Explanatory Memorandum to COM(2024)159 - - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2024)159 - . |
|---|---|
| source | COM(2024)159 |
| date | 08-04-2024 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Amid increasingly challenging global economic developments, Jordan’s economic growth has remained overall stable at around 2% in the last 5 years (excluding a marked contraction in the COVID-19 pandemic year of 2020). However, this growth performance was weaker than that of regional peers and not strong enough to lower the very high unemployment or help ease the considerable public debt burden. Instead, fiscal pressures have remained high, with persistent budget deficits further adding to the already high public debt, which reached 88.7% of GDP (excluding holdings by the Social Security Corporation) in 2023. Having remained relatively contained in the last 5 years, consumer price inflation slowed to 1.6% at the end of 2023 as a result of the monetary tightening policy, among other factors. The high interest rates, however, are expected to weigh on economic activity going forward. On the external side, Jordan experiences chronic external deficits (7.1% of GDP current account deficit in H1 2023), driven by the persistent deficit in trade in goods, which reflects the economy’s dependence on energy, food and machinery imports in conjunction with a weak export base.
A broadly appropriate policy response and large-scale international support have so far helped the country to preserve macroeconomic stability, but the persistent economic challenges reflected in external and fiscal deficits make the economy vulnerable to external shocks. In past years, Jordan has taken initiatives to modernise its economy, most recently with the Economic Modernisation Vision of 2022, to attract foreign investment and promote growth, also supported by the reform agendas underpinning the earlier macro-financial assistance (MFA) operations.
These reform efforts were undertaken at a time when Jordan faced multiple external shocks, in particular the war in neighbouring Syria and the major influx of refugees that followed, the COVID-19 pandemic, Russia’s fullscale war of aggression against Ukraine, increased security challenges along the Syrian border and, most recently, the war in Israel/Gaza and ensuing Red Sea crisis impacting important trade routes.
In light of the multiple external shocks and its importance to ensure stability in the region, Jordan received substantial support in various forms from its international partners in the past decade. This includes three MFA programmes since 2014 for a total of EUR 1 080 million; four consecutive International Monetary Fund (‘IMF’) programmes since 2012; and substantial US support in the form of grants. The third and latest MFA operation (MFA-III, 2020-2023) with an initial amount of EUR 500 million was adopted in January 2020 and subsequently (May 2020) topped up by EUR 200 million in response to the socio-economic fallout of the COVID-19 pandemic in 2020. MFA-III was successfully concluded in May 2023, having supported reforms on public finance management, the utilities sector, social and labour market policy, and governance, where overall positive even if somewhat uneven progress was achieved.
In this context and given Jordan’s continued sizeable financing needs and the many different challenges faced by the country, the Jordanian authorities requested a follow-up MFA operation of EUR 700 million on 8 October 2023 in a letter to Commissioner Gentiloni, where they specifically referred to challenging global economic prospects, restrictive credit conditions due to monetary tightening, high energy costs, inflationary pressures and the burden of the Syrian refugee crisis. The call for further assistance comes in a situation of increased uncertainty and regional instability, not least due to the outbreak of the war in neighbouring Israel and Gaza the day before the letter was sent.
After an in-depth assessment of the political and economic situation in Jordan, the Commission is submitting to the European Parliament and the Council a proposal to provide a new MFA of up to EUR 500 million to the benefit of Jordan. The proposed MFA would help Jordan cover part of its residual external financing needs, in the context of the new IMF programme, and would by creating the necessary fiscal space also help safeguard the ongoing reform progress.
The disbursement is planned to take place in three instalments, with the release of instalments strictly linked to progress with the implementation of both the IMF programme and a number of additional policy measures to be agreed between the Commission and the authorities and listed in a Memorandum of Understanding (MoU). The MoU could, in principle, include policy reforms addressing economic governance, including Public Finance Management and tax administration; social and labour market policy; and governance and fight against fraud, corruption and money-laundering. The implementation of the proposed operation is expected to go hand-in-hand with the support under budgetary operations financed by the Neighbourhood, Development and International Cooperation Instrument- Global Europe (‘NDICI-GE’).
As further explained in the Commission staff working document accompanying this proposal, the Commission considers, based also on the assessment of the political situation made by the European External Action Service (‘EEAS’), that the political and economic pre-conditions for the proposed MFA operation are satisfied.
• General economic context
Economic growth has remained stable albeit relatively low (compared to regional peers), over the past years, and is expected to only slowly pick up. Following the contraction during the COVID-19 pandemic, GDP recovered at 2.2% growth in 2021 and 2.5% in 2022; growth expectations for 2023 were slightly revised downward to 2.6% following the outbreak of the Israel-Gaza war in Q4. The sectors that contributed most to economic growth in 2023 were agriculture, manufacturing, tourism and mining, reflecting the still strong role of these sectors in the economy but also the rebound in tourism. Major structural challenges remain to boosting economic growth, in particular in the area of private sector development, where deficiencies in the business environment, access to finance, labour market flexibility and public administration persist.
Economic growth has not been strong enough to lower the very high unemployment. Bringing down the traditionally high unemployment rate and increasing labour market participation are important structural challenges in Jordan. In 2023, the unemployment rate slightly decreased to 22.3% in Q3-2023 (22.9% in 2022). Unemployment remains high especially for women, youth and university graduates, with women’s labour force participation rate (around 14% in 2023) being one of the lowest world-wide.
Inflation decelerated considerably in 2023, with average inflation at 2.1% in 2023 (down from 4.2% in 2022). Price increases levelled out in response to the tightening of monetary policy and lower global commodity prices. The Central Bank of Jordan (CBJ) raised its policy rates in 10 steps from 2.5% in March 2022 to 7.5% in July 2023. The CBJ decisions were necessary given the Jordanian Dinar’s peg to the USD, to be in line with the US Federal Reserve’s monetary tightening and avoid pressures on capital flows, and indeed contributed to the moderation of inflationary pressures.
The fiscal situation remains challenging, with structurally high deficits reflecting a narrow revenue base (domestic tax revenue mobilisation at 16% of GDP, compared to Tunisia at 23.3% of GDP and Morocco at 21.4% of GDP) feeding further into the already high level of debt. The fiscal deficit stood at 5.1% for the first 8 months of 2023 (4.6% of GDP in 2022), roughly in line with the average fiscal deficit of the past 5 years. Public sector revenue increased by 5.4% during the first 8 months compared to the same period a year earlier, on the back of higher income and profit tax collection. Total expenditure grew by 2.9%, driven by higher interest payments, military expenditure and compensation of civil sector employees. In April 2023, Jordan successfully issued Eurobonds for USD 1.25 billion, despite the tightening of global financing conditions. The issuance has a maturity of 6 years at 7.5% and was oversubscribed six times, allowing the government to increase the initially sought amount.
Total public sector debt (excluding debt holdings by the Social Security Corporation, SSC) remained at a very high 88.7% of GDP in 2023, slightly down from 90.8% of GDP in 2021, as nominal GDP growth during these 2 years outpaced the increase in debt. Adding debt holdings by the SSC, public sector debt reached 111.5% of GDP in 2023, after having continuously increased over the past decade (from 84.5% of GDP in 2013). In its report on the new Extended Fund Facility (EFF) arrangement with Jordan (January 2024), the IMF assessed Jordan’s public debt level as sustainable, stating further that while debt sustainability risks remained, the authorities’ policy efforts and the development partners’ ongoing commitment to Jordan would constitute important safeguards.
On the external side, Jordan experiences chronic external deficits, driven by the persistent deficit in trade in goods, which reflects Jordan’s dependence on energy, food and machinery imports in conjunction with a weak export base relying on low-value added sectors. Main export items over the past years have been phosphoric acid, potash and phosphates, which have benefited from increased demand following Russia’s invasion of Ukraine. Overall, the current account deficit averaged around 6.5% of GDP in the past 5 years, with larger deficits in 2021-2023. Most recently, the current account deficit narrowed to 7.1% of GDP in H1 2023 (from 13% in H1 2022, 8.8% of GDP in 2022), on the back of an increased trade in services surplus driven by increasing tourism revenue. Traditionally strong remittances (around 8% of GDP over the past years) from abroad have also contributed to mitigating the current account deficit. The CBJ’s gross foreign reserves have remained strong, whilst decreasing slightly in the period 2021-2023 to USD 17.3 billion at the end of September 2023, covering an estimated 7.6 months of imports of goods and services.
The IMF, in its January 2024 forecast, expects economic growth to stand at 2.6% in both 2023 and 2024. Its previous forecast was revised slightly downwards following the outbreak of the war in Israel/Gaza. However, the war implies a very substantial downside risk to the outlook, in particular due to the increased level of uncertainty in the region and the possible impact on the important tourism sector, with cancellations by tourists from advanced economies, who represent a third of tourism receipts. Domestic demand may be negatively impacted by consumer sentiment and a boycott of Western brands, which reportedly could be weighing on value added tax revenue. After the Hamas terrorist attack of 7 October 2023, sovereign bond spreads for Jordan temporarily increased but were back to pre-war levels 4 weeks later. A similar development was observed for oil prices. The ongoing Houthi attacks on cargo and energy vessels in the Red Sea hinder vessel traffic to Asia, impacting Jordan’s exports – in particular exports of minerals and chemicals, and imports. Jordan’s energy imports are less affected, as they are mostly transported via pipelines locally.
Given the significant public debt burden, the fiscal consolidation course needs to continue, as supported by the new IMF programme, with a view to narrowing the budget deficit by broadening the tax base and improving the efficiency and targeting of social measures. The inflation rate in Jordan has dropped to low levels and is expected to remain low in 2024, also due to the monetary tightening of the CBJ. The resulting high interest rates are expected to curb credit growth to the private sector. Fiscal and external deficits are expected to remain high, reflecting the underlying structural challenges to sustainably improve fiscal revenue and the trade deficit. At the same time, since Jordan imports most of its energy and a large share of its food, including essential cereals, the slower growth of global commodity prices helps ease pressures on fiscal and external balances. The Red Sea crisis is expected to weigh on exports of fertilisers and phosphates, while the war and general regional instability is expected to lessen tourism revenue; in normal times, both sectors considerably alleviate external pressures.
• Consistency with existing policy provisions in the policy area
Decisions (EU) 2020/331 and (EU) 2020/7012 on providing macro-financial assistance to the Hashemite Kingdom of Jordan were adopted by the European Parliament and the Council on 15 January 2020 and 25 May 2020, respectively. The overall assistance of EUR 700 million (EUR 500 million under Decision (EU) 2020/33 and EUR 200 million under Decision (EU) 2020/701) was fully disbursed during the period 2020-2023.
• Consistency with other EU policies
The proposed MFA is consistent with the EU’s commitment to support Jordan’s economic and political situation. It is consistent with the principles governing the use of the instrument of MFA, including its exceptional character, political preconditions, complementarity, conditionality and financial discipline.
The EU and Jordan enjoy excellent relations and have been linked by an Association Agreement since 2002 (advanced status since 2010)3. In 2022, they signed the Partnership Priorities4 which aim to strengthen cooperation even further and will guide the partnership until 2027. The Partnership Priorities are based on common values and dialogue, and promote reforms in areas such as good governance, the rule of law, human rights, social cohesion and equal opportunities for all, non-discrimination, environmental and climate protection, macroeconomic stability and the business environment.
The proposed MFA is in line with the objectives of the European Neighbourhood Policy (ENP). It contributes to support the European Union’s objectives of economic stability and development in Jordan and, more broadly, resilience in the South European neighbourhood. The EU MFA would complement the grants mobilised under the NDICI and other EU programmes and instruments and, in particular, the conditions envisaged under the budget support packages being implemented by the EU under the current multiannual financial framework (MFF) 2021-2027. By supporting the adoption by the Jordanian authorities of an appropriate framework for macroeconomic policy and structural reforms, the EU’s MFA would increase the added value and effectiveness of the EU’s overall financial support measures, including through other instruments.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The legal basis for this proposal is Article 212 of the Treaty on the Functioning of the European Union (‘TFEU’).
• Subsidiarity (for non-exclusive competence)
The subsidiarity principle is respected as the objectives of maintaining short-term macroeconomic stability in Jordan cannot be sufficiently achieved by the Member States alone and can be better achieved by the European Union. The main reasons are the budgetary constraints faced at the national level and the need for strong donor coordination in order to maximise the scale and effectivenes of the assistance.
• Proportionality
The proposal complies with the proportionality principle: it confines itself to the minimum required in order to achieve the objectives of short-term macroeconomic stability and does not go beyond what is necessary for that purpose.
As identified by the Commission based on the estimates of the IMF in the context of the EFF, the amount of the proposed new MFA corresponds to 7.1% of the estimated residual financing gap for the period 2025-2027. This is consistent with standard practices on burden-sharing for MFA operations (for a country with an Association Agreement, the upper limit would be 60% according to the ECOFIN Council conclusions of 8 October 2002), taking into account the assistance pledged to Jordan by other bilateral and multilateral donors. When considering the overall EU support to Jordan via various instruments (including the proposed MFA, EU budget support and EIB loans, excluding bilateral Member States support), the total EU support would cover 16.0% of the estimated residual financing gap; the overall EU contribution including budget support and EIB loans to Jordan is expected to be higher than in the past.
• Choice of instrument
Project finance or technical assistance would not be suitable or sufficient to address the macroeconomic objectives. The key added value of the MFA compared to other EU instruments would be to alleviate the external financial constraints and to help create a stable macroeconomic framework, including by promoting a sustainable balance of payments and budgetary situation, and an appropriate framework for structural reforms. By helping put in place an appropriate overall policy framework, MFA can increase the effectiveness of the actions financed in Jordan under other, more narrowly-focused EU instruments.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The Commission’s MFA proposal builds on lessons learnt from ex-post evaluations carried out on past operations in the EU’s neighbourhood, including on the ex-post evaluation of the MFA-II operation provided to Jordan in 2016-2019 that was governed by Decision (EU) 2016/2371 of the European Parliament and of the Council of 14 December 20165.
This ex-post evaluation6 concluded overall that the MFA-II programme met its objectives. Its design was relevant to Jordan’s economic challenges, while it contributed substantially to the effective stabilisation of Jordan’s external and fiscal financial position. The programme had considerable added value for the EU as it supported macroeconomic stability in a neighbouring partner country and mitigated the impact of the refugee crisis. It was designed and implemented in a way that was coherent with other EU policies and instruments.
• Stakeholder consultations
MFA is provided as an integral part of the international support for the economic stabilisation of Jordan. To prepare this proposal for MFA, the Commission consulted with the IMF, which has already put in place sizeable financing programmes. The Commission consulted the Alternate Economic and Financial Committee on 26 February 2024, where an endorsement for the draft proposal was provided. The Commission has also been in regular contact with the Jordanian authorities.
• Collection and use of expertise
In line with the requirements under Regulation (EU, Euratom) 2018/10467 (‘Financial Regulation’), the Commission services will carry out, before the implementation of the MFA, an operational assessment of the financial and administrative circuits of Jordan in order to ascertain that the procedures in place for the management of programme assistance, including MFA, provide adequate guarantees.
• Impact assessment
The EU’s MFA is an exceptional emergency instrument aimed at addressing severere balance-of-payments difficulties in non-EU countries. This MFA proposal is therefore exempted from the requirement to carry out an Impact Assessment in line with the Commission's Better Regulation Guidelines (SWD(2015) 111 final) as there is a political imperative to move ahead quickly in a situation requiring a rapid response.
More generally, the Commission's MFA proposals build on lessons learnt from ex-post evaluations carried out on past operations in the EU's neighbourhood. The new MFA, and the economic adjustment and reform programme attached to it, will help alleviate Jordan’s short-term financing needs while supporting policy measures aimed at strengthening medium-term balance of payments and fiscal sustainability and raising sustainable growth, thus complementing the programme adopted by the IMF Executive Board. These policy conditions should address some of the fundamental weaknesses shown over the years by the Jordanian economy and economic governance system. Possible areas of conditionality could, in principle, include reforms to improve economic governance, including public finance management and tax administration; social and labour market policy; and governance and fight against fraud, corruption and money-laundering.
• Fundamental rights
Countries that are covered by the European Neighbourhood Policy are eligible for MFA. A pre-condition for granting MFA is that the eligible country respects effective democratic mechanisms, including a multi-party parliamentary system and the rule of law, and guarantees respect for human rights.
Jordan has continued its political reform efforts to strengthen parliamentary democracy and the rule of law. In 2021, Jordan launched a political modernisation process aspiring to foster political participation of women and youth, to overcome tribal allegiance and encourage the formation of nationwide programme-based political parties, introduced through amendments to the Elections and Political Parties Laws. In 2023, the government amended the Labour Code in line with international human rights standards.
While important political, security, economic and social challenges remain, and despite an increasingly challenging regional context, Jordan is making steps towards a more effective democratic political system based on the rule of law and respect for human rights. The EU remains fully committed in supporting Jordan in this challenging transition process. In this context, the political pre-condition for granting MFA is considered to be satisfied.
4. BUDGETARY IMPLICATIONS
The proposed MFA operation of up to EUR 500 million in loans for Jordan is planned to be disbursed in three instalments to be released in between 2024 and 2027. The loan will be provided under the External Action Guarantee with a provisioning at a rate of 9%, which will be programmed under the NDICI-GE, for a total amount of EUR 45 million (budget line 14 02 01 70 ‘NDICI – Provisioning of the Common Provisioning Fund’). The loans shall be granted in the form of amortising loans with a grace period and subsequent capital repayments in equal tranches over a longer period. Such loan structure will be beneficial for both the beneficiary, in that it facilitates repayments, and the budget, by spreading contingent liabilities over a long time-frame.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The European Union will make the MFA available to Jordan for a total amount of up to EUR 500 million, provided in the form of loans, which will contribute to covering Jordan’s residual financing needs in the operation’s availability period. The assistance is planned to be disbursed in three instalments, provided that the policy measures attached to each instalment have been fully implemented in a timely manner.
The assistance will be managed by the Commission. Specific provisions on the prevention of fraud and other irregularities, consistent with the Financial Regulation, are applicable.
Disbursements under the proposed MFA operation will be conditional on successful programme reviews under the IMF programme. In addition, the Commission and the Jordanian authorities will agree on a specific set of structural reform measures, to be set out in a Memorandum of Understanding. These reform measures should support the authorities’ reform agenda and complement the programmes agreed with the IMF, the World Bank and other donors, as well as the policy programmes associated with the EU’s budgetary support operations. They should be consistent with the main economic reform priorities agreed between the EU and Jordan in the Association Agreement, the Partnership Priorities and annexed Compact; Jordan's Modernisation Vision and other strategic documents.