Jordan: Second Review Under the Stand-By Arrangement, Request for Waivers of Nonobservance of Performance Criteria, and Modification of Performance Criteria

EXECUTIVE SUMMARYRegional instability continues to affect Jordan. The conflict in Syria and shortfalls in gas flowsfrom Egypt are putting pressure on the fiscal and external accounts. The large inflow of refugeesfrom Syria is also straining labor and housing markets as well as the provision of public services.Nonetheless, growth is recovering (albeit slowly), inflation is contained, and the current accountdeficit is narrowing.Program performance is broadly on track. The central bank rebuilt reserves, which are now at acomfortable level and well above what was programmed. The national electricity company's losseswere in line with the program through June, but the end-September performance criterion (PC) isestimated to have been missed because a temporary interruption in gas flows required moreexpensive fuel imports. This, together with the central government unexpectedly having to servicedebt of utilities, resulted in a breach of the end-September PC on the central government primarydeficit. Excluding these transfers, central government performance is estimated to have stayedbroadly on track. The implementation of structural reforms has been mixed, with delays in actionsrelated to the energy sector, a revised income tax law, and public financial management. TheAugust increase in electricity tariffs, which exempted all households, was an important step toreforming the energy sector.Looking ahead, the program will continue to focus on fiscal consolidation, a comfortablereserve position, and higher and more inclusive growth. Fiscal consolidation will continue toplace debt on a downward trend, but has been slowed down compared to the original programby up to 1.3 percent of GDP in 2013 and 1.1 percent of GDP in 2014 to help cushion the impact ofexternal shocks, specifically from lower Egyptian gas supplies and the Syrian crisis . A bettertargeting of subsidies and income tax reform are among the key fiscal measures envisaged for2014, aimed at improving equity. Energy sector reforms aim at diversifying Jordan's energysources, enhancing efficiency, and gradually reforming tariffs while protecting the poor. Thecentral bank will focus on maintaining an appropriate reserve buffer. Structural reforms should beaccelerated to create more jobs, including through enhancing access to finance.More grants are critical in light of elevated risks. The main risks relate to appropriatelyaddressing the needs related to the Syria crisis, renewed disruptions to gas inflows , and a weakercurrent account. Such shocks could be absorbed, but growth would suffer and already high debtwould expand. Securing additional grants is critical as it could help alleviate fiscal andmacroeconomic pressures while stimulating employment and strengthening growth.The completion of the second review makes available SDR 170.5 million (about $258 million).