IMF Agreement with The Jordanian Government National Economic Reform Program Brief Overview

1. IMF Agreement with The Jordanian GovernmentNational Economic Reform ProgramBrief Overview December 31 2012 Prepared by: Bana Hajjara; AbdelmonemAlzu’bi

2. The Purpose of The Program The agreement signed between the IMF & the Jordanian government aims at bridging Jordan’s external foreign currency gap until the National fiscal consolidation plan is implemented and the energy sector medium term strategy achieves its targets. Budget Deficit From 11% of GDP in 2012 to 3.5% in 2015 NEPCO to reach cost recovery by mid 2016 Foreign Reserves to cover an average of 4 months of imports in the coming three years.

3. Measures To Be Taken Under The Program 4 2 6 3 5 1 Improving government’s cash management system through appropriate IT systems and monitoring criteria. Submitting a new tax law to the parliament and improving tax administration in 2013 Announce a medium term strategy with the World Bank to reach with NEPCT to a cost recovery point in 2016 Issue a new Eurobond and extra reliance on external financing in 2013. Reducing central government’s deficit through extra measures equivalent to 1% of GDP in 2013. Removing untargeted subsidies on oil derivatives (mainly diesel) against solid safety net. (Already Done)

4. New Tax Law to The Parliament • Lowering the personal income thresholds. • Removing exemptions on consumption and property taxes. • Imposing taxes on dividends and capital gains and interest income. • Increasing taxes on profitable corporations. • Dropping the proposal of different taxes’ brackets based on a company’s size. • Less auditing & more filing.

5. Issuing New Eurobonds • This step aims at reducing the crowding out effect of the credit granted to the private sector. • The new bonds are expected to yield from 6%-8% if issued for 10 years. • This step will improve foreign reserves’ levels and boost excess liquidity levels in Dinar. • Expectations that the new issue will take place in Q1 2013.

6. Medium Term Strategy For The Electricity Sector • The chart represents the cost recovery plan, assuming that Egyptian Gas supplies remain at a very low level, as was the case in the first half of the year when the report was written. • Over the strategy plan, Jordan should diversify its energy sources mainly through a liquid gas port that will be ready in 2014. • If this scenario comes true, the average electricity tariffs should double and therefore the increase will be gradual over the coming years starting from 2013. • The proposed hikes will include households with high consumption and sectors not covered with previous hikes.

7. Medium Term Strategy For The Electricity Sector – Egyptian Gas Supplies Back to Normal Levels • If gas supplies remain at its maximum capacity as of today, NEPCO losses will go down from 5.30% in 2012 to 1.8% or JD 280 Million in 2013. • This decrease in NEPCO losses does not mean dropping the plan of increasing Electricity tariffs, since this lower loss should be addressed and since NEPCO arrears should be covered. • In addition, the hike in tariffs should remain there in order to reduce the government’s exposure to gas and oil shocks. • However, there is no clear guideline in the agreement on whether the rate of tariffs increase will be affected by the return of Egyptian Gas supplies. • The return of gas supplies should not stop the government projects of establishing a new liquid gas port and extracting gas for Al-Reesha field.

8. Re-pricing Water Tariffs Water Authority Debt • The water authority debt is ballooning and may reach JD 1.6 Billion in 2016. • The government should start with the World Bank working in increasing water tariffs to avoid another NEPCO’s scenario. • The water tariff increase is part of a comprehensive plan to reduce the losses of governmental own budget entities.

9. Quantitative Targets, Ceilings & Floors Ceiling on primary budget deficit excluding grants. Ceiling on NEPCO’s borrowing. (IMF recommends no extra government guarantees on NEPCO’s debt). Floor on CBJ Foreign Reserves. (4 months of imports) Ceiling on CBJ Net Domestic Assets (Repos & Outrights). These liquidity injections should be reversed once reserves stabilized and Dollarization is reversed by investors. Government Cash Management efficiency indicators. Ceiling on the stock of NEPCO’s arrears.

10. Monetary Outlook & Recommendations • The peg is strongly recommended to be sustained and still solid when compared with medium term fundamentals. • CBJ should not be reluctant to hike interest rates in order to keep the attractiveness in the JD. • CBJ has refused a proposal of increasing legal reserves imposed on foreign currency deposits at commercial banks. • CBJ should start reversing its liquidity injections (Repo & outrights) once market sentiment returns positive and dollarization is curbed. This is considered as an essential step to avoid inflationary pressures in 2013. • CBJ has injected JD 1.20 Billion in the market since the beginning of year in Repos (JD 600 Million) and bonds’ purchases (JD 600 Million).

11. Monetary Outlook & Recommendations • Average reserves is expected to remain above 4 months of imports. • Foreign grants expected to amount for 3% -4 % of GDP (USD 1 Billion next year). • Receiving expected grants will leave the Jordanian Economy with a minimal external foreign currency gaps.

12. Banking Sector Remains Solid Despite Lower Profitability & Higher NPLs

13. Risk Assessment Matrix

14. Risk Assessment Matrix

15. Disclaimer The materials of this report may contain inaccuracies and typographical errors. Cairo Amman Bank does not warrant the accuracy or completeness of the materials or the reliability of any advice, opinion, statement or other information displayed or distributed through this report. You acknowledge that any reliance on any such opinion, advice, statement, memorandum, or information shall be at your sole risk. Cairo Amman Bank reserves the right, in its sole discretion, to correct any error or omission in any portion of the report without notice. Cairo Amman Bank may make any other changes to the report, its materials described in the report at any time without notice. The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and are provided "As Is" without any representation or warranty and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy any securities or other investment and\or to be relied on for any act whatsoever. Information and opinions contained in the report are published for the assistance of recipients "As Is", but are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient; they are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. Cairo Amman Bank does not accept any liability whatsoever for any direct, indirect, or consequential loss arising from any use of material contained in this report. All estimates, opinions, analysis and/or any content for whatsoever nature included in this report constitute Cairo Amman Bank’s sole judgments and opinions without any liability and/or representation as of the date of this report and it should not be relied upon as such. Cairo Amman Bank reserves the right to change any part of this report or this legal Disclaimer at any time without notice. Any changes to this legal Disclaimer shall take effect immediately. Notwithstanding the above, Cairo Amman Bank shall not be obliged to keep this report up to date. The Recipient agree to defend, indemnify and hold harmless Cairo Amman Bank and its subsidiaries & affiliate companies and their respective officers, directors, employees, agents and representatives from any and all claims arising directly or indirectly out of and in connection of the recipient activities conducted in connection with this report.