Document of

The World Bank

FOR OMCAL USE ONLY

Report No. 12918

PROJECT COMPLETION REPORT

HASHEMITE KINGDOM OF JORDAN

INDUSTRY AND TRADE POLICY ADJUSTMENT LOAN(LOAN 3142-JO)

MARCH 29, 1994

Country Operations DivisionCountry Department IIMiddle East and North Africa Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EOUIVALENT

Currency Unit = Jordanian Dinar (JD)

Exchange Rate = USSI: JD .5705 (at Board approval)USSl: JD .6798 (at project completion)

ABBREVTATIONS AND ACRONYMS

BOP - Balance of PaymentC8J - Central Bank of JordanCEM - Country Economic MemorandumDEF - Development and Employment FundECGC - Export Credit Guarantee CorporationEDF - Export Rediscounting FacilityEEL - Encouragement of Investment LawFZC - Free Zone CorporationGCFCG - Gulf Crisis Financial Coordinating GroupGDP - Gross Domesic ProductGNP - Gross National ProductIEC - Industrial Estate CorporationJD - Jordanian DinarJEDCO - Jordan Export Development and Trade Centers CorporationNGOs - Non-Government OrganizationsPER - Public Expenditure ReviewQRs - Quantitative RestrictionsREER - Real Effective Exchange RateSMI - Small- and Medium-Scale Industries

Government of Hashemite Kingdom of JordanFLscal Year

January 1 - December 31

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation

March 29, 1994

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Hashemite Kingdom of Jordan -Industry and Trade Policy Adjustment Loan (Loan 3142-JO)

Attached is the Project Completion Report on Hashemite Kingdom of Jordan - Industry andTrade Policy Adjustment Loan (Loan 3142-JO) prepared by the Middle East and North AfricaRegion, with a brief Part II prepared by the Borrower.

The loan's aim was to support the Government's structural adjustment program, in parallelwith an IMF stand-by arrangement. Within a framework of measures to ensure a competitive andstable economic environment, the loan's specific conditionality addressed trade policy (reduction ofeffective protection, elimination of import quotas, equalization of import and domestic taxation ofluxury goods, provision of export credits), investment promotion, rationalization of publicexpenditures, and social issues (creation of an apex agency to coordinate poverty alleviation andprograms targeted to women). An extensive technical assistance (TA) program was included in theoperation to finance studies needed for the design of institutional reforms.

Implementation of the loan, which was approved in December 1989, was interrupted by theGulf crisis and war. This crisis disrupted the Jordanian economy, owing to the loss of exports,workers' remittances and tourism earnings, and to the fiscal burden imposed by the sudden massiveinflow of refugees. But, following the end of the crisis, implementation resumed, disbursementscontinued, and the loan closed on schedule.

Loan disbursements were hindered by the Government's inability to comply fully with theBank's procurement procedures. Compliance with the loan conditionality was only partial. Tradeliberalization succeeded in reducing effective protection, but an anti-export bias remains. Otherplanned export-promotion and investment-incentive measures were not fully carried out. Althoughsome restructuring and better targeting of public expenditures did help to protect the poor duringthe fiscal adjustment, the planned institutional arrangements aimed at coordinating poverty andgender targeted programs did not materialize. The TA studies specified in the loan agreement werecompleted, although they were financed through other sources.

On balance, the major accomplishment of this operation was to help the Governmentmaintain the momentum of structural adjustment in spite of the major obstacles created by the Gulfcrisis. Its overall outcome is rated as satisfactory, its institutional development impact as modest andits sustainability as likely. The PCR presents a good picture of the implementation experience andoutcome.

An audit is planned.

Attachment

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Itscontents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

HASHEMITE KINGDOM OF JORDAN

INDUSTRY AND TRADE POLICY ADJUSTMENT LOAN (ITPAL'(LOAN 3142-JO)

PROJECT COMPLETION REPORT

TABLE OF CONTENTS

Page No.

Preface . ............................................................iEvaluation Summary .iii

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .1

Project Identity .1Background. 1Program Preparation. 2Program Objective and Description. 3Program Design. 7Program Implementation. 9Program Impact .12Program Sustainability .17Lessons of Experience .18

PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE .19

PART III: STATISTICAL INFORMATION .22

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

HASHEMITE KINGDOM OF JORDAN

INDUSTRY AND TRADE POLICY ADJUSTMENT LOAN (aTPAL)

LOAN 3142-JO

PROJECT COMPLETION REPORT

PREFACE

This Project Completion Report (PCR) was expected to be completed by October1992 on the basis of the second tranche release by late 1991. However, implementation ofthe adjustment program was disrupted by the Gulf crisis which exacerbated the delay in thesecond tranche release. The second tranche was declared effective in February 1992following the end of the crisis and the resumption of the adjustment program. The loanamount was fully disbursed, with the last disbursement made on October 20, 1992, and theloan account was officially closed on December 31, 1992, as originally scheduled.

This Project Completion Report (PCR) was prepared by the Country OperationsDivision of the Middle East and North Africa Region Department, on the basis of data andreports available in the project files and discussions with the Borrower. Part II of this PCRwas prepared by the Borrower from its perspective.

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HASHEMITE KINGDOM OF JORDAN

INDUSTRY AND TRADE POLICY ADJUSTMENT LOAN (ITPAL)

LOAN 3142-JO

EVALUATION SUMMARY

Background

Economic trends in Jordan had been influenced by its links to oil-producing Gulf States and Jordan's narrow productive base. Following rapidgrowth in the 1970s, the decline in oil prices and subsequent slowdown inregional economies starting in the early 1980s, have adversely affected theJordanian economy. Demand for Jordanian exports declined, workers remittancesstagnated, and grant aid declined sharply. The Government did not respondeffectively to these adverse developments, concentrating its efforts onprotecting existing domestic enterprises and increasing expenditures tostimulate domestic demand. The nominal exchange rate was maintained throughexternal borrowing and drawing down of reserves, and internationalcompetitiveness of domestic production steadily eroded. In the second half ofthe 1980s, exports fell, real GDP stagnated, the overall fiscal situationdeteriorated and the balance of payments position worsened.

The Government's response to the crisis, initiated in 1988, led to theadoption of a comprehensive adjustment program in mid-1989. The budget deficitwas reduced, a significant exchange rate adjustment took place and a flexiblepolicy was adopted to maintain export competitiveness. The Government, theIMF, and the Bank jointly developed a medium term macroeconomic framework, andthe Government and the Bank jointly developed a comprehensive trade andindustrial policy reform program; the latter formed the basis for the $150million Trade and Industrial Policy Adjustment Loan (ITPAL) and the former foran 18 month IMF Stand-by Arrangement.

Objectives

Notwithstanding the macroeconomic adjustment measures implemented in late1988, the economy continued its downward slide in 1989. The objective of theITPAL was to assist the Government in responding to the acute economicdifficulties by deepening its macroeconomic adjustment efforts and reformingtrade and industrial policies to lay the basis for sustainable long-termgrowth. The ITPAL program, which complemented the IMF medium-term adjustmentprogram, initiated in 1989, sought to improve the efficiency andcompetitiveness of industry and trade and protect the poor from the adverseimpact of the adjustment policies, by (i) strengthening institutional supportfor the growth of agriculture, manufacturing and commercial services on thebasis of export expansion and market diversification and efficient importsubstitution; (ii) establishing a more uniform, less distorted incentivestructure in the economy through rationalizing the trade and investmentincentives regimes; and (iii) improving the effectiveness of service deliveryto the poor by creating an apex organization to coordinate the activities ofgovernment agencies and NGO's.

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Implementation Experience

The ITPAL was approved by the Board in December,1989, and declaredeffective in February, 1990; by June 1990, the first tranche had beensubstantially disbursed. In December 1990, the Japan EXIM Bank provided $75million equivalent in co-financing. The main problem experienced indisbursements related to inconsistencies between the Bank's procurementprocedures and the existing Jordanian legislation. The second tranche wasoriginally expected to be fully disbursed by the end of March 1991. However,implementation of the adjustment program was interrupted by the Gulf crisis(August 1990 - February 1991), which undermined the macroeconomic framework,delayed Government action on trade measures and the undertaking of ITPALstudies. Following the crisis, the Government resumed the implementation ofthe adjustment program, and entered into a new Stand-by Arrangement with theIMF in February, 1992. Based on satisfactory progress made, the secondtranche of the ITPAL was released in March 1992 and the loan fully disbursedin October, 1992; it was closed on December 31, 1992, as originally scheduled.

Results

The trade and industrial policy reform improved the incentive structure.The average tariff protection rate and the disparities among sectors werereduced between 1987 and 1992, and both external and internal competitivenessincreased significantly. Nevertheless, the anti-export bias, whilesignificantly reduced, still prevails. Merchandise exports responded stronglyto the new incentive regime, growing by more than 20% p.a. during 1988-92, andGDP growth, after experiencing a severe drop in 1989, stabilized in 1990 and1991, and accelerated in 1992. The impact of the policy reforms would havebeen more pronounced for 1990 and 1991 if not for the effects of the Gulfcrisis, which disrupted Jordan's trade, reduced remittances and burdened theeconomy with fiscal outlays for social services for the returnees from theGulf. The resulting pressures on the budget and balance of payments slowedprogress towards macroeconomic stabilization; the growth performance of theeconomy was adversely affected and unemployment rose sharply. Since then theimplementation of the adjustment and stabilization program have contributed toan encouraging recovery in 1992 with GDP growth of 11% and a sharp decline inthe fiscal deficit.

Progress in strengthening institutional support for exports was mixed.Use of the Export Rediscounting Facility declined as the interest marginreductions made its use less attractive to banks. Despite the streamlining ofthe applications of incentives under the Encouragement of Investment Law, theproject screening process remains ambiguous. The Jordan Export Development andTrade Centers Corporation, a joint venture funded by the public and privatesectors, has played a useful role in finding new markets for Jordanianproducts following the disruption of traditional markets following the Gulfcrisis, but its effectiveness remains constrained by a shortage of manpowerand expertise.

Good results have been achieved in protecting the poor during theadjustment period by restructuring the public expenditures. Despite theoverall reductions of public expenditures, spending on social sectors has beenwell protected, with priority budget allocations for primary and secondaryeducation, which benefit the poor the most, and increased spending on health,

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combined with improved cost recovery and an increased use of primary carefacilities. The coupon system for sugar, rice, and powdered milk wasrationalized to improve targeting in the social safety net. The results ofthe apex agency, the Development and Employment Fund (DEF) established in June1990, were mixed. Over time, DEF departed from its original concept ofcoordinating the activities of other government agencies and NGO's, andfocused the bulk of its financing on direct lending to small enterprises.Thus, while a recent review of the DEF confirms that initially it served as auseful unemployment relief program to win public support for the adjustmentefforts, it may not be the most effective element of a longer term povertyreduction program.

Sustainabilitv

The most important factor underlying the sustainability of the reformefforts supported by the ITPAL is the strong commitment on the part of theJordanian authorities, which has been demonstrated both in the implementationof the ITPAL program as well as in the more recent formulation of the nextFive-year Development Plan (1993-98), the draft document of which includes allthe key elements of the ITPAL-supported policy objectives.

The second important factor is that the reforms have been built on theinitial success in macroeconomic adjustment; therefore policy reversal isunlikely. This pertains to the exchange rate adjustment and the deficitreductions preceding the overall tariff reductions, and to the gradual andsteady implementation of each phase of trade policy reforms. Furthermore, therecent economic recovery has reversed the decline in per capita income, andthe Government has undertaken to tackle poverty more forcefully.

Nevertheless, Jordan's reform efforts face serious challenges. Exportsfinance only one-third of its imports, and the dependence on workersremittances constitutes a major uncertainty to the long-term balance ofpayments viability. Given the large external debt, Jordan needs exceptionalfinancing on concessional terms over the next two to three years andsuccessive rescheduling through 1998. In the interim it needs to continue topursue a set of policies aimed at concurrently reducing domestic expenditures,and increasing domestic output in order to ensure that the benefits of tradeand industrial policy reforms are sustained.

FindinQs and Lessons Learned

The first lesson that can be drawn is that macroeconomic adjustmentshould precede trade liberalization. The initial progress in fiscalstabilization reduced the conflict between revenue generation and tariffreductions and thereby reduced the likelihood of major policy reversals.Further, the realignment of the exchange rate improved the overall relativeincentive structure, enhanced tariff revenue, and created the conditions fortariff reforms at the later stage. Second, trade liberalization strategiesmust be tailored to specific country conditions. In this case a phasedapproached was followed. Third, is the importance of alleviating the adverseeffects of adjustment through well published schemes. Finally, the Bank'sstandard procurement procedures may run counter to the objective offacilitating the expansion of private sector participation in foreign trade.

HASHEMITE KINGDOM OF JORDAN

INDUSTRY AND TRADE POLICY ADJUSTMENT LOAN (ITPAL)

LOAN 3142-JO

PROJECT COMPLETION REPORT

PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

1. PROJECT IDENTITY

Project Name: Industry and Trade Policy Adjustment LoanLoan No.: 3142-JORVP Unit: Middle East and North Africa RegionCountry: Hashemite Kingdom of JordanSector: Industry and Trade

BACKGROUND

2. Economic trends in Jordan had been influenced by its links to oil-rich Gulf States and itsnarrow productive base. In the 1970s the Jordanian economy enjoyed a high rate of growth andachieved significant improvement in the standard of living. Such economic performance tookplace in the context of increasing exports of goods and skills to the neighboring countries,sustained inflow of workers' remittances, foreign aid, and investments. Near full employment wasreached in the early 1970s. The capital inflows and the accumulation of foreign reserves hadstrengthened the Jordanian Dinar (JD). This, together with rising investment, rapid economicgrowth and high liquidity in the economy, led to rapidly rising imports and widening trade deficitsfrom US$0.6 billion in the mid-1970s to about US$1.6 billion in the late 1970s, or 59 percent ofGNP. Despite the underlying instability in the economy, however, the authorities managed tomaintain fiscal and external equilibria; up to 1981, external indebtedness was contained andinflation remained low.

3. The rapid decline in oil prices and subsequent slowdown in regional economies, whichbegan in 1982, adversely affected the Jordanian economy. The demand for Jordanian goods andservices in the neighboring countries declined resulting in a decrease in Jordan's exports ofagricultural and manufactured goods to the region. A slowdown in out-migration of Jordanians,along with the emerging macro-economic instability, led to stagnation in remittances and causeddomestic unemployment to rise. There was also a sharp decline in grant aid from the Gulfcountries beginning in 1982, which had financed about 30 percent of imports and amounted toabout 80 percent of the fiscal income.

4. The Government did not respond effectively to these adverse economic developments inthe early 1980s. Instead, it concentrated its efforts on protecting the existing domesticenterprises. This response was perhaps based on the assumption that the difficulties beingexperienced by the oil exporting countries, and their consequences to the Jordanian economy,

were temporary. Thus, in the agriculture sector, a system of production licensing and subsidieswas adopted in 1985 to reduce the output of crops facing marketing difficulties abroad. In themanufacturing sector, high import tariffs and bans on competitive imports were introduced in theearly 1980's to protect domestic producers from falling demand. Government expenditures werealso increased to stimulate domestic demand. In addition, the nominal exchange rate wasmaintained, despite the pressure of domestic inflation, through external borrowing and drawingdown reserves.

5. The consequence of this policy stance was a steady erosion in the internationalcompetitiveness of domestic production which, along with the fall in regional demand, adverselyaffected Jordan's exports, compounding the effects of declining remittances. Real GDP for mostof the second half of the 1980s stagnated. This was accompanied by a further deterioration in theoverall fiscal situation, with an increase in the budget deficit excluding grants to over 24 percentof GDP by 1988. The balance of payments position worsened, and large overall deficits led to adepletion of official reserves to a level of only half a month of imports. It was evident that thesituation was likely to worsen unless corrective policy action was initiated without delay.

6. Recognizing the emerging crisis, the Government initiated a response in 1988, whichculminated in the adoption of a comprehensive adjustment program in mid-1989. The objectivesof the program were to redress macroeconomic imbalances, reduce distortions in the trade regimeand restore economic growth. Between 1988-1989, the Government undertook a number ofpolicy measures toward these objectives, which included a series of fiscal adjustments to reducethe budget deficit including containment of military expenditure, reduction of consumer subsidies,tax reforms to enlarge the revenue base and enhance revenue performance, and a largedevaluation of the exchange rate followed by the pursuit of a flexible exchange rate policy tomaintain export competitiveness.

7. The Bank's economic and sector work during 1988-1989 assisted the Government inframing the economic debate and choosing viable policy options. A report on Small- andMedium-Scale Manufacturing (SMI) set out recommendations for an improved framework fortrade and incentives for investment and exports. The 1988 Country Economic Memorandum(CEM) reviewed major macroeconomic trends and recommended policy changes throughadjustment of exchange rates, trade policy reform, social policies to deal with unemployment andfiscal retrenchment to reduce the deficit. In early 1989, the Government's request for a tradepolicy-based, quick disbursing, adjustment loan came in the wake of the implementation of thereforms mentioned above.

PROGRAM PREPARATION

8. The Bank responded positively to the Government's request by sending a Preparationmission to Jordan in February 1989; IMF staff participated in this mission. The principalobjectives of the mission were: i) to assess Jordan's macroeconomic situation and identify theareas where policy reforms are needed to complement the Government's ongoing stabilizationefforts; and ii) to formulate policy and institutional reforms to encourage industrial growth andexport diversification. In developing these policy measures, the Bank worked closely with theGovernment in identifying the components of the policy-based operation, and in formulating the

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organizational framework required for the implementation of policy changes. The details of theAide-Memoire describing the likely agenda for the adjustment operation were discussed with aGovernment committee consisting of representatives from the major Ministries and the CentralBank of Jordan, and at the request of the Government, the Preparation mission also met withH.R.H. Crown Prince Hassan.

9. By working together, the Bank was able to develop, jointly with the Government, acomprehensive trade and industrial policy reform program. The Bank has managed to convey tothe Government the need for implementing a set of policy and institutional reform measureswithin an established time frame, while recognizing the political sensitivities involved, theabsorptive capacity of the country and the need for special attention to the impact of the policymeasures on the vulnerable segments of the population. In the meanwhile, prospects forcofinancing were explored with the Japanese and German governments. In this context, it wasagreed with the Government that a medium-term macroeconomic framework supported by asound external financing plan would be the necessary foundation for the Bank to proceed with aTrade and Industrial Policy Adjustment Loan. Subsequently, the Government reached agreementwith the IMF over an eighteen-month Stand-by Arrangement.

PROGRAM OBJECTIVE AND DESCRIPTION

10. Notwithstanding the macroeconomic adjustment measures implemented in late 1988,Jordan's economy continued its downward slide in 1989. The agriculture sector GDP declined byover 11 percent, reflecting the unfavorable weather conditions, and the construction industry by12 percent due to the lack of confidence in the business environment, and the short-fall inremittances from abroad. Overall, real GDP declined by 13 percent in 1989. Imports of goodsand non-factor services in 1989 dropped by about 18 percent, due to the slack economic activity,the depreciating JD and the declining remittances and tourist receipts. In view of thedepreciating JD and the decision not to increase the prices of basic foodstuffs, Governmentexpenditures on food subsidies rose significantly, amounting to about 3 percent of GDP. This,together with the much larger external interest payments, resulted in a fiscal deficit of 21 percentof GDP. Government borrowing was increased significantly, and domestic inflation was runningat 26 percent. The real interest rate was repressed to well below zero due to the ceilings imposed(Table 1).

11. The objective of the ITPAL was therefore to assist the Government in responding to theacute economic difficulties by deepening its macroeconomic adjustment efforts, and by reformingthe trade and industrial policies to lay the basis for sustainable long-term growth. Toward thisbroad objective, the ITPAL program incorporated a three-prong approach comprising measuresto: (i) complement the IMF medium-term adjustment program (initiated in 1989) in ensuring astable and competitive macroeconomic environment; (ii) improve the efficiency andcompetitiveness of industry and trade; and (iii) protect the poor from the adverse impact of theadjustment policies.

12. In pursuit of these objectives, the ITPAL was aimed at: (i) encouraging a strong supplyresponse to the macroeconomic adjustment measures by strengthening institutional support forthe growth of agriculture, manufacturing and commercial services on the basis of export expansion(with diversification into non-regional markets) and efficient import substitution; (ii) establishing a

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more uniform, less distorted incentive structure in the economy by rationalizing the trade regimeand replacing the existing system of investment incentives by a simpler and more transparent one;and (iii) improving the effectiveness of service delivery to the poor by creating an apexorganization to coordinate the activities of the Government agencies and the Non-GovernmentOrganizations.

13. The proceeds of the Bank loan, amounting to US$150 million, were to be disbursedagainst general imports (i.e. imports excluding those in a negative list such as military or para-military items, luxury goods, alcoholic beverages, tobacco, radioactive materials, nuclear reactorsand parts) in two tranches: US$75 million after the loan was declared effective; US$73.5 millionafter the satisfactory completion of a set of agreed upon policy measures; and US$1.5 million tofinance technical assistance over the life of the operation.

14. Release of the first tranche, after loan effectiveness was made contingent on thefollowing:

* removing quantitative import restrictions and import bans on selected productsdetermined in agreement with the Bank:

- reducing the maximum import tariff rate to 60 percent, except for a limited list ofluxury imports for which no similar goods were produced in Jordan;

* increasing the minimum tariff rate applicable to imports to 5 percent, except forcertain capital goods and essential food items;

X revising the Encouragement of Investment Law to streamline application ofinvestment incentives;

* taking steps to improve the effectiveness of the Export Rediscounting Facility; and

* maintaining the macroeconomic policy framework consistent with the objectives ofthe program.

15. The release of the second tranche was made contingent on maintaining a sustainablemacroeconomic situation and on meeting specific criteria which were classified into four areas:

* Restructuring public expenditure. Preparation and implementation of a publicexpenditure restructuring program based upon an exchange of views thereon withthe Bank;

* Restructuring of the tariff svstem. Implementation of measures to simplify thetariff administration with the introduction of the harmonized system, replacementof specific tariff rates with ad valorem rates, and setting tariff rates at multiples of5 percent; reducing the maximum tariff rate applied to imports from 60 percent to50 percent, except for certain luxury goods; and agreeing on a program specifyingthe future steps and timing therefore for the equal taxation of these excludedluxury goods and similar locally produced goods.;

* Institutional support for export and investment promotion. Adoption of an actionplan for the merger of the Industrial Estate Corporation (IEC) and Free ZoneCorporation (FZC) and a national investment and export promotion program, andratification of revisions to the provisions of the Encouragement of Investment Lawon the discretionary elements of incentives.

* Protecting the poor during the adjustment period. Establishment of an agency tocoordinate the governmental and non-governmental organizations engaged inassisting the poor.

16. The technical assistance component of US$1.5 million was to finance studies required forthe effective implementation of the envisaged institutional reforms. These studies included:

(i) A study to merge the Industrial Estate Corporation (IEC) and the Free ZoneCorporation (FZC) and to prepare an export and investment promotion strategy;

(ii) A review of Industrial Standards;

(iii) A review of the institutional arrangements in export finance; and,

(iv) A study to determine the optimal structure and procedures of an Apex agency forprotecting the poor.

All the above studies were carried out and completed:

(i) the study to assist GOJ in defining an action program to support the merger ofIEC and FZC and to determine the role and strategy of the institution createdafter the merger was funded by UNDP and conducted by the International TradeCenter; the export and investment promotion strategy under the same study wascompleted in September 1990.

(ii) the study on industrial standards to improve quality and reliability of Jordanianexports, local products and imports, was conducted with the assistance of theGerman government through a GTZ project. It included a number of legislativeand administrative changes in the standards system. In May 1989, GOJpromulgated a temporary law on standards and specifications. The Government'sefforts to further improve the system was assisted by the Bank through itseconomic and sector work;

(iii) the study to improve the institutional arrangements for export finance was fundedby USAID and conducted by the First Washington Associates, Inc. The feasibilitystudy provided valuable recommendations for creating an Export Credit Guaranteeand Insurance Agency;

(iv) the study to determine the optimal structure and procedures of an Apex agencyfor protecting the poor was funded by USAID and completed in April 1990 by theJordan Institute of Public Administration which recommended an agency along thelines envisaged under the ITPAL. Subsequently, the Development and

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Employment Fund (DEF) was established in June 1990 to coordinate and improvethe efficiency of the existing institutions working on social development and smallproductive projects.

The consultants' performance was satisfactory. There were no significant delays except for thoseattributed to the Gulf crisis. Resources were deployed directly through the financing agencies.

17. Procurement. As provided in the Loan Agreement, contracts for the procurement ofgoods (both public and private sector procurement) each costing the equivalent of US$5 millionor more were to be awarded through International Competitive Bidding (ICB) in accordance withthe procedures set forth in the "Guidelines for Procurement Under IBRD Loans and IDACredits". However, for contracts below US$5 million equivalent, the procurement procedures thatwere to be followed differed for public sector purchasers and private sector purchasers. Publicsector purchases below US$5 million were allowed under Borrower's public procurementprocedure, subject to the Bank's review of the contracts; for private sector purchasers,procurement followed the established commercial practice on the basis of comparison ofquotation from suppliers from at least two countries, excepting the use of direct contractingprocedures acceptable to the Bank. For private sector procurement for contracts between US$2and US$5 million, the Borrower encountered difficulty with the Bank's standard provision underthe Loan Agreement requiring quotations from two suppliers, given the nature of private sectorcontracting in Jordan.

18. There were extensive discussions on the issue of procurement procedures, in particularthose that were to be followed by public sector purchasers. In September 1990, Bankmanagement considered it appropriate for the Bank to be responsive to the needs of our membercountries affected by the Gulf crisis by exercising flexibility on our procedures. Subsequent to thisthe Borrower requested to amend the legal document, for the reasons indicated above, to:

i) increase the ICB threshold from US$5 million to US$6.9 million. The Borrower pointedout that an additional US$32 million would be eligible for financing if ICB thresholds wereincreased to $6.9 million, thus expediting disbursement on previously awarded contracts.

ii) increase the threshold from US$2 million to US$5 million for private sector contractsrequiring competitive bids from at least two countries (Sch. 3, para 2(b) of Loan Agreement). Itis the practice of many private firms in Jordan to purchase from established business relationshipswithout obtaining bids. The Borrower was not in a position to change the procurement practicesof these firms to increase the number of contracts under the ITPAL financing; and

iii) increase the US$30 million ceiling on food imports (already reached under the firsttranche) to US$65 million (Sch. 1, para. 3(g) of Loan Agreement). Food constitutes 31 percentof Jordan's yearly imports while the percentage of food permitted to be financed under theITPAL represents only 20 percent of the total loan. In addition, demand for food importsincrcased with the influx of the returnees and refugees.

19. While the Bank would not agree under normal circumstances to the proposed amendmentto the procurement procedures, in view of Jordan's immediate requirements for funding caused bythe Gulf crisis, the Bank agreed to items (ii) and (iii) on an exceptional basis, and waivers of therespective provisions in the Loan Agreement were issued. With regard to item (i), US$5 million

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was the threshold limit established for this purpose, and the Bank considered that it would beinappropriate to set a precedent.

PROGRAM DESIGN

20. Experiences from countries going through trade policy reform suggest that trade policyadjustment succeeds best in a stable economic environment. The phasing of the adjustmentmeasures should complement the process of fiscal stabilization, and should be supported by theactive pursuit of exchange rate and interest rate policies. The experiences also show that tradereform is more effective when complemented by efforts on the supply side through reforms ofindustrial policies and improvement of institutional supports, and that tariff reform is moreeffective when coordinated with reforms of the domestic tax. The design of the ITPAL bearssalient features in all these aspects.

21. The overall objective of the ITPAL was to complement the initial progress in macro-economic stabilization by encouraging a strong supply response through improvement in the tradeincentive regime. By 1990 the adjustment efforts had produced positive results and provided for arelatively stable environment in which restructuring of the tariff regime could take place. Thetariff adjustment measures were phased in with a view to complementing the fiscal adjustment,and were supported in a timely fashion by continuous adjustment of exchange rates, de-control ofinterest rates as well as by supply-side policies. The design and implementation of tariff reformspaid particular attention to the ultimate goals in domestic tax reforms--such as tailoring thescheme of tax equalization to the design and implementation of the General Sales Tax, as well asprotecting the domestic revenue base and finally, to the need for alleviating measures to protectthe poor during adjustment.

22. The ITPAL had been preceded by the initial success in fiscal stabilization. By 1990, thefiscal deficit excluding foreign grants had been reduced to 18.7 percent from well above 24percent in 1988 with increases in revenue accounting for most of the deficit reduction. Domesticinflation as measured by CPI was brought down to 16 percent in 1990 from 26 percent in theprevious year. Two major factors contributed to the increase in fiscal revenue. First, theadjustment of foreign exchange rate that took place during 1988-89 had resulted in a depreciationof the JD by 25 percent in real terms. The first order effect of the adjustment was that the JDvalue of imports rose and the tariff revenue accrued to the central government increased, thuscreating a stronger revenue base for the subsequent tariff reductions.

23. Second, the initial phase of the trade reform was focused on removing the import ban onluxury items, converting quantitative restrictions to tariffs and reducing tariff exemptions, thusincreasing tariff revenue by shifting (potential) quota rents to the public sector. This first phaseof tariff reform was followed by reductions and restructuring of tariffs and reforms of supply sidepolicies during the second phase; and tax equalization in the third phase (see para.31). Thisapproach ensured that the initial trade policy reform measures i.e., the conversion of quantitativerestrictions (QRs) to tariffs and reductions of tariff exemptions, resulted in an increase in tariffrevenues, therefore strengthening the sustainability of tariff reforms.

24. The trade reform under adjustment was complemented by liberalizing nominal interestrates, thus adjusting real interest rates to international levels. The liberalized interest rate policy

has facilitated financial deepening (as measured by M2lGDP, see table 1), and helped to establisha stable financial system, attractive to the reflows of capital and complementary to the pursuit ofan active and flexible exchange rate policy.

25. The full benefits from trade liberalization can only be realized when correspondingchanges have been made in the industrial policy framework In this regard, the ITPAL containeda number of initiatives on the supply side. It set out to simplify the procedures for investmentapproval, expand the eligibility criteria for investment incentives provided under theEncouragement of Investment Law (EEL), and reduce the discretionary elements in EIL.Furthermore, the ITPAL entailed measures to facilitate export finance, strengthen institutionalsupport for export development, improve the industrial infrastructure as well as the industrialstandard.

26. The trade adjustment measures were also accompanied by measures to protect the poorduring adjustment. The timely Public Expenditure Review and the effective protection ofessential public spending on programs benefiting the poor (see para. 4849 below) went a longway toward alleviating the adverse effect of adjustment on the poor. Finally, there were mutualunderstanding and agreement at the onset between the Borrower and the Bank over theconceptual foundation of the program, its design and major policy objectives. There were somedivergent points of view relating to the implementation and choice of measures to achieve thepolicy objectives, but they were swiftly resolved to mutual satisfaction (see para. 31).

TABLE 1: KEY MACROECONOMIC INDICATORS

(In percentage, unless otherwise indicated)

1985 1986 1987 1988 1989 1990 1991 1992

GDP Growth 6.1 7.7 2.6 -0.5 -13.5 1.7 1.8 11.3Annual % Change in CPI 3.0 0.0 -0.2 6.6 25.8 16.1 8.2 3.8Current Account Balance/GDP 2/ -19.9 -11.2 -7.7 -14.0 -17.2 -29.1 -21.5 -22.7Growth of GNFS Exports (BOP,S) .. -19.1 16.2 0.4 -3.7 2.7 -3.2 5.3Growth of Non-Traditional Exports(BOP,S)1/.. -24.9 18.6 -4.8 -2.6 5.3 -2.2 7.3Growth of GNFS Imports (BOP,S) .. -15.6 3.3 -3.7 -18.4 9.6 -2.7 22.8

Gross Domestic Investment/GDP 21.7 21.2 25.2 25.7 25.9 28.8 24.0 31.6Gross Domestic Savings/GDP -17.4 -7.8 -4.6 -2.4 -2.2 -16.3 -15.8 -17.8Growth of Real Consumption Per Capita 24.8 -4.7 -4.0 -5.9 -16.8 7.9 -9.3 8.7

Import Duties/GDP 5.9 5.2 4.9 5.1 4.3 4.3 4.5 6.3Overall Budget Deficit/GDP 2/ -21.6 -13.7 -21.7 -24.0 -21.0 -18.7 -17.8 -4.0Real Average Interest Rate (lending) 10.8 8.8 8.3 5.3 -9.9 .4 6.5 6.2

M2/GDP 95.2 98.0 109.7 119.6 128.3 119.4 133.7 122.6Real Effective Exch Rate (1980=100) 110.4 101.6 91.1 79.5 67.1 59.6 60.9 59.4Nominal Average Exchange Rate 0.3950 0.3500 0.3380 0.3715 0.5705 0.6636 0.6807 0.6798Salter Ratio 101.2 100.0 99.6 96.9 100.1 100.9 116.8 117.6

Notes :

1/ Exports of GNFS excluding potash, phosphate, and fertilizers.2/ Excludes grants.

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PROGRAM IMPLEMENTATION

27. Implementation Arrangement. The Ministry of Planning was responsible for theimplementation of the operation, and the Central Bank of Jordan for collecting all supportingdocuments, preparation and submission of withdrawal applications, and maintenance of necessaryaccounts for the loan funds. The Bank monitored the progress of program implementationthrough regular supervision and consultations with the Govemment. The operation's account,including the Special Account, was audited by independent auditors acceptable to the Bank, andthe annual audit report was submitted to the Bank within six months of each fiscal year.

28. Compliance with tranche conditions. Conditions for the first tranche release (see para.14)were fully met. The Government had taken measures, before the end of November, 1989, toreduce the maximum tariff rates to 60 percent, increase minimum tariffs to 5 percent, removequantitative restrictions on imports, and improve the operation of the Export RediscountingFacility. Finally, the progress in macro-economic adjustment had been sufficiently maintained.

29. Subsequent to the implementation of these measures, the MAL was approved by theBoard on December 14, 1989, and was declared effective on February 26, 1990, one month earlierthan was originally anticipated. By June 1990, US$73.2 million against the first tranche had beendisbursed.

30. GOJ requested the Export-Import Bank of Japan (Eximbank) to finance urgently neededimports required during the adjustment program. On December 31, 1990, a Co-lenders'Agreement was entered into between the World Bank and Eximbank. Eximbank granted GOJ aloan in Yen equivalent an aggregate amount of US$75 million for the program on a parallel basiswith the World Bank loan. The supervision of the procurement process and replenishmentnotification was carried out by the World Bank in accordance with its standard procedures. Thefirst tranche of US$37.5 million equivalent was released in December 1990; the second tranchefor the same amount was disbursed in July 1992.

31. The implementation of the adjustment program was, however, interrupted by the Gulfcrisis (August 1990 - February 1991). The crisis disrupted Jordan's trade, reduced remittances andburdened the economy with fiscal outlays to fund social services for the returnees from the Gulf.These factors exerted pressure on the budget and balance of payments, and thus slowed theprogress towards macroeconomic stabilization. The growth performance of the economy was alsoadversely affected and unemployment rose sharply. More importantly, because of the tradeembargo on Iraq, and the blockade of the port of Aqaba it was not possible for the Governmentto timely implement the tariff restructuring measures under the MAL Furthermore, completionof the studies commissioned under the ITPAL was delayed by the disruption of internationaltravel and uncertain situation in the country during the crisis, and this in turn delayed theimplementation of institutional reforms envisaged under the program.

32. The crisis exacerbated the nature of economic problems confronting Jordan including itsworsening credit standing, and compressed import capacity. During the months immediatelyfollowing the Gulf crisis, the Bank focused its support to Jordan on mobilizing external assistanceincluding technical analysis to support aid flows from the GCFCG, and the formulation of a soundmedium-term financing plan.

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33. The Government in the meanwhile, resumed the implementation of the adjustmentprogram which culminated in a new Stand-by Arrangement approved by the IMF Board onFebruary 26, 1992. By then, the Government had taken the following measures to fully complywith the conditions for the second tranche release:

* The public expenditure review was conducted and the recommendations of thereview were endorsed and adopted including: the elimination of subsidies on lamband beef; reductions of subsidies on sugar, rice and milk; increase of electricity andwater tariffs, and charges for sewerage and railway transport;

* Tariff reforms were implemented including: (i) introduction of the harmonizedsystem; (ii) replacement of specific tariff rates with ad valorem tariff rates;(iii) setting tariff rates at multiples of 5 percent; and (iv) reducing the maximumtariff rate to 50 percent, except for certain luxury goods;

* National investment and export promotion programs were adopted under theTPAL, and institutional reforms were implemented;

3 A Development and Employment Fund (DEF) was established with the objectiveof coordinating governmental and non-governmental organizations (NGOs) inassisting the poor.

Following the satisfactory progress made in the macroeconomic program, the second tranche wasreleased in March 1992.

34. Problems in Implementation. Some problems were encountered in implementationpertaining to three main issues:

(i) Tendering Procedure

Some conflicts between the Bank's procurement procedures and the existing Jordanianlegislation and general import needs of the country came to surface during the first fewmonths of the ITPAL These included the requirement by the Jordanian legislation (forpublic sector purchases) that foreign bidders be locally represented which contradicts theBank's guidelines; the increase in threshold limits on private sector imports; and increaseon ceiling for food imports as mentioned in paragraph 18 (i), (ii), and (iii). Afterextensive discussions, including a field visit by the Bank's procurement specialist,agreements were reached to: on the part of the Borrower, the removal of the aboverestriction on foreign bidders and, on the part of the Bank, an agreement to waive therespective provisions in the Loan Agreement on the threshold limit and ceiling for foodimports (see paragraph 19).

(ii) Egualization of Tax on Competing Luxury Imports and Similar Domestic Goods

The implementation schedule of tariff reforms reflected the practical problems incollecting taxes from small-scale enterprises, and therefore allowed for a sufficient periodof three years for fully achieving the tax equalization scheme. Overall, the tariff reform

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program provided for retaining above 50 percent import duties on a specified list ofcompeting luxury goods on the condition that such a tax was applied equally to importsand similar domestic goods. A total of 87 import items belonging to six commoditycategories (tobacco products, special soaps, clothing and footwear, furniture, luxurybuilding materials, refrigerators and television antennas) were earmarked for such equaltaxation (These goods accounted for 2.5 percent of total import value in 1989). Inpractice, however, clothing, footwear, and furniture categories (74 items) were mostlyproduced by small-scale enterprises and workshops which do not keep systematic recordsof operation, and tax collection would be difficult. Reflecting this practical concern, it wasagreed between the Bank and the Borrower that tax equalization was to be achieved forabout one-third (in terms of 1989 import value) of the goods on the original list duringthe life of the ITPAL, and that tax equalization for the remaining items would beimplemented over the next two years in line with the proposed General Sales Tax scheme.The share of these goods (by value) in total commodity imports in 1992 was about 2.3percent.

(iii) The Merger of Industrial Estate Corporation (IEC) and Free Zone Corporation(FZC)

The Jordanian authorities made serious attempts to merge these two organizations.However, the prevailing problem surrounding FZC has prevented the proposed merger.So far, the FZC continues to serve as a service center supporting the re-export of tradewith the neighboring Arab countries. Nearly all the companies established in the FreeZone are in the trading rather than manufacturing business. The predominant tradingrole of the Free Zone has been compounded by the increased demand for transit tradefollowing the Gulf crisis, therefore merging the two organizations has proven to be moredifficult.

35. Disbursement. Disbursements were made on the basis of 100 percent of foreignexpenditures for foreign exchange costs of imported goods. A Special Account with an initialdeposit of US$15 million was established at the Central Bank of Jordan (CBJ) in order to ensurespeedy disbursements. Withdrawals for expenditures of less than US$2 million were permitted onthe basis of Statements of Expenditures. Retroactive financing was permitted up to US$29million (20 percent of the loan amount) against expenditures made after July 1, 1989. Thisretroactive financing was justified by the advanced actions already taken by the Borrower in keyareas of the policy reform, and provided critically needed financing for goods and services forwhich no other financing was available. All the studies specified in the Loan Agreement werefinanced through other sources. Therefore funds (US$1.5 million) earmarked for technicalservices were reallocated and utilized for general imports. The second tranche was originallyexpected to be fully disbursed by the end of March 1991. However, due to the delay inimplementation caused by the Gulf crisis, the loan amount was fully disbursed on October 20,1992; the loan was officially closed on December 31, 1992, as originally scheduled. The CBJmaintained records of all disbursements, including the Special Accounts, and separate accounts foramounts disbursed on the basis of Statements of Expenditure.

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PROGRAM IMPACT

36. The objective of the trade and industrial policy reform was to improve the incentivestructure and thereby change the behavior and performance at the micro level by inducing greatercompetition into the previously protected domestic economy. The efficiency gains entailed by thechange in the incentive regime were to be achieved both through increased output growth giventhe level of input and a shift in resource allocations from the inefficient to the efficient sectors.The transition, however, to a more open trade regime can impose short-run adjustment costsresulting from the greater exposure to increased competition. The change in behavior andperformance at the micro level cannot be fully assessed given the limited scope of this report, andthe relatively short period of time for the change to manifest. Therefore, the following section,based on preliminary data and stylized facts, intends to evaluate the impact of policy reforms onthe tariff incentive regime, the response of the economy and export sector to the new incentiveregime, the effectiveness of the institutional measures to support the policy reforms, and theeffectiveness of public spending and programs to alleviate the adjustment costs on the poor.

37. Impact on the Tariff Structure. The average tariff protection rate and the disparitiesoffered to different sectors of the economy were reduced. The import duties are now moreevenly spread on different domestic consumers and industries, and tariff revenues now come froma wider range of product groups rather than concentrated on the high-tariff product groups asbefore.

38. Table 2 shows that the weighted average tariff rate was reduced from 34.4 percent in 1987(prior to the ITPAL) to 25.0 percent in 1992, and that uniformity in the tariff structure wasincreased. The tariff coefficient of variation has been reduced from 167 in 1987 to 88.5 in 1992,and the tariff frequency rates have been simplified to multiples of 5 percentage point. Theweighted average tariff rate for the groups falling between 5.1 - 10.0 has slightly increased. Thosefor all other groups above 10 percentage point have been reduced significantly. There are nowonly 5 items with no import tariffs (except for a 2 percent fee for overtime payments for customsofficials) as compared to 9 items in the 1987 schedule. The minimum tariff rate of 5.2 percent(including a 0.2 percent fee to pay customs officials for overtime work) was applied to 87 productsranging from live animals to fertilizer.

39. The effective rate of tariff protection for the manufacturing sector declined from 42percent in 1987 to 27 percent in 1992, reflecting the cumulative impact of tariff restructuring onthe input and output sides. During this period, the weighted average tariff rate on intermediategoods increased marginally, from 16.0 percent to 18.0 percent, while the average tariff rate onfinal goods decreased significantly, from 35.6 percent to 25.0 percent. It is important to notethat these estimates do not capture the impact of the removal of QRs and the replacement ofspecific tariff rates with ad valorem rates. When they are taken into account, the actualmagnitude of the decline of the effective protection levels would be much greater. However, theauthorities continue to maintain high tariffs for non-competing luxury imports, the number ofwhich, at weighted average rate of 72 percent in 1992 as compared with 86 percent in 1987,increased from 424 to 500. These products accounted for 16.6 percent of total values of imports,and provided for 47.6 percent of tariff revenues in 1992.

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TABLE 2 : DISTRIBUTION OF NOMINAL TARIFF RATES

1987

WEIGHTEDAVERAGECOEFFICIENT OF SHARE OF SHARE OF TARIFF REV 3/ IMPORT VALUE TARIFF 4/TARIFF RANGE 1/ VARIATION 2/ IMPORT VALUES TARIFF REV (JD mil) (JD mil) CX)

… … -

0.0 - 5.0 26.6 15.7 1.4 2.4 79.6 3.15.1 - 10.0 0.1 24.4 5.1 8.9 123.3 7.210.1 - 20.0 10.9 4.3 2.2 3.9 21.8 17.820.1 - 30.0 7.8 7.3 5.3 9.2 36.9 25.030.1 - 40.0 6.4 13.0 13.1 22.8 66.0 34.540.1 - 50.0 5.9 13.1 17.4 30.3 66.4 45.6- 50.1 65.4 22.2 55.5 96.6 112.5 85.8

TOTAL 166.9 100.0 100.0 174.1 506.6 34.4

1992

WEIGHTEDAVERAGECOEFFICIENT OF SHARE OF SHARE OF TARIFF REV 3/ IMPORT VALUE TARIFF 4/TARIFF RANGE VARIATION 2/ IMPORT VALUE TARIFF REV (JD mit) (JD mit) C)

0.0 - 5.0 0.0 2.8 0.0 0.1 60.5 0.25.1 - 10.0 25.7 32.6 9.8 53.6 717.8 7.510.1 - 20.0 8.3 18.9 7.8 42.9 415.2 10.320.1 - 30.0 8.4 13.8 12.7 69.8 303.8 23.030.1 - 40.0 6.5 10.0 13.2 72.4 219.3 33.040.1 -50.0 5.3 5.4 8.9 49.1 118.1 41.6>> 50.1 59.2 16.6 47.6 261.5 365.3 71.6

TOTAL 88.5 100.0 100.0 549.4 2200.0 25.0

1/ Defined at the 8 digit level of the Brussels Tariff Nomenclature (BTN) codes.2/ Standard deviation divided by mean.3/ Assuning there was no exemption.4/ Weighted by nominal import values.

Sources : Based on data provided by Customs Department, Department of Statistics, and Ministry of Planning

40. Impact on the Overall Incentive Structure. In assessing the impact of policy reforms onthe competitiveness of the Jordanian economy, it is important to focus on two aspects ofcompetitiveness: external competitiveness as reflected by the relative price of domestic andforeign goods, and internal competitiveness as measured by the relative domestic prices oftradable and non-tradable. External competitiveness determines the ability of domestic firms tomaintain or increase their market share both in foreign and domestic market(s) relative to that offoreign competitors. Internal competitiveness determines the ability of tradable good industries toattract resources.

41. The measure commonly used in determining external competitiveness is the real effectiveexchange rate (REER); trade-weighted bilateral nominal exchange rates vis-a-vis trading partnercountries adjusted for relative inflation between these countries and the domestic economy. Ascan be seen in Table 1, Jordan's external competitiveness as seen in the REER (profitability ofboth import-substitution and export production) improved considerably throughout the periodunder consideration and the improvement has been more marked since about 1988.

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42. Internal competitiveness is measured in terms of the so-called "Salter" ratio', the ratio ofthe domestic price of tradable to non-tradable. As Table 1 shows, the ratio has significantlyincreased since 1989 reflecting improved profitability of tradable good production over non-tradable good production in the economy.

43. It is evident that the policy reforms have enhanced both the external and internalcompetitiveness of the Jordanian economy as defined above. Nevertheless, the question remains:within tradable production, what has happened to the relative profitability of exports compared toimportables (i.e. import-competing goods)? Preliminary estimates suggest that a clear anti-exportbias still prevails, although it has been reduced considerably by the tariff reforms under theITPAL. At present, import-competing goods still enjoy considerable tariff protection boththrough lower tariff on input and higher tariffs on final products. Most of the import-competinggoods belong to higher tariff brackets. These tariffs are essentially taxing export production. Theexisting duty-rebate and export rediscounting facilities in their present form of operation have notbeen successful in redressing this bias.

44. The Impact on Economic Performance. The tariff reforms, along with the flexible foreignexchange rate policy stance pursued since 1988, has strengthened Jordan's competitiveness in theagriculture and manufacturing industries. The major realignments of exchange rate that tookplace during 1988-89 resulted in the depreciation of JD by 25 percent in real terms. Export ofgoods responded strongly to the new incentive regime. Total exports in dollar terms grew bymore than 20 percent per annum during 1988-92, and non-traditional exports grew at an evenmore rapid rate of 28 percent. The pursuit of a competitive exchange rate policy has beencomplemented by the removal of ceilings on interest rates. The resultant, positive real interestrates have enhanced financial deepening in the economy: the M2/GDP ratio increased from anaverage level of 110 between 1985-88 to 130 between 1989-92 (Table 1). This, in turn, hashelped attract the capital retlows and increased the availability of real loan funds for theexpansion of private sector investment.

45. With the surge in exports, and the increase in imports financed, to a larger extent, by theincreases in workers' remittances as well as foreign transfers, GDP growth, after experiencing asevere drop in 1989, stabilized in 1990 and 1991, and accelerated in 1992 (Table 1). The impactof the policy reforms would have been more pronounced for 1990 and 1991 if not for thedisruptions caused by the Gulf crisis. In the first four months following the outbreak of the Gulfcrisis (in August, 1990) Jordan's GDP at factor cost fell by over 20 percent on an annualizedbasis; Jordan lost its export market in Iraq, Saudi Arabia and Kuwait; income in the transittransport and trade; income from travel and tourism; and for a brief period, worker's remittancesas well. At the same time, Jordan had to bear unexpected outlays to shelter the returnees. In1991, the adverse impact of the Gulf crisis was compounded by the bad weather conditions andthe consequent drop in the agriculture production as well as the decline of the mining sectoroutput. And, as much of the investment during 1990 and 1991 went to the residentialconstruction (at about 10 percent of GDP or over 35 percent of the total official estimates offixed investment), and to the provision of services to the returnees, the effects of these

j/ This nomenclature is due to Corden (Corden, W.M., 1990, "Exchange Rate Policy inDeveloping Countries" in Jaime de Melo and Andre Sapir (Eds.) Trade and Economic Reforms:North, South, and East. Oxford: Basic Blackwell for the World Bank.

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investments on the rest of the economy fell far short of compensating for the loss of productionand income resulting from the Gulf crisis.

46. Rationalizing the Export Rediscounting Facility. The Export Rediscounting Facility (EDF)administered by the Central Bank of Jordan provides funds to finance exports through commercialbanks at a discount. Two objectives were set out under the ITPAL to rationalize the EDF:

i) reduce the average interest rate margin to exporters to about 5 percent, and holdit constant by changing the rate of discount to reflect commercial lending rate;and,

ii) offer a lower discount rate for exports to non-traditional markets.

47. Accordingly, the authorities adjusted the discount rate to hold the average interest ratemargin to about 5 percent to exporters. In addition, a two percentage point rate differential wasoffered for goods destined to traditional and nontraditional markets. At the same time, theeligibility for use of EDF was expanded to cover virtually all exports. Effective from January1991, the value added threshold for access to EDF was reduced from 40 percent to 20 percent,and in August 1992, the EDF financing as a share of the total export value was increased from 60percent to 75 percent and from 80 percent to 90 percent respectively for pre-shipment and post-shipment credit facilities.

48. Notwithstanding the measures above, the use of EDF has declined since 1990; as a shareof the total export finance, it was only 4 percent in 1992 compared with over 10 percent in 1990.In terms of JD value, the EDF amounted to only JD 24 million in 1992 as compared with JD 71million in 1990. Possible reason seems to be that given the low operational margin permitted inhandling EDF as compared to the operational margin relating to general lending under theprevailing market lending rates (10 to 13 percent) commercial banks do not show active interestin promoting lending under the scheme. Such practice is consistent with the healthy liquidityposition of banks which has reduced their reliance on the central bank credit including EDF. Inany case, the EDF in its present form does not seem to play an active role in promoting exports.Moreover, as against the operational criteria stipulated in the ITPAL, the subsidy elementinvolved in EDF (the difference between the discount rate and the average commercial banklending rate) has widened, rather than reduced. In fact, the two percentage point discount ratedifferential was removed and a single discount rate at 5 percent was set for all exports in August,1992. This discount rate has been reduced to 3.5 percent in 1993. Recently, the processingmargins allowed for commercial banks in handling the EDF was increased from 1.5 percent toover 2.0 percent. The Government seems to be aware of the inadequacy of the EDF, and is inthe process of establishing an Export Credit Guarantee Corporation (ECGC), which may entailmeasures to address the problems in the EDF.

49. Encouragement of Investment Law (EILJ. The EIL was established in 1989 to provideincentives for investment projects in manufacturing, mining, agriculture, hospitals, and tourism. Ithas been used to encourage investment in the rural area, using high technology or capitalintensive. The EIL offers income tax and customs duty exemptions to the projects that meet atleast one of the above criteria. This law was revised in October 1991 to streamline theapplication of investment incentives. However, the EIL remains ambiguous regarding projectscreening process and provides for an arbitrary differentiation between economical and approved

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economical projects. A proposal to amend the Encouragement of Investment Law (EIL), with aview to strengthening the objectivity in prospect selection, has been discussed by the Cabinet.

50. Jordan Export Development and Trade Centers Corporation. The Jordan ExportDevelopment and Trade Centers Corporation (JEDCO) is a joint venture operating with fundsfrom both the public and private sectors. In the last two years, it has played a useful role infinding new markets for Jordanian products in response to the disruption of traditional marketsfollowing the Gulf crisis. JEDCO has organized export exhibitions and participated ininternational trade fairs abroad. The corporation is currently implementing the Export TradeService project funded by USAID with US$1.0 million to study the US and European markets,and forged cooperative relations with other bilateral and multilateral agencies. JEDCO hasmaintained good contact with the United Nations Commission on Trade and Development(UNCTAD) and the European Economic Community (EEC). The shortage of manpower andexpertise in marketing has proven to be a serious constraint to strengthening JEDCO'seffectiveness.

51. Protecting the Poor During Adjustment. The Government envisaged two vehicles toprotect the poor during the adjustment period in order to alleviate the social distress, and to winbroad-based social support for the adjustment efforts. First, restructuring the public expenditurein line with the recommendations from the "Public Expenditure Review" prepared by the Bank toboth protect the budgetary allocations on health, education and social services going to the poor,and to improve targeting of the poor in the social safety net by reducing general subsidies.Second, creating an Apex agency to coordinate NGO and government activities in assisting thepoor. The Government also envisaged on-lending the bilateral donor funds through the Apexagency to employment generating micro-projects.

52. Good results have been achieved by restructuring the public expenditures. Despite theoverall reductions of public expenditures, spending on education, health and other social serviceshas been well protected. In education, primary and secondary education, which benefit the poorthe most, have received priority in budget allocations since 1988. The budgetary costs ineducation as a whole are moderate relative to the quality of services provided. In health, theGovernment has adopted measures to improve cost recovery and the use of primary health carefacilities. Overall, public spending on health care service has been increased both as a share ofGDP and in real absolute value, which has enabled the public institutions to continue service tothe poor and vulnerable. In line with the PER recommendations, the protection of essentialspending on social sector services has been facilitated by reductions of spending on non-essentialitems. In this regard, the Government took major decisions to curtail spending on militaryequipment, and to withhold increases in civil service salary during 1990-91. The Government alsoeliminated subsidies for mutton, beef, and maize. Rationing coupon system for sugar, rice, andpowdered milk was introduced in order to improve targeting in the social safety net. The pricesof water, electricity, and diesel fuel were increased to reduce the fiscal claim on the Governmentand to strengthen the financial viability of the public utilities.

53. The results of the Apex agency were mixed. The Development and Employment Fund(DEF) was established in June 1990. By March, 1992 the DEF had financed 15 projects to beimplemented by NGOs, and had made loans to specialized credit agencies, to the AgriculturalCredit Corporation (ACC) and the Small Scale Industries and Handicrafts Corporations (SSIH)for on-lending to micro-businesses. These activities were widely perceived by the public as a

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particular assistance effort made by the Government to alleviate the adverse impact of theadjustment on the poor. However, over time DEF has departed from its original concept ofbeing a small Apex organization which would coordinate other government agencies and NGOs,and focused the bulk of its financing on direct lending to small enterprises. A review of DEFhas confirmed these deviations, and considered that while DEF has served as usefulunemployment relief program to win the public support for the adjustment efforts, it may not beeffective element of poverty reduction program from a longer-term point of view.

54. Environmental Protection. The ITPAL was designed to implement policy reforms in theindustry and trade sectors. Its loan covenant prohibited the importation of hazardous materialssuch as radioactive materials and fuel elements. Environmental protection is being dealt withmore in the context of the follow-on adjustment operations (Energy Sector Adjustment Loan -ESAL and the Agriculture Sector Adjustment Loan - ASAL). Under these operations, GOJwould strengthen its efforts in natural resource managements in conformity with internationallyacceptable environmental guidelines; it would adopt environmental standards for protectionagainst air and water pollution, designate a responsible authority to monitor and enforceenvironmental regulations in the energy sector, and undertake policy adjustments for water qualitycontrol and agricultural chemical monitoring.

PROGRAM SUSTAINABILITY

55. The most important factor underlying the sustainability of the reform efforts supported bythe ITPAL is the strong commitment on the part of the Jordanian authorities. In his Letter ofAppointment of the present cabinet, King Hussein reiterated the continuation of stabilization-cum-market oriented reforms as the basic tenet of Jordan's economic policy. The authorities'commitment has been demonstrated both in the implementation of the ITPAL program as well asin the more recent formulation of the next Five-year Development Plan (1993-98), the draftdocument of which includes all the key elements of the ITPAL-supported policy objectives.Furthermore, support from the IMF for Jordan's adjustment efforts has been strong.

56. The second important factor is that the reforms have been built on the initial success inmacroeconomic adjustment, therefore policy reversal is very unlikely. This pertains to theexchange rate adjustment and the deficit reductions preceding the overall tariff reductions, and tothe gradual and steady implementation of each phase of trade policy reforms as described above(para. 18). Furthermore, the recent economic recovery has reversed the decline in per capitaincome, and promised to improve the living standard for the Jordanian people; in this context, theGovernment has also undertaken to tackle poverty more forcefully. This development, alongwith the more open public policy debate under the on-going political liberalization, is likely to winbroader public support for the adjustment program.

57. Notwithstanding these positive factors, Jordan's reform efforts face serious challenges.Jordan's current export income could finance only one-third of its imports, and its dependence onthe flow of worker's remittances constitutes a major uncertainty to the long-term balance ofpayments viability. In the short-run, Jordan's ability in mobilizing domestic savings is very limited.Given the large external debt, Jordan needs exceptional financing on concessionary terms over thenext two to three years and successive rescheduling through 1998. In the interim, however,Jordan needs to pursue a set of policies aimed at concurrently reducing domestic expenditures,

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and increasing domestic output in order to ensure that the benefits of trade and industrial policyreforms are sustained. These policies entail: (i) maintaining a flexible and competitive exchangerate stance; (ii) further reducing and rationalizing the tariff structure, and at the same timebroadening the tax revenue base and improving tax efficiency through adopting the general salestax--eventually income tax as well so that policy makers use tariff policies as the primaryinstruments to maintain trade competitiveness rather than to raise revenue; (iii) redressing theanti-export bias (as shown in the Salter ratios in table 1) by revamping the existing duty drawbackscheme and export re-financing facilities; (iv) reducing public sector deficit so as to increasedomestic savings.

58. The Bank's assistance strategy over the next 3-5 years is to help Jordan sustain theachievement in macroeconomic adjustment by focusing on sector structural reforms, as well ascarrying out of the tax policy reform to complement the tariff reforms under the mTAL. TheBank would also assist the Government in its external financing strategy by helping Jordan tomobilize the concessionary financing needed to close the resource gap, and to compress theperiod during which per capita consumption is expected to fall.

LESSONS OF EXPERIENCE

59. The first lesson that can be drawn is that macroeconomic adjustment should precede tradeliberalization. In Jordan's case, the initial progress in fiscal stabilization reduced the conflictbetween revenue generation and tariff reductions and thereby reduced the likelihood of majorpolicy reversals. Further, the realignment of the exchange rate improved the overall relativeincentive structure, enhanced tariff revenue, and created the conditions for tariff reforms at thelater stage. Second, is the importance of tailoring a trade liberalization strategy to specificcountry conditions. Here, a phased approached was applied. The first phase under the ITPALemphasized conversion of QRs into tariff, elimination of tariff exemptions and creation of exportfinance facilities, and the second phase, the general reduction of tariffs and increasing the tariffuniformity, which was to be followed by efforts to equalize tax increases with tariff reductions.Third is the importance of alleviating the adverse effects of adjustment through well publishedschemes, such as protecting essential public expenditure programs benefiting the poor, supportingthe self-help programs and financing of well targeted employment generating micro-projects.However, the intervention through DEF has not turned out to be 100 percent successful,especially when it is measured in terms of cost-effectiveness, and targeting the poorest segment ofthe society.

60. Finally, there is the amendment to the tendering procedure. A key BOP objective undertrade policy adjustment lending is to facilitate the expansion of private sector participation inforeign trade. The strict adherence to the World Bank standard tendering procedure, whichseems to have been formulated mostly to cater to the import procurement requirements of large-scale (and mostly public-sector) projects may run counter to this objective. Thus, in order tomaximize the private sector's share, there seems to be a need to consider appropriate adjustmentsto the standard procurement requirements by taking into account existing trade practices of theprivate sector and its import requirements. In the Jordanian case, the failure to do so at theoutset resulted in an unexpected delay in loan disbursement and a presumable loss of the fullbenefit of the lending operation to the private sector, until the basic inconsistencies wereredressed at a later stage.

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PART II - PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE

Introduction

This part of the Project Completion Report analyses the key issues of the Industry andTrade Policy Adjustment Loan from the standpoint of the Government of Jordan. Itreviews the project in terms of concept, design and implementation. Then it gives anoverall assessment of project achievement. The report was prepared by the Ministry ofPlanning, Central Bank of Jordan and Ministry of Finance/Customs.

2 Project Concept and Design

There was agreement on the project concept between the Government of Jordan and theWorld Bank. In fact, the project was designed to support and complement thegovernment's ongoing stabilization and structural reform efforts which had been initiatedin 1988. During negotiations, however, there was some disagreement about theprocurement procedures which caused some difficulties and delays in disbursement of theloan during implementation.

3. Project Implementation

3.1 Tendering and Procurement Procedures

The Loan Agreement stipulated that the Bank's Procurement Guidelines be adhered to.These require the international bidding be used for tendering and procurement of anygoods and services financed by the Bank. This stipulation was in conflict with Jordanianlegislation as well as with established commercial practices. Although some agreement wasreached later on for financing contracts of US$ 5 million and less, the benefits that couldhave been reaped were reduced by limiting the number of beneficiaries especially in theprivate sector. No contracts above US$ 5 million were financed.

3.1.1 Private Sector Procurement

The private sector in Jordan is a relatively developed sector with establishedcommercial practices and direct and extensive connections with internationalmarkets. The Bank agreed to finance contracts obtained under such practices foramounts that are less than US$ 2 million.

For contracts between US$ 2 and 5 million the Bank required offers to beobtained from at least two different sources. This condition was difficult to meetsince private importers generally had established links and contacts with specificforeign companies.

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For contracts above US$ 5 million the Bank's Procurement Guidelines had to beadhered to, and no such contracts were financed.

This shows that strict adherence to the Bank's Guidelines was very difficult. Theestablished practices of the commercial sector, at least, as far as procurementprocedures are concerned, should have been taken into account at the outset.

3.1.2 Public Sector Procurement

Existing Jordanian legislation for public sector tendering and procurementconflicted with the Bank's Procurement Guidelines in two ways:

a. Jordanian legislation requires bidders to have local agents orrepresentatives, while eligibility conditions of the Bank do not include sucha stipulation. Therefore, tenders issued with the additional condition didnot qualify for financing under the loan. This led to delays and difficultiesin financing import contracts, and necessitated the issuance of a specialwaiver for foreign companies from having a local agent or representativefor the purposes of this loan. This was accepted by the Bank for contractsfor less than US$ 5 million only.

b. Jordanian legislation requires insurance of imported goods to be covered byJordanian companies or companies with local agents. This necessitatedthat quotations from foreign bidders based on FOB or C & F. However,bid evaluation, according to the Bank Guidelines, should be done on theCIF quotations. Consequently offers based on FOB or C & F were noteligible.

No contracts above US$ 5 million were financed since international competitivebidding was required for such contracts.

The above mentioned conflicts between Jordanian legislation and the Bank'sGuidelines should have been addressed and resolved earlier, in order to avoiddelays and realize the full benefits of the loan.

3.2 Policy Reforms and Institutional Support

Tariff reforms were undertaken according to the conditions of the loan agreement. Themain problem encountered was with respect to the equalization of tax on competingimported and domestically-produced goods. A list of commodities earmarked for equaltaxation was identilied and included clothing, footwear and furniture. These items aremostly produced in small workshops which do not keep systematic records. Therefore,practical difficultics in collecting the tax would have been encountered. Agreement wasreached to implement that part within the context of the proposed General Sales Tax.

Institutional reforms for export and investment promotion and for protecting the poorwere also undertaken. Although delays in completing the studies required for these

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reforms were encountered due to the eruption of the Gulf crisis, these studies werecompleted satisfactorily.

4. Project Achievement

Overall, the implementation of the project was satisfactory. The timing and sequencing ofthe project were appropriate at two levels. First, the project provided much neededforeign exchange at a time when Jordan was suffering from reduced foreign exchangeinflows that exacerbated the existing budget and current account deficits. Second, tradepolicy reforms came after the initiation of macroeconomic stabilization and reform policiescomplementing the government's efforts in this respect. These efforts resulted inincreased confidence in the economy which stimulated private sector activities andenhanced Jordan's competitiveness in external markets.

All throughout the duration of the project, the Bank was cooperative. Various Bankmissions were sent to assist in resolving problems and in the implementation of policyreforms.

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JORDAN

INDUSTRY AND TRADE POLICY ADJUSTMENT LOAN (3142-JO)

PART III - STATISTICAL INFORMATION

As of May 31, 1993

Original Disbursed Cancelled Repaid Outstanding

150.0 150.0 0 0 150.0

Original Loan Date Actual

Initiating Memorandum 1/12/89 5/05/89Letter of Dev. Policy 11/26/89Negotiations 9/20/89 11/06/89Board Approval 10/31/89 12/14/89Loan Agreement 1/05/90Effectiveness 4/05/90 2/26/90Loan Closing 12/31/92 12/31/92Actual Completion 10/20/92

CUMULATIVE LOAN DISBURSEMENT

FY90 FY91 FY92 FY93(Amounts in US$ million)

(i) Planned 75 100 150(ii) Actual 73 73 103 150

(iii) (ii) as I of (i) 97 73 69 100

Date of final disbursement: October 20, 1992

MISSION DATA

No. of No. of Staff Date ofMonth/Year Weeks Persons weeks Report

Preparation 2/89 2 7 14 3/06/89AnDraisal 5/89 3 5 15 6/20/89Supervision I 12/89 2 2 4 12/14/89Supervision II 6/90 1 1 1 07/12/90Supervision III 11/91 2 2 4 11/20/91Completion 4/92 2 2 4 06/30/93

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Staff InDuts

FY89 FY90 FY91 FY92 TOTAL

Preparation 75 75Appraisal 6 27 33Negotiation & Board 12 12Supervision 18 14 15 47

Total 81 57 14 15 167

Bank Loans Related to ITPAL

Loan No. Prolect Amount Board Date Effectiveness

Ln. 3355 Industrial Exports $15.0 Jun 21, 1991 Nov. 13, 1991Ln. 3568 Transport III 35.0 Mar 11, 1993 NYELn. 3574 Health Development 20.0 Mar 16, 1993 NYE

Follow-on Adiustment Operations (Planned)

Energy Sector Adjustment Loan (ESAL) Preappraisal - January 1992Appraisal - April 1993Board Date - September 1993

Agriculture Sector Adjustment Loan (ASAL): Preappraisal - Late 1993Appraisal - January 1994Board Date - July 1994

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Persons Interviewed

Mr. Mohammad M. AsfourChairmanAmman Chamber of Commerce

(Subject: Private sector perception of the trade policy reform)

Mrs. Nelly BatchonHeadForeign Investment DepartmentCentral Bank of Jordan

(Disbursement of ITPAL and problems encountered in procurement of imports under ITPAL)

Dr. Fahed Al FanekEconomist and Financial Consultantand Economic Writer- AL Rai and Jordan Times

(An overall discussion on trade policy reform)

Mr. Ali Abu-RummanControllerDomestic Banking DepartmentCentral Bank of Jordan

(Export credit rediscounting scheme)

Mr. Jamail Gammouh,Head, Encouragement of Investment DivisionMinistry of Industry and Trade

(Encouragement of investment law)

Mr. Eyad Al-IqdaDeputy DirectorMinistry of Planning

(An overall discussion on ITPAL and its implementation)

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Dr. Abdalla MalkiResearch DirectorJordan Bankers' Associationand Economic Writer- Jordan Times

Dr. Michel MartoDeputy GovernorCentral Bank of Jordan

(The role of CBJ in import procurement under ITPAL and the problems encountered in thisoperation)

Mr. Abdul-Haleem I. MohasinUNDP EconomistMinistry of Planning

(An overall discussion)

Mr. Khaled M. RababaDeputy DirectorCustoms Department

(Duty drawback scheme, import licensing and other charges on imports)

Mr. Nazmi AbdulahDirector, Tariff and Value DirectorCustoms Department(Tariff reform)Mr. Nazmi AbdulahDirector, Tariff and ValueCustoms Department

Mrs. Rula SalahHead, International Economic Relations DivisionMinistry of Planning

Mr. Ali T. DajaniAdvisor, Amman Chamber of Industry

Mr. Ghaitth K SharaihaDirector, Exports and Foreign Relations DepartmentAmman Chamber of Industry