of GDP focus on its recent trends, as well as its efficiency and in H1-2022, compared to 0.2 percent of GDP in H1-2021. effectiveness. This is particularly relevant given Jordan’s Persistent external pressures have led to a drawdown in the constrained fiscal envelope. The analysis notes that public CBJ’s foreign exchange reserves, which stood at US$16.9 investment spending has been steadily declining during the billion at the end of October 2022, US$2.1 billion lower past two decades, squeezed by the need to meet the fiscal than their levels at end-December 2021. However, reserves consolidation targets. Institutional weaknesses in remain at an adequate level due to the build-up of sizable budgeting for capital projects have led to a consistent and foreign exchange buffers during the past two years. increasing under-execution of capital spending. Large Going forward, Jordan’s economic recovery in 2022 is dependency on external aid for capital expenditures is a expected to be driven by a full rebound of the services major challenge, leading to large swings in spending and sector, helped by the full reopening of the economy delays in procurement and project implementation. For and a strong rebound in tourism. GDP growth is instance, on average in the past ten years, 44 percent of projected to reach 2.5 percent in 2022, compared to 2.2 annual capital spending happened in the last quarter and 27 percent registered in 2021. However, highly volatile global percent in the last month of the fiscal year, when foreign fuel and food prices are impacting both domestic grants provided the necessary cash. This also has significant consumption and the trade balance. Elevated consumer implications for the externally funded public assets, which prices, higher borrowing costs, and the retraction of will incur significant operational and maintenance costs government spending may weigh on aggregate demand in during their lifecycle, and long after the donor financing the second half of 2022. Moreover, while goods and ends. The efficiency of public investment can be services exports benefit from higher fertilizer prices and a maximized by having in place financially realistic long-term rapidly recovering tourism, the impact of highly volatile strategic planning, transparent and consistent project selection, capital budgeting integrated into a medium-term 6 perspective, effective procurement, and implementation purposefully integrating climate concerns in public and monitoring throughout the lifetime of the asset. In line investments would advance the country’s achievement of with the Economic Modernization Vision 2033 which its climate targets. promotes a transformation towards a greener economy, 7 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 A. Recent Economic Development 1. Real Sector and Labor Market Figure 1. The services sector is leading growth recovery Supply side growth contribution, percentage points/percent Real GDP expanded by 2.7 percent in the first half of 2022 (H1-2022), maintaining a solid pace of recovery. Agriculture Industry Services Growth has accelerated to 2.9 percent (year on year) during Net Taxes Real GDP 4.0 the second quarter of the year (Q2-2022), up from 2.5 percent in Q1-2022; this is also a solid improvement 2.0 compared to the 1.8 percent achieved during H1-2021 (Figure 1). This acceleration was propelled by a strong recovery of international tourism to Jordan, the full 0.0 reopening of the economy and the easing of COVID- related restrictions and improving exports. -2.0 The full reopening of the economy propelled a vital -4.0 rebound, with the recovery led by the services sector. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Contact-intensive services (transportation & 2019 2020 2021 2022 communications, wholesale & retail and social & personal Source: DoS and World Bank staff calculations services) were disproportionally affected by the COVID- induced restrictions but have attained pre-pandemic levels Figure 2. Almost all subsectors reached pre-pandemic for the first time since the COVID-19 shock. The levels “restaurants & hotels” subsector registered the strongest Growth of subsectors in H1-2022, year-on year, percent year-on-year expansion in H1-2022 but remains the only sector that has not fully recovered to pre-pandemic level. Agriculture Mining & Quarrying Manufacturing – Jordan’s largest sub-sector with a 20 Industry Construction percent share in GDP – continued to show a robust growth Manufacturing performance of 3.5 percent, while extractive industries Electricity & Water Restaurants & Hotels (mining and quarrying) benefitted from increased Finance & Insurance international commodity prices for chemical and fertilizer Transport & Communications Services Wholesale and Retail minerals (Figure 2). Private Non-Profit Services Social & Personal Services The rebound in growth is modestly reflected in labor Real Estate market indicators as structural rigidities impair Government Services Domestic Services stronger job creation. The employment rate increased to Net Taxes . 26 percent in Q2-2022, with the services sector – which -5 0 5 10 15 accounts for more than 80 percent of total employment – y-o-y vis-à-vis H1-2019 supporting the increase in both female and male employment. However, it still stands 1.8 percentage points Source: DoS and World Bank staff calculations. below its level in 2019 and employment in subsectors such as “public administration and defense”, “wholesale and Labor force participation also shows persistent retail trade” as well as “education” remain weak. This may stickiness and remains nearly constant (Figure 3). potentially indicate that the public sector is fiscally Labor force participation (LFP) continued to hover around constrained to absorb new entrants to the labor force. a relatively low value of just under 34 percent - below pre- Moreover, the private sector’s ability to generate sufficient pandemic levels - suggesting that there may have been jobs for a growing labor force remains limited.1 workers’ discouragement resulting in exit from the workforce. While this is somewhat expected given that changes in LFP rates require longer-term behavioral shifts, 1World Bank, Jordan Economic Monitor - Spring 2022. "Global Turbulence Dampens Recovery and Job Creation". 8 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 it should be possible to see some short-run movements in Figure 5. … but at slower pace compared to peers the participation rate as a reflection to cyclical factors. Unemployment in regional comparison, Index: Q4-2019=100 Women seem to be particularly slow to enter or leave the 170 labor force in response to changes in economic conditions. 160 150 Unemployment is gradually improving but remains 140 higher than pre-pandemic levels. The unemployment 130 rate declined to 22.6 percent in Q2-2022, down from 24.8 120 Jordan 22.6% 110 Morocco 11.2% percent during the same period of the previous year. Yet, it 100 Tunisia 15.3% remains 4 ppts higher than the pre-pandemic level of 90 KSA 5.8% around 19.1 percent in 2019 (Figure 4). Youth 80 Egypt 7.2% unemployment (15-24 years of age) declined by 6 ppts 70 Turkey 10.7% 60 compared to end-2021 and reached 46.1 percent in Q2- Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 2022. However, despite this decline, it still is almost 6 ppts above the pre-pandemic level (2019) of 40.6 percent. Sources: DoS, Haver and World Bank staff calculations Compared to peers, unemployment in Jordan has been relatively sticky despite the recovery. Several peer countries have seen their unemployment rates decline to 2. Fiscal and Debt Developments pre-pandemic levels while others continue on a steeper downward path. In contrast, Jordan’s unemployment rate The challenging global environment has slowed has not declined substantially (Figure 5). progress towards fiscal consolidation. The Central Government (CG) fiscal deficit (excl. grants) has slightly Figure 3. Labor Force Participation remains sticky deteriorated compared to the same period in 2021 and Labor Force Participation Rates, Percent remains above the pre-crisis level (Figure 6). While the Total Male Female economic recovery and efforts to broaden the tax base 70 have continued to improve domestic revenue collection, 60 COVID-19 outbreak spending pressures from the re-introduction of fuel 50 subsidies exerted pressure on the fiscal deficit. Meanwhile, 40 the fiscal deficit including grants reached 3.7 percent of 33.4 30 GDP, 1.5 percentage points higher than the same period in 20 33.6 the previous year, reflecting a shift in the disbursement of 10 foreign grants towards the end of the year. 0 The overall increase in tax revenues reflects the Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 positive impact of tax administration reforms and 2018 2019 2020 2021 2022 anti-tax evasion campaigns, yet indirect taxes Sources: DoS, Haver and World Bank staff calculations achieved a modest growth. The increase in domestic Figure 4. Unemployment is gradually declining… revenues was driven by a solid expansion in taxes on Unemployment rates, Percent income and profits and real estate tax, with a 35 percent surge in income taxes from companies. On the other hand, 70 Total Youth (15-24 years) Female general sales tax (GST) grew at a modest 4.9 percent (y-o- 60 y), hampered by the non-payment of excises by oil 50 distributors as a reaction to the delays in government 40 disbursement of transfers to cover fuel subsidies. While GST on services on imported goods benefitted from high 30 growth in non-energy imports and a nascent recovery in 20 19.3 22.6 the services sector, collection of GST on domestic goods 10 COVID-19 outbreak and the commercial sector remained weak. Moreover, taxes on foreign trade were constrained by a major customs tax 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 reform that was approved in January 2022. Despite 2018 2019 2020 2021 2022 Sources: DoS, Haver and World Bank staff calculations. 9 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 simplifying the tariff system,2 a lower average tariff led to a percent for 2022, considering historical trends (see the decline in taxes on international trade by 28 percent (y-o-y) special focus for more details on capital spending). during 8M-2022 (Figure 7). Figure 7. Revenue performance was good except for trade Grants received in the period covering the 8M-2022 taxes are affected by the change in the disbursement timing Domestic revenues, year-on-year % growth of foreign assistance. In 2022, the bulk of international grants is expected to be disbursed in the last quarter of 120 2022, as in the pre-pandemic period. Hence, foreign grants 100 Int. trade tax Non-tax revenues stood at 0.4 percent of GDP in 8M-2022, much lower than 80 Income & profit tax GST in the same period of the two previous years when foreign 60 Real Estate Tax grants’ disbursements had peaked at mid-year, following 40 the COVID-19 outbreak. Nevertheless, Jordan’s budget 20 continues to benefit from strong support of international 0 grants, most notably from the USA.3 -20 -40 Figure 6. Fiscal consolidation has slowed down -60 Overall Central Government balance, Percent of GDP -80 8M-2020 8M-2017 8M-2018 8M-2019 8M-2021 8M-2022 -5.3 -3.9 -4.1 Sources: Ministry of Finance and World Bank staff calculations -3.5 -3.2 -2.6 Figure 8. Subsidies exerted significant expenditure pressures -1.1 -1.0 -1.2 Current Expenditures Growth, percent / percentage point contribution -1.0 10 8 8.1 8M-2018 8M-2019 8M-2020 8M-2021 8M-2022 Overall Balance (excl. grants) 6 6.0 4.8 Primary Balance (excl. grants) 4 2.6 Sources: Ministry of Finance and World Bank staff calculations 2 On the expenditure side, pandemic-related spending 0 pressures eased but fuel and wheat subsidies have -2 exerted upward pressure on spending (Figure 8). 8M-2019 8M-2020 8M-2021 8M-2022 Gasoline prices at the pump were kept stable during the Transfers Compensations first four months of 2022 and began only phasing out in Goods & Services Interest Payments Military Expenditures Fuel & wheat subsidies May. At end -August, fuel subsidies reached 0.7 percent of GDP (JD 232 million) while wheat subsidies stood at 0.2 Source: MoF and World Bank staff calculations percent (JD 55 million). This increase outpaced the moderate savings in military expenditures, compensation The sustained economic recovery has a favorable of employees and transfers, which have slightly declined as impact on Jordan’s debt dynamics despite the percentage of GDP. Capital expenditures, on the other elevated deficit. At end-August 2022, government and hand, stood at 2.0 percent of GDP in 8M-2022, a guaranteed gross 4 debt reached almost JD 37.8 billion, significant increase compared to previous years, but still which is JD1.3 billion higher than its end-2021 position. A have a long way to meet their ambitious target of 4.5 2 The reform reduced the number of tariff brackets from 11 (between of US assistance worth US$845 million is expected to be signed in 0 and 40 percent) to 4 categories (between 0 and 25 percent). November 2022. 3 In September, Jordan and the U.S. signed an MOU under which the 4 Government and guaranteed gross debt including SSIF debt holdings USA provides US$1.45 billion per year in U.S. bilateral foreign assistance and arrears securitized in 2019 and 2020. to Jordan beginning in 2023 until 2029. As for 2022, the disbursement 10 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 recent revision of the GDP historical numbers5 has led to New debt during the first half of 2022 was dominated a lower public debt-to-GDP ratio in 2021, which declined by domestic borrowing, and mostly short issuances. In by 1.2 percentage points to 112.3 percent GDP (Figure 9). contrast to previous years, the government issued mainly Meanwhile, public debt excluding the SSIF debt holdings, short-termed T-bills, while the repayment of T-bonds reached JD 30.3 billion in Aug-2022.6 (notably those with longer maturity) exceeded new issuances (Figure 10). As a result, the weighted average Figure 9. An upward revision of GDP has lowered the maturity of domestic debt7 declined from 4.5 years at end public debt-to-GDP ratio 2021 to 4.3 years in the first half of 2022. This is probably Gross central government and guaranteed debt, including SSIF debt to limit the impact on interest rate payments given the rise holdings, Percent of GDP in global and domestic yields, but may create rollover risks 113.6 if they shorten the average debt maturity. 115.0 109.0 112.3 Net external borrowing was dominated by multilateral 110.0 loans, while the stock of Eurobonds remained 107.8 unchanged. Most of the multilateral borrowing during 105.0 8M-2022 came from the IMF and the World Bank. The 100.0 97.4 Eurobond of US$1 billion, which matured in June 2022, was only partially rolled over, with the issuance during the 92.8 92.9 96.3 same month of a US$650 million Eurobond at 7.75 percent 95.0 92.1 92.1 92.3 91.9 for a 5.5 year maturity. This was more than three times 90.0 oversubscribed, reflecting investor’s confidence in Jordan 2016 2017 2018 2019 2020 2021 and the continued access to foreign financial markets. To Debt (old) Debt (revised GDP) finance the remaining part, the government issued US- dollar denominated domestic bonds in July 2022. Source: Dos, MoF, IMF and World Bank staff calculations Reflecting the Eurobonds repayment in June, public debt service (of budgetary and guaranteed debt) in 8M-2022 increased to 7.9 percent of GDP compared to 6.6 percent Figure 10. Domestic borrowing was dominated by of GDP during the same period last year. International Treasury bills rating agencies Fitch and Standard & Poor's affirmed Net issuance of Treasury bills and bonds, JD million Jordan’s foreign-currency sovereign credit rating with a 1,800 Treasury Bills Treasury Bonds stable outlook this year, while Moody’s upgraded Jordan’s 1,600 credit outlook from B1 “stable” to “positive”, citing fiscal 1,400 and economic reforms efforts and resilient financing from 1,200 the liquid banking sector, public pension fund and 1,000 international donors. 800 600 3. External Accounts 400 200 Despite the improvement in exports and tourism, the 0 current account deficit (CAD) widened to its highest -200 level since 2012, reflecting a larger trade deficit. The Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul CAD (incl. grants) widened to 7.0 percent of projected 2020 2021 2022 2022 GDP in the first half of 2022, up from 5.4 percent Source: MoF and World Bank staff calculations. during the same period in the previous year (Figure 11).8 Most of the deterioration can be explained by the increase in trade deficit, mainly pressured by a significant hike in 5 Joran’s real and nominal GDP figures for 2017-21 were revised reclassification takes out the Social Security Investment Fund (SSIF) upwards in September 2022, resulting in a downtick in the gross holdings of government debt. government and guaranteed debt-to-GDP ratio to 112.5 percent in 7 General Government bulletin only provides this information for debt 2021, compared to 113.7 percent before the GDP revisions. excluding SSIF holdings. 6 In 2020, in mutual agreement with the IMF, Jordanian authorities 8 All GDP ratios are based on the projected GDP for 2022 - full year - changed the definition of debt to a consolidated concept. This presented in the outlook. 11 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 imports. In particular, the global price shock to major Because of their much larger size, the rise in imports commodities, specifically fuel, has led to a continued weighed on the trade deficit, overcompensating the deterioration in Jordan’s terms-of-trade, which contributed exports increase. Non-energy imports accounted for to the widening trade deficit (Figure 12). around two thirds of this increase, likely driven by the improvement in domestic demand as imports of A considerable improvement in goods exports has intermediate goods and consumer goods remained partially mitigated the impact of the rising import bill buoyant. Moreover, the increase in global oil prices have on the trade deficit. Total exports grew by almost 44 led to a substantial hike in Jordan’s energy import bill, percent in H1-2022, predominantly driven by a substantial which grew by almost 70 percent during the first half of increase in international prices for potassium, phosphate 2022. Estimates suggest that the increase in energy imports and fertilizers. Together with other chemicals, these was predominantly driven by the price effect. commodities explain 70 percent of the increase in total exports. A breakdown by destination shows that exports to Figure 13. Exports benefitted from high prices for some of the world’s largest potash and fertilizer importers chemicals and fertilizers such as India, Indonesia, Malaysia, and China – contributed Exports Growth by Commodity, Percentage point contribution/ to more than half of the export growth in H1-2022 (Figure percent, e.o.p. 13). 60 Clothes & Figure 11. The Current Account remains under pressure due 50 Textiles to a rising import bill Chemicals & Current Account Developments, Percent of GDP 40 Fertilizers 6 30 Potash 4 20 Phosphates 2 10 0 0 Food & Live -2 Animals -4 -10 Other -6 -20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 -8 Domestic Exports Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 Trade Balance Services A/C Sources: DoS and World Bank staff estimates Income A/C Current Transfers C/A A significant rebound in travel and tourism supported Note: ratios reflect full year GDP in the denominator. the services balance, but workers’ remittances remain Sources: CBJ and World Bank staff estimates stable. Travel receipts grew by around 240 percent (y-o-y) during the first half of 2022, reaching nearly US$ 2.2 billion Figure 12. Worsening terms of trade suggest Jordan needs (Figure 14). The increase was mainly led by tourist arrivals to export more to cover the same amount of imports from Arab countries, as well as Jordanian expatriates. In Percent of GDP/Index (Jun-2012=100) contrast, the recovery of non-Arab tourism remained Trade deficit (% of GDP) protracted, reaching around 60 percent of its pre-pandemic 3.5 Terms of trade, Jun-2012=100 (R.H.S) 130 level during H1-2022. Further improvement was witnessed 3.0 125 in the period covering 9M-2022, as travel receipts have 2.5 120 nearly recovered to their pre-pandemic level. Overall, the 115 services balance reached a surplus of 1.1 percent of GDP 2.0 110 compared to a deficit of 0.7 percent during the same period 1.5 105 in the previous year. In contrast, workers’ remittances 1.0 100 continued to remain relatively stable, growing by 2 percent 0.5 95 during the first half of 2022. Both the primary and 0.0 90 secondary income account have slightly deteriorated Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 compared to H1-2021. Sources: DoS, IMF commodity terms of trade and World Bank staff estimates 12 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 Figure 14. Tourism is nearly reaching pre-pandemic levels Figure 15. Financial flows could not keep up with the Tourist arrivals (in thousands) and travel receipts (in US$ million), end widening CAD… of period value Financing of the Current account, percent of GDP Travel receipts (US$ million) Non-debt creating flows Debt creating flows Tourist arrivals (thousand individuals, R.H.S.) 8.0 Use of reserves 1000 1,000 Errors and omissions 6.0 CAD 800 800 4.0 600 600 2.0 400 400 0.0 200 200 -2.0 0 0 -4.0 Sep-18 May-19 Sep-19 May-20 Sep-20 May-21 Sep-21 May-22 May-18 Sep-22 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 -6.0 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 Sources: CBJ, DoS, and World Bank staff estimates Sources: CBJ, DoS, IMF, World Bank staff estimates The widening CAD was not sufficiently compensated by capital and financial flows, resulting in an overall Figure 16. … leading to a drawdown on Foreign Reserves BOP deficit. Net foreign direct investments (FDI) rose to CBJ Gross Foreign Reserves, US$ billion 1.1 percent of GDP in H1-2022 – its highest level in five 20 9.0 years. In contrast, net portfolio inflows contracted, 19 8.5 reaching -1.1 percent of GDP mainly driven by a net 18 8.0 outflow of US$350 million in Eurobonds. The net assets 17 7.5 of currency and deposits of the banking sector saw a 16 7.0 decrease by US$ 420 million, driven by the high imports 15 6.5 needs. Hence, debt-creating flows continued to dominate 14 6.0 the capital and financial account (Figure 15). Government 13 5.5 12 5.0 net official loans rose to US$520 million in 2021 compared Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 to US$70 million in H1-2021. This was further supported by IMF-EFF (net) disbursements of US$443 million following the fourth review. Overall, the increase in capital Gross usable reserves in months of imports (RHS) Gross foreign exchange reserves and financial flows were not sufficient to cover the widening CAD, resulting in an increase in the overall BOP Sources: CBJ and World Bank staff estimates deficit to 2.6 percent of GDP in H1-2022 (compared to 0.2 Notes: Reserves of Gold and Foreign Currencies. Gross usable reserves include gold and foreign currencies and exclude forward contracts. In months of next year's imports percent of GDP in H1-2021). of Goods and Services. Sustained external pressures have led to a decline in gross foreign reserves. The CBJ’s gross foreign reserves 4. Monetary Policy and Inflation stood at US$16.9 billion at the end of October 2022, US$2.1 billion lower than their levels in end December Global inflation and tighter financing conditions had 2021 position (Figure 16).9 Yet, the relatively high reserves ripple effects on Jordan’s small and import-dependent position at end 2021 has enabled the country to make use economy. International commodity prices rose sharply as of buffers while maintaining comfortable reserve levels. a result of the war in Ukraine, while persistent supply side bottlenecks and lagged effects of fiscal stimuli contributed to global inflationary pressures. Following the international oil price shock in February 2022, the GoJ had kept the price of oil derivatives stable for consumers, effectively limiting 9 Reserves of Gold and Foreign Currencies. 13 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 the pass-through of rising international oil prices during the this monetary tightening, the CBJ’s continues however to first four months of 2022. Beyond the provision of support the economy through its targeted refinance untargeted fuel subsidies, the government provided price program, as favorable interest rates on its JD1.3 billion support in the form of i) price controls (e.g., price cap on refinancing program were left unchanged, while the JD700 vegetable oils, fixing bread prices until the end of 2023), ii) million support program for SMEs was extended until the indirect tax exemptions (e.g., GST for vegetable oils end of this year. These quasi-fiscal operations ensure that removed until the end of May 2022; reduced customs liquidity to Jordan’s recovering priority sectors is made duties on some basic commodities), and iii) trade controls available in spite of tighter monetary policy. However, (e.g., export bans on some essential food items; extended these measures can entail important allocative, the cap on freight costs until June 2022). While price macroeconomic and financial implications (see Box 1). controls -– particularly those related to fuel subsidies - may Figure 17. Inflation accelerated on account of rising fuel have helped curtail inflationary pressures, they have prices. relatively high fiscal costs and distort price signals. Thus, CPI inflation (end of period), year-on-year % growth / percentage point the government has started phasing out fuel subsidies in contribution to headline inflation May 2022, which had a notable impact on consumer prices. 6 Fuel & Transportation Inflation Reflecting these developments, headline inflation 5 Food Inflation reached 5.4 percent in September 2022, the highest Core Inflation price increase since July 2018, but declined to 5.2 4 Headline Inflation percent in October. On average, CPI inflation reached 4.1 3 percent (y-o-y) during 10M- 2022, compared to 1.2 percent 2 in the same period of the previous year. Fuel and transportation prices drove the increase (averaging 9.5 1 percent), particularly after subsidies were being phased out 0 (Figure 17). In contrast, average food inflation has slightly eased in recent months, reaching 3.1 percent on average. -1 Core inflation – which excludes food and energy items -2 Apr-20 Apr-21 Apr-22 Aug-20 Aug-21 Aug-22 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Oct-20 Feb-21 Oct-21 Feb-22 Oct-22 – averaged 2.5 percent during 10M-2022 but has significantly accelerated during June to October. Improvement in economic activity, a solid recovery in Sources: CBJ and World Bank staff calculations. tourism and the rising cost of housing seem to be the main Figure 18. Despite its acceleration, inflation remains low in drivers behind this increase. Detailed data indicates that regional comparison rents, restaurants & hotels, and culture & recreation explain Average CPI in regional comparison, Index, Jan-2020 = 100 around 60 percent of the increase in core inflation during 10M-2022. Housing alone accounted for almost a third of 130 127 Egypt the elevated inflation rate, potentially reflecting a delayed Tunisia catch-up of real estate activity in the post-pandemic period. 124 Iraq However, in regional comparison, headline inflation in 121 Morocco Jordan remained relatively low. Compared to an average 118 Saudi Arabia inflation rate of 4.1 percent in Jordan, inflation in the 115 Jordan region averaged around 7.3 percent during 10M-2022 112 (Figure 18). 109 106 Consistent with its pegged exchange rate and to 103 mitigate inflationary pressures, the Central Bank of 100 Jordan (CBJ) is tightening its monetary policy. 97 Following the U.S. Federal Reserves’ interest rate hikes Apr-20 Apr-21 Apr-22 Jun-20 Jun-21 Jun-22 Aug-20 Dec-20 Aug-21 Dec-21 Aug-22 Feb-20 Oct-20 Feb-21 Oct-21 Feb-22 Oct-22 since March 2022, the CBJ has raised the rate six times by a total of 350 basis points on all monetary policy Sources: Haver and World Bank staff calculations. instruments, except for the overnight deposit window rate, which was raised by 375 basis points, bringing the CBJ main rate to 6.00 percent at the end of November. With 14 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 Despite monetary tightening and rising borrowing Figure 19. Money Supply continues to be driven by costs, money supply increased on the back of domestic assets expanding credit growth. Broad money supply (M2) Money Supply (Assets side), year-on-year % growth, percentage point grew by 4.9 percent (y-o-y) in the first ten months of 2022, contribution. driven by an accelerated increase in net domestic assets 12 NFA NDA M2 (Asset side) (NDA) of the banking system. Credit to private sector was 10 the major driver of the NDA expansion during 10M-2022 8 (Figure 19). Credit to the public sector also accelerated and 6 grew by 9.0 percent during the first ten months of 2022, 4 indicating higher domestic budget financing. In contrast, 2 net foreign assets (NFA) continued to contract (around 0 20.8 percent) in 10M-2022, reflecting the impact of the -2 widening trade deficit. -4 -6 Apr-19 Apr-20 Apr-21 Apr-22 Jul-19 Jul-20 Jul-21 Jul-22 Jan-19 Oct-19 Jan-20 Oct-20 Jan-21 Oct-21 Jan-22 Oct-22 Sources: CBJ and World Bank staff calculations. 15 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 Box 1. Quasi-fiscal operations of the Central Bank of Jordan To mitigate the negative impact of COVID-19 on businesses, the Central Bank of Jordan provided crucial support to Jordan’s hard-hit private sector through two sizable lending programs. These liquidity operations have been extended since both in scope and size, reaching a total of about JD 2 billion (~6.2 percent of GDP): (1) The terms of an existing JD 1.3 billion program have been adjusted to refinance ten vital economic sectors through preferential interest rates. (2) A JD500 million program supporting SMEs, professionals, craftspeople and basic commodity importers, stipulating specific borrower limits for each sector. This program has been increased to JD 700 million (~2.2 percent of GDP) in March 2021, including an extension of borrowing limits for especially hard-hit sectors by the pandemic (i.e., tourism and trade). Within this lending scheme: ▪ The government bears the interest cost on loans in case SMEs use the loans to pay employee salaries. ▪ In March 2022, the CBJ utilized this lending scheme to mitigate the impact of rising international commodity prices on importers by raising the borrowing limits for firms that import basic commodities, such as wheat, sugar, and oil. During 2022, the CBJ has gradually increased the interest rates on its policy instruments but left preferential rates for its refinancing programs unchanged to maintain its support to the private sector. It effectively provides lending to selected sectors at below-market interest rates, a form of administered interest rate. The funds are lent from the CBJ at a low rate (1 percent for projects within the capital governorate, and 0.5 percent for projects within the other governorates), which private banks then on-lend with a small margin. While this hampers banks’ ability to price the risk adequately and may undermine the development of this market segment, a guarantee of 85 percent by the Jordan Loan Guarantee Corporation (JLGC) allows commercial banks to be more comfortable to lend with these low-administered lending rates. The CBJ is planning to phase out the programs by end of 2023 to avoid the unintended adverse effects of such programs. This is because these lending schemes are quasi-fiscal operations, as they represent a transfer of public resources to specific economic sectors, thus carrying out a fiscal policy that falls outside of the fiscal budget. Although these activities fall outside of central banks’ regular mandate, quasi-fiscal operations often become crisis tools, because they are easier to administer, faster to implement than typical budget- financed subsidies, or are simply considered financial operations which fall within the scope of the central bank’s realm. In the case of Jordan, limited fiscal space and large liquidity needs of the hard -hit private sector gave rise to the CBJ’s quasi-fiscal operations at the onset of the pandemic. During 2022, they allowed the CBJ to safeguard the peg by closely aligning its policy rate with the U.S. Fed funds rate while maintaining support for selected sectors. Quasi-fiscal operations can have important allocative, macroeconomic and financial implications. In cases where they are large in size, quasi-fiscal operations can affect the Central Bank’s profitability and can create losses. For instance, subsidized lending schemes can impede proper credit evaluation and raise the risk for loan recovery. In their presence, the extent of fiscal activity in the economy can be masked when using conventional fiscal balance measures If they were to happen, losses of Central Bank caused by quasi-fiscal operations would not be easily quantifiable, hereby posing a transparency issue. Those aspects stress on the importance of quantifying existing quasi-fiscal operations for the purpose of macroeconomic analysis. Moreover, similar to other taxes and subsidies, quasi-fiscal operations distort relative prices in the economy (mostly favoring special interest groups) and can lead to a misallocation of resources. Hence, quasi-fiscal activities should remain a temporary instrument and be gradually phased out. In the future, such programs should be included in the budget. 16 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 Other countries in the MENA region have also resorted to similar initiatives of subsidized lending for different purposes. In Egypt, The Central Bank of Egypt (CBE) has been also launching several quasi-fiscal initiatives in support of various categories sectors and socioeconomic objectives. Within this context, significant financing was availed to various categories of beneficiaries at interest rates lower than prevailing market rates, with the CBE compensating banks for the interest rate differential. The aim of those initiatives was to incentivize banks to lend selected target groups and facilitate their access to credit. From 2016, several initiatives worth EGP 610.5 billion were announced. The initiatives are wide in their sectoral scopes, covering the social housing mortgage finance initiatives, SMEs initiatives providing financing for already-established or newly established companies in the industrial, agricultural and new and renewable energy sectors, and sector-specific initiatives to alleviate the pressure on workers in the tourism sector that was affected by numerous shocks in the past decade (World Bank, 2022c) In November 2022, the CBE has put an end to the initiatives backing the industrial, agricultural and contracting sectors, and the low-interest financing initiatives were transferred to the finance ministry. A prime minister decree also banned all entities, including the CBE, from drafting any new financing initiatives or amending current ones except after obtaining the approval of the cabinet. * The ten sectors are: industry, tourism, agriculture, renewable energy, information technology, transportation, health, technical and vocational education, engineering and consulting. 17 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 Table 1. Jordan’s Central Government fiscal accounts in 8M-2022 JD million Percent of GDP Percent of total Budget 8M-2020 8M-2021 8M-2022 8M-2020 8M-2021 8M-2022 8M-2020 8M-2021 8M-2022 Total revenues and grants 4,731 5,528 5,544 15.1 17.0 16.1 55.9 67.9 62.2 Total domestic revenues 4,108 4,973 5,419 13.1 15.3 15.7 53.6 68.1 67.2 Total Tax revenues 3,313 3,829 4,209 10.6 11.8 12.2 59.6 71.0 69.1 Direct 944 1,036 1,352 3.0 3.2 3.9 74.5 84.6 96.2 Taxes on income and profits 919 994 1,290 2.9 3.1 3.7 72.6 89.5 100.1 Real-estates tax 25 43 62 0.1 0.1 0.2 25.5 37.0 53.2 Indirect 2,370 2,792 2,857 7.6 8.6 8.3 55.3 67.0 61.9 General sales tax 2,195 2,574 2,701 7.0 7.9 7.8 55.5 67.3 63.4 Imported goods 551 688 762 1.8 2.1 2.2 48.3 67.7 66.6 Domestic goods 777 817 789 2.5 2.5 2.3 86.7 73.0 65.1 Services 276 289 356 0.9 0.9 1.0 46.0 70.5 65.2 Commercial Sector 592 780 794 1.9 2.4 2.3 44.8 61.0 58.5 Taxes on Foreign Trade 174 218 156 0.6 0.7 0.5 52.7 64.1 44.0 Non-tax revenues 794 1,144 1,210 2.5 3.5 3.5 37.8 60.0 61.3 Grants 623 556 125 2.0 1.7 0.4 77.3 66.2 14.7 Total expenditures 5,779 6,227 6,836 18.4 19.2 19.8 60.2 61.6 64.2 Current Expenditures 5,436 5,697 6,161 17.3 17.5 17.8 65.2 64.7 67.7 Compensation of employees 1,100 1,183 1,213 3.5 3.6 3.5 65.7 66.1 63.2 Purchases of Goods and Services 177 233 236 0.6 0.7 0.7 45.6 53.8 51.0 Interest Payments 841 934 990 2.7 2.9 2.9 67.1 64.3 69.3 Military Expenditures 1,773 1,841 1,883 5.7 5.7 5.5 67.3 67.0 66.2 Goods Subsidies 0 0 55 0.0 0.0 0.2 … 0.0 91.7 Fuel subsidies 0 0 232 0.0 0.0 0.7 … … … Transfers 1,545 1,507 1,553 4.9 4.6 4.5 64.8 64.7 64.9 Capital Expenditures 343 529 675 1.1 1.6 2.0 27.0 40.7 43.7 Overall Balance (excl. grants) -1,671 -1,254 -1,416 -5.3 -3.9 -4.1 85.7 44.6 54.7 Overall Balance (incl. grants) -1,048 -698 -1,291 -3.3 -2.2 -3.7 91.7 35.4 74.2 Primary Balance (excl. grants) -830 -320 -427 -2.6 -1.0 -1.2 119.4 23.6 36.8 Primary Balance (incl. grants) -206 235 -302 -0.7 0.7 -0.9 -184.0 -45.4 96.5 Memorandum items: Nominal GDP 31,369 32,478 34,540 Source: Ministry of Finance, IMF and WB staff calculations 18 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 B. Outlook and Risks Amman © Raad Adileh Resurging tourism is expected to boost Jordan’s Structural reforms need to be accelerated to tackle the long- economic recovery in 2022, but the destabilizing standing impediments to private sector-led growth and global context is likely to moderate medium-term increase productivity. Deep labor market reforms are also growth prospects. Real GDP growth is projected to reach needed to facilitate the economic inclusion of females and 2.5 percent in 2022 compared to 2.2 percent in 2021. 10 youth, and the integration of different segments of workers Hence, growth in 2022 is expected to be mainly driven by in the formal labor market. a full recovery in services, helped by the full reopening of Elevated global food and energy prices are expected the economy and strong rebound in international travel to to raise inflation to its highest level in four years. Jordan. In addition, the significant growth in exports Headline CPI inflation is projected to increase to 4.4 helped sustaining real economic growth. However, percent in 2022 compared to 1.3 percent in 2021, driven by increasing consumer prices, monetary tightening, and the global food and energy prices. Over the medium term, the retraction of government spending may weigh on aggregate impact of monetary tightening and a gradual decline in demand in the second half of 2022. Over the medium- global commodity prices are expected to ease price term, growth is expected to moderate slightly as the pressures. economic momentum fades and global growth declines. 10This is an upward revision from the latest forecast of 2.1 percent published in the Macro-poverty Outlook (October 2022), driven by high growth numbers in Q2-2022 and a robust improvement in tourism. 19 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 Fiscal adjustments are on track, but debt pressures predominantly by phosphate, potash, phosphoric acid, and from the broader public sector will likely intensify. On other fertilizers, for which global prices are expected to the revenue side, the economic recovery and continued remain high during 2022. The services balance will benefit efforts to increase tax compliance and improve tax from a substantial recovery in tourism of Jordanian administration will increase receipts from taxes on income expatriates and Arab tourists, projected to reach over 90 and profit, specifically from corporate income taxes. The percent of pre-pandemic levels. Over the medium term, the termination of exemptions from real estate registration CAD is expected to gradually narrow under the assumption taxes and fees are also expected to benefit both tax and of easing commodity prices, and further recovery in non-tax revenues. These gains in domestic revenue are tourism receipts. Gross external financing needs will anticipated to offset the decline in taxes on foreign trade remain high, but gradually decline over the medium term. triggered by customs reform. External support through As for the capital and financial account, FDI inflows are grants is expected to remain stable at 10 percent of anticipated to improve on the back of reforms of the revenues. On the spending side, expenditure-to-GDP is investment and business environment and an economic expected to slightly decrease with the retraction of upswing of the Gulf states. Jordan will also continue to COVID-related spending, partially compensating for benefit from steady official multilateral and bilateral higher fuel and wheat subsidies and additional cash financing. transfers. Wheat subsidies, in particular, are expected to Uncertainty and risks surrounding Jordan’s outlook reflect on full year-figures as the bulk of spending took remain relatively high, with major disruptions place in the second half of the year when the authorities expected from the external environment. The resumed replenishment of strategic food reserves. These tightening of financial conditions will substantially raise additional spending pressures are expected to be taking a borrowing costs on international and domestic capital toll on capital spending in 2022, which is likely to remain markets, which could further strain already high debt levels. restrained to meet the fiscal targets. Overall, the fiscal Additional downside risks include a prolongation of the deficit is projected to narrow to 5.4 percent of GDP in Ukraine-Russia war, and a possible intensification of global 2022, down from 6.3 percent in 2021. However, the loss- political rifts, with damaging implications on food and making state-owned electricity and water companies are energy crisis. The latter could put further pressure on the expected to largely contribute to an increase public and external deficit and directly impact Jordan’s capacity to publicly guaranteed gross debt to 113.4 percent of GDP meet its food security needs. Food security risks could (with debt net of Social Security Investment Fund holdings further be exacerbated by the impact of climate change, at around 89.9 percent). Over the medium term, additional notably lower precipitation and rising temperatures, on fiscal reforms under the ongoing IMF-EFF program, Jordan’s already stressed water supply. Finally, COVID-19 especially in the areas of tax administration, are expected to risks remain a threat and can impact global supply chains. continue supporting fiscal performance. However, a more On the flip side, the Gulf states’ major oil exporters are challenging global environment and higher borrowing expected to benefit from substantial windfall gains from costs will warrant a more cautious fiscal consolidation elevated oil prices, which could reflect positively on trajectory to ensure that a primary surplus can be achieved remittances, FDI inflows and tourism. by 2025. Several factors limit the extent to which Jordan can External accounts will remain affected by the cushion the impact of global risk factors. The fiscal unfavorable global context and high import prices. space remains narrow and hinders the government’s ability The current account deficit (including grants) is projected to support poor and vulnerable households. The adopted to remain elevated at 8.5 percent of GDP (compared to 8.7 measures to mitigate the impact of higher food and fuel percent in 2021), mainly driven by a considerable prices through subsidies is further limiting the fiscal space deterioration in Jordan’s merchandise trade deficit. and may further affect government’s capital expenditures. Unfavorable import prices, particularly of food and energy, Substantial risks emanate from the state-owned electricity are hiking up Jordan’s import bill despite the partial and water companies’ losses. Rapidly rising cost of living, protection brought by the high level of strategic wheat increased borrowing costs for consumers and businesses in strategic reserves and the favorable long-term gas import a context of an already challenging economic environment, contracts. However, authorities expected to replenish these high unemployment and poor job conditions pose reserves in the remainder of 2022. Some of this impact will substantial social risks and increase the risk of economic be cushioned by a strong expansion in exports, scarring. 20 Public Investment: Maximizing the Development Impact Jordan Economic Monitor Fall 2022 Table 2. Jordan – Selected Economic Indicators (2019-2024) 2019 2020 2021 2022 2023 2024 Act. Act. Act. Proj. Proj. Proj. Real sector (Percent, unless otherwise specified) Real GDP growth 1.9 -1.6 2.2 2.5 2.4 2.4 Nominal GDP (JD Billion) 31.946 31.369 32.478 34.540 36.405 38.189 CPI Inflation (p.a.) 0.8 0.3 1.4 4.4 3.0 2.5 Government finance (Percent of GDP, unless otherwise specified) Total revenues and grants 24.0 22.4 25.0 25.0 25.1 24.6 Domestic Revenue 21.6 19.9 22.6 22.5 23.0 22.9 Tax revenues 14.4 15.8 17.3 17.4 17.6 17.5 Non-tax revenues 7.2 4.1 5.2 5.4 5.4 5.4 Foreign Grants 2.5 2.5 2.5 2.5 2.0 1.6 Total expenditure (incl. use of cash)1/ 28.9 29.6 31.3 30.4 30.2 29.7 Current 24.8 26.9 27.3 27.1 26.7 26.3 Capital Expenditure 3.1 2.6 3.6 3.3 3.5 3.5 Unallocated discretionary fiscal measures (cumulative) 2/ 0.0 0.0 0.0 0.0 0.2 0.6 CG 'Overall balance (deficit (-), incl. grants) -4.8 -7.2 -6.3 -5.4 -4.9 -4.6 CG Primary Balance (deficit (-), incl. grants) -1.2 -3.1 -2.0 -1.6 -0.8 -0.3 (Percent of GDP, unless otherwise specified) Government and guaranteed gross debt3/ 96.3 107.8 112.3 113.4 114.5 115.4 Government and guaranteed gross debt, net of SSIF holdings3/ 77.2 87.0 90.7 89.9 89.7 89.1 SSIF holdings of government debt4/ 19.2 20.8 21.6 23.5 24.7 26.3 External sector (Percent of GDP, unless otherwise specified) Current Account (incl. grants) -1.7 -5.7 -8.7 -8.5 -5.5 -4.7 Memorandum Items: NEPCO operating balance (JD million)5/ -5 -62 - 133 - 294 - 570 - 662 WAJ overall balance, excl. project grants (JD million)5/ -291 -257 - 220 - 230 - 268 - 262 Export FOB (% growth) 7.3 -4.5 17.8 35.0 5.6 3.0 Import FOB (% growth) -5.5 -10.1 25.0 26.9 1.6 2.3 Travel Receipts (% growth) 10.2 -75.7 95.8 95.1 11.0 8.0 Remittances (% growth) 0.9 -9.1 1.0 2.0 3.1 2.8 Gross usable Foreign Currency Reserves (US$ million) 13,511 15,127 17,272 15,972 15,356 15,601 in months of next year's imports of GNFS 8.8 7.8 6.9 6.2 5.8 5.7 Source: Central Bank of Jordan, Department of Statistics, Ministry of finance, IMF and World Bank staff projections. 1/ Includes use of cash based on IMF 4th EFF review, Country Report No. 22/4, Jan 2022. 2/ Unidentified cumulative fiscal discretionary measures part of IMF framework, 4th EFF review, Country Report No. 22/4, Jan 2022. 3/Government's direct and guaranteed debt (including NEPCO and WAJ debt) and securitization of domestic arrears in 2019 and 2020. 4/ Projected SSIF holdings of public debt as estimated in 5th EFF review, Dec 2022. 5/ Based on 2023 Draft Budget Law. 21 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 C. Special Focus Public Investment: Maximizing the Development Impact Wadi Abdoun Bridge © Shutterstock Public investment is a key driver of growth and can help Jordan to lifecycle, and long after the donor financing ends. On Public Private reinvigorate growth, create jobs, and lay the foundation for sustained Partnerships (PPPs), Jordan has a good regulatory foundation, but socioeconomic development. Jordan’s constrained fiscal envelope institutional and fiscal challenges prevent the good utilization of the underscores the need to focus on managing public investment efficiently framework. The efficiency of public investment can be maximized by and effectively. Public investment spending has been steadily declining having in place financially realistic long-term strategic planning, over the past two decades and institutional weaknesses in budgeting transparent and consistent project selection, capital budgeting for public projects have led to a consistent under-execution of budgeted integrated into a medium-term perspective, effective procurement, and capital spending. Dependency on external aid for capital expenditures implementation and monitoring throughout the lifetime of the asset. creates major challenges for planning and implementation. It also has Purposefully integrating climate concerns in public investments would significant implications for the externally funded public assets, which advance the country’s achievement of its climate targets.11 will incur significant operational and maintenance costs during their 11 This chapter builds on an analysis of the public expenditure review for capital spending undertaken by the World Bank. 22 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 With its ambitious development agenda, public Jordan’s infrastructure quality is on par with peer investment should feature at the center of Jordan’s countries but remained almost stagnant for over a drivers of growth. The analysis is timely, as Jordan has decade. According to the World Bank’s Logistics embarked on a path of fiscal consolidation, where fiscal Performance Index (LPI), Jordan’s infrastructure quality resources are constrained, the cost of funding on the rise, improved only marginally from 2.6 in 2007 to 2.7 in 2018. and capital spending becomes further at risk of losing Nevertheless, Jordan’s infrastructure quality is aligned with ground in favor of less discretionary and more pressing that observed in other countries with similar income levels current expenditure needs. The recently launched Economic Modernization Vision 2022-2033 and its (Figure 20). Also, infrastructure constraints are not Executive program (2023-2025) also provides an perceived as being a major barrier to doing business in the opportunity to anchor and guide strategic planning in country, with the inadequate supply of infrastructure Jordan, including making public investment decisions that ranking as the 5th most problematic factor.12 contribute to the achievements of national priorities. Well- Trends in Capital Public Expenditure targeted public investments can potentially add directly to the capital stock and crowd in private investments, a top Public investment spending has been on a steadily policy priority for Jordan. declining path during the past two decades. Capital spending13 averaged 7.2 percent of GDP in FY2000-2010 This focus piece analyzes public spending on but declined to an average 3.7 percent in the following investment and its performance during the past decade (2011-2021). The year 2020 witnessed a notable dip decade. It highlights the main trends in capital spending (to 2.6 percent) in capital spending, affected by the budget allocation, its execution, and the sectoral COVID-19 crisis before picking up to 3.6 percent in 2021 breakdown of these allocations. The analysis also identifies (Figure 21). In comparative terms, spending on some long-standing bottlenecks in the strategic planning, nonfinancial assets is lower than the average spending in implementation and asset management phases of public Upper-Middle-Income countries and oil-importing MENA projects. It also aims at informing the Government of countries ( Jordan on how to make public investment more supportive of the recovery by improving the effectiveness of public Figure 22). 14 Its share in total spending – compared to investment through better management of the process. recurrent expenditure has also declined from an average of 20 percent between 2000-2010 to 12.5 percent in the past Figure 20. Jordan’s infrastructure quality is on par with decade. peer countries Quality of Infrastructure and GDP per capita Figure 21. Public investment spending has been steadily declining 5.0 Capital Spending. Percent of GDP 4.5 4.0 10% 9.9% Infrastructure quality 3.5 3.0 JOR 8% 8.3% 2.5 Index 2.0 6% 1.5 3.6% 4% 1.0 0 50,000 100,000 150,000 2% GDP per capita, PPP (current international $); 2.6% Average 2015-19 0% 2000 2003 2006 2009 2012 2015 2018 2021 Source: WDI, World Bank Logistics Performance Index (2018) and World Bank staff calculations. Source: Ministry of Finance and IMF. Note: Ratios reflect the revised GDP. 12Global Competitiveness Report 2020. 14 Nonfinancial assets represent the cost of public works and 13In addition to spending on nonfinancial assets, Jordan’s definition of construction, maintenance and repair of the building sector, and capital spending includes sub-categories, namely compensation of equipment, machinery, and vehicles. Other sub-categories of capital employees, subsidies, grants and other expenses, that could fall under a spending including compensation of employees, subsidies, grants and different classification depending on their nature. other expenses could fall under a different classification depending on their nature. 23 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 Source: Ministry of Finance, IMF, DoS and World Bank staff calculations Figure 22. Spending on nonfinancial assets is lower than Capital spending has been consistently under- the average spending in peer countries executed in the past decade. This can be partially Regional Comparison -Nonfinancial Assets - Percent of GDP explained by the overestimation of government revenue, which then makes investment spending the variable of Jordan adjustment to meet the fiscal targets. This is a consistent 4 challenge as total revenues are not even sufficient to cover Upper Middle Income recurrent spending, thus squeezing the fiscal space 3 Countries available for capital spending. This implementation gap has been widening since 2015, with budget execution 2 deteriorating to only 71 percent in 2020 before redressing to 97 percent in the following year (Figure 23). Other 1 institutional weaknesses in budgeting for capital projects exist, including the overestimation of capital expenditures 0 needs, the weak project-level follow up and the 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 reinstatement of undisbursed budgeted amounts for inactive projects without clarifying their status. Source: IMF Government Finance Statistics Additionally, project payments are frequently subject to Figure 23. Capital spending has been consistently under- cash rationing. executed in the past decade Capital budget execution - Percent Rigid spending categories leave little room for discretionary spending. Recurrent spending has been 98% 97% dominated by the wage bill, pension, and interest payments, 89% 93% 87% 82% 82% 82% which together absorb 83 percent of recurrent expenditure 74% 72% in 2020 and almost 76 percent of total public expenditure 67% in the same year (Figure 24).15 The central government civil service wage bill has grown significantly during recent years driven by increases in hiring and spending on basic salary and allowances (including security and defense), reaching 45 percent of total current spending in 2021 and averaging 13 percent of GDP during the past decade 2010-2020.16 This is higher than in peer countries (10.7 percent in Oman, 201 201 201 201 201 201 201 201 201 202 202 1 2 3 4 5 6 7 8 9 0 1 7 percent in Turkey and 5.4 percent in Egypt). Source: General Budget department and World Bank staff calculations. Public capital spending is heavily dependent on Figure 24. Recurrent spending leaves little room for capital external financing, with critical implications for spending operations and maintenance costs. Given the limited Capital and Current Spending - Percent of total spending fiscal space, capital spending has been the variable of 100% adjustment, depending on the availability of external aid and for cash management purposes. Monthly trends in 80% capital spending also reflect aid dependency: budget 60% execution data shows that in the past five years, capital 40% Average 2000-2010: 20% Average 2011-2021: spending happened when foreign grants provided the 12.5% 20% necessary cash (Figure 25). Aid dependency, together with 0% the limited predictability of foreign aid, are major challenges that weigh heavily on capital spending. 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Additional challenges contribute to these large variations in spending throughout the year, including cash rationing, Current expenditures Capital Expenditures protracted procurement delays, and lack of project readiness for implementation. On average in the past ten 15 Wage bill includes salaries, wages and allowances of the military. 16Source: General Budget Department, actual data according to the economic spending classification. 24 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 years, 44 percent of annual capital spending happened in and education, the GoJ relied heavily on financial support the last quarter and 27 percent in the last month of the from the international community and agencies for fiscal year. Additionally, external funding of capital financing capital spending to meet the health sector’s spending has significant operation and maintenance costs. growing needs, accommodate the significant increase in the This is particularly the case for large investments, as number of students enrolled in public schools and reduce external aid generates public assets which will incur the reliance on rented schools. Health capital spending has significant operational and maintenance costs during their averaged 14 percent of total health public spending, but has lifecycle, and long after the donor financing ends. During been gradually declining since 2015, reflecting fiscal 2010-2020, Jordan received foreign aid in the form of challenges. grants and concessional loans of over US$ 26 billion17 (US$ 16.7 billion in grants and US$ 9.6 billion in concessional Figure 26. Nearly half of total capital expenditure is loans), averaging 6 percent of GDP on an annual basis. allocated to five sectors Capital Expenditure by Sector - Percentage of total, 2010-20 average Figure 25. Capital spending happens when foreign grants Health are provided 11% Monthly Foreign Grants Receipts and Capital Spending - Million JD Others Education 26% 10% 700 600 Tourism 500 2% Roads 400 Telecoms 15% 2% 300 Energy 200 6% Agriculture Local 100 2% Transpo development Water 16% 0 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 May-19 Oct-19 Mar-20 Aug-20 Jan-21 Jun-21 Nov-21 Source: General Budget department and World Bank staff calculations. Capital Expenditures Foreign grants Figure 27. The year 2021 has seen large variations in sector allocations Source: Jordanian Authorities and WB staff calculations. Public Investment - Percentage of total Capital spending is concentrated in a few sectors. 0% 5% 10% 15% 20% 25% 2020 2021 During 2010-2020, 49 percent of the total capital Health Education expenditure was absorbed by five sectors: transport, Roads education, health, water, and energy (Figure 26). The year local development Water 2021 has however seen large variations in sector Transport allocations. For example, the share of investment allocated Agriculture Energy to roads, education, health and local development has Telecommunications declined in favor of higher investment in development Tourism zones and investment, which have seen their share increase Social development Security and Defense from 4 percent to 21 percent (Figure 27). Cultural, religious, youth… Development Zones and… Sectors’ needs for capital spending are substantial, Public Administration Justice and Judiciary including on assets maintenance. For instance, despite The environment the expansion of the road network in recent years, it has Housing Other not been able to keep pace with urban expansion and population growth. Recent years also saw a steady increase Source: GBD and WB staff calculations in the number of causalities and deaths from road accidents, which cost nearly 1 percent of GDP.18 In health 17Foreign Assistance annual report, the Ministry of Planning and 18 Jordan Annual Road Accidents Report 2020. International Cooperation 25 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 Key Public Investment Management Challenges the initial project value. Changes to designs and technical specifications were the major contributors to this Reforming Public Investment Management is critical overspending between 2007 and 2018 (on average 45%), to make more effective use of Jordan’s limited followed by demands from local communities. The latter domestic resources for capital expenditure and to highlights the need to create a mechanism that incorporates better leverage and absorb external funds. The consultations with local communities and a social impact efficiency of public investment can be maximized by assessment in early stages of the project design. It also putting in place a financially realistic long-term strategic highlights the importance of strengthening the devolution planning, transparent and consistent project selection, of capital spending to local governments that are closer to capital budgeting integrated into a medium-term the beneficiaries and more able to identify the local needs.20 perspective, effective procurement, and implementation Additionally, the public procurement process seems to and monitoring throughout the lifetime of the asset solicit the lowest financial offers without sufficient (Rajaram et al., 2014). consideration of important elements such as value for money, life cycle cost, weighted quality evaluation criteria Gaps in the planning process result in unrealistic and other procurement technics. Inadequate and weak plans. The strategic planning process needs to clearly designs have caused significant cost and time overruns in identify the portfolio of investment projects that are several projects due to changes to the design, in addition to technically feasible, economically viable, and for which weak contract management capabilities. funding is available. For instance, the plans issued during 2010-2020 included projects costing over US$ 27 billion19, Good progress has been achieved in modernizing the while only half of this amount was available from domestic public procurement system, introducing modernized funding. Short-term political considerations continue to legal framework and institutional set-up, and in play an important role in deciding which domestically deploying an e-procurement platform (JONEPS) but financed projects go forward, even with a strategy in place. project implementation suffers from deficiencies in Hence, there is a need to modernize the planning function, cash planning. Cash rationing and late payments are not and strategic considerations need to sufficiently influence uncommon, which over time have led to increases in the the selection of public projects. cost of investment as contractors build risks to delays into their bids. While procurement reform is advancing and Budgeting for maintenance and operation costs is a ongoing, procurement practices will need more time to pressing concern. Budget allocations do not necessarily streamline the bureaucratic processes. reflect maintenance requirements, often resulting in under- maintenance and deterioration in the quality of public Some progress was achieved in improving the projects’ assets in the medium- and long term. This is also institutional and implementation framework for the case for aid-funded projects, in particular off-budget public investment. In 2018, a new public investment investment. Finally, the lack of asset management leads to management framework was introduced to integrate the public assets remaining idle or suffering from significant two streams of public investment and PPPs to select deterioration. In the roads sector for instance, a first step economically viable projects. Before that, the planning towards raising efficiency is implementing measures to process did not follow precise institutional arrangements, preserve and improve investment benefits and avoid the and the GoJ employed two separate work streams for need to spend more on road rehabilitation. However, public investment projects and PPPs. In 2020, the during 2010-2020, Jordan only spent JD 10 million (US$ Guidance Note on Project Concept Note Preparation and 14.1 million) per year on road network maintenance, (out Preliminary Screening was introduced. It provides detailed of an average capital spending of JD 143 million (US$202 selection criteria for public investment projects, including million). In education, only 42 percent of the budget for example the needs and rationale for the projects, needed for schools’ maintenance could be allocated. consistency with government or sector priorities, viability, risk levels, and implementation capacity, among others. Inadequate and old designs (some over 15 years old) are used for infrastructure projects, resulting in significant cost and time overruns. In the roads sector for example, cost overruns can reach up to 100 percent of 19 MOPIC reports on Foreign Assistance: https://www.mop.gov.jo/EN/Pages/Foreign_Assistance 20 The Ministry of Public Works and Housing data. 26 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 Nevertheless, key public investment projects do not main focus is promoting commercial opportunities and fall under the jurisdiction of the PIM regime, FDI, and not public services as is the case for PPPs. It also undermining the transparency of the process and has limited capacity (. Hence, the role of the PPP Unit government oversight. This includes projects like the could be gradually enhanced from being only a coordinator national railway network, the electricity interconnectivity to covering project assessment and implementation. The project with Saudi Arabia, the pipeline to transfer crude oil governance process, which requires many rounds of and fuel derivatives to the Jordan Petroleum Refinery approvals from different committees, could also be Company, and consumption and storage points, which fall simplified. Additionally, PPP projects that were developed under the Investment Fund Law.21 before the enactment of the 2020 PPP Act are not under the mandate of the Fiscal Cost Unit (FCU), as the PPP law Public Private Partnerships (PPPs) only focuses on new projects. The FCU in the MoF is mandated to manage fiscal commitments and contingent Public-private partnerships allow for priority liabilities (FCCL) of PPPs, but the unit is understaffed and government projects to be executed by the private would benefit from investing in capacity building... sector. PPPs reduce the need for upfront public capital investments from government’s own revenues (taxes) or Green Investment through direct borrowing, as the financing comes mostly from the private sector but requires payments from the The Economic Modernization Vision 2033 outlines public sector and/or users over the project's lifetime. PPPs the importance for Jordan to continue its efforts to contracts typically span over 20-30 years or longer, during tackle needs related to climate change, achieve a which risks are distributed between the public and private transformation towards a green economy, and foster partners. investment in sustainable projects. In 2021, the Jordan has a good regulatory foundation for an government adopted climate change-related eligibility effective regulatory environment for public criteria in the PIM and PPP systems, according to which all investment, but its implementation is ongoing. The projects need to be screened for climate change co-benefits Public Investment Management (PIM) – PPP Governance to inform the budget’s prioritization and assessment Framework of 2018, the PIM – PPP Policy of 2019, and process. It should build a pipeline for upstream the PPP Law of 2020 have all been positive steps in this identification of climate financing needs with development direction by promoting a unified PIM-PPP approach for partners and enhance transparency in financing flows. In project prioritization, appraisal, selection, development, 2020, the Government had allocated less than 30 percent implementation, management, and monitoring public of Jordan’s capital projects’ budget towards the six “green projects. The Aqaba-Amman Water Desalination and growth” sectors (tourism, energy, agriculture, water, National Conveyor (AAC) project, however, was granted transport, and buildings), and most projects in those an exemption to the PPP law on the basis of procurement sectors do not fulfill the climate-responsive eligibility being initiated prior to the enactment of the law, yet the criteria established by the national government. However, project is being prepared in a manner that attempts to most projects could be redesigned to meet those criteria. comply with many of the salient points of the law. Actual climate-responsive projects represented approximately 3 percent of the total budget, and potentially Institutional and fiscal challenges prevent the good climate-responsive projects, i.e., with a redesign, utilization of the PPP framework. Most contracting represented approximately 21 percent. 22 Purposefully authorities (ministries, departments, state-owned mainstreaming climate concerns in public investments companies and agencies) lack experience and expertise in would improve progress toward climate targets. PPP transaction structuring, procurement, contract negotiations and contract management. Long decision- making by GoJ on PPP project structure is a major issue. The PPP Unit was recently moved from the Prime Minister’s Office to the Ministry of Investment, whose 21According to this law ((Law No. 16 of 2016), sovereign funds and to possess, invest and develop specific projects such as those listed Arab and foreign investment institutions are invited to establish a above. shareholding company or more to invest in development rights and 22 “World Bank Group. 2022. Jordan Country Climate and projects listed in the law. The law stipulates that the Fund has the right Development Report. CCDR Series; World Bank, Washington, DC. © World Bank Group. 27 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 Policy Recommendations to Maximize the should set clear and transparent guidelines and requirements Development Impact of Public Investment for a climate-informed project appraisal and selection. ▪ Is the procurement process efficient, competitive The Infrastructure Assessment Governance and transparent? Whether public investment projects are Framework (World Bank, 2020) provides an overview delivered using public procurement, or through PPPs, a of the relevant issues to be considered when assessing high-quality procurement process will ensure that a country’s infrastructure governance framework. infrastructure projects provide good value for money. Below are a number of key elements to consider in all Creating a level playing field in procurement ensures that the public investment projects. project is awarded to the most advantageous bidder, in a transparent way. ▪ Is the project worth doing from a strategic and overall economic perspective? Selection is perhaps the ▪ Are detailed implementation plans in place? most critical stage of the project cycle. Hence, the planning Implementation determines the success of the project. of projects should be based on a national vision for Detailed implementation plans need to be in place to ensure infrastructure and sectoral plans. Projects assessment, that projects are delivered according to the contract prioritization, and selection should happen according to specifications, on time, and within budget. Clear rigorous technical methodologies in a transparent and data- organizational arrangements, institutional capacity, driven manner. Projects appraisal should analyze individual adherence to realistic timeframes, and effective use of key projects using economic, social, environmental, fiscal, and performance indicators are key ingredients to effective financial criteria, especially for projects above a certain implementation. threshold. A solid legal framework and institutional capacity ▪ Is project information comprehensively and are required to plan, assess, prioritize, and select potential transparently accessible throughout the project cycle? investment projects. Access to information is key for project performance and ▪ What is the economic efficiency and value for accountability. The government needs to invest in money over the project life cycle? This should be assessed collecting, monitoring, and analyzing high-quality and by considering the total cost over the project’s life cycle and integrated data that can serve as the basis for project should include operation and maintenance costs. It is also management, decision-making, consultation, and important to take into consideration different choices of accountability. financing modalities with varying degrees of private ▪ Are public entities equipped with sufficient participation. capacity? To ensure that all the above steps are conducted ▪ Is the project fiscally affordable and sustainable? appropriately, the government must build sufficient It is essential that the appraisal and selection process is capacity, incentives, and opportunities for public entities to linked to the budget cycle. Ideally, investment plans should undertake such work and be able to present suitable choices be grounded in adequately detailed and realistically to decision-makers. For Jordan, it is particularly important formulated medium-term expenditure frameworks to build the capacity of line ministries in the preparation and (MTEFs), as multiyear budgeting facilitates this integration. appraisal phases of the investment projects. While the PIM Proper control, monitoring, and reporting on public Unit can provide some technical assistance to line ministries, commitments are key, in particular for PPPs that, absent it cannot substitute the functionality of the initiating clear mechanisms, could be utilized to circumvent ministries. Line ministries will also need to strengthen their conventional budgetary and accounting controls. technical skills in project review in order to improve their ability to assess the realism of feasibility studies, accuracy, ▪ Does the project incorporate climate and public objectivity, and quality. health risk considerations? Climate change and environmental sustainability considerations should be embedded into public investment projects not just on the mitigation front but also via adaptation strategies. In line with this, public investment should consider national and local climate change and disaster risk management strategies and should correspond to the relevant international commitments of the government. Hence, the government 28 Public Investment: Maximizing the Development Impact Jordan Economic Monitor - Fall 2022 References Ministry of Planning and International Cooperation. Foreign Aid Report 2020. Freinkman, L., G. Gyulumyan, and A. Kyurumyan. 2003. World Bank. 2016. Lebanon Economic Monitor, Fall 2016: "Quasi-fiscal activities, hidden government subsidies, and The big swap: dollars for trust. fiscal adjustment in Armenia" World bank working paper 27144 World Bank Group. 2022. Jordan Country Climate and Development Report. CCDR Series; World Bank, Mackenzie G.A. and P. Stella. 1996. “Quasi-Fiscal Washington, DC. © World Bank Group. Operations of Public Financial Institutions”. Washington, D.C.: International Monetary Fund. World Bank. 2022a. Lebanon Public Finance Review: Ponzi Finance? Washington, DC. © World Bank. Jordan Traffic Institute. Annual report of traffic accidents in Jordan for the year 2020. World Bank. 2022b. Lebanon Economic Monitor, Fall 2022: Time for an Equitable Banking Resolution. International Monetary Fund (IMF) 2022 Article IV Consultation and Fourth Review under the Extended Fund World Bank. 2022c. Egypt Public Expenditure Review for Facility. Human Development, Volume 1. IMF. 2017. Jordan: Technical Assistance Report - Public World Bank. 2020. Infrastructure Assessment Governance Investment Management Assessment (PIMA). Country Framework. Report No. 2017/366. World Economic Forum. 2020. Global Competitiveness Report 2020. 29 Global Turbulence Threatens Recovery and Job Creation Jordan Economic Monitor Spring 2022 Annex 1. 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 The Impact of Protracted Displacement on Syrian Refugees September 28, 2022 Policy Research Working Paper in Jordan: The Evolution of Household Composition and Poverty Rates Jordan Gender Landscape June 30, 2022 Brief Jordan Economic Monitor - Spring 2022 : Global June 29, 2022 Report Turbulence Dampens Recovery and Job Creation Building Stability Between Host and Refugee Communities: June 6, 2022 Policy Research Working Paper Evidence from a TVET Program in Jordan and Lebanon Lessons Learned on the Inclusion of Women in the Digital June 1, 2022 Report Economy in Jordan and Lebanon : Recommendations for Increasing Women’s Participation Jordan - Climate-Smart Agriculture Action Plan : Investment May 8, 2022 Report Opportunities in the Agriculture Sector’s Transition to a Climate Resilient Growth Path Jordan - Country Progress Report : Supplement to the 2021 April 1, 2022 Report Global Progress Report of the Sustainable Banking and Finance Network Jordan - Addressing Fiscal Commitments and Contingency March 14, 2022 Brief Liability Management for PPP Projects in Jordan Jordan Economic Monitor - Fall 2021: En Route to October 1, 2022 Report Recovery Barriers and Opportunities to Refugee Women Engaging in October 1, 2022 Report the Digital Economy in Jordan and Lebanon : Final Report Jordan Economic Monitor – Spring 2021: Uncertain and June 23, 2021 Report Long Trail Ahead The Business Case for Investing in Women’s Employment June 17, 2021 Report in Jordan Case Study: Umniah - Safe and Respectful Workplaces Education Expenditure, Enrolment Dynamics and the April 28, 2021 Working Paper Impact of COVID-19 on Learning in Jordan The Amman Climate Plan: A Vision for 2050 Amman March 31, 2021 Report Jordan Economic Monitor – Fall 2020: Navigating through March 1, 2021 Report Continued Turbulence Fiscal Policy, Poverty and Inequality in Jordan: The Role of March 1, 2021 Working Paper Taxes and Public Spending - Policy Summary 30 Global Turbulence Threatens Recovery and Job Creation Jordan Economic Monitor Spring 2022 Annex 2. Summary of Special Focuses from the Latest Jordan Economic Monitors Spring 2021 JEM: “Creating more and better Jobs in services resulting in a low ridership and limited access for Jordan” most Jordanians, particularly women, youth, and those with reduced mobility. The government launched Jordan’s labor market is characterized by high levels of initiatives to improve the public transportation system, unemployment and informality, which are largely the but implementation has been slow. Going forward, policy result of the limited capacity of the private sector to reforms should focus on the goal of effecting a modal shift generate more and better jobs. Higher job creation is from private cars to public transportation. generally held back by an economic structure that is dominated by small, low-productivity firms—the result of Spring 2021 JEM: “A year into the pandemic: inefficient firm dynamics. Thus, creating more and better Jordan’s private sector snapshot” jobs in Jordan requires, first and foremost, reforms to increase market contestability by reducing state-induced Surveys conducted by the WBG show that, a year into the distortions. This needs to be accompanied by efforts to pandemic, the lockdowns and demand shocks have had a upskill the workforce, labor policies that facilitate job strong impact on the private sector, including high closure creation while protecting workers, as well as specific rates, particularly in the services sector. To respond to the measures to create opportunities and lift constraints to challenges, Jordanian firms have introduced new products female employment. and are using digital technologies more intensively. However, the pace of transformation has lagged other Fall 2021 JEM: “How wealthy is Jordan? Measuring countries. The programs put forward by the government Jordan’s comprehensive wealth using Wealth of to support the recovery have reached a significant share of Nations Approach (1995-2018)” companies interviewed, but some gaps remain. The lackluster growth of Jordan’s economy in the most Spring 2021 JEM: “COVID-19 and inequality in the recent decade has been compounded with slow wealth MENA region and in Jordan” accumulation. During 2010-18, Jordan's per capita wealth has been on a declining trend. As a result, the wealth gap The COVID-19 pandemic has thrown entire economies with upper middle-income countries significantly widened into disarray and upended livelihoods. Despite being by year 2018; a typical UMIC citizen had 4.3 times as much initially heralded as the “great equalizer,” new evidence wealth as a typical Jordanian. Moreover, Jordanian citizen has shown that the consequences of COVID-19 have wealth in 2018 was five percent lower than in 1995. Given been borne unequally, disproportionately affecting the limited natural resources in Jordan, convergence toward poor and vulnerable. This Special Focus looks at the upper middle-income countries would require Jordan to inequality-enhancing effects of COVID-19 in the MENA focus its polices on building human capital and increasing region, with a special zoom in on Jordan. the efficiency of asset utilization. Moreover, Jordan also needs to unblock bottlenecks in its produced capital Fall 2020 JEM: “Moving Toward an Equitable and growth by improving its business climate and regulatory Sustainable Pension and Social Insurance in Jordan” environment. Addressing pension and social insurance issues means addressing financial, fiscal, social, and economic Fall 2021 JEM: “Public Transportation Challenges in challenges. Although designed to be financially self- Jordan” sustainable, the contributory pension program is actually There are significant development constraints to public unsustainable. The program also creates inequities, and transportation in Jordan. Looking at various sources, the adverse incentives. Despite some past reform efforts, the costs are estimated to be at least six percent of GDP a program has still considerable parametric inconsistencies year, not counting the adverse impact poor transportation (benefit promises are not in line with contribution rates services pose to women’s employment. Jordan has and retirement ages). At the moment such inconsistencies historically prioritized investing in transportation are bridged by favorable demographics, but in less than a infrastructure with limited attention to services such as decade, revenues from contributions will not be enough public transportation. While this has resulted in significant for pension spending. There are some potential solutions new transportation infrastructure, it has also led to and proposals that Jordan could adopt in order to improve inefficient, uncoordinated, and unreliable public transit pension outcomes, and its financing mechanisms. 31