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IMF’s $2-billion will ease, not solve, Jordan’s problems

IMF managing director Christine Lagarde gestures during her speech at a forum for the annual meetings of the IMF and World Bank Group at a Tokyo hotel Friday, July 6, 2012.

Itsuo Inouye/AP

Jordan's faltering economic prospects have received a much-needed boost after the International Monetary Fund said it would provide as much as $2-billion in fresh credit to Amman over the next three years.

Analysts say the IMF package, announced last week, is an important show of support for the Hashemite kingdom at a time of unprecedented political turmoil in the region. Foreign investors are likely to read the unusually generous loan as a sign that Jordan's allies in the west and the Gulf are determined to shield Amman from the troubles that have beset other Arab regimes – and to prevent the country from sliding further toward economic crisis.

However, there is also broad agreement among economists that the IMF package falls far short of solving Jordan's long-term financial problems: "The IMF package gives a signal that, when the going gets tough, Jordan can rely on the fact that it is seen as strategically important and that it can rely on international help," says Elliot Hentov, a sovereign credit analyst at Standard & Poor's, the rating agency.

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But Mr. Hentov also stresses that Jordan will still have to rely on foreign grants from countries such as Saudi Arabia and the U.S. to balance its budget. "What they are trying to do is to lessen that dependency," he says. Foreign grants accounted for up to 6 per cent of gross domestic product in 2011. This year, the rate is expected to fall back to 4.5-5 per cent – a slight improvement but still several points ahead of the recent historical average.

Since the start of the Arab Spring in January last year, the Jordanian economy has suffered a series of harsh blows that have pushed public finances ever deeper into deficit. A series of attacks on the gas pipeline running through the Sinai Peninsula interrupted the supply of cheap Egyptian gas to Jordan, forcing the government to buy expensive heavy fuel on the open market. Political turmoil in the region also kept away both foreign investors and western tourists – key sources of revenue for the Jordanian economy.

"Jordan's economy has been hit by exogenous shocks that were outside the government's control," Kristina Kostial, the IMF mission chief in Jordan, said in a statement. "As a result, growth has slowed. Despite improvements in tourism income and remittances in 2012 … the external current account deficit is expected to widen to an estimated 14 per cent of GDP [this year]."

While the IMF deal will be seen as a clear endorsement of Jordan's current economic policies, some observers argue that the country is in need of wholesale political and economic reform – not more funding from abroad.

"The loans and aid are like putting cosmetics on a very sick person, while at the same time not doing anything about the person's fundamental illness," says Riad al-Khoury, a Jordanian economist and commentator who is also a principal at Development Equity Associates, a Washington-based consultancy.

Mr. al-Khoury argues that Jordan's budgetary problems are not least the result of the country's bloated public sector and security apparatus – which in turn are the product of a political system that encourages loyalty in exchange for safe government jobs.

A similar dynamic has led Jordan to create a generous system of grants and subsidies for important staples such as food, power and fuel – though that system is now under threat. In a bid to curb public spending, the current government launched an austerity drive in May, announcing a rise in electricity and fuel prices and raising some taxes. Critics say the cuts do not go far enough, but they were applauded by the IMF last week as "significant measures to bring the fiscal and energy policies to a sustainable path."

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The fund also stressed that the latest loan facility – which runs to a highly unusual 800 per cent of Jordan's IMF quota – was partly designed to encourage further consolidation. The government has, for example, promised to push ahead with further expenditure and tax reforms as well as "comprehensive reforms" of the energy sector.

However, Mr. al-Khoury says he is unsure whether Jordan, which has faced small-scale but persistent protests calling for democratic and economic reforms over the past year, could follow through. "The underlying problems have never been tackled," he says. "And I suspect many of these promises [to the IMF] will not be kept."

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