Jordan—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
March 16, 2004

The following item is a Letter of Intent of the government of Jordan, which describes the policies that Jordan intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Jordan, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. de Rato,

1. The Government of Jordan has held discussions with Fund staff in the context of the second review of the program supported by the two-year Stand-By Arrangement (SBA) approved in July 2002. Based on these discussions, the attached Memorandum on Economic and Financial Policies (MEFP) reviews macroeconomic developments and implementation of structural policies in 2003 and describes the government's economic policies for 2004, cast in the context of a revised medium-term macroeconomic framework. Jordan's economic performance under the 2003 program was strong, exceeding expectations in many areas, and the policies for 2004 represent an appropriate response to the challenges emanating from the conflict in Iraq and are consistent with sound medium-term objectives. Accordingly, we hereby request completion of the second review under the SBA and a waiver of applicability for end-March 2004 performance criteria.

2. The Government of Jordan appreciates the financial and technical support provided by the Fund and intends to continue its adjustment and reform efforts as envisaged under the program supported by the SBA. In this regard, given Jordan's markedly improved balance of payments performance under the program and the substantial increase in its official foreign exchange reserves (well above the level envisaged under the program), we intend to treat the remainder of the SBA as precautionary.

3. We believe that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program, but we will take any further measures that may become appropriate for this purpose. Jordan will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultation.

Very truly yours,

Memorandum on Economic and Financial Policies, 2003–04

1. This memorandum reviews economic performance in 2003, updates the government's macroeconomic objectives in the context of a medium-term framework, and describes the government's economic policies for 2004.

I. Developments Under the 2003 Program

2. The economy appears to be recovering from the disruptions caused by the war in Iraq. Real GDP grew by 3.2 percent in 2003, after a sharp deceleration in the first half of the year because of the decline in exports to Iraq and the negative effects of the conflict on tourism and transportation. Growth in the second half of the year was mainly supported by a pick up in domestic demand, associated with increased confidence after the war, the recovery in bilateral trade with Iraq, and further growth of apparel exports from the Qualified Industrial Zones (QIZs), mainly to the United States. Inflation remained subdued at an annual average of 2.3 percent. The Amman Stock Exchange witnessed a boom after the war on expectations of a quick economic recovery and grew by about 54 percent in 2003. Unemployment, however, remains stubbornly high at 13.9 percent in part due to an increased participation rate.

3. All quantitative performance criteria on the fiscal deficit for end-June, end-September, and end-December 2003 were met by large margins. The overall fiscal balance for end-December, as measured from the financing side under the program, registered a deficit of JD 73 million (1.1 percent of GDP), compared to a deficit target of JD 175 million under the program (2.5 percent of GDP). About two-thirds of this large overperformance reflects a delay in settling certain payments to Iraq. Thus, the performance criterion for the fiscal deficit at end-December 2003 would still have been met with a comfortable margin, even if these payments were settled before the end of the year. Higher-than-programmed grant receipts allowed the government to increase spending substantially in support of domestic economic activity and at the same time reduce the fiscal deficit by almost 3 percent of GDP over the preceding year on a commitment basis. Budget revenues fell short of program projections, with higher tax revenues only partly offsetting a substantial shortfall in nontax revenues. In particular, general sales tax (GST) collections increased strongly, boosted by high import growth and improved revenue administration. In the last two months of 2003, the new government successfully limited current spending below programmed levels, despite significantly higher military spending reflecting the difficult security situation in the region and some payments to compensate economic sectors affected by the war in Iraq. In particular, the new Minister of Finance implemented spending cuts of JD 70 million committed but not executed by the previous government and issued a special order stopping all expenditure authorizations effected December 15, 2003.

4. Notwithstanding the substantial reduction in the fiscal deficit, government and government-guaranteed debt increased by about 1 percentage point to 101½ percent of GDP at end-2003 as a result of valuation losses amounting to 6 percent of GDP associated with the depreciation of the U.S. dollar against other major currencies. The level of outstanding public sector debt, however, declined by 1 percentage point to 59.7 percent of GDP as a part of the valuation loss at the central government level were recovered through improved financial position of the CBJ and the continued generation of surplus by the Social Security Corporation (SSC). In line with its new fiscal funding strategy aimed at rebalancing the public debt portfolio in favor of domestic debt, the government also reduced external public debt by about 6 percent of GDP through the pre-payment of Brady Bonds and debt swaps transactions in December 2003, which will reduce external interest payments by $25 million per year. The Ministry of Finance also issued five-year government bonds every quarter, the cumulative sum amounting to JD 500 million through end-December 2003, with the proceeds being used to prepay Jordan's stock of Par Brady Bonds.

5. The external current account registered a large surplus in 2003, reflecting a surge in grant receipts and underlying strength in the balance of payments. Total exports grew by 8.2 percent in 2003, despite the disruption and cancellation of export orders during the war in Iraq. Nontraditional exports fared particularly well, including textiles and apparel mainly destined to the U.S. market which now account for almost 30 percent of total domestic exports. Tourism receipts have started to recover due to an increase of visits from neighboring countries as well as higher official and business travel related to the situation in Iraq. Import growth rebounded strongly (10.8 percent), reflecting a pickup in domestic demand, higher oil prices, and an increase in re-export activity to Iraq. With grant receipts of more than $1.2 billion (13 percent of GDP), the external current account surplus in 2003 was equivalent to 11.1 percent of GDP. Reflecting these positive developments, gross official reserves increased by $1.2 billion to reach $4.7 billion at end-December 2003 (equivalent to 9.7 months of imports of goods and non factor services), notwithstanding the early redemption of outstanding Brady Bonds ($456 million in face value) in late 2003, financed by a drawdown of reserves of about $300 million. The real effective exchange rate depreciated by 8.3 percent in 2003, implying an increase in competitiveness of Jordanian exports.

6. Reflecting the strength of the balance of payments and the resulting large net foreign asset (NFA) inflows, monetary aggregates expanded at a healthy pace. Broad money grew by an annual rate of 11 percent in 2003. Private sector credit growth continued to be low (3.5 percent), as banks remain cautious due to the difficult regional situation. Lower interest rates have not yet had the expected impact on private sector credit due to structural issues in the economy. The large increase in NFA was only partly sterilized through an increase in bank deposits at the CBJ overnight window facility and bank holdings of certificates of deposit (CDs). As a result, reserve money grew at an annual rate of 20.7 percent. In December 2003, the CBJ further reduced the interest rate on the overnight window facility to 2 percent in order to improve the short-term yield curve.

7. The recent Financial Sector Assessment Program (FSAP) missions reported that the banking system generally shows high capital ratios, liquidity, and profitability. However, poor governance affected negatively the asset quality of a few banks in the 1990s, resulting in high nonperforming loans and undercapitalization in those banks. The CBJ acted strongly to resolve this problem in the last two years, intervening in the case of two banks. An agreement was reached to restructure one of these banks in January 2004, entailing a change of management, the reconstitution of the bank's Board of Directors, and a limited liquidity support from the CBJ. In order to improve capitalization and corporate governance, the CBJ issued a regulation in August 2003 requiring banks to double their minimum capital requirements to JD 40 million over the next four years and introduced a minimum leverage ratio of 6 percent effective immediately. Over the last few months, the CBJ has been strengthening its bank supervision with a four pillar approach comprising: (i) a prompt corrective action framework that stipulates automatic penalties for violations of prudential regulations by banks, in line with the recommendations of the FSAP reports; (ii) a corporate governance handbook that delineates the appropriate separation of ownership and management in banks and sets standards for sound credit policies; (iii) an early warning system that flags unsafe and unsound practices, and the deterioration of the financial position of banks; and (iv) an electronic information sharing system with commercial banks. Jordan's regulatory and supervisory framework generally observes international standards and codes in banking, payments systems, securities, and insurance, reflecting the efforts to strengthen supervision in recent years.

8. Structural reforms are progressing as planned. The government sold half (26 percent) of its holdings in the Arab Potash Company (APC) to a Canadian corporation for JD 88 million in October 2003 net of all privatization costs. The government also started preparations for selling a majority stake in the electricity generation and distribution companies in 2004. A new gas pipeline between Egypt and Jordan has been completed under private sector initiative, which will be extended to Lebanon, Syria, and Turkey over the next few years. The government has embarked on an initiative to modernize the education system and improve its efficiency, under an education sector reform loan from the World Bank.

9. The pension reform has been completed. In January 2004, parliament approved the establishment of a medical committee in charge of approving military disability pensions, which is comprised of three civilian doctors appointed by the Ministry of Health and two military personnel. The maximum disability pension has also been capped at JD 500 per month and the formula for calculating disability benefits has been made more stringent. The so-called "four-year rule," which provided military officers with a pension of the next higher rank if they have served four or more years in their rank, has been eliminated.

10. Progress was made in establishing a unified tax administration. In line with Fund technical assistance recommendations, a unified revenue department was established in December 2003, encompassing the Income Tax and the Sales Tax Departments. The government appointed a director general in charge of the new department in January 2004. The merging of the operations of the Income Tax and Sales Tax Departments is proceeding with technical support from an Fund expert.

II. Medium-Term Macroeconomic Framework and Policies for 2004

A. Medium-Term Framework

11. The government's central objective is to further raise living standards over the medium term through accelerated, private sector-led growth. As outlined in the MEFPs of June 2002 and June 2003, key elements of the medium-term strategy include a deepening of structural reforms, public investment in human capital and economic infrastructure, and continued implementation of sound macroeconomic policies, including further fiscal consolidation. The program aims to increase Jordan's real GDP growth rate to 6 percent per year over the medium term with a view to enabling the economy to create sufficient jobs to absorb the rapidly expanding labor force and reduce the unemployment rate from its current level of 13.9 percent. Macroeconomic policies will preserve and consolidate monetary stability and fiscal sustainability. Microeconomic policies, supported by the government's Plan for Social and Economic Transformation (PSET) under the National Social and Economic Action Plan (2004-06), will seek to bolster both the magnitude and the efficiency of private sector investment, through human resource development, improved public services provision, rural development, accelerated privatization, and the implementation of fiscal, administrative, regulatory, and judicial reforms. Because the PSET involves a large resource commitment through at least 2005 and will entail sizable recurrent outlays over a much longer period, the government is seeking multi-year grant financing from donors in order to ensure the achievement of its medium-term objectives. The operational aspects of PSET integration into the budget will be strengthened by merging the PSET in Chapter I of the 2005 budget along with other capital spending. The implementation of the PSET during the last two years will also be reviewed, in collaboration with the World Bank, to assess the quality of PSET spending and its impact on the economy.

12. The medium-term macroeconomic framework envisages a strong recovery in economic activity beginning in 2004, with real GDP growth accelerating to 6 percent per year on a sustainable basis over the medium term; continued moderate inflation of about 2 percent per year; a small surplus on average in the external current account; a secular decline in public external debt as a proportion of GDP and exports; and the maintenance of official international reserves equivalent to about eight months of prospective import cover. The private sector investments that will accrue as a result of privatization and the accelerated implementation of major projects will enhance prospects for growth.

13. The macroeconomic framework will be underpinned by a medium-term fiscal strategy aimed at sustained reductions in public debt and unfunded future pension liabilities. A sizable further debt reduction will be crucial for improving the quality of government expenditure, lowering real interest rates, and fostering investor confidence. Key elements of the fiscal strategy will include an acceleration of the privatization program; steps to broaden the GST and income tax bases; the elimination of the cross subsidies on petroleum products to offset the loss of Iraqi oil grants; and strengthening the long-term financial viability of the SSC. Despite an assumed steady decline in annual grant inflows, the overall fiscal deficit, including grants, is to be narrowed and stabilized at about 2½ percent of GDP by 2007. Notwithstanding the recent setback due to valuation adjustments and lower-than-anticipated GDP growth, the ratio of government and government-guaranteed debt to GDP is still expected to fall by about 40 percentage points over the next six years, to about 65 percent by end-2009. This strategy is consistent with the 2001 Public Debt Management Law, which requires that the government reduce overall public debt to less than 80 percent of GDP by end-2006, with external public debt not exceeding 60 percent of GDP.

B. Policies for 2004

14. Economic policies for 2004 are designed to strengthen economic growth; maintain financial stability and a solid external reserve position through prudent demand management policy; and reduce further public indebtedness through continued fiscal consolidation. Real GDP growth is projected to rebound to 5 percent, somewhat lower than Jordan's full potential, reflecting the still uncertain security situation in Iraq, and the continued tensions in the West Bank and Gaza. Inflation is expected to increase somewhat because of upward adjustments in administered prices and certain tax rates, but will still remain moderate at about 3 percent. The balance of payments outlook is expected to remain strong despite the expected drop in the exceptional flow of external grants associated with the war in Iraq. As a result, the external current account is now expected to register a surplus of 5.3 percent of GDP, and official external reserves are programmed to remain at a comfortable level of about $4.7 billion by end-2004.

The 2004 fiscal program

15. The 2004 budget, approved by parliament in February 2004, limits the overall budget deficit to 3.9 percent of GDP. The authorities will make their utmost effort to achieve this fiscal deficit target. However, additional payments that could not be settled in 2003 will require additional spending in 2004 over and above the budgeted level of at least 1 percent of GDP. We expect to cover these additional payments through higher grants beyond the budgeted level that are under active consideration but not yet fully secured. In the event, though, that these grants do not materialize, the budget deficit may need to be increased by up to 1 percent of GDP. Tax revenue is budgeted to increase by about 0.3 percent of GDP in 2004 compared to 2003 outturn, with higher GST receipts more than offsetting the decline in trade-related tax revenues brought about by the continuing liberalization of the trade regime. The expected revenue increase is supported by a package of revenue measures (yielding 1.6 percent of GDP on an annualized basis) and administrative reform. The tax measures, envisaged to be implemented shortly, include (with annualized revenue yields in parenthesis): (i) an increase in the basic GST rate by 2 percentage points to 15 percent (0.6 percent of GDP); (ii) an increase in excise taxes on alcohol and cigarettes (0.2 percent of GDP); and (iii) the doubling of taxes on mobile phone bill to 8 percent (0.1 percent of GDP). Nontax revenues are budgeted to remain broadly unchanged in relation to GDP, supported by an average increase in petroleum product prices of about 8 percent. Grants are projected to decline by 3½ percent of GDP, after the exceptional level of international support received in 2003, but would remain still high at 8.7 percent of GDP, based on existing commitments.

16. The government revenue efforts will also be supplemented by spending cuts equivalent to 3 percent of GDP, thus reversing the fiscal stimulus of 2003. Current expenditure is budgeted to decline by 2.1 percent of GDP compared to 2003, including about 1.1 percent of GDP in cuts envisaged in the budget. The areas where spending cuts would take place include: purchases of goods and services, transfers, and other nonproductive spending. Capital spending related to PSET execution is budgeted to be about 2.1 percent of GDP, in line with the projected availability of PSET grants. The implementation of the budget and the full utilization of privatization proceeds for debt-reduction purposes should enable us to reduce net government and government-guaranteed debt by 8½ percentage points of GDP to 93 percent of GDP by end-2004, based on current exchange rate assumptions.

17. The fiscal measures outlined above will be complemented by further structural reforms in the fiscal area. All government accounts have now been consolidated into a Treasury Single Account as of December 1, 2003 that allows for a timely and transparent monitoring of fiscal developments. The ministry of finance has also made significant progress in merging the Income Tax and the Sales Tax Departments (Income Tax Department (ITD) and Sales Tax Department (STD), respectively) to improve revenue collection. To this end, it has developed a comprehensive strategy to establish a unified tax administration with assistance from the Fund through the integration of the ITD and the STD. The proposed strategy would create a single function-based tax department with procedures based on the principles of self-assessment and taxpayer segmentation. The integration commenced in December 2003 with the establishment of a unified revenue department, encompassing the ITD and the STD under a single director general reporting to the Minister of Finance. In addition, in February 2004, the government set up a temporary integration project directorate with technical assistance from the Fund to oversee the development and implementation of the large and the medium taxpayer offices; the reform of small taxpayer administration; and the incremental establishment of an integrated head office. As the next step, by April 1, we will finalize the criteria for taxpayers who will be subject to the Large Taxpayer Office (LTO) administration.

Monetary and financial policy

18. Monetary policy will continue to support price stability. The current peg to the U.S. dollar has served Jordan well, bringing inflation down to industrial country levels and fostering confidence in the Jordanian dinar. Strong export growth in 2001-02, the recent sharp depreciation of the real effective exchange rate, and the rapid recovery in exports in the aftermath of the war in Iraq, provide assurance that competitiveness is adequate. The CBJ will continue to maintain a very comfortable international reserve position and stands ready to protect reserves and monetary stability through active liquidity management. The monetary program for 2004 is consistent with the objective of continued price stability and also allows for a substantial rebound in the rate of growth of bank credit to the domestic private sector. Broad money is projected to expand by about 8.5 percent, broadly in line with nominal GDP. The CBJ will limit the expansion of its net domestic assets so as to meet its international reserve target in a non-inflationary manner.

19. The government and the CBJ recognize the need to strengthen financial intermediation. The government will continue to issue long-term bonds to provide a benchmark for long-term lending by commercial banks. In addition, new laws were passed in the last few years to provide the legal frameworks for establishing and operating leasing companies, mutual funds, and credit rating agencies. Monetary conditions permitting, the CBJ will continue to improve on the structure of interest rates by increasing the spread between the overnight deposit rate and CD yields. This should revitalize the rather thin interbank market. Stronger competition and better management practices in commercial banks should also lead to a reduction in the spread between deposit and lending rates.

20. The CBJ plans to restructure the small bank under its temporary administration with new capital injection and with a new management and board, once the ongoing criminal proceedings are completed. The restructuring of this bank would probably require use of some public funds. In line with the prompt corrective action framework, the CBJ has reached agreements with undercapitalized banks on time-bound restructuring plans, will monitor closely these banks, and will be ready with corrective measures in the event of deviations from the agreed restructuring. The CBJ will continue with the implementation of the recommendations of the Fund safeguards assessment, which will further strengthen the control framework in the central bank. In this regard, the audit of the CBJ financial statements for 2003 will be done in accordance with international accounting standards and will include a second partner review by a reputable international accounting firm.

Structural reform

21. The government has embarked on a new fiscal funding strategy aimed at achieving a more balanced distribution between the local currency- and foreign currency-denominated components of the public debt. Sustained progress toward this goal would help absorb excess liquidity, develop a longer yield curve that would also provide a benchmark for lending to the domestic private sector, and reduce external indebtedness. The ministry of finance has been issuing five-year government bonds on a quarterly basis since end-2002. The government intends to continue with this strategy by developing a quarterly program for auctions of bonds of various maturities, with gross issuance targeted at levels consistent with a deepening of the domestic debt market. The authorities will explore the possibility of selling bonds to households directly under a national savings scheme. The funds thus raised will be used to reduce net external borrowings and, combined with the medium-term fiscal strategy outlined above, will reduce both the vulnerability of the public debt burden to exchange rate movements, and the level of excess liquidity in the domestic banking system.

22. The government plans to accelerate and broaden the privatization program. As regards the power sector, the government has created separate generation, transmission, and distribution companies and has established an effective regulatory body for the industry. A new electricity law has been passed paving the way for the privatization of the sector through a new regulatory and tariff regime. With the completion of these steps, the stage has been set for the privatization of the generation and distribution companies in 2004. The government intends to sell a majority stake as well as management control in the Jordan Phosphate Mines Company to strategic investors and possibly an additional portion of the government's share in the Jordan Telecommunications Company. It will continue to privatize the remaining noncore units of the Royal Jordanian Airlines and will sell Jordan Post Company to a strategic partner. The fiscal program for 2004 estimates total privatization proceeds of about JD 300 million.

23. The government remains fully committed to pension reform. It has already shifted new military recruits to the SSC starting in January 2003, so as to reduce military pension liabilities to the budget over the long run. Parliament also ratified the associated temporary law in February 2004. The new tighter criteria for military disability pensions and the elimination of the "four-year rule" were implemented in March 2004. The government is also reviewing the draft actuarial review of the SSC and, once the report is finalized in 2004, it plans to implement the recommendations.

24. The government intends to improve the competitiveness of Jordanian exports by increasing efficiency in the transport sector. In addition, the handling capacity at the Aqaba port will be improved to avoid undue delays, following the increased activity of the port after the war in Iraq. The management of container handling at the port has also been privatized to improve efficiency and develop a medium-term strategic plan. The launch of the first independent power producer (IPP) project in the energy sector, the Samra power plant, fell through in November 2002 due to the difficult regional situation. The government has now created a separate public company to implement the project. The new company will seek to raise funds to implement the project mostly from the domestic banking sector without a government guarantee.

25. The loss of the Iraqi oil grant underlines the need to rationalize petroleum product prices and liberalize the domestic market for petroleum products. The government intends to eliminate the remaining subsidies on diesel, fuel oil, liquefied petroleum gas, and kerosene by end-2006 and to reduce the vulnerability of the budget to world oil price fluctuations. The government anticipates a multi-year transition period during which discretionary price adjustments will gradually eliminate the existing gap between domestic and international prices for the subsidized products. The price increases for energy products to be implemented in the context of the 2004 budget constitute a major step in that direction. Once the gaps between domestic and international prices have been closed, a symmetric automatic price adjustment mechanism based on international prices will be introduced. However, the full liberalization of the oil sector cannot be achieved until the exclusive concession rights of the Jordan Petroleum Refinery Company expire in 2008.

26. The government and the CBJ are committed to meeting the Fund's Special Data Dissemination Standard within the next two to three years, and are implementing the recommendations of the Update to the Report on the Observation of Standards and Codes--Data Module in order to achieve this goal. In particular, the CBJ has already established a new balance of payments compilation division and has allocated additional positions to the new division. The CBJ also plans to start publishing its statistics according to the fifth edition of the BPM5 and the international reserve template by May 2004. A strategy to compile the international investment position in accordance with BPM5 will also be adopted by May 2004, with a view to commencing regular publication of these statistics within the following 12 months. To meet these targets, the CBJ is working with an Fund technical advisor on balance of payments statistics. In addition, the ministry of finance has requested technical assistance from the Fund to publish general government statistics by July 2004.

III. Program Monitoring

27. Purchases under the SBA will be subject to observance of benchmarks and performance criteria, completion of program reviews, and a continuous performance criterion on the nonaccumulation of new external payment arrears. The third review of economic developments under the program will be conducted in June 2004.

28. Consistent with the discussion in Section II, quantitative performance criteria have been established for end-March 2004 and indicative targets have been established for end-June, as specified in Table 1. The performance criteria will apply to changes in net international reserves and net domestic assets of the CBJ; the overall fiscal deficit after grants; the stock of government and government-guaranteed short-term external debt (including that of the CBJ); and the contracting or guaranteeing of new nonconcessional medium- and long-term external debt by the government and the CBJ. The quantitative performance criteria are defined in the attached Technical Memorandum of Understanding. Structural benchmarks are specified in Table 2. We will consult with Fund staff regarding developments that may affect external financing and grants, and any significant deviation from programmed levels will be a subject of program reviews.

Table 1. Jordan: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2004
	End-March	End-June
	2004	2004
	Program	Program1
	(Cumulative flows from January 1, in millions of Jordanian dinars)
Performance Criteria
Net international reserves of the CBJ2	-376	-348
Net domestic assets of the CBJ3,4	139	162
Overall fiscal deficit after grants of the central government5,6,7	140	55
	(Cumulative flows from January 1, in millions of U.S. dollars)
Outstanding stock of government and government-	25	25
guaranteed short-term external debt (ceiling)
Contracting or guaranteeing of new non-concessional medium-	100	150
and long-term external debt by the government (ceiling)
Of which: with maturity of more than one year and	40	80
up to and including five years
Non-accumulation of external payment arrears8	0	0
	(Cumulative flows from January 1, in millions of Jordanian dinars)
Memorandum items
Programmed sum of foreign grants, net external financing	21	309
of the budget (excluding project loans) and privatization
proceeds from abroad
Programmed foreign grants6,9	83	454
Programmed expenditure associated with debt swaps	10	15
with official bilateral creditors
Source: Quarterly macroeconomic program. 1The targets for end-June 2004 are indicative targets. 2These floors will adjusted upward (downward) by the extent to which the actual sum of foreign grants and net external financing of the central government (excluding project-related loans and privatization proceeds from abroad) received during 2004 exceeds (falls short of) the levels specified above. This adjuster includes any net cost of prepaying external debt. 3These ceilings will be adjusted upward (downward) by the extent to which the floors on the net international reserves of the CBJ are adjusted downward (upward) due to shortfalls (excesses) in the sum of foreign grants and net external financing of the central government (excluding project-related loans and privatization proceeds from abroad) received during 2004, compared to the levels specified above.This adjuster includes any net cost of prepaying external debt. 4These ceilings will be adjusted downward (upward) by the extent to which the CBJ decreases (increases) reserve requirements on Jordanian dinar deposits of the banking system. The adjustment will equal the change in the required reserve ratio multiplied by the stock of deposits at licensed banks at the start of the month when the new reserve requirement ratio applies that are: (i) denominated in Jordanian dinars; and (ii) subject to reserve requirements. 5These ceilings will be adjusted upward by the extent to which expenditure associated with debt swaps with official bilateral creditors exceeds the amount specified above. 6These ceilings will be adjusted upward by the amount of recapitalization bonds at market interest rates placed by the government with the troubled banks discussed in Section II of the MEFP, up to a maximum amount of JD 100 million. 7These ceilings will be adjusted upward by the amount of the shortfall in grants received by the central government compared to the program targets, up to a maximum of JD 75 million. 8Continuous performance criterion. 9Excludes technical assistance grants channeled through the Ministry of Planning.

Table 2. Structural Benchmarks
Under the Stand-By Arrangement, 2003

Structural Benchmarks

29. The CBJ will publish: (a) the balance of payments statistics of the CBJ according to the fifth edition of the Balance of Payments Manual of the Fund; and (b) the international reserve template according to Fund methodology (end-May 2004).

30. The government will issue a decree to create a single function-based revenue department by integrating the income tax and sales tax departments under a single director general reporting to the minister of finance. In addition, the ministry of finance will create a temporary integration project directorate to oversee development and implementation of the large and medium taxpayer offices; the reform of small taxpayer administration; and the incremental establishment of an integrated head office (end-March 2004)

Technical Memorandum of Understanding

1. Under the Stand-By Arrangement, the government of Jordan is committed to implementing a financial program and a set of structural reforms. Progress in implementing the financial program will be monitored on the basis of quantitative performance criteria and indicative targets as set out in this memorandum, which is organized as follows: Section I specifies the quantitative performance criteria, indicative targets, and applicable adjusters. Section II specifies the content and frequency of the data to be provided for monitoring the program. Section III provides definitions of the principal concepts and financial variables.

I. Quantitative Performance Criteria and Indicative Targets

2. The quantitative performance criteria will consist of quarterly ceilings or floors on the following variables: (i) cumulative change (from December 31, 2003) in the net international reserves (NIR) of the Central Bank of Jordan (CBJ); (ii) cumulative change (from December 31, 2003) in the net domestic assets (NDA) of the CBJ; (iii) overall deficit after grants of the central government (as defined in Section III); (iv) outstanding stock of government and government-guaranteed short-term external debt with an initial maturity of up to and including one year; and (v) the contracting (from January 1, 2004) of new nonconcessional medium- and long-term government and government-guaranteed external debt with an initial maturity of more than one year, with a subceiling on debt with an initial maturity of up to and including five years. The floors and the ceilings applicable to the preceding variables will be monitored on the basis of the magnitudes specified in Table 1 of the MEFP.

Adjusters to the performance criteria

3. The performance criteria specified above will be adjusted as follows:

• The ceilings on the overall fiscal deficit after grants of the central government will be adjusted upward by the extent to which expenditures associated with debt swaps¹ with official bilateral creditors exceed the amounts specified in Table 1 of the MEFP.

• The ceilings on the overall fiscal deficit after grants of the central government will be adjusted upward by the amount of the shortfall in grants received by the central government compared to the programmed level as specified in Table 1 of the MEFP, up to a maximum JD 75 million.

• The ceilings on the overall fiscal deficit after grants of the central government will be adjusted upward by the amount of recapitalization bonds at market interest rates placed by the government with the troubled banks discussed in Section II of the MEFP, up to a maximum amount of JD 100 million.

• The floors on the net international reserves of the CBJ will be adjusted upward (downward) by the extent to which the actual sum of foreign grants and net external financing of the central government (excluding project-related loans and privatization proceeds from abroad) received during 2004 exceeds (falls short of) the levels specified in Table 1 of the MEFP.

• The ceilings on the net domestic assets of the CBJ will be adjusted upward (downward) by the extent to which the floors on the net international reserves of the CBJ are adjusted downward (upward) due to shortfalls (excesses) in the sum of foreign grants and net external financing of the central government (excluding project-related loans and privatization proceeds from abroad) received during 2004, compared to the levels specified in Table 1 of the MEFP.

• The ceilings on the net domestic assets of the CBJ will be adjusted downward (upward) by the extent to which the CBJ decreases (increases) reserve requirements on Jordanian dinar deposits of the banking system. The adjustment will equal the change in the required reserve ratio on Jordanian dinar deposits multiplied by the stock of Jordanian dinar deposits subject to reserve requirements programmed for the subsequent test dates. The stock of Jordanian dinar deposits subject to reserve requirements are programmed to be JD 5,505 million at end-March 2004 and JD 5,632 million at end-June 2004. During the program period, there will be no changes in the regulations defining the deposits that are subject to reserve requirements.

II. Provision of Information to Fund Staff

4. To permit the monitoring of developments under the program, the government will provide to Division B of the Middle East and Central Asia Department the information specified below and summarized in the list of reporting tables:

• CBJ foreign exchange reserves (weekly).

• Data on auctions of CDs by the CBJ (following each auction).

• Monetary statistics, interest rates and consumer prices, and exports and imports (monthly).

• Summary budget operations, revenues, expenditures (including net advances), net domestic financing, balances in the government accounts with the CBJ and the commercial banks (including privatization accounts), swaps with official bilateral creditors and associated expenditures, the gross cost of debt buybacks and the proceeds from the sale of any collateral released (with accrued interest payments and receipts identified separately), and the receipt and use of privatization proceeds (monthly).

• The quarterly and annual accounts of the SSC (quarterly).

• Detailed foreign grants and loans received by the central government; foreign debt amortization and interest (including separately, cash payments, rescheduled and overdue amounts, excluding deferred debt service payments to the Arab development funds); any put or call options, collateral guarantees, warrants or similar derivative arrangements entered into by the government or the CBJ; and the onlending operations of the government (monthly).

• Balance of payments (current and capital accounts) and external debt developments (quarterly).

• List of short,-medium, -and long-term public or publicly guaranteed external loans contracted during each quarter; identifying, for each loan: the creditor, the borrower, the amount and currency, the maturity and grace period, and interest rate arrangements (quarterly).

• New external arrears (if any) and total outstanding amount of arrears (quarterly), excluding deferred debt service payments to the Arab development funds.

• National accounts statistics (quarterly).

5. Weekly data and data on the central bank CD auctions should be sent to the Fund with a lag of no more than one week. Monthly and quarterly data should be sent within a period of no more than six weeks, except for external sector data, which should be sent within a period of no more than eight weeks, and quarterly national accounts statistics, which should be sent within a period of no more than three months. Any revisions to previously reported data should be communicated to the staff in the context of the regular updates.

III. Definitions of the Principal Concepts and Variables

6. The net international reserves of the CBJ consist of foreign exchange (foreign currency cash, deposits with foreign correspondents, and holdings of foreign securities, excluding any assets that are pledged or used as collateral), gold, the Fund reserve position, and SDRs, less the foreign liabilities of the CBJ (including to the Fund), less commercial banks' foreign currency deposits with the CBJ, and less any change in the CBJ's net foreign currency swap and forward positions from December 31, 2003. In addition, deposits received from foreign central banks or governments will be treated as liabilities in NIR, irrespective of maturity. Alternatively, the net international reserve (NIR) is equivalent to the national foreign asset (NFA) of the CBJ adjusted for outstanding purchases from the Fund and the bilateral accounts (net).² Gold will be valued at the average price of JD 219.78 per fine troy ounce. The U.S. dollar value of foreign assets and liabilities will be converted into Jordanian dinars at the exchange rate of JD 1 = US$1.4104.

7. Reserve money is defined as the sum of: (i) currency in circulation (currency outside banks and commercial banks' cash in vaults); and (ii) nonremunerated deposits of the commercial banks in Jordanian dinars.

8. The net domestic assets of the CBJ are defined as reserve money less the sum of net international reserves and bilateral accounts. They include: (i) net claims on the central government; (ii) net claims on autonomous agencies with their own budgets; (iii) net claims on the SSC; (iv) net claims on municipalities and local governments; (v) net claims on nonfinancial public enterprises; (vi) gross claims on licensed commercial banks; (vii) claims on other financial institutions net of deposits; and (viii) other items (net); less: (ix) JD-denominated central bank CDs; (x) remunerated deposits of the licensed commercial banks in Jordanian dinars; and (xi) other remunerated deposits with the CBJ.

9. The central government is defined as the budgetary central government that is covered by the annual General Budgetary Law (GBL). It excludes the budgets of the 32 autonomous agencies, but includes all ministries and government departments, which operate in the context of the central authority system of the state.

10. Net external financing of the central government is defined as cash external debt disbursements, less scheduled external debt repayments; less gross cash payments made in relation to buybacks of debt and/or swaps of debt to official creditors net of: (i) accrued interest paid; and (ii) market value of any collateral released, excluding accrued interest receipts; plus exceptional external financing (rescheduled principal, interest, and accumulated external arrears, if any). The debts covered are debts of the central government (excluding off-budget military debts) and any foreign debts that are channeled through the central government to finance operations of the rest of the public sector (excluding off-budget onlending on loans that were contracted before January 1, 2002).

11. Net bank financing of the central government is defined as the cumulative change from December 31, 2003 in the banking system's claims in Jordanian dinars and in foreign currency on the central government (excluding holdings of Brady bonds), and net of the balances on government accounts with the CBJ and the commercial banks (including balances reflecting privatization receipts, but excluding deposits of UN compensation funds relating to damages incurred in the context of the Gulf war). Foreign currency claims will be converted into Jordanian dinars at the exchange rate of JD 1 = $1.4104.

12. Net domestic nonbank financing of the central government is defined as central government borrowing from, less repayments to, the nonbank sector (including the nonfinancial public sector not covered by the general budget, and, specifically, the SSC), and the cumulative change (from December 31, 2003) in the stocks of government securities held by nonbanks and in the float. Float consists of the value of checks issued by the government but not yet cashed by the beneficiaries.

13. The overall deficit after grants of the central government is defined as the sum of: (i) net external financing of the central government (including exceptional financing, i.e., rescheduled principal and interest payments); (ii) privatization receipts net of identified direct costs of privatization transferred during the relevant period to the central government accounts; (iii) net domestic bank financing of the central government; and (iv) net domestic nonbank financing of the central government. Profit transfers from the Jordan Investment Corporation (JIC) and small sales of JIC assets (not exceeding JD 5 million) will not be included in privatization receipts.

14. Government and government-guaranteed external debt covers all external debts incurred or guaranteed by government. "Debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), adopted August 24, 2000) and includes loans, bonds, suppliers' credits, leases, and other liabilities as further defined in the guidelines. Excluded are leases of real property by Jordanian embassies or other foreign representations, and any other lease from a nonresident for which the present value of all payments contracted during the period of the lease does not exceed JD 1 million. For program purposes, "government" includes the central government defined in paragraph 9 above, and government departments and official agencies which do not seek profit and whose budgets are issued independent of the GBL. The external debt will be expressed in U.S. dollar terms, with debts in currencies other than the U.S. dollar converted into U.S. dollars at the market rates of the respective currencies prevailing on December 31, 2003 as published in IFS.

15. Government and government-guaranteed short-term debt covers external debt defined in paragraph 14 above with an original maturity of up to and including one year, with the exception of normal import-related financing and instruments contracted after December 31, 2003 with put dates that occur within one year of the original contracting date.

16. The performance criterion on contracting or guaranteeing of nonconcessional government and government-guaranteed external debt applies not only to debt as defined in paragraph 14 above, but also to commitments contracted or guaranteed by government for which value has not been received. The performance criterion covers the contracting or guaranteeing by government or the CBJ of debt as defined in paragraph 14 above with an original maturity of more than one year and a grant element of less than 35 percent, using currency-specific discount rates based on the commercial interest rates (CIRRs) reported by the OECD. Discount rates for assessing the conditionality of loans with a maturity of at least 15 years or more will be based on the average CIRRs over the last 10 years. The assessment of conditionality for loans with maturities of less than 15 years will be based on the average CIRRs of the preceding six-month period.³ Aircraft leases contracted by Royal Jordanian Airlines are excluded.

17. Any variable that is mentioned herein for the purpose of monitoring a performance criterion and that is not explicitly defined, is defined in accordance with the Fund's standard statistical methodology, such as the GFS. For variables that are omitted from the Technical Memorandum of Understanding but that are relevant for program targets, the Jordanian authorities shall consult with the staff on the appropriate treatment based on the Fund's standard statistical methodology and program purposes.

List of Reporting Tables
Table		Source	Frequency	Reporting lag
Fiscal Data
F1.	Government Domestic Revenues	Ministry of Finance	Monthly	Six weeks or less
F2.	Government Expenditure and Net Lending	Ministry of Finance	Monthly	Six weeks or less
F3.	Summary Fiscal Operations	Ministry of Finance	Monthly	Six weeks or less
F4.	Balances of Government Accounts with the Banking System	Ministry of Finance	Monthly	Six weeks or less
F5.	Foreign grants	Ministry of Finance	Monthly	Six weeks or less
F6.	Foreign loans	Ministry of Finance	Monthly	Six weeks or less
F7.	Net Lending to Public Entities	Ministry of Finance	Monthly	Six weeks or less
F8.	Receipt and Use pf Privatization Proceeds Fund	Ministry of Finance	Monthly	Six weeks or less
F9.	Budgetary Expenditure Related to Debt Swaps with Official Creditors	Ministry of Finance	Monthly	Six weeks or less
Monetary Data
M1.	Monetary Survey	Central Bank of Jordan	Monthly	Six weeks or less
M2	Balance Sheet of the Central Bank	Central Bank of Jordan	Monthly	Six weeks or less
M3.	Consolidated Balance Sheet of Deposit Money Banks	Central Bank of Jordan	Monthly	Six weeks or less
M4.	Selected Bi-Weekly Statistics	Central Bank of Jordan	Monthly	Six weeks or less
M5.	Foreign Assets and Liabilities of the Central Bank of Jordan	Central Bank of Jordan	Monthly	Six weeks or less
M6.	Off-balance Sheet Activities of the Central Bank of Jordan	Central Bank of Jordan	Monthly	Six weeks or less
External Sector Data
E1.	Quarterly Data on the Balance of Payments	Central Bank of Jordan	Quarterly	Eight weeks or less
E2.	Monthly Data on Exports -- Prices and Volumes	Central Bank of Jordan	Monthly	Eight weeks or less
E3.	Monthly Data on Imports -- Prices and Volumes	Central Bank of Jordan	Monthly	Eight weeks or less
E4.	Quarterly Data on the Services Balances	Central Bank of Jordan	Quartely	Eight weeks or less
E5.	Quarterly Data on External Debt Service	Ministry of Finance	Quartely	Eight weeks or less
E6.	Monthly Data on Outstanding and Newly Contracted External Debt	Ministry of Finance	Monthly	Eight weeks or less
E7.	Quarterly Data on Foreign Grants (BOP basis)	Central Bank of Jordan	Quarterly	Eight weeks or less