Jordan - Hussein Thermal Power Project

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1208a-JO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO JORDAN FOR THE HUSSEIN THERMAL POWER PROJECT May 10, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Unit Jordan Dinar US$1 = JD 0.32144 JD 1 = US$3.111 JD 1000 = US$3,111.4 JD 13000,000 = uS$3,111,400 Fiscal Year - January 1 to December 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO JORDAN FOR THE HUSSEIN THERMAL POWER PROJECT 1 * I submit the following report and recommendation on a proposed credit to Jordan for the equivalent of US$10.2 million on standard IDA terms to help finance the Hussein Thermal Power Project. The proceeds of the credit would be relent to the Jordan Electricity Authority (JEA) for 25 years, including 3-1/2 years of grace, with interest at 7-1/4 percent per annum. The credit would be made jointly with a loan equiv- alent to US$10.2 million from the Kuwait Fund for Arab Economic Develop- ment, also to the Government for relending to JEA. PART I - TIE ECONOMY 2. An economic mission visited Jordan in November/December 1971 and its report entitled "Current Economic Position and Prospects of Jordan" (R72-231) dated October 10, 1972, has been distributed to the Executive Directors. Country data are presented in Annex I. 3. Recent economic events in Jordan have been influenced by the 1967 war with Israel and the subsequent confrontation with the Palestinian Fedayeen groups in 1970/71. In particular, the Israeli occupation of the West Bank led to a considerable reduction in the existing poor resource base, and added over 300,000 refugees to the already overpopulated East Bank. The occupation of the West Bank, comprising only 6 percent of Jordan's territory but 30 percent of its population, deprived the country of about 35-40 percent of its GDP and severely curtailed the growth of the most promising sectors, agriculture, tourism' and industry. These changes made the Jordanian economy even more dependent on external transfers, which together with net factor income from abroad, have ac- counted for almost one-third of GNP since 1969. 4. The fighting with the Palestinian guerrilla movements in 1970/71 interrupted economic activities and provoked economic sanctions against Jordan by some Arab countries. Vulnerable because of its landlocked geography, Jordan was particularly affected by the closure, from July 1971 to November 1972, of the Syrian border to Jordanian trade, cutting off the country from Europe and resulting in a decrease in the volume of exports from $33 million in 1969 to $25 million in 1971. Dif- ficulties were compounded by the suspension of budget support from Kuwait and Libya. Of the US$105 million annual subsidies Jordan had received under the Khartoum Agreement in the period 1967 to 1970 from Saudi Arabia,  - 2 - Libya and Kuwait, only Saudi Arabia continued its US$40 million annual payments after 1970. However, the suspension of the payments from Kuwait and Libya were partly compensated by increased US assistance. 5. After a four year period of economic stagnation, signs of economic recovery began to appear in the second half of 1971 and there was continued improvement through 1972. There was an upturn in agricultural output in 1971 to about the level of 1969, but the recovery in industry and particularly construction lagged due to the shortage of imported industrial supplies. With the reopening of the Syrian border, which is a vital link to the Mediterranean, an improved domestic political situation and the apparent revival of private investment, the outlook for accelerated economic growth has now improved markedly. Exports, for example, rose sharply to $48 million in 1972. Im- portantly, the change in atmosphere and attitude within the country has permitted the Jordan Government to give more attention to longer-term economic policies. A Three-Year Development Plan (1973-75) was prepared which, together with supporting financial and budgetary policies, should provide an addlt:ional impetus to economic and social development and restore some confidence in Jordan's future. Nevertheless, Jordan's future development is internally constrained by the poverty of natural resources and the pressure of population, and is linked to the fundamental problems of the Middle East situation, which could continue to have unpredictable economic effects. 6. The Plan calls for increased employment, high growth in output, reduction of the trade gap, and elimination of budget support from abroad over thie longer run. A key feature of the Plan is to step up investment to $557 million oVer the 1973-75 period; this would be an increase of roughly 50 percent over the investment level of the depressed 1969-71 period and would nake possible the creation of about 70,000 new jobs. This would partially alleviate the serious unemployment problem existing around the urban centers, partictla'rly it the refugee camps. The Plan aims at achieving an average annual growth in GDP of 8 percent, which is equal to the growth rate of the Jordan-an ec;onomy for the period 1962-1 966, 7. Of the total Plan investment, three-fourths are allocated to four sectors: transport (20 percent), mining, power and industry (20 percent), construction ('19 percent), and agriculture (15 percent). Other social sectors claim together about 17 percent of Plan investment. In the transport sector, the bulk of investments are for railroad construction works to connect the Port o