Documentof The World BankGroup FOR OFFICIAL USE ONLY Report No. 47518-50 INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY ASSISTANCE STRATEGY PROGRESSREPORT FOR THE HASHEMITE KINGDOMOF JORDAN FOR THE PERIOD FY06-10 March 11,2009 Middle East Department Middle East and North Africa Region This document has a restricteddistributionand may be usedby recipientsonly inthe performanceof their officialduties. Itscontents may not otherwise be disclosedwithout World Bankauthorization. Thedate of the last CountryAssistanceStrategy discussionsfor Jordan wasMay 4, 2006 (ReportNo. 35665-JO) CURRENCYAND EQUIVALENTS (ExchangeRateas of December 15,2008) Currency Unit= JordanianDinar (JD) US$1= JD 0.708 JD 1 = US$1.414 FISCALYEAR January 1-December31 ABBREVIATIONS AND ACRONYMS AWI Arab World Initiative LIL Learning and InnovationLoan DPL Development Policy Lending L M I C Lower middle income country ERfKE EducationReformfor the KnowledgeEconomy MENA MiddleEast andNorthAfrica Region ESMAP Energy Sector Management Assistance MIGA Multilateral Investment Guarantee Agency Programme MoH MinistryofHealth ESW Economicand SectorWork MoMA MinistryofMunicipal Affairs EU EuropeanUnion MoSD Ministryof SocialDevelopment FDI Foreign Direct Investment MTEF Medium-TermExpenditureFramework GAM Greater Amman Municipality NAF National Aid Fund GDP Gross Domestic Product ODS OzoneDepletingSubstance GEF Global Environment Facility PHRD Japanese Policy and Human Resources GoJ Government o f Jordan Development HERfKE Higher Education Reform for the PPP Public Private Partnerships Knowledge Economy project PRG Partial Risk Guarantee IBRD International Bank for Reconstruction and RLDP Regional and Local Development Project Development ssc Social Security Corporation I C A InvestmentClimate Assessment TIMSS Trends in International Mathematics and IDF Institutional Development Fund Science Study IEG Independent Evaluation Group USAID United States Agency for International IFC International Finance Corporation Development IPP Independent Power Producer WEF World EconomicForum IBRD IFC Vice President Daniela Gressani Rashad R. Kaldany Director Hedi Larbi Michael Essex TeamLeader Sophie Warlop Ahmed Attiga Core CAS Team Pilar Maisterra, SebnemAkkaya, Mariko Higashi, Rapti A. Jaafar Fria, Abdelmoula Ghzala, Goonesekere, Gulrez Hoda, Mama Chadi BouHabib, William Mako, Al-Nasaa Jean-Michel Marchat, RosannaNitti, Haneen Sayed, Colin Scott, Vladislav Vucetic FOR OFFICIAL USE ONLY Table of Contents I.INTRODUCTION....................................................................................................................... 1 I1. COUNTRY CONTEXT............................................................................................................. 1 A RecentPolitical, Social andEconomic Developments......................................................... . 1 B. National Agenda Objectives, CAS Relevance,andKey Outcomes ..................................... 3 I11 PROGRESS INCAS IMPLEMENTATION............................................................................ . 5 A Areas of Bank Group Involvement through Implementationofthe CAS ............................ . 5 B. Performanceofthe Financial andAdvisory andAnalytical Assistance............................. 10 IV THE WAY FORWARD......................................................................................................... 12 V CREDIT WORTHINESS AND RISKS .................................................................................. .. 13 A. Creditworthiness and Bank Exposure................................................................................. 13 B Risks.................................................................................................................................... . 13 Annex 1: CAS Work Program FY06-10...................................................................................... 15 Annex 2-1: IFC's Investment Portfolio ....................................................................................... 16 Annex 2-2: IFC's Advisory Portfolio .......................................................................................... 17 Annex 3: RevisedResults Matrix ................................................................................................ 19 Annex 4: Progress inIFC CAS Implementation........................................................................... 22 Annex 5: Country Financing Parameters..................................................................................... 26 Annex A1: Jordan at a glance...................................................................................................... 32 Annex B2: SelectedIndicators of Bank Portfolio Performanceand Management ..................... 34 Annex B3-1: IBRDProgram Summary....................................................................................... 35 Annex B3-2: IFC Investment Operations Program ..................................................................... 36 Graph 1: Sector Distribution ............................................................................................ 37 Graph 2: Product Distribution.......................................................................................... 38 Annex B4: Summary of NonlendingServices............................................................................. 39 Annex B5: Social Indicators........................................................................................................ 40 Annex B6: Key Economic Indicators .......................................................................................... 41 Annex B7: Key Exposure Indicators ........................................................................................... 43 Annex B8-1: Operations Portfolio (IBRDand Grants) ............................................................... 44 Annex B8-2: IFC Committed and DisbursedOutstanding Investment Portfolio........................ 45 MAP This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. HASHEMITE KINGDOMOF JORDAN COUNTRY ASSISTANCE STRATEGY FY06-FY10: PROGRESSREPORT I.INTRODUCTION 1. On M a y 4, 2006 the Board of Executive Directors discussed the Country Assistance Strategy (CAS) for Jordan, for the Fiscal Years 06-10 (Report No. 35665-50). This Progress Report takes stock of the implementation of the CAS under a largely unchanged strategic framework, and proposes increased flexibility to assist the Government o f Jordan (GoJ) in mitigating the impact o f the recent global economic downturn, as needed, during the remaining period. It examines lessons learned, assesses implementation progress and impact o f analytical support, and recommends ways to effectively assist Jordan to address its development challenges. 2. Jordan i s a lower middle income country (LMIC) with strong ownership of its development strategy. Over the last years, the Government has established a solid track recordas one of the champions of structural reforms inkey areas inthe Middle East and NorthAfrica region (MENA). 11. COUNTRY CONTEXT A. Recent Political, Social and EconomicDevelopments 3. The political situation in Jordan has remained largely unchanged since the presentation of the CAS. Municipal elections were held in July 2007 and parliamentary elections in November 2007. Nader al-Dahabi was appointed Prime Minister following the Parliamentary elections. Prime Minister Dahabi reiterated Jordan's long-term development goal of transforming Jordan from a lower-middle income country into a modem knowledge-based economy with higher value-added and increased productivity and employment, and he underscored the GoJ's commitment to implementing economic policies to reduce the budget deficit and maintain a stable fiscal policy. 4. Jordan continues to maintain strong growth performance. Real GDP growth, after averaging 7.6 percent during 2004-07, i s expected to remain highat around 5.5 percent in2008. However, with the recent global economic downturn, Jordan could see a slower growth of GDP in 2009 (estimated at less than 4 percent) due to a slowdown inexports of goods and services and foreign inflows, including foreign direct investments. Inflationaccelerated to 14.9 percent in2008 (year-on-year), drivenby rapid increases in international oil and food prices that occurred during the first three quarters of 2008. Despite the elimination of oil price subsidies inFebruary 2008, the fiscal deficit widened over the first eleven months of 2008 due to rising wages, transfers, and increased food subsidies. 5. The current account deficit (17.7 percent of GDP in 2007) i s expected to decline to 14 percent of GDP, reflecting good performance in exports, net income receipts, and net current transfers, despite a significant increase (32.2 percent) in imports of goods and non-financial services in 2008. Jordan saw continued FDI inflows (US$2.2 billion during the first three quarters of 2008). Currently, Central Bank reserves remain strong at US$8.6 billion, equivalent to over six months of imports. The rollback in international prices of commodities, especially oil, i s reducing inflation and is accompanied by an improvement in the current account balance and reserves. However, if sustained, lower oil prices are likely to reduce capital inflows and workers' remittances from Gulf countries over the period ahead. 6. External debt declined from about US$7.4. billion at the end of 2007 to about US$5.1 billion by November 2008. As for Jordan's financial sector, no major direct losses or capital flight has occurred 2 so far, but it i s uncertain if major losses have been incurred by some major clients due to the global financial crisis. 7. Sustained progress in implementation of structural reforms and a supportive regional and external environment are critical for sustaining good economic performance. Despite negative external shocks, the economy continues to perform well-growth remains above 5 percent, public debt has been restructured and remains under control, and foreign reserves are comfortable. Nevertheless, there are risks associated with Jordan's heavy reliance on capital inflows and with pressures on the fiscal balance. 8. The fiscal consolidation program i s stalled. 2008 i s considered a transition year, with an increase in the fiscal deficit due to compensation packages and food subsidies. In the period ahead, pressures from price shocks are expected to ease resulting in budgetary savings from subsidies in the GoJ's 2009 budget, but the indirect economic impact of the global financial turmoil may continue to put pressure on the fiscal balance. The GoJ i s currently considering possible avenues to address these pressures, including channeling the expected 2009 budgetary savings to finance a capital budget larger than originally plannedto stimulate economic activity. The unemployment rate remains high and could further increase in 2009 if economic activity slows down and fewer job opportunities are available for Jordanians in the Gulf countries. Unemployment needs to be addressed through changes in policies that affect incentives for employers to hire Jordanian workers and incentives for Jordanians to accept availablejobs rather than wait for public sector openings or overseasjobs. 9. Further improvements in the investment environment will help advance private sector development in Jordan. Jordan remains one of the better perfonning MENA countries in the Doing Business 2009 rankings-101 out of 181 globally. An investment climate survey sponsored by the Bank Group reveals good scores on perceptions of corruption, security, and property rights. In addition, the financial sector has been able for the most part to meet the needs o f operating enterprises, and infrastructure i s not a major constraint. The key areas where improvements have been witnessed are business regulations, corporate governance, labor laws, and the legal system. The survey also points to strong performance o f Jordanian enterprises and hightotal factor productivity. Nevertheless, more needs to be done in the areas of streamlining civil proceedings; reforming taxation and tax administration; providing demand-driven skills training for workers; and providing greater opportunities for private employment agencies to operate inJordan's labor market, inorder for Jordan to maximize its potential as an attractive destination for local and foreign investment. Further liberalizing trade and opening the economy will help increase competitiveness, efficiency, and productivity. 10. Despite the progress made, Jordan still confronts several challenges, including those that will arise from the recent global economic slowdown. Challenges include vulnerability to fluctuations inthe internationaloil market, due to the country's highenergy import dependency; highunemployment and dependency on remittances from Gulf economies; and increasing pressure on natural resources, especially water. The greatest challenge (and also the largest opportunity) remains the necessity to create adequate conditions for increased private investment and improved competitiveness. This will help to deliver the high and sustainable growth neededto create employment and to reduce poverty. Staying the course with the implementation of the fiscal consolidation program may prove more challenging in the future but i s key to preserve good economic performance. 11. New external shocks: high oil and food prices and the global economic downturn: Oil prices more than doubled during the first half of the CAS period, and this hit Jordan particularly heavily as it imports more than 90 percent o f its energy needs. This increase, which followed the increase in food prices and the gradual elimination of oil price subsidies, had an adverse impact on the wellbeing of poor and vulnerable households and broader 3 economic and social implications as households cut back on consumption, and the cost of inputs rose for keysectors. The GoJ's policy of gradual elimination of subsidies over the past three years was coupledwith a compensation package that directed a portion o f the budgetary savings to finance better targeted expenditures that benefit low- and middle-income households. The combination of sharp increases in both oil and food prices in 2008 has, however, ledto a massive increase inthe coverage o f the compensation package in2008. The GoJ acknowledges that the budgetary compensation measures are an imprecise method of compensating for price increases and could eliminate the recent hard-achieved fiscal gains. In addition, the cash transfer schemes under the compensation packages need to be integrated into the on-going reforms of the National Aid Fund(NAF),as there i s also the need to push harder with the introduction of a new targeting mechanismfor all cashtransfer programs. The Bank i s analyzing the impact of most o f these compensation measures on poverty, income distribution and public fmances-a Fiscal and Poverty Impact Study that will inform the short- to medium-termpolicy agenda. The global financial turmoil has not had immediate tangible effects on Jordan's financial system to-date. However, the resulting global economic downturn could have an adverse impact on Jordan's growth through the channels o f exports, investments and remittances. The GoJ has moved quickly to form a high-level inter-ministerial committee to track relevant economic information and identify emerging macroeconomic imbalances ina timely fashion. A slowdown in the Jordanian economy will undoubtedly have an impact on low income households in the country. The social safety net reforms are, therefore, highly relevant and urgent so that their targeting i s made sharper and leakages are restricted. At the request of the GoJ and to inform its policy agenda, a Bank Group team conducted a preliminary assessment of the vulnerability of the Jordanian economy to the ongoing global financial and economic turmoil and will provide continued support to the GoJ as it develops policy responses to mitigate the negative impact on growth, fiscal stability, employment, and poverty. A Bank/lMF team also prepareda financial sector assessment programupdate. B. NationalAgenda Objectives, CAS Relevance, andKey Outcomes 12. In 2005, a Steering Committee including representatives from the government, civil society, private sector, Parliament, and media completed the National Agenda, an ambitious development agenda to transform Jordan from a lower-middle income country into a modern knowledge-based economy with higher value added, increased productivity and employment, and improved quality of life for Jordanians. The GoJ program presented to Parliament inDecember 2007 runs along the same lines of the National Agenda. Inparticular continuing education reform and fighting poverty and unemployment are the top development priorities of the GoJ. 13. The GoJ has recently put together an inter-ministerial Steering Committee to develop the seven pillars of the new Executive Program and sector strategies to underpin the Program. The Executive Program will cover calendar years 2009-2011 and i s expected to be published in June 2009 after endorsement by the Cabinet. The program will address the effects o f the global economic downturn on the Jordanian economy and will guide the preparationof the next CAS. 14. The Bank Group Assistance program supports the GoJ's overarching objectives of poverty reduction and productive jobs creation. The structure of the CAS i s based on 4 clusters: (1) strengthening the investment environment and buildinghuman resources for a value-added, skill-intensive and knowledge-based economy; (2) supporting local development through increased access to services and economic opportunities; (3) reforming social protection and expanding inclusion; and (4) restructuringpublic expenditures and supporting public sector reform. 4 15. The four clusters remain consistent with the governmental priorities and are relevant in guiding the Bank's future program choices. Annex 2 presents a results matrix which includes outcomes and milestones for each of the four CAS clusters. Several of the indicators have been revisedto take into account changes in country circumstances and the Bank's program over the CAS period. In education and public expenditure management, the original targets are likely to be achieved duringthe CAS period. Insocial protection, investment climate, and local development, the tools to achieve the CAS outcomes are inplace, and, if efforts are sustained, the objectives are likely to be achieved early inthe next CAS period. As such, the targets inthis area have been modifiedto better align with the timetable of reforms. In social insurance and energy, the Bank's involvement has been deeper than anticipated as the GoJ requested that the Bank provide continued technical assistance to the implementation of reforms, particularly in light of the energy and food price shocks and the global financial and economic crisis. In public sector reform progress has been slower than anticipated when the CAS was first formulated, and the Bank's planned assistanceinthis area has not materialized; the relevant outcome indicators have been modified accordingly. 16. The CAS envelope for IBRD lending is US$540 million in the base case, of which US$240 million for investment lending, US$200 million for development policy loans, and US$lOO million for guarantees. Since the CAS discussions, the Bank has approved five investment loans, one supplemental loan, and a partial risk guarantee for a total commitment amount o f US$191 million. Two additional investment projects (for about US$45-85 million) and a partial risk guarantee (for about US$45 million) are scheduled to be presented to the Board this fiscal year. In addition to providing resources for these investments and guarantees, Jordan has sought Bank support to develop overall policy frameworks and to serve as a catalyst for additional financing. With the exception of the development policy loans, all the operations originally envisaged in the CAS will have been approved by the end o f FY09 ( h e x 1 provides details on the actual and pipeline program). However, as the GoJ has sought to contain its external debt, the volume of these loans has often been lower than anticipated when the CAS was designed. While this has resulted in country-owned frameworks supported by multiple donors and improved donor coordination, it has come at a cost to the Bank because the budget required to prepare and supervise small projects is close to the budget required to prepare and supervise larger projects. Project preparationhas also been slower than anticipated (by about one year on average), largely because o f delays in the preparation of the policy frameworks the projects are supporting. In some instances, delays have reduced the impact the projects could have during the CAS period. MIGA has issued guarantees inthe water and energy sectors. 17. At endJanuary 2009, IFC had a committed investment portfolio of around US$286 million in 15 projects through a combination of products including loans, equity, guarantees, risk management and quasi-loans/quasi-equity. IFC also helped mobilize close to US$200 million in syndications to complement its financing o f investment projects duringthe CAS period. 18. Going forward, the Bank Group will strive for selectivity and flexibility in supporting Jordan's development agenda. These two principles will guide the Bank's engagement inJordan with a view to being able to respond to requests from the GoJ based on the following criteria for involvement: (a) select sectors with the highest contributionto the GoJ's strategic objectives and inwhich the Bank can serve as a catalyst for reform, and (b) address emergency issues, particularly the impact of the global economic and financial downturn on Jordan's economy. The Bank has been successful at meeting government requests in energy, education, social protection, public expenditure management and poverty reduction, through a mix of instruments relevant to a sophisticated LMIC. Inorder to quickly respond to the challenges that may arise as a result of the global economic downturn, the Bank will approach the Jordan program with an even higher degree of flexibility to deploy rapidly, using the various instruments available. 5 111.PROGRESSINCAS IMPLEMENTATION A. Areas ofBank GroupInvolvement throughImplementationof the CAS 19. Cluster 1-Strengthening the investment environment and buildinghumanresourcesfor a value-added, skill-intensive andknowledge-basedeconomyhas showngoodprogress inmanyareas. 20. The GoJ's commitment to transform the education system into one that can produce graduateswiththe skills necessaryto meetthe needsof a knowledgeeconomyis still strong. At the pre-tertiary level, the GoJ's implementation of a 10-year reform program- Education Reform for the Knowledge Economy ( E R W ) for which the Bank i s the lead donor-is already yielding positive results: the 2007 Trends inInternational Mathematics and Science Study results show strong improvements in Jordan's ranking in science and math since 2003. Similarly, the 2008 National Knowledge Economy Assessment scores indicate strong improvements compared to the 2006 results. The Bank's support to the GoJ in developing a comprehensive policy framework for education has been instrumental in attracting donors. Within the program, the Bank financed the development and implementation of a student outcomes-based curriculum for all subjects and grades, an assessment framework for student achievement that measures authentic, performance-based achievement; the development and piloting of supplemental e-learning materials in core subject areas; the connection o f more than 2,000 schools to high-speed learning network; the upgrade of 466 schools, and the constructionof 40 new schools to provide access to safe and adequate school facilities to basic and secondary students. Inaddition, in the area of early childhood education, the Bank project supported the development and implementation of a first time national curriculum and teacher guides and accreditation standards; implemented extensive training o f early childhood education teachers, principals and supervisors; and financed the construction of 143 kindergarten extensions and 170 kindergarten classroom renovations. With the support of the forthcoming ERJKE I.project, the GoJ will adopt a whole school approach that engages teachers, principals, administrators, parents and communities in the formulation and implementation o f school development initiatives focused onthe achievement of quality learning outcomes. 0 In higher education, with technical support from the Bank and a PHRD Grant, the GoJ prepared a comprehensive higher education policy framework to serve as the foundation for the reform to be supported by the Bank-financed Higher Education Reform for the Knowledge Economy project (HERfKE) (FY09). Under the project, a student aid program will be strengthened and expanded as will the overall financing and governance o f the system. IFC granteditsfirstinvestmentinthe education sector inJordan.This project consists of a student loanprogram for university students, whereby the IFC will share risk o f up to US$5 million on a portfolio o f loans that will be originated and managed by the Cairo Amman Bank, a private commercial bank. 0 With the approval of the Employer Driven Skills Development Project, the training sector has gained momentumto undertake significant reforms, such as engaging employers in the training process, bridging the gaps in matching vacancies with job seekers and ensuring that workers and unemployed get access to education and training. The Cabinet has endorsed a new law setting up the T-VET council whose capacity the project i s expected to strengthen. 21. In 2008, the GoJ launched its Public Private Partnership program and embarked on an investment climate reformprocesswiththe support ofthe Bank Group.The GoJ has adopted a more strategic approach to capital formation, combining efforts to improve the investment climate and attract/encourage private business investment, promoting Public Private Partnerships (PPPs) for 6 selectedinfrastructureinvestments, and reservingthe GoJ-only investment for general public goods. PPPs could play a key role inJordan by creating employment opportunities, providingessential services to the general public, and thereby fostering local economic growth and reducing poverty. The GoJ i s pursuing medium-size PPPs intransport, housing and education and may seek support from the Bank and the IFC to help stimulate the involvement of the private sector inthe current environment. The privatization trust fund from USAID managed by the Bank was critical to support Jordan's major privatizationtransactions. While continuing to provide technical advice and oversight to the Executive Privatization Commission, the focus of the assistance has shifted away from the privatization of state assets (which i s now almost fblly completed) to the development of a pipeline of medium-size PPPs for needed infrastructure and services. 22. IFC played a key role in supporting the rehabilitation and expansion of the Queen Alia International Airport project. IFC was the lead advisor to the GoJ in structuring and implementing the project leading to the award of a 25-year concession to the Akroports de Paris Consortium with a bid of 54.58 percent of gross revenue to the GoJ, the highest revenue-sharing percentage achieved inthe world for similar projects. This transaction representedthe largest private sector investment inJordan to-date of approximately US$l billion, and i s expected to generate US$3.7 billion (approximately US$148 million annually) inconcession fees to the GoJ and to realize fiscal savings o f approximately US$1.7 billion. 23. IFC also supported the privatization of Royal Jordanian Airlines by conducting the pre-feasibility study that led to the initial public offering inNovember 2007, in which the GoJ sold 71 percent o f the airline to the private sector. In addition, IFC i s currently the lead advisor to the GoJ for the implementation of Amman Ring Road PPP concession to help mobilize private sector investment for the 118-kilometer expressway-the first Toll roadproject inJordan. 24. In private sector development, the GoJ reduced the minimum required capital to establish a limited liability company-from the equivalent of 795 percent o f GDP per capita to 24 percent-to encourage businesses to enter the formal sector. However, Jordan's overall investment climate ranking slid to 101" in Doing Business 2009 from 94* in 2008 due to slow progress in the implementation of other investment climate reforms and to the speed at which others have reformed. Additional progress has been made since the Doing Business 2009 data gathering exercise, and there are indications that the GoJ continues to streamline its business registration processes; a new commercial code i s beingconsidered; a Unified Tax Code i s in draft; and there are significant reform efforts underway in the area of trading across borders. With assistance from the Bank Group, Jordan i s focusing on addressing some o f the remaining constraints, including streamlining civil proceedings; reforming taxation and tax administration; providing demand-driven skills training for workers; providing greater opportunities for private employment agencies to operate in Jordan's labor market, and developing the capacity of insolvency administrators. LFC i s supporting the GoJ in implementing a comprehensive licensing and inspectionreformprogram to simplify and streamline the inspection processes in selected ministries and to reduce the time and cost burdenthat inspections place on businesses. 25. The involvement o f IFC in developing the financial sector has focused on promoting access to finance by: promoting leasing by strengthening the legislative regime and clarifying the tax treatment of leasing; supporting the preparation of the corporate governance code for banks inJordan; supporting the microfinance sector; stimulating the housing finance market through an investment in a new mortgage finance company, support for the Jordan Mortgage Refinance Company, and advisory services to support new legislation for the sector; and assisting the GoJ in drafting the new legislation that will regulate the sharing of credit information. Through its Global Trade Finance Program, IFC also supported the capacity of three commercial banks to deliver trade financing through partial or full guarantees covering payment risks on banks in the emerging markets for trade related transactions. Moreover, a US$50 million IFC equity investment (IFC's largest equity investment in the banking sector in Jordan) in Capital Bank 7 supports the bank in its small and medium enterprise and housing finance strategy, promoting better corporate governance standards, and helps with future regional expansion. 26. Most institutionaland market structure reforms o f the energy sector have been implemented.The GoJ's energy strategy (updated in 2007) calls for enhancing energy security through diversification of energy imports and strengthened regional trade o f gas and electricity, development of renewable energy, promotion of energy efficiency, and development of domestic energy resources, including oil shale. A new energy law was approved by the Cabinet in200%and will lead to the creation of a single regulatory agency for electricity, oil, and gas. 0 In the electricity sector, the strategy calls for the development of additional gas-based independent power producer (IPP) contracts. The Bank Group has provided a Partial Risk Guarantee and a MIGA Guarantee (US$45 million for the PRG and US$69.%million for the MIGA guarantee) for the construction of the Amman East power plant and is preparinga second PRG (FY09) for A1 Qatrana IPP. The success of the projects could catalyze further private sector investment ininfrastructure. The strategy emphasizes the need to develop renewable energy and an institutional framework for the promotion of renewable energy and energy efficiency and calls for adoption of the Renewable Energy Promotion Law. The Law was drafted in 2007 and still awaits Parliamentary approval. The Bank i s providing support to the sub-sector inthe form of two GEFs-one project supportingwind power generation and one for energy efficiency. The Bankhas also launched a study to assessthe potential for regional energy integrationin the Mashreq, fimded by ESMAP and the Arab World Initiative. IFC is supporting the implementation of the energy sector PPP program through potential direct financing and mobilization of resources to projects in generation, distribution, and renewables. 27. Cluster 2-supporting local development through increased access to services and economic opportunities i s showing progress in spite o f a slow start-up. The results matrix was modified to reflect the slow start-up of the Regional and Local Development Project (RLDP) andnew indicators were added to report on the additional work undertaken with GAM. Since shifting to result-based budgetingin2007, the Ministry o f Municipal Affairs (MoMA) i s taking a pro-active role infostering local development and supporting municipalities intheir efforts to increase access to services at the local level, with the support from the RLDP, co-financed by the Agence FranCaise de Developpement, and the Cultural Heritage, Tourism, and Urban Development Project, both approved in FY07. The European Union, the German Agency for Technical Cooperation, and USAID/Millennium Challenge Corporation are also heavily involved inthe sector focusing on local development and poverty alleviation, piloting municipal finance systems, and developingnew municipal financial management information systems. 2%. In2008, MOMA issued the 2008-2011 Municipal Development Strategy, a strategic framework to guide the implementation of the municipal sector reform agenda whose implementation the RLDP i s supporting. Under the RLDP, the GoJ is taking steps to update the$scal transfer system with a new equalizationtransfer formula. 29. The Greater Amman Municipality (GAM) presents an excellent example of decentralization working effectively in Jordan. Under the RLDP project, GAM i s sharing its experience with other municipalities (e.g., Irbid and Salt) and i s developing the capacity of the newly created Amman Institute to formally train and mentor at a national and regional level. In addition, new collaboration between GAM and a joint Bank-IFC Sub-National Finance Program will soon be launched, aimed at supporting GAM instrengthening its BondInitiative and supportinginnovative PPP inthe delivery o f efficient urban infrastructure and services. 8 30. A number of activities at the sub-national level are underway with GAM: the Bank is providing technical support in the area o f PPP in the provision of services (including affordable housing), and infrastructure, and the identification of priority investments. GAM entered into an agreement with the Bank for the development and implementation of a Clean Development Project operationand to purchase part of the Certified Emission Reduction amounting to 0.9 to 0.95 million tons of C02. GAM also obtained an accompanying investment loan to systematically address municipal solid waste management issues and to initiate steps towards integrated and efficient municipal solid waste management while mitigating negative environmental effects at both the local and global level. Both the carbon finance and the investment operations were approved inFY09. 31. There i s currently a population of between 300,000 to 400,000 Iraqi guests in Jordan, adding to the demand for services and economic opportunities. In2008, the Bank began support to the communities hosting Iraqi guests with a small grant from the Save the Children alliance primarily in the education sector (kindergartens). Expansion of Bank support to other sectors could be considered, as needed, inthe coming year. 32. Cluster 3-reforming social protection and expanding inclusion. The GoJ has developed specific strategies, policies, and action plans with support from the Bank inkey areas, namely reforming the pension system, introducing unemployment insurance savings accounts, reforming health insurance, and modernizing the National Aid Fund (NAF) and expanding its safety nets. Major progress has been achieved inthe social insurance sector with the support of the Bank's multi-year programmatic ESW. In the pension reform area, the Bank assisted the Social Security Corporation (SSC) to design parametric reforms of the current system aimed at: (i) improving the sustainability o f the SSC; (ii) introducing other benefits such as unemployment insurance, maternity benefits and health insurance; (ii) improving the administration of the SSC, and (iv) developing a regulatory framework for private pensions in Jordan. With Bank support, a new law that will serve as the basis for the new pension system was approved in January 2008 by the Board of Directors of the SSC and the Cabinet and i s pending Parliamentary approval. The Bank i s supporting the GoJ's aim to achieve universal health insurance and to increase coverage ina sustainable and equitable way inthe coming years. The Bank prepared an assessment o f the financial implications o f possible reform scenarios which was discussed with stakeholders. On unemployment insurance, the Bank analyzed different alternatives, including the viability of an unemployment savings accounts option. The results matrix was slightly modified to reflect the additional work done at the request of the GoJinunemployment insurance. 33. In social protection, the GoJ with assistance from the Social Protection Enhancement Project (approved in FY08) i s seeking to improve the targeting mechanism of the NAF and to increase its coverage. Reaching a consensus on the need for reform was slower than anticipated, and project preparation was delayed by one year. Under the project, the GoJ has taken steps to establish the database on poor and vulnerable populations as a key element in achieving better targeting, but progress has been slower than anticipated. A slowdown inthe Jordanian economy that may result from the global economic downturn will undoubtedly have an impact on low income households. The ongoing social safety nets reform, supported by the project, i s highly relevant and urgent so that their targeting i s made sharper and leakages are restricted to increase coverage of poor people. The results matrix was modified becausethe original targets can only be achieved upon completion of the project, which will take place mid-way through he implementationo f the next CAS. 34. The 2006 HouseholdIncome and Expenditure Survey estimated that poverty stood at 13 percent in 2006, with varying levels of poverty between governorates. The Jordan Department of Statistics and the Bank prepared a Poverty Update to analyze the data and informsocial protectionreforms. The update finds that real expenditures have grown significantly, but real incomes have been largely stagnant, and that incomewould have fallen for most Jordanians ifnot for growth intransfer income. Labor incomewas 9 stagnant for most Jordanians, although the wealthiest quintile saw significant gains. The Bank will continue to provide programmatic assistance inpoverty monitoring and mapping, including developing a computable general equilibriummodel; small area estimation; and improvingthe quality, timeliness and periodicity of wage and earnings data. 35. Cluster &restructuring public expenditures and supporting public sector reformhas seen good progress on the public expenditure management side. The GoJ introduced a Medium Term Expenditure Framework (MTEF) in2008, integratingthe planning and budgetingprocesses, for which the Bank provided programmatic technical assistance. Jordan i s still at an early stage of the development of its MTEF which was introduced along with other initiatives such as the new Chart of Accounts, the new Government Financial Management Information System, and the revision o f the budget planning timetable to allow for the Budget to be promulgatedprior to the start of new fiscal year. The Bankteam i s the lead advisor to the General Budget Directorate in charge o f these reforms. For the first time, the preparation o f the 2008 budget was carried out within a medium-term policy/results framework. The Bank has initiated support to the Ministry of Health in designing a multi-year budget process. Support to the Ministry of Finance i s ongoing and will continue inthe period ahead. 36. Progress on public sector reform has been uneven. The Public Sector Reform Capacity Building Project, which was supporting the development of capacity to carry out the reforms, was cancelled at the request of the GoJ. O f the original agenda articulated in the White Paper, progress has beenmade inmonitoring key service delivery indicators in selected ministries. Other areas, ranging from reforms inpay and grading to improving meritocracy and human resources management to strengthening policy coordination and streamlining government, have witnessed limited progress. Yet progress has been registered within several ministriedpublic institutions using different tools such as the KingAbdullah I1 Center for Excellence, which plays an innovative role in promoting excellence in service delivery by public sector institutions; and twinning projects with EU institutions which i s proving effective in harmonizing Jordan's institutional framework with the EU's. The GoJ has also approached other donors to provide grants to cover some of the agenda previously considered under the project. Because o f the lack of Bank involvement in this area, the Results Matrix has been revised and no longer includes the corresponding outcome indicators and milestones. 37. Interms of governance,the GoJhasrequestedtechnicalassistanceinthe pharmaceutical sector to define policy reforms and activities that will have a positive impact on availability and prices of pharmaceuticals inthe public sector and promote equitable access to highquality medicines. Jordan will also become a pilot for the use of country systems inprocurement. Analytic work i s taking place on the functioning o f Jordan's new anticorruption agency inthe context o f a regional survey of such institutions. 38. Cross-cutting dimensions, The CAS proposed to address three thematic/cross-cutting issues within four priority sectors. 0 The CAS had envisaged different possible instruments to support the water sector. The GoJ i s working to invest innon-renewable sources with IFC and with USAID on the preparation of a water sector review to analyze the economic and fiscal costs and trade-offs o f alternative policy options. Some water-related issues were addressed in the Country Environment Analysis ledby the Bank. 0 Environment.The GoJ and the Bank prepared a Country Environment Analysis, assessing Jordan's environmental agenda and the linkages between development and environmental impact with emphasis on water quality and transport. Under the OzoneDepleting Substances (00s)Phase-out I.project, Jordan exceeded its target by reducing its ODS importation of chlorofluorocarbon by 96 percent in 2006 compared to the baseline. Under the Conservation of Medicinal and Herbal Plants Project, bothin-situand ex-situ activities inthe project areas 10 currently contribute to protect endangered species, including seed bank collection, and farmer communities are integrated in activities seeking to improve vegetation and combat land degradation. In addition to the two GEF Grants, the carbon finance operation, and the Amman Solid Waste Management project, a GEF Grant was approved to secure the ecological integrity of the Jordan Rift Valley by applying the principles of integrated ecosystemmanagement. 0 Ingender, the Bank Group has developed a programseeking to create anenvironment more conducive to higher participation o f women in the labor force. The HERJKEproject under preparation i s expected to re-orient job-market access programs for women towards technicaVapplied fields that are consistent with labor market needs. An IDF grant to measure the impact of national policies and strategies on gender equality i s under implementation. With funding from the Arab World Initiative (AWI), the Bank Group recently launched a technical assistanceprogram to assist in creating an enabling environment for job creation for young women inpartnership with the private sector. 39. Several activities were launched under the Arab World Initiative in FY09 to support Jordan's further integration into the regional and global economy, to foster faster and more inclusive growth and to address special challenges to Jordan's development. 0 Technical Assistance for the establishment o f a center of excellence for teacher professional development. 0 Assessment of energy integrationinthe Mashreqcountries. 0 Assessment of cross-border facilitation and infrastructureinMashreqcountries B. Performance of the Financialand Advisory and Analytical Assistance 40. The existing loan portfolio i s an important instrument for achieving the CAS objectives. The Bank portfolio in Jordan consists of 7 investment operations for a total net commitment o f US$304 million. The disbursement ratio for investment projects remainedstrong at 23 percent on average per year duringthe CAS period. The quality of the portfolio is satisfactory, with no project considered at risk.The portfolio also includes one guarantee operation, four GEFs and one Montreal Protocol activity, all in satisfactory status. The Country RecordFlag was recently activated as a result of the net disconnect' of 33 percent. To reduce the overall net disconnect, the country team will more closely monitor projects that are ready to close and will prepare realistic implementation status and results reports. 41. Three projects closed during the CAS period. IEG rated the outcome o f two o f the projects unsatisfactory/moderately unsatisfactory, citing that the relevance of the design of the Higher Education project was modest, and did not provide effective means for obtaining the expected benefits. The HERfKEproject currently under preparationis integrating the lessons learned from this experience. LEG found that the Horticultural Exports Promotion LIL generated little operationally relevant knowledge on the potential for involving small farmers in out-grower schemes. LEG rated the outcome o f the Amman Water and Sanitationproject moderately satisfactory becausethe objective was only modestly achieved. 42. There are nine active recipient-executed grants in the portfolio for a total of US$38 million. Jordan's trust fund portfolio performance i s good albeit with some initial delays, generally due to a lack of proactivity from the relevant staff on both Bank and Government sides. The Bank team has been The countryrecordflag is raisedincountrieswith a net disconnect of 20 percentor more.The net disconnect is the difference between the percentage of projects rated as unsatisfactoryby IEG and the percentageratedby the Bank team in the final Implementation Status and Results Reports as unsatisfactory for achieving their development objectives. 11 working closely with the GoJ, and there are no outstanding issues. The team will continue close monitoringto avoid further delays. 43. IFC's current investment portfolio in Jordan encompasses a number of financial instruments, including loans (52 percent); equity and quasi-equity (43 percent); and risk management and guarantees (5 percent). Portfolio performance has been generally good. 44. Analytical and advisory services remain a key instrument for achieving the CAS objectives. The GoJ seeks high quality and detailed analytic work to further their drive towards reforming the economy and to adapt international experience to Jordan's specific circumstances (see CAS Annex B4). The GoJ has sought programmatic assistance from the Bank to accompany reforms (many underpinned by diagnostic work) during the implementation phase. The Bank will continue to provide programmatic analytic support in key areas, including public expenditure management, social insurance, poverty monitoring, and energy sector reform. While there has been a high level o f receptivity of the analytical program, dissemination has generally been limited, and, the GoJ has not benefited fully from feedback from key stakeholders which could have increasedthe impact o f the analysis onthe policy reformagenda. 45. To respond to pressing requests from the GoJ, particularly in response to external shocks and the global economic downturn, the Bank Group quickly deployed ajoint IBRD/IFC team of experts to prepare technical notes on specific issues such as the impact on growth of reductions inFDI, exports and remittances, as well as firm-level surveys. The Bank Group strove to apply the same rigor to these quick response studies designed to answer specific policy questions as i s applied to classic ESW products, albeit with shorter delivery timelines. The Bank plans to follow up on this work in FY09 with a set of policy recommendations to help the GoJ addressthe effects of the economic downturn. 46. Financial Products. The GoJ took advantage of the interest rate conversion offer in connection with all eight o fthe currency pool loans inits IBRDloanportfolio. Most of the loans have been converted into fixed rate which resultedina savings of about 2 percent ininterest payments. The Bank will continue to focus on building awareness o f the breadth o f the menu of banking products available to Jordan. In addition to the choices available for new lending, the Bank will continue its dialogue on the use of existing IBRDfinancial products incontributing to the management o f Jordan's financial risks. 47. Public Debt Management. At the request o f the Minister of Finance, ajoint Bank/IMFmission advised the GoJ on developing a medium-term debt management strategy with a view to helping the authorities strengthen the governance structures for debt management and improve operational risk management. The Bank and the Fund also advised the authorities on how to strengthen the integration of debt and fiscal management issues, in particular with a view to improving the effectiveness of cash management. In each o f these areas, the team reviewed existing systems and capacities, and provided recommendations for strengthening these functions in the future. The Bank/IMF team will continue to assist in debt management strategy formulation and reorganization of the public debt management functions. 48. Interms ofdonor coordination, Jordanapprovedthe Paris DeclarationonAid Effectiveness, and the first Survey onMonitoringthe Paris Declarationtook place in2008. Five ongoing projects have been prepared inconjunction with other donors and have co- or parallel financiers. Coordinationwith donors i s generally stronger where it i s ledby a sector ministry andwithin a country-owned reformframework. 12 IV. THE WAY FORWARD 49. Overall the strategic focus proposed in the CAS remains relevant. IBRD, IFC, and MIGA will continue to provide strong and coordinated support to the implementation o f the GoJ's reform program. Over the next two years, the Bank Group will provide increased flexibility, bothinterm o f areas of engagement and instruments, to quickly address the challenges resulting from the global economic downturn and to support the GoJ's actions to address the effects of the crisis. 50. The GoJ's concern about the impact of the ongoing global crisis could translate into more vigorous demand for Bank lendingover the next two years. The Bank will consider priority investments that the GoJ may propose as a means to address the impact of the global economic downturn, particularly ininfrastructure (such as solid waste management and transport). The Bank's DPL financing (including the deferred drawdown option) will remain available under an overall sound macroeconomic environment to launch key structural reforms and to support change in a tangible dimension (key areas that could be considered include energy, business environment, and possibly water). The Bank would also consider DPLs to support a GoJ strategy for mitigating the effects of the global crisis on Jordan's economy and the poor, andto support a possible economic stimulus package that the GoJ may consider. 51. Additional sub-national lending could be provided to GAM, particularly in priority areas for which the Bank i s currently providing technical assistance. GAM has requested Bank support in promoting private sector participation in potential segments of its existing solid waste management system with a focus on collection and recycling. GAM also requested support for the development of a city-wide clean development mechanism program in urban transport, water and wastewater, solid waste and street lighting, which could help GAM mobilize additionahon-conventional financial resources to provide these services in a more sustainable manner while contributing to the global climate change agenda. The Bank i s already providing support to the development o f a business and financing plan for the Amman Urban Strip Development and support to the implementation o f a National Housing Strategy. Inlight ofthe successhlpreparationofthe Amman SolidWaste Management Project, which combines a lendingoperationwith carbon finance, sub-national lending or a combinationof sub-national andnational lendingcouldbe extended to other municipalities. 52. The Sub-NationalFinance Program(a combined initiative o f the Bank and IFC) also enables IFC to engage with sub-national entities inJordan (such as the Aqaba Development Corporation and GAM) in order to assist them inaccessingneededfinance for key infrastructureprojects. 53. Alternatively, this amount, or part thereof, could be used for new guarantee operations, particularly in light of the success of the first PRG. The GoJ has a strong pipeline of large infrastructure projects for which private sector participationthrough PPPs may not materialize to the extent desired as a result of the tightening o f the international and domestic credit markets. The Bank Group will seek creative solutions to bridge the possible infrastructure financing gap, as needed, through a mix of investments, guarantees and IFC instruments. The Bank Group i s currently considering supporting the GoJ in setting up a Jordan InfrastructureGuarantee Facility that would combine IBRDand IFC guarantee instruments to scale up small and medium-size PPP financing inJordan. 54. IFC will strengthen its activities with a strategic focus on supporting major PPPs in key infrastructure sectors, developing the financial sector, and promoting the business environment. IFC will provide long-term debt financing, take selective equity stakes, andprovide riskmanagement and guarantee products. IFC i s especially needed inprojects that have large and long term financing needs in strategic sectors and with clients who have regional expansion plans. To address the challenges o f the global financial crisis, IFC will utilize as neededthe new global facilities that have been set up to ensure 13 trade flows, keep infrastructure projects ontrack, and shift/focus advisory support to help companies cope with potential challenges. IFC i s already engaging with its clients inJordan to assess their needs inlight of the crisis andto help address them through further support. 55. In moving forward with CAS implementation, the Bank Group will continue to adapt its analytical work to the GoJ's demands, especially in terms of addressing the ongoing or new external shocks and crises, and will increase its responsiveness to provide just-in-time technical assistance for specific policy issues. The Bank will provide assistance to the GoJ in the development and implementation of policy responses to mitigate the effects of the global crisis. The Bank will seek to increase both the relevance and the impact of its work, especially inthe context of reforms that give rise to technical questions. The successful programmatic technical assistance provided in key areas (social insurance, poverty, energy, and public expenditure management) will also continue in the period ahead. Analytical work, such as inthe exploration of sources of growth, could also be developed to underpinthe upcoming CAS. V. CREDITWORTHINESSAND RISKS A. CreditworthinessandBankExposure 56. Jordan maintains a sovereign rating from the commercial agencies that i s two notches below investment grade. Despite largely prudent policies, Jordan's overall creditworthiness i s constrained by fiscal strains.and still-high government debt together with significant external vulnerabilities, including an exceptionally large current account deficit. While the current account deficit i s expected to narrow somewhat in 2009 as the cost of energy imports moderate and the flow of discounted oil from Iraq resumes, the balance of payments position is expected to remain weak due to a decline in exports, particularly textile exports to the UnitedStates, andprospects for lower remittances from abroad. External financing needs are heavily dependent on capital inflows and grants, mostly from the Gulf countries. While the rating agencies' outlook for Jordan i s currently stable, the global economic downturn has exacerbated downside risks and could lead to additional financing. Adverse regional developments, including the recent resurgence in the Palestinian-Israeli conflict, add to domestic and regional political tensions. The fiscal position has deteriorated and could worsen Wher givenincreased domestic spending pressures. Weaker exports and reduced inflows from the Gulf countries could lead to increased pressure on the balance of payments and undermine the currency peg, leading to potential payment difficulties. FromIBRD's perspective, while exposure to Jordan has been declining inrecent years as a result of lower disbursements and significant amortization payments, it remains highrelative to Jordan's population size, income level and risk profile. Inaddition, given significant public borrowing from multilateral sources, Jordan's overall level of preferredcreditor debt remains elevated. B. Risks 57. Jordan remains vulnerable to external shocks, due to the fragility o f the regional political environment and to the volatility of some key economic parameters. The economy i s exposed to commodity price fluctuations, volatile tourism receipts, and dependence on energy imports. External financing has been heavily dependent on current transfers, including workers' remittances from the Gulf countries, official assistance, and private capital flows. 58. Jordan is also affected by regional economic and political developments, including: the transition inIraq, from which alarge number ofrefugeeshave enteredthe country, seekingto make their livelihood andplacing demands onpublic services. Jordan also faces a number of domestic social challenges related 14 to its demographics, persistently high unemployment, and the domestic repercussions of regional conflicts. 59. Political stability in the country, relatively good governance, and broad-based external support, which have allowed Jordan to weather this volatile environment inthe past, are expected to continue in the future. However, the GoJ will need to continue to manage the risks associated with vulnerability to external shocks, especially inlight of the recent global economic downturn. Lower prices for exports and fewer job opportunities for Jordanians in the Gulf countries could result in increased unemployment, lower remittances and more fiscal expenditures on safety nets. Ths inturn would place increased strains on the fiscal balance. In order to moderate the effect of regional and global economic and political fluctuations, Jordan must create the conditions for increased private investment and improved competitiveness which will help deliver the high and sustainable growth needed to create employment and reduce poverty. I I s z x s z x ? 5 r- W .- Yx Ba Y E 2Y >; +s " 3 8 4 8 i d a .-+ 4 8 1% I 3 e, l 3-Q 5.c) ei L' m I I c gebYl r*ecE 4ik.- b 5 6 E a .Lc Ezi5e 8U 81 a 9 I 22 Annex 4: Progress inIFC CAS Implementation 1. The FY06-09 period has seen extensive increase in IFC's program in Jordan. With the establishment of its field office inAmman, the Corporation's investment and advisory services activities have supported major private sector development priorities inthe country (see annex 2-1 and 2-2). 2. IFC's strategic priorities in supporting the Jordanian private sector include: (i) supporting Public-Private Partnerships, particularly in financing strategic infrastructure projects, (ii) developing the financial sector, especially "Access to Finance" in areas such as leasing, housing finance, trade finance, and microfinance; (iii)supporting the business enabling environment, and (iv) mobilizing financial resources for project finance and attractionof FDI. 3. IFC currently has a committed investment portfolio inJordan of around US$310 million in 15 projects, growing from around US$50 million in FY05. In FY08 alone, IFC committed US$255 million-its largest ever program inJordan delivered in one fiscal year. IFC's FY08 investment program inJordanwas also the largest within the MENA region. IFC has also helped mobilize close to US$200 million in syndications to complement its financing of investment projects (see a detailed description o f the investment programunder h e x 2-1). 4. Through PEP-MENA-IFC's Advisory services arm inMENA-a comprehensive Advisory Services program is being implemented. It includes activities and projects in access to finance, small and mediumenterprise development, business enabling environment, and PPP. A. Supporting Privatization andPublic-Private Partnerships 5. As part of the GoJ's strategy to engage the private sector in transportation, IFC played a key role in supporting the rehabilitation and expansion of the Queen Alia International Airport project. IFC was the lead advisor to the GoJ in structuring the project and supporting its implementation leading to the awarding of a 25-year concession to the ACroports de Paris Consortium with a bid of 54.58 percent of gross revenue to the GoJ, the highest revenue-sharing percentage achieved in the world for similar projects. This transaction representedthe largest private sector investment in Jordan to date of approximately US$1 billion. Moreover, the project i s expected to generate US$3.7 billion (approximately US$148 million annually) inconcession fees to the GoJ, as well as realizing fiscal savings o f approximately US$l.7billion. IFC also financed the project through a combination of direct financing, syndication, andriskmanagement instruments, amounting to a total commitment of US$300 million. The project's outcome was hailed as a land-mark in attracting private participation to the largest private project thus far inJordan. 6. Also in the transportation sector, IFC supported the privatization of Royal Jordanian Airlines by conduction the pre-feasibility study that led to the initial public offering inNovember 2007, inwhichthe GoJ sold 71 percent of the airline to the private sector. Inaddition, IFC is currently the lead advisor to the GoJ for the implementation o f the Amman Ring Road PPP concession to help mobilize private sector investment for the 118-kilometerexpressway-the first Toll roadproject inJordan. 7. Inthe Power sector, IFCis supporting the implementationofthePPPprogramthroughpotential direct financing and mobilization of resources to projects in generation, distribution, and renewable (e.g., wind). 8. The GoJ has brought a number of key infrastructure projects to the market for private participation. IF'C is well positioned to support and mobilize financing to a number of these projects 23 inTransportation (Amman-Zarqa Light Rail), Water (Disi-Amman Water), Power, andPorts (Aqaba Port Relocationproject). IFC has already engagedwith the sponsors o f these projects. B. Supporting Financial Sector Development 9. The involvement of IFC indeveloping the financial sector duringthe last three years has focused onpromoting access to finance through the following areas: (a) Leasing: IFC has been actively engaged in promoting leasing in Jordan on several fronts. The primary effort is focused on strengthening the legislative regime and clarifying the tax treatment of leasing. Inaddition, the first ever-leasing market study in Jordan completed and disseminated. IFC i s actively pursuingits first investment inthe sector and i s helping a number of leasing companies to build their capacities to conduct and support leasing activities. IFC's own investment inleasing inJordan i s beingidentified. (b) Corporate Governance (CG)for Banks: Incooperation with the Association of Banks inJordan and the Central Bank, IFC supported the preparation of the first-ever corporate governance code for banks in Jordan (and the MENA region). The code has been adopted by the Central Bank and commercial banks have started to incorporate it in their governance and operational systems. Follow up CG activities that will focus of awarenessraising and dissemination are under way. (c) Microfinance: The private sector also has a role to play to ensure an efficient social protection and inclusion by ensuring access to finance to segments o f society who would otherwise not have access through the conventional banking system. As such, IFC comprehensively responded to the GoJ's request to support to the microfinance sector. This involvement included: (i) investing in Micro-Fund for Women-the leading microfinance institution in Jordan-by providing a PartialCredit Guarantee to a US$3 million loan from a commercial bank (first time to use an IFC structured finance product inJordan), (ii) assisting the Development and Employment Fund-the GoJ's microfinance arm-to restructure and move out from the retail microfinance business, (iii)financing a feasibility study for a new microfinance investment inthe country, and (iv) working with the Consultative Group to Assist the Poor and other partners to improve the legal andregulatory framework for microfinance. (d) Housing Finance: Aiming to stimulate the housing finance market in Jordan, IFC is investing in a new mortgage finance company, supporting the Jordan Mortgage Refinance Company, and providing advisory services to support new legislation for the sector (e.g., securitization). (e) Credit Information Services: IFC signed an agreement with the GoJ to help the country draft and adopt a new legislationthat will regulate the sharing of credit information, aiming to establish the first private credit bureau inthe country. The long-term goals of Jordan's credit bureau program are to increase the efficiency o f financial institutions, support the growth o f SMEs, and mitigate lendingrisks. 10. InFY08, IFC made its largest equity investment inthe banking sector inJordan. A US$50 million investment in Capital Bank supports the Capital Bank's small and medium enterprise and housing finance strategy, promote better corporate governance standards, and help with future regional expansion. 24 11. Through its Global Trade Finance Program, IFC supported the capacity of three commercial banks in Jordan to deliver trade financing through partial or full guarantees (a utilization of US$30 million) covering payment risks onbanks inthe emerging markets for trade relatedtransactions. The three participant Banks are Capital Bank, Bank of Jordan, and UnionBank. C. SupportingPrivateSector Development throughPrioritizedInvestments. 12. In addition to infrastructure and financial sector development, IFC stepped up its efforts to support new investment opportunities with new local private sponsors in key sectors.For example, IFC invested around US$31 million with leading cement shipping company (CTI Group) to allow it to expand its fleet and regional business. IFC also supported the tourism sector by investing a US$40 millioninZara Tourism Investment Company to a new hotel inAqaba. 13. FY08 saw IFC's first investmentinthe education sector inJordan.This project is the first of its kindinJordan. It i s student loan program for university students inJordan, whereby the IFC will share risk of up to US$5 million on a portfolio of loans that will be originated and managed by Cairo Amman Bank, a private commercial bank. 14. IFC also committed US$20 million in Foursan, an SME private Equity Fundworking in Jordan and the region. D. Supportingthe BusinessEnablingEnvironment 15. Doing Business Better in Jordan; Together with IBRD, IFC has been supporting the GoJ improving the Doing Business indicators. Through reviewing and validating the data, awareness raising, and close consultation with all stakeholders, IFC has been able to provide an action plan of targeted reforms to improve the business climate in Jordan, thus encouraging further investments. Support for the implementationof the neededreforms i s underway. 16. Licensing and Inspection Reform in Jordan: As part of the efforts to improve the Business Climate in Jordan, government inspections on businesses were identified as a challenge that faces businesses due to lack o f clarity o f inspectionrequirements. IFC i s supporting the GoJ in implementinga comprehensive licensing and inspection reform program. This i s expected to simplify and streamline the inspectionprocesses in selected ministries and reduce the time and cost burden that inspections place on businesses. The wider project's goal i s to foster private sector compliance to regulations, which will create a more dynamic and productive private sector. The project consists o f three phases starting with comprehensive assessment and review of the current inspectionsystems, development o f reformscenarios including processesre-engineering inpilot inspectorates, and implementation o f new inspectionreform. E. FinancialInstruments andPortfolioPerformance 17. IFC's current investment portfolio in Jordan encompasses a number of financial instruments, including loans (52 percent), equity and quasi-equity (43 percent), and risk management and guarantees (5 percent). Portfolio performance has been generally good. Recovery effort i s underway for twojeopardy projects. F. The Way Forward 18. IFC will continue to strengthen its activities in Jordan: with strategic focus on supporting major PPP projects in key Infrastructure sectors, developing the financial sector, and promoting the business enabling environment. 25 19. IFC's approach in Jordan is to provide long-term debt financing, take selective equity stakes, and provide risk management and guarantee products. IFC i s especially needed inprojects that have large and longterm financing needs instrategic sectors and with clients who have regional expansionplans. 20. To face the challenges o f the global financial crisis, IFC will utilize (if needed) the new global facilities that have been set up to ensure trade flows (through the Global Trade Finance Program), keep infrastructure projects on track, and shift/focus advisory support to help companies cope with potential challenges. IFC i s already engaging with its clients inJordan to assesstheir needs inlight of the crisis and provide further support as needed. 26 Annex 5: Country FinancingParameters Date: February 6, 2009 The country financing parameters for Jordan set out below have been approved by the Regional Vice President, MiddleEast andNorthAfrica, and are beingposted onthe Bank's internal website. Item Parameter Remarks/ Explanation Cost sharing. Limitonthe proportion of The Bank will place emphasis on Government individual project costs that the Bank 100% providing funding from its own resources. The may finance Bank would also encourage project teams to seek co-financing from other development partners in all projects. However, there may be some projects inthe social sectors in which the Bank may finance up to 100 percent of project costs e.g., those that support education, social development and health sectors. Recurrent cost financing. Any limits N o country While no country level limit will be imposed on that would apply to the overall amount of level limit recurrent cost financing, the Bank would finance recurrent expenditures that the Bank may recurrent costs on a project by project basis after finance careful consideration to determine sustainability of Bank-financed recurrent activities. Recurrent cost financing will be allowed to support the cost of managing project implementation only on an exceptional basis for projects where a strong implementation track record already exists. The Bank may make adjustments in this policy as it considers necessary. Local cost financing. Are the Yes The two requirements are met. The Bank can requirements for Bank financing o f local therefore finance local costs as needed to achieve expenditures met, namely that: (i) individual project objectives. financing requirements for the country's development program would exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing o f foreign expenditures alone would not enable the Bank to assist inthe financing ofindividualmoiects Taxes and duties. Are there any taxes None No taxes or duties have been identified as and duties that the Bank would not excessive, unreasonable or discriminatory. At the finance? project-level, the Bank would consider whether taxes and duties constitute an excessively high share ofproject costs. 27 Jordan: Country Financing Parameters A. Introduction 1. This note describes the rationale and application of the Bank policy on expenditure eligibility for Bank-financedactivities inJordan. The policy allows the Bank to finance expenditures neededto meet the development objectives of the operations it supports, and with due consideration to fiscal sustainability and appropriate use of resources provided by the Bank. The policy has been discussed with the Government and the authorities have expressed their support for the enhanced flexibility and greater simplicity of the Bank's approach. 2. The policy is expected to increase the flexibility in the use o f Bank loan proceeds; reduce the transaction costs to the country and the Bank, and enable easier harmonization of donor procedures around country systems. It rests on three guidingprinciples: (a) the expenditures financed from the Bank loan proceeds are productive; (b) the impact of operations financed under such loans on the borrowing country's fiscal sustainability i s acceptable; and (c) oversight arrangements on the use of Bank funds are acceptable. 3. Under the financing policy parameters, the Government of Jordan will have flexibility in allocation and management of resources inthe following areas: overall cost sharing; local cost$nancing; recurrent expenditures; and3nancing of taxes and duties. The Jordan country team has reviewed the Bank policy on expenditure eligibility from both macroeconomic and project perspectives and welcomes the added flexibility in Bank financing to accompany government's efforts in improving the poverty impact of its development program. The changes in expenditure eligibility are not expected to jeopardize fiscal sustainability and they are not likely to lead to an increase indemand for Bank financing. Instead, these changes will simplifyprocedures by reducing transaction costs imposedby the current policy on the Government of Jordan, and they will contributeto increasethe country's absorptive capacity. 4. In applying these financing parameters, the Jordan country team will ensure that all Bank supported projects include adequate fiduciary oversight arrangements and due diligence procedures (project reviews and approval processes). The degree to which the Government o f Jordan would like to use the increased flexibility depends, in part, on the fiscal implications and public sector debt servicing considerations. It i s expected that the flexibility will be used to finance reasonable levels of taxes and duties related to investments. 5. The financing parameters (for cost sharing, recurrent costs, and taxes and duties) will be applied on a project-by-project basis, depending upon the type of operation, to ensure efficient implementation and sustainability after project closure. As needed, the parameters will be reviewed and necessary adjustments made inaccordance with Bankprocedures. 6. This note provides an overview o f the country's recent macroeconomic performance and the Country Assistance Strategy. It then moves on to assess the expected impact o f the changes in the eligibility of expenditures in four areas: (i) overall cost sharing; (ii) cost financing; (iii) local recurrent expenditures; and (iv) financing of taxes and duties. It then sets the new financing parameters for each of these areas. 28 B. Macroeconomic Perspective 7. Jordan continues to maintainstrong growth performance. Real GDP growth, after averaging 7.6 percent during 2004-07, i s expected to remain high at around 5.5 percent in 2008. Economic performance reflects the increasing strength of sectors that have been benefiting from: (i) high regional demand for services; (ii) large inflows of capital, income, and transfers from the region; and (iii) the consecutive rise inbothprivate and public consumption. These sectors include: (a) hotels and restaurants; (b) transport and communication; (c) social and personal services, electricity, and water; and (d) wholesale and retail trade. Indeed, while these sectors represent 31 percent o f GDP, they contributedto 41 percent of the GDP growth. In parallel, the recent slowdown in construction and real estate sectors demonstrates the saturation of a market that experienced strong demand and strong price increases inthe past four years. Also, the manufacturing sector grew at moderate rates, which reflects the slowdown in clothing exports from Qualified Industrial Zones (QIZ). The unemployment rate remains high and needs to be addressed through selective changes in policies that affect the incentives of employers to hire Jordanian workers, and the incentives of Jordanians to accept available jobs rather than wait for public sector openings or overseasjobs. Inflation accelerated to 14.9 percent in2008, driven by rapid increases ininternationaloil and foodpricesthat occurred inthe first 3 quarters ofthe year whichhas since started decelerating with the reversal inthe trendof internationalprices. 8. Fiscal accounts are under pressure from higher spending. Despite elimination of oil price subsidies inFebruary, the fiscal deficit widened in2008 as expenditure growth of 28.4 percent outpaced revenue growth o f 14.6 percent by November. Behind the increase in expenditures are rising wages, transfers, and food subsidies that have been introduced to compensate for a surge in inflation. Foreign grants (at US$786 as of November) more than doubled during this period, financing 48 percent of the budget deficit. The possible indirect impact o f ongoing global financial turmoil might lead to continued fiscal pressures over the period ahead. 9. The external accounts underpin exposure to external shocks. The current account deficit (17.7 percent of GDP in 2007) i s expected to remain high at 14 percent o f GDP. The decline in the current account deficit reflects the good performance of exports, net income receipts, and net current transfers. It also reflects the slowdown inimports inthe last quarter of 2008 resultingfrom the international financial crisis. Despite the current account deficit, and with continued strong FDI inflows (US$2.2 billion during the first three quarters of 2008), Central Bank reserves remained strong at US$8.6 billion4quivalent to over six months of imports, (GNFS). A sharp decline inoil prices since Fall 2008 i s expected to improve the current account balance and reserves in2009. , 10. Structural reforms are progressing. Reforms are progressing particularly in the areas of privatization, expenditurebudget management, and education. Inaddition, the GoJ has been considering public administration and tax system reforms (areas o f slow progress due to lack of consensus), social protection system reforms, and improving the conditions for greater public- private partnership in infrastructure. Sustained progress in implementation of structural reforms and a supportive regional and external environment are critical for sustaining good economic performance. 11. Sustaining the good economic performance of recent years is a key challenge for the years ahead. Despite negative external shocks, the economy performed well in 2008-growth remained above 5 percent, and public debt was restructured (and remains under control), and foreign reserves are comfortable. Nevertheless, risks lurk inthe highcurrent account deficit, heavy reliance on capital inflows, and worsening fiscal balance. The management of the macroeconomic impact o f large capital inflows from the region requires vigilance and strict bank/financial market supervision. The fiscal consolidation program is stalled, and 2008 i s considered a transition year, with fiscal deficits increasing due to compensation packages and food subsidies. Inthe period ahead, the rollback in international prices o f 29 commodities will certainly improve figures for inflation accompanied by an improvement in current account balance andreserves.However, inthe longer run, lower oil prices accompanied by a slowdown in the Middle East and North African economy due to the international financial crisis may also reduce capital inflows coming mainly from Gulf countries and potentially decreases in workers' remittances. Jordan could see a slower growth of GDP in 2009-less thanthe 5.0 percent predicted inthe budget of 2009. The unemployment rate remains high and needs to be addressed through selective changes in policies that affect the incentives o f employers to hire Jordanian workers, and the incentives of Jordanians to accept available jobs rather thanwait for public sector openings or overseasjobs. C. Bank Portfolio 12. The Bank portfolio inJordan consists o f seven investment operations for a total net commitment of US$304 million. The disbursement ratio for investment projects remained strong at 23 percent on average per year during the CAS period. The quality o f the portfolio i s satisfactory, with no project considered to be at risk o f achieving its development objectives. The portfolio also includes one guarantee operation, four Global Environment Facility operations and one Montreal Protocol, all in satisfactory status. The Country RecordFlagwas recently activated as result of the net disconnect2 of 33 percent. To reduce the overall net disconnect, the country team will more closely monitor projects that are ready to close andprepare realistic implementation status and results reports. D. Cost-Sharing 13. The policy emphasizes the need for borrower commitment and ownership. The Bank may finance activities for which the borrower has demonstrated ownership and commitment by, among other things, providing funding from its own resources. The Bank would judge the adequacy o f this hding in the context of the country's overall development program generally and its funding for the sectors on which Bank assistance would focus in particular. This policy would provide the Bank with the flexibility to finance higher proportions of projects costs, insome circumstances up to 100 percent. 14. The Bank's base case lendingprogram in the current CAS allows for lending o f up to US$540 million over the four-year CAS period. Investment lending i s currently projected to be around US260 million, and about US$lOO million i s expected to be used to finance Partial Risk Guarantees. While US$200 million hadbeen indicated inthe CAS for budget support, it i s unclear at this time what form the remainingUS$180 million available will take. 15. The Government has a comprehensive reformprogram across a range of sectors and has assured adequate financing of priority sectors inthe following year's budget. The Government's resources (taxes, revenues and domestic borrowing excluding grants) for the first 9 months of 2008, represents 122 percent of the total budget for the same period and 739 percent o f the development (investment) budget (or capital expenditure). All development expenditure, irrespective of source of funding, i s included in the budget and Bank-financed expenditure is a small proportion of development expenditure both overall and inany given sector. All Bank-financedprojects, as well as donor projects, are integrated into Government's own budgetary processes. 16. Based on these factors, the limit for Bank financing o f individual projects i s being set at 100%. Government ownership of Bank-financed projects i s key and will continue to be emphasized. Cost- 'The country record flag is raised incountries with a net disconnect o f 20 percent or more. The net disconnect is the difference between the percentage o f projects rated as unsatisfactory by IEG and the percentage rated by the region inthe final ImplementationStatusandResultsReports as unsatisfactoryfor achievingtheir development objectives. 30 sharing arrangements in individual projects will be determined on a case-by-case basis, based on economic, financial and fiscal assessments (loolung at aspects such as the Government's own financing of the project/program for the sector concerned, the project cost estimates and availability of co-financing from other development partners). The Bank will in general seek Government counterpart funding in all projects, and in addition the Bank will continue to promote harmonization o f its program with other donors' assistance including through seeking co-financing. Nonetheless there may be some projects in which the Bank finances up to 100 percent of project costs e.g., those that support education, social development and health sectors. The Bank may also finance 100% of the cost o f activities supported by IDFgrants. E. Recurrent Cost Financing 17. The policy provides flexibility to permit Bank financing o f the recurrent expenditures. In determining recurrent cost financing in individual projects, the Bank would take into account sustainability issues at the sector and the project levels. From a project perspective, the flexibility to finance recurrent expenditure may in some cases be essential to specific government programs (in particular social sector projects such as in health and education where recurrent costs are some o f the most important costs). 18. For infrastructure projects, financing of recurrent costs associated with long-term sustainability o f the project i s normally included in the government budget as counterpart funding. Incremental staffing costs fall in such a category as well as non-consultant related project management costs. It is expected that Jordan will gradually move towards increased funding o f its own recurrent expenditures, however, until such time, the Bankwill continue to finance costs associatedwith managingproject implementation, such as office operating costs, office equipment etc. These costs constitute a very small percentage of the total project and keeping this in mind, no country-level limit on recurrent cost financing i s proposed. Financing recurrent costs in the Bank-supported projects would have no significant impact on fiscal or debt sustainability. F. Local Cost Financing 19. On a project by project basis, the Bank may consider financing any mix o f local and foreign costs infinancing plans for all investment projects inJordan. The share of local cost financing could go up to 100% as neededto achieve individual project objectives more efficiently. 20. The fact that current rates are less than 100 percent financing of any given local cost transaction adds to the lengthy budget implementation. Each transaction i s currently reviewed at various stages including ensuring (i) eligibility for Bank financing; and (ii) two distinct payments are made to that account for Bank and government financing separately when they are bothbudgeted inthe Government's own budget under one heading. As stated earlier, the added flexibility inthe policy, will improve project efficiency through the reduction intime it takes to implement a givenBank-funded activity. Therefore, to simplifyprocedures, reduce transaction costs and enhancethe implementation efficiency of Bank-funded activities, it i s proposed that the Bank finance local costs as required by the project's development objectives. 21. The first requirement necessaryunder the operational policy i s that the financing requirements for the country's development program exceed the public sector's own resources. This requirement is clearly met in Jordan. The Government o f Jordan's own resources from taxes and other sources cover only a small portion of its total investment program while the remaining portion o f the investment program i s covered by donors, includingthe Bank, and some domestic borrowing. 31 22. The secondrequirement under the policy i s that financing o f foreign expenditure alone would not enable the Bank to assist inthe financing o f individual projects. This requirement i s also met. The current Bank-funded projects are mostly concentrated in sectors such as education, social protection, cultural heritage, tourism, urban and local development which consume mostly local goods and services rather than foreign and this trend i s likely to continue with the projected investment operations for FY09 and beyond. Financingonly foreign expenditures would impede the Bank's ability to assist infinancing of the CAS program. 23. The two criteria for Bank financing of localcosts are met inthe case of Jordan, andthe Bank may therefore finance local costs inthe proportions required by individual projects. N o distinction needsto be made between foreign and local expenditures in individual projects, unless needed for project-specific considerations. G. Taxes andDuties 24. The policy on eligibility o f expenditure allows the Bank to finance the reasonable costs of taxes and duties associatedwithproject expenditures. At aproject level, purchase of goods and services funded by foreign loans are submitted to the usual fiscal policy (including income tax). The Jordanian system allocates funds for both Bank and counterpart funds through its national budget, mobilizingthe required counterpart funding for taxes and duties. This means that there i s a need for two separate tracks for each transaction funded by the Bank: one for the Bank's funding which excludes taxes and duties and one for the part not financed by the Bank. As explained above, this leads to further implementation delays andto highertransaction costs for doing businesswiththe Bank. 25. The policy would allow the Bank to support consistent application o f good fiscal policy practices for the projects that it finances, and would also reduce transaction costs through greater administrative simplicity. Since taxes and duties are considered reasonable,Bank financing o f these costs would support the timely and effective implementation o f the Bank's program and thus contribute to achievement o f the projects' development objectives. At the project-level, the Bank would consider whether taxes and duties constitute an excessively highshare of project costs. H. ConcludingRemarks 26. The Bank and the Government of Jordan find that the framework set out above reflects the best arrangements for Jordan, keeping in mind the three guiding principles mentioned above: (a) the expenditures financed from the Bank loan proceeds are productive; (b) the impact of operations financed under such loans on the borrowing country's fiscal sustainability is acceptable; and (c) oversight arrangements on the use of Bank funds are acceptable. As needed, the parameters will be reviewed and necessaryadjustments made inaccordancewith Bankprocedures. 32 Annex A I: Jordanat a glance M. East Lower- POVERTY and SOCIAL 8 North middle- 1 Jordan Africa income Developmentdiamond' 2007 Population,mid-year(millions) 5.7 313 3,437 GNI percapita (Atlas method, US$) Life expectancy 2,850 2,794 1.887 GNI (Atlas method, US$ billions) 16.3 876 6,485 T Average annual growth, 2001-07 Population(%) 2.5 1.8 1.1 Laborforce 1%) 4.1 3.6 1.5 Gross primar, Most recent estimate (latest year available, 2001-07) capita enrollmeni Poverty(% ofpopulationbelownationalpovertyline) 14 Urbanpopulation(% of totalpopulation) 78 57 42 Lifeexpectancyat birth (years) 72 70 69 , Infantmortality (per 1,000livebirths) 21 34 41 Child malnutrition(% ofchildrenunder 5) 4 25 1 Accessto improvedwater source Accessto an improvedwater source (% ofpopulation) 98 89 08 Literacy(% ofpopulationage 75+) 91 73 89 Gross primaryenrollment (% ofschool-agepopulation) 97 105 111 -Jordan Male 96 108 112 Lower-middle-incomegroup Female 98 103 109 KEY ECONOMIC RATIOS and LONG-TERM TRENDS I I987 1997 2006 2007 ~Economicratios' GDP (US$ billions) 6.5 7.2 14.1 15.8 I Grosscapital formationlGDP 23.3 25.7 26.8 26.4 Exportsof goodsand sewiceslGDP 34.2 49.2 54.6 Trade 57.0 Grossdomestic savingslGDP -2.2 3.5 -10.7 -8.7 GrossnationalsavingslGDP 15.1 26.2 14.3 13.4 Currentaccount balancelGDP -5.4 0.4 -12.5 -13.7 Interestpayments/GDP 4.1 4.3 1.4 Total debffGDP 96.0 100.9 56.7 Total debt service/exports 23.6 15.8 6.1 Presentvalue of debffGDP 54.0 Presentvalue of debffexports 67.7 Indebtedness 1987.97 1997.07 2006 2007 2007-11 (average annualgrowih) GDP 3.7 5.5 6.3 6.0 6.2 Jordan GDP per capita -1.2 3.0 3.9 2.6 3.7 Exportsof goodsand sewices 3.6 6.9 6.7 4.1 8.5 STRUCTURE of the ECONOMY 1987 1997 2006 2007 1 (% of GDP) Growth of capitaland GDP (%) 1 Agriculture 7.3 3.3 3.1 3.1 Industry 23.9 25.8 29.5 31.8 Manufacturing 11.4 14.0 19.2 20.7 Services 68.8 70.8 67.4 65.1 Householdfinal consumption expenditure 75.6 71.0 88.7 89.3 i20 GeneralgovT final consumptionexpenditure 26.6 25.5 21.9 19.5 Importsof goods and sewices -GCF +GDP 59.8 71.5 92.0 92.9 I 1987-97 1997-07 2006 2007 (average annualgrowth) Growthof exports and imports(%) Agriculture 2.7 4.6 0.9 -1.1 ''T Industry 4.8 7.6 8.1 3.6 Manufacturing 5.8 9.6 9.5 2.8 Services 2.4 5.2 6.7 6.8 Householdfinal consumption expenditure 0.9 6.3 -2.9 -0.3 Generalgov't final consumption expenditure 0.5 2.8 13.6 25.0 Gross capital formation 4.4 5.2 13.8 -2.3 Importsof goods and sewices 0.1 6.3 -0.2 0.0 Note:2007 data are preliminaryestimates. This table was producedfrom the Development EconomicsLDBdatabase. *The diamondsshow four key indicatorsinthe country(inbold)compared with its income-group average. If data are missing,the diamond will be incomplete. 33 Jordan PRICES and GOVERNMENTFINANCE I 1987 1997 2006 2007 Inflation(%) Domesticprices (% change) Consumerprices -0.2 3.1 6.2 5.1 ImplicitGDP deflator -0.8 1.3 5.2 6.0 Government finance (% of GDP, includescurrentgrants) Currentrevenue 35.6 34.0 34.3 34.4 02 03 04 05 OB 07 Currentbudgetbalance 8.3 4.3 3.5 0.9 -GDP deflator -CPI Overallsurplusldeficit -4.0 -3.1 -3.9 -5.5 TRADE II 1987 1997 2006 2007 (US$ millions) ' Export and import levels (US$ mill.) Total exports(fob) 933 1,871 5,147 5,432 115,000 T Food and live animals 100 256 534 723 Phosphates 180 190 154 216 Manufactures 353 757 1,879 2,133 10.000 Total imports(cif) 2,705 4,099 11,561 13,127 Food 460 761 1,439 1,675 5.000 Fueland energy 440 541 2,638 3,149 Capitalgoods 481 1,148 2,246 2,415 o m Export price index (2000=100) I 01 03 79 114 144 171 02 04 05 OB Importprice index (2000=100) 89 101 164 187 BExports BImports O7 Termsof trade (2000=100) 89 113 88 91 BALANCEof PAYMENTS 1987 1997 2006 2007 (US$ millions) Current account balanceto GDP (%) I Exportsof goods and services 2,226 3,572 7,702 9,160 importsof goods and services 3,698 5,186 12,987 14,728 Resource balance -1,472 -1,613 -5,285 -5,568 Net income -221 -209 581 738 Net currenttransfers 1,343 1,851 2,943 2,664 01 02 03 04 Currentaccount balance -349 29 -1,761 -2,166 -10 -. Financingitems (net) 334 415 3,057 2,737 Changesin net reserves 16 -444 -1,296 -571 -20 - Memo: Reservesincludinggold (US$ millions) 625 2,401 6,985 7,585 Conversionrate (DEC, loca//US$) 0.3 0.7 0.7 0.7 EXTERNAL DEBT and RESOURCEFLOWS 1987 1997 2006 2007 (US$ millions) !Compositionof 2006 debt (US$ mill.) Total debt outstandingand disbursed 6,262 7,314 8,000 iBRD 427 749 897 868 I G:699 A:897 IDA 80 65 42 39 Total debtservice 761 864 688 IBRD 57 116 123 128 IDA 2 3 3 3 Compositionof net resource flows Officialgrants 504 296 505 Officialcreditors 134 230 -63 Privatecreditors 350 -133 -12 Foreigndirect investment(net inflows) 39 361 3,219 Portfolioequity(net inflows) 0 0 144 World Bank program Commitments 38 62 0 121 A IBRD E Bilateral - Disbursements 97 94 43 39 B IDA -- D -Othermultilateral F Private - Principalrepayments 28 72 80 80 C IMF - G - Short-tern Net flows 69 23 -38 -41 Interestpayments 31 47 46 50 Net transfers 38 -24 -83 -91 Note:Thistablewas producedfrom the DevelopmentEconomicsLDB database. 9/24/08 34 Annex B2: Selected Indicators of Bank Portfolio Performance and Management As of January 27, 2009 Indicator 2006 2007 2008 2009 Portfolio Assessment Number of Projects Under Implementationa 8 9 11 11 Average Implementation Period (years) 4.6 3.4 3.1 3.2 Percent of Problem Projects by Number a ' c 12.5 11.1 9.1 0.0 Percent of Problem Projects by Amount a,c 5.4 5.6 0.2 0.0 Percent of Projects at Risk by Number a, 12.5 11.1 9.1 0.0 Percent of Projects at Risk byAmount a, 5.4 5.6 0.2 0.0 Disbursement Ratio (YO)e 16.6 33.2 18.9 22.2 Portfolio Management CPPR during the year (yes/no) no no no no Supervision Resources (total US$) 537 799 853 800 Average Supervision (US$/project) 67 89 78 80 Memorandum Item Since PI80 Last Five FYs Proj Eva1by OED by Number 61 5 Proj Eva1by OED byAmt (US$ millions) 2,011.3 154.8 % of OED Projects Rated U or HU by Number 16.7 40.0 YOof OED Projects Rated U or HU by Amt 11.5 23.7 a. As shown in the Annual Report on Portfolio Performance (except for current FY). Includes, IBRD investments, Montreal Protocol,and GEFs (with the exception of Medium-Sized GEF). b. Average age of projects in the Bank's country portfolio. c. Percentof projects rated U or HU on development objectives (DO) andor implementation progress(IP). d. As defined under the Portfolio Improvement Program. e. Ratioof disbursements duringthe year to the undisbursed balance of the Bank's portfolio at the beginningof the year: Investment projects only. * All indicators are for projects active in the Portfolio,with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 35 Annex B3-1: IBRDProgramSummary As of January 27, 2009 Proposed IBRD Base-Case Lending Program Fiscal Proj ID Strategic Implementation b year Rewards Risks (HIMIL) (HIMIL) Higher Education Reformfor the Knowledge 2009 Economy 15-25 H M EducationReform for the KnowledgeEconomy 30-60 H L AI Qatrana Power Guarantee 47 H M Total 92-132 36 Annex B3-2: IFC Investment OperationsProgram 2006 2007 2008 2009 Commitments (US$m) Gross 39.41 35.71 415.22 458.22 Net** 39.41 35.71 255.22 298.22 Net Commitments by Sector 1%) EQUITY 12.7 GUARANTEE 100.0 10.1 40.2 LOAN 100.0 45.3 33.7 QUASI LOAN 28.9 26.2 RISK PRODUCT 3.0 Total 100.0 100.0 100.0 100.0 Net Commitments by Investment Instrument1%) Equity 12.7 Guarantee 100.0 10.1 40.2 Loan 100.0 45.3 33.7 Quasi loan 28.9 26.2 Risk product 3.0 Total 100.0 100.0 100.0 100.0 ** IFC's Own Account only 37 Graph1: Sector Distribution IFC NO8 Portfolio IFC FY07 Portfolio 0% 1% 8% 55% 2Yo 0 Agribusiness Global FinancialMarkets GeneralManufacturing&Services Health& Mucation Infrastructure I IFC FY06 Portfolio I IFC FY05 Portfolio 1% 5% 7% 1% 11% 38 h2: Product Distribution IFC W08Portfolio by Product IFC FY07 Portfolio by Product 28 5200 I Loan I I Esuity I Quasi Loan&Quasi Equity Guarantee j Rsk Manaaemnt IFC FY06 Portfolio by Product IFC NO5 Portfolio by Product 39 Annex B4: Summary of NonlendingServices As of January 27,2009 Completion Cost Product - FY (US$OOO) Audiencea Objectiveb Recent completions Knowledge generation and Strategic Options for Energy Sector Development FY05 387 Problem Solving Knowledge generation and Public Expenditure Review FY05 369 Problem Solving Resolving Jordan's Labor Market Paradox: Knowledge generation and Economic Growth with High Unemployment FY07 173 Problem Solving Strategy for Modernization of the Social Safety FY07 Knowledge generation and Nets 94 Problem Solving Investment Climate Survey FY07 156 Government Knowledge generation and Public Debate Investment Climate Seminar FY08 60 Government Public Debate Knowledge generation and Poverty Update FY08 88 Problem Solving Environment Safeguard TA FY05 33 Government Problem Solving Private Participationin Infrastructure FY06 50 Government Knowledge generation and Problem Solving Skills and Vocational Training FY06 37 Government Problem Solving Ccmerative Sector Restructurina FY07 17 Government Problem Solving 24 Government Public Debate High Policy Gender Forum FY07 Macro Modelling FY08 92 Government Problem Solving Wage and Earnings Statistics FY08 17 Government Problem Solving Medicines Transparency Alliance (Pilot) - FY08 Government Problem Solving Pharmaceutical Governance TA 22 Underwav Country Environment Analysis FYO9 Knowledge generation and 356 Problem Solving Fiscal and Poverty Impact Study Knowledge generation and FYO9 2oo Problem Solving Knowledge generation and Programmatic TA in Social Insurance Yearly 120 Government Problem Solving Programmatic TA in Poverty Monitoring/ Yearly Knowledge generation and Mapping/lnstitutionaIFramework 8o Problem Solving Programmatic TA in Public Expenditure Knowledge generation and Management Yearly 135 Government Problem Solving Programmatic TA in Energy Sector Refom and Knowledge generation and Implementation FYO7-10 I 2 O Problem Solving Employmentfor Young Women Graduates FY09-10 100 Government Problem Solving Vulnerability to Recent Global Financial Turmoil FYO9 80 Government Problem Solving a. Government,donor, Bank, publicdissemination. b. Know!edgegeneration,publicdebate,problem-solving. 40 Annex B5: SocialIndicators Latestsingle year Same regionlincomegroup M. East Lower- & North middle- 1980-85 1990-95 2001-07 Africa income POPULATION Total population, mid-year (millions) 2.6 4.2 5.7 313.4 3,437.1 Growth rate (% annual average for period) 3.9 5.6 2.5 1.8 1.1 Urban population (% of population) 66.3 78.2 78.4 57.2 41.7 Total fertility rate (births per woman) 6.2 4.6 3.2 2.9 2.3 POVERTY (% of population) National headcount index 14.2 Urban headcount index 12.9 Rural headcount index 18.7 INCOME GNI per capita (US$) 1,990 1,560 2,850 2,794 1,887 Consumer price index (2000=100) 46 87 126 120 144 Food price index (2000=100) 44 86 102 INCOMElCONSUMPTlON DISTRIBUTION Gini index 43.4 38.8 Lowestquintile (% of income or consumption) 5.9 6.7 Highest quintile (% of income or consumption) 49.8 46.3 SOCIAL INDICATORS Public expenditure Health (% of GDP) 4.8 3.1 2.0 Education (% of GDP) 8.0 4.7 Net primary school enrollment rate Phof agegroup) Total 94 90 90 90 Male 94 89 92 91 Female 94 90 88 89 Access to an improved water source of population) Total 97 98 89 88 Urban 99 99 95 96 Rural 91 91 81 82 Immunization rate (% of children ages 12-23 months) Measles 73 92 99 91 77 DPT 85 95 98 92 75 Child malnutrition (% under 5 years) 5 4 25 Life expectancy at birth (Years) Total 65 69 72 70 69 Male 63 68 71 68 67 Female 67 70 74 72 70 Mortality Infant (per 1,000 live births) 41 29 21 34 41 Under 5 (per 1,000) 50 35 25 42 54 Adult (15-59) Male (per 1,000 population) 205 167 167 202 Female (per 1,000 population) 152 116 115 128 Maternal (modeled, per 100,000 live births) 62 200 300 Birthsattended by skilled health staff (%) 87 100 77 69 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to changefrom ISCED76to ISCED97. Immunization: refers to children ages 12-23months who received vaccinations before one year of age or at any time before the survey. World Development Indicators database, World Bank 10 September 2008. - 41 Annex B6: Key Economic Indicators Actual Estimate Projected Indicator 2006 2007 2008 2009 2010 Nationalaccounts (as % of GDP) Gross domestic producta 100 100 100 100 100 0 Agriculture 3 3 3 4 4 Industry 28 28 30 31 31 Services 69 69 66 65 66 Total Consumption 103 112 109 103 101 Gross domestic fixed investment 28 28 29 29 29 Government investment 8 7 9 10 10 Private investment 20 21 20 19 19 Exports (GNFS)b 55 55 65 58 57 Imports (GNFS) 89 95 104 90 87 Gross domestic savings -3 -12 -9 -3 -1 Gross national savingsc 20 10 15 18 18 Memorandum items Gross domestic product 14,856 16,551 20,069 22,565 24,481 (US$ million at currentprices) GNI per capita (US$, Atlas method) 2,700 2,920 3,250 3,600 4,020 Real annual growth rates (%, calculatedfrom 85 prices) Gross domestic product at market prices 9.6 6.0 5.5 3.9 4.0 Gross Domestic Income 9.8 6.7 9.8 1.o 3.1 Real annual per capita growth rates (%, calculated from 85 prices) Gross domestic product at market prices 7.1 3.7 3.2 1.7 1.8 Total consumption 3.7 10.5 10.1 0.7 0.9 Private consumption -0.7 9.8 5.4 1.5 3.1 Balance of Payments (US%millions) Exports (GNFS)b 8,121 9,173 13,033 13,123 13,987 Merchandise FOB 5,210 5,738 8,009 8,24 8 8,868 Imports (GNFSf 13,246 15,743 20,811 20,360 21,384 Merchandise FOB 10,272 12,235 15,895 15,200 15,951 Resource balame -5,125 -6,570 -7,778 -7,237 -7,397 Net current transfers 2,943 2,782 4,147 3,808 3,774 Current account balance -1,600 -2,980 -2,810 -2,550 -2,590 Net private foreign direct investment 3,361 1,905 1,744 1,04 5 1,463 Long-term loans(net) -482 -352 -393 -239 -315 Official -63 -112 -244 -219 -290 Private -419 -240 -149 -19 -25 Other capital (net,incl.errors & ommissions) 17 2,197 2,315 1,611 1,845 Change in reservesd -1,296 -770 -856 133 -404 Memorandum items Resource balance (% o f GDP) -34.5 -39.7 -38.8 -32.1 -30.2 Real annual growth rates ( YR85 prices) Merchandise exports (FOB) 7.8 4.5 -5.2 1.9 6.8 Primary -6.3 15.9 -0.7 -2.0 5.0 Manufactures 9.7 -5.6 -12.3 8.9 9.5 Merchandise imports (CIF) 0.5 3.2 10.1 0.4 3.8 (Continued) 42 Estimate Projected Indicator 2006 2007 2008 2009 2010 Public finance (as O h of GDP at market prices)' Current revenues 32.6 33.5 37.9 37.7 33.7 Current expenditures 29.1 31.5 33.8 30.6 28.4 Current account surplus (+) or deficit (-) 3.4 1.9 4.1 7.1 5.2 Capital expenditure 7.5 7.2 9.2 10.5 9.8 Foreign financing 1.2 0.6 -1.3 -1.0 -1.2 Monetary indicators M2IGDP 134.1 133.1 139.5 142.9 144.9 Growth o f M2 (%) 14.1 10.6 27.0 15.2 10.1 Private sector credit growth/ 118.1 60.7 80.1 72.5 65.8 total credit growth (%) Price indices( yR85 =loo) Merchandise export price index 153.6 179.3 234.9 248.1 254.9 Merchandise importprice index 193.8 220.1 290.5 276.8 279.8 Merchandise terms o f trade index 79.3 81.5 80.9 89.6 91.1 Real exchange rate (US$/LCU)f 114.4 109.8 127.3 124.4 122.2 Real interestrates Consumer price index (% change) 7.5 5.8 15.0 2.9 3.6 GDP deflator (% change) 7.3 5.1 14.9 8.2 4.3 a. GDP at factor cost b. "GNFS" denotes "goods andnonfactor services." c. Includes net unrequitedtransfers excluding official capital grants. d. Includes useofIMFresources. e. Consolidatedcentral government. f. "LCU" denotes "local currencyunits." An increaseinUS$/LCU denotes appreciation. 43 Annex B7: Key Exposure Indicators Actual Estimate Projected Indicator 2006 2007 2008 2009 2010 Total debt outstanding and 8000 8218 6088 5826 5506 disbursed ("DO) (US$m)" Net disbursements (US$m)a 304 218 -2129 -263 -319 Total debt service (TDS) 688 979 719 704 698 (US$m>a Debt and debt service indicators (%I TDO~XGS~ 68.5 60.7 33.2 32.5 28.7 TDO/GDP 53.9 49.7 30.3 25.8 22.5 T D S K G S 5.9 7.2 3.9 3.9 3.6 ConcessionaLRDO 47.7 49.7 0.0 0.0 0.0 IBRDexposure indicators (%) IBRDDSipublic DS 19.0 15.0 15.9 16.5 17.0 Preferred creditor DS/public 55.1 40.3 41.1 38.3 36.6 DS (%)" IBRDDSiXGS 1.1 1.1 0.8 0.8 0.8 IBRDTDO (US$m)d 897 910 880 8 64 807 Ofwhichpresent value o f 42 44 90 86 guarantees (USSm) Share o f IBRD portfolio (%) 0.9 1.o 0.9 0.8 0.7 IDA TDO (us$mId 42 39 37 34 32 IFC (US$m) Loans Equity andquasi-equity ic MIGA MIGA guarantees (US$m) a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f IMF credits andnet short- term capital. b. "XGS" denotes exports o fgoods and services, includingworkers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regionalmultilateral development banks, the IMF, and tl Bankfor International Settlements. d. Includes present value o f guarantees. e. Includes equity andquasiequity types o fboth loan and equity instruments. 44 Annex BS-1: OperationsPortfolio (IBRD andGrants) As of January 27,2009 Closed Projects: 72 BQUDA' Tota Disbursed(Active) 146.15 ofwhich has been repaid 4.08 Total Disbursed(Closed) 2048.71 ofwhich has been repaid 1441.44 Total Disbursed(Active + Closed) 2194.86 ofwhich has been repaid 1445.52 Total Undisbursed (Actne) 157.19 Tota Undisbursed (Closed) 0.00 Tota Undisbursed (Active +Closed) 157.19 Active Projects Difference Between La?L!sK Expected andActual Supervision Rating pnalnal Amount In US$ Milllong Project ID Project Name Development implementation Fiscal IBRD Grant Cancel. Undisb. Orlg. Frm Rev'd Cbjectives Progress Year po75829 Education Reform for Knowledge S S 2003 120.0 7.6 7.6 Economy I PO81505 Amman Development Corridor S S 2004 71.0 42.1 9.1 Cultural Heritage, Urban and Tourism PO81823 Prniert S S 2007 56.0 52.4 5.2 PO70958 Regional and Local Development S MS 2007 20.0 18.6 7.2 P100534 Employer Driwn Skills Development S S 2008 7.5 7.0 -0.5 PI00546 Social Protection Enhancement MS MS 2008 4.0 4.0 0.4 p104960 Amman Solid Waste Management S S 2009 25.0 25.0 Project PO49706 ODS Phaseout I1 S S 1997 5.0 0.4 0.2 0.4 po69847 Conservation of MedicinallHerbal S 2003 5.0 2.3 2.3 Plants GEF S po75534 Integrated EcosystemslRifiValley S S 2007 6.2 5.4 0.7 GEF Promotion of a Wind-Power Market po93201 0.0 GEF S S 2008 6.0 6.0 p108064 Energy Efficiencyinvestment Support Framework GEF 2009 1.o 1.o Total 303.5 232 171.8 32.3 0.5 Po94306 Amman East Power Partial Risk Guarantee 2007 45.0 z $ :: m U 9 I c E E C C s C C U U U 9 C C r IC R C C 01 m a 0 0 dm % (D : - r U k L C R (c C C C C C E C C C (c C C C C E 3 3 3 3 5 3 *) 2 2 0N B 0N 0 m d 2 Y 2 x8 N 8 N L -2 b U c 0 8 0 0 9 0 0 9 0 M 0 xxxxzxx2 N 0 0 9 0 8 0 0 9 0 ? 0N s P c b xx ? -2 U c r? 8 0 0 0 8 0 r 0? 0 0 9 r 0 0 0 0 8 r 0 4 0N B CN C 0: b - N 0 8 2 0 82 0 0 8 0 rc:N md 0 r 0 0 0 0 8 r d m E 2 2 N0 0 0 d ._E 4 E T c ; Y 0 8 0 0 c 8 0 i8 882 0 m 0 0 8 8 0 0 0 0 8 0 C R C i? ci e - 2 2 1 2 C E E 8 h (c a E C C E C C (.: a: C C C N m hv1 N 88888 0 0 0 0 P xxx IY 3 Y 2 2 2 0 8 d mIn 8 0 0 8 xxx 0 2 UY 0 0 9 0 8 In 0 3 5 3 n 5 m I 0 0 8 0 2 In 0 0 8 8 0 0 0 5 8 3 2 2 001 O N s a 8 0 8 2 In rr IL1 z 0 8 2 2 Ili 0 0 8 0 In 88 0 0 8 P 0 0 0 8 P 2 hC 0 IC s ._E 2 LL 2 c a 8 0 C c 0 0 3 8888 0 0 0 9 0 0 8 8 0 0 0 0 8 0 3cYO 3c :ij 3cU@ ?e u 2 a zi x 0 8 2 m 8 0 0 8 8 0 s m 8 0 0 8 r In 9 8 0 8 0 0 8 r Ino! 0N 0 m 3 * c .- c m 5 Y s 0 8 8 0 8 0 0 8 8 0 d 0 0 0 8 8 0 8 0 8 P 0 8 8 P IBRD 33424 35°E 36°E 37°E 38°E 39°E 34°N 34°N Sea JORDAN Mediterranean 33°N 33°N To To Zefat Damascus Lake To Tiberias Baghdad Um Qais Um Qais IrbidIrbid IRBIDIRBID Ar Ruwayshid Ar Ruwayshid AJLUN Ajlun Ajlun Al Mafrak Al Mafrak JARASH reviR Jarash Jarash M A F R A K Jordan ArdaArda Mahattat al Halif Mahattat al Halif BALQA BALQA Az Az 32°N As Salt As Salt Zarka Zarka 32°N AMMANAMMAN ZARKAZARKA Azraq ash Azraq ash ShishanShishan - - Madaba Madaba To Jerusalem MADABAMADABA A M M A N DeadDead SeaSea To Al Mazra'ah Al Mazra'ah Al Jawf - To Al Karak Al Karak Al Qatranah Al Qatranah Beersheba K A R A K As Safi As Safi - - 31°N A r 31°N d TAFILAH FILAH a s At Tafilah At afilah S a AlAl w Ba'irBa'ir - a RashadiyahRashadiyah - a n Ash Shawbak Ash Shawbak M A ' A N PetraPetra Al Jafr Al Jafr Ma'an Ma'an 0 0 50 Kilometers 0 25 50 Miles 30°N Ra'sanNaqbRa' anNaqb 30°N 38°E 39°E A Q A B A AdDisiAdDisi JORDAN To Nuweiba Aqaba Aqaba Jabal Ram Jabal Ram (1,734 m) (1,734 m) SELECTED CITIES AND TOWNS GulfofAqaba GOVERNORATE CAPITALS AlMudawwarahAlMudawwarah This map was produced by NATIONAL CAPITAL To the Map Design Unit of The Al B'ir World Bank. The boundaries, RIVERS colors, denominations and any other information shown 29°N on this map do not imply, on MAIN ROADS the part of The World Bank To Group, any judgment on the RAILROADS Al B'ir legal status of any territory, or any endorsement or GOVERNORATE BOUNDARIES a c c e p t a n c e o f s u c h boundaries. INTERNATIONAL BOUNDARIES 35°E 36°E 37°E JANUARY 2005