ARAB BANK PLC

THE HASHMITE KINGDOM OF JORDAN

SUMMARY ONSURROUNDING ENVIRONMENT

June 2002

POLITICAL SCENE

Global Scene: Political instability manifested by regional

turmoil following US military actions in Afghanistan, chaos in Palestine & possibility of military strike against Iraq.

The predominance of a state of unclear vision & fickle expectations.

Regional instability & risks are mitigated by friendly relations with Arab neighbors and support from the USA.

Jordan-US FT Agreement signifies a message of support & appreciation for Jordan.

Global Scene (Cont’d): Having a clear & moderate stand on the crisis

(Sept.11th), Jordan has no political bills to pay.

The warmth of Jordan-US relations started to wane due to differences over regional issues (Iraq & Israeli-Palestinian conflict).

Jordan relations with Israel have remained cool.

Domestic Scene: Tense atmosphere & public dissatisfaction

with regional events. Internal stability is reinforced by the King’s

popularity and the improving relations with Arab states.

The king, acting as a CEO, is keenly pushing towards political & economic reform.

Despite regional political turbulence, Jordan will pursue its economic agenda.

Parliamentary elections planned late 2002.

ECONOMIC ENVIRONMENT

Economic Highlights: Jordan has been pursuing IMF recommended

comprehensive economic re-adjustment policies since early 1990s.

Policies have been significantly successful in stabilizing the economy and maintaining monetary stability.

However, structural reforms, earnestly under-taken since late 1990s to cover all aspects of the economy, are still emphasized to set the stage for sustainable future growth.

Economic Performance: During the 1990s, the economy faced several

difficulties due to trade deregulation, liberal-ization & political instability.

Hence, economic growth had been modest over the period 1996/2000 (3% on average).

This growth had been below population growth rate causing a deterioration in per capita income.

However, the continuous reform policies laid the bases for future growth.

Economic Performance (Cont’d): In year 2000, economic growth stood at 4%

despite difficult conditions. All other indicators were satisfactory:Ω Low inflation (0.7%).Ω Stable JD exchange rate.Ω Comfortable level of net foreign reserves

(US$ 2.7 billion covering 8 months of imports).

Ω Improvement in external debt / GDP ratio (95% in 1996 to 80% in 2000).

Economic Performance (Cont’d): Strong performance in 2001 despite

unfavorable regional & int’l conditions:Ω 4.2% real GDP growth (4.5% nominal).

¤ Growth sectors (mining, telecommuni-cations, money, banking & insurance, construction & industry).

¤ Slow growth (petroleum products, electricity & potash).

¤ Retreat sectors (tourism, air transport, shipping, investment).

Economic Performance (Cont’d): Year 2001 performance (Cont’d):Ω Inflation 1.8% (0.7% in 2000) due to price

increases.Ω JD stability has been maintained.Ω Unemployment 14.9%.Ω Net foreign currency reserves of US$ 2.6

billion (7-month export coverage).Ω External debt of US$ 6.7 billion (75.8% of

GDP vs. 80% in 2000).Ω Industrial production rose by 5.4%.

Economic Performance (Cont’d): Year 2001 performance (Cont’d):Ω Narrowing down of trade deficit:

¤ Exports (JD 1.62 billion) rose by 21%.¤ Imports (JD 3.41 billion) rose by 5%.¤ Deficit decreased by 6.2% (28.5% of

GDP vs. 31.7% in 2000).Ω Current account after grants at the same

level (JD 40 million) representing 0.6% of GDP vs. 0.7% in 2000.

Fiscal Performance: Fiscal deficit is still high (6.9% of GDP before

grants & 3.0% after grants) due to:Ω Drop in non-tax revenues (-21%):

¤ Fall in custom tariffs on many goods.¤ Drop in tourism activities & proceeds.¤ Drop in mining proceeds (JPMC).¤ Tax relief extended to tourism sector.

Ω Rigidities on expenditure side (pension funds, rural development, subsidies).

Ω Capital expenditure at 84% of budgeted.

Fiscal Performance (Cont’d): External debt is still high ($ 6.7 bln) & entails

heavy burden ($ 720 mm. in debt service). Paris Club’s debts on Jordan are expected to

be rescheduled with the help of the IMF. Securitization of internal debt and more

dependence on public debt instruments to cover budget deficit.

New Public Debt Law allowing for domestic borrowing up to 40% of GDP.

Monetary Policy: Successful in containing inflation & maintain-

ing monetary stability. 7 cuts on domestic interest rates vs. 11 cuts

on the US Dollar interest rate. 2% drop in 3-month CDs following the

decline in US Treasury Bills. Reserve ratio slipped to 8%. Recent loosening shows restored confidence

in the economy, and is justified by the level of net foreign reserves (US$ 2.6 billion).

Monetary Policy (Cont’d): M.S. increased by 5.8% (10.2% in 2000) due to

the absence of UN compensations effect. Credit to the private sector recovered

strongly (increasing at 11%) in response to low interest rates (JD 402.4 million).

Economy During 2002: Outlook for the economy since Sept., 2001

has been dampened by int’l and regional developments (USA military reaction to Sept.11th events, turmoil in Palestine, possibility of a military strike on Iraq).

Sectors most affected: (tourism, airline activities, shipping, capital investment inflow).

S&Ps has revised Jordan’s outlook from “Positive” to “Stable”.

Economy During 2002

(Cont’d): Real GDP growth anticipated around 4.0%. Motors of growth:Ω Investment projects (Disi water

conveyance, Jordan-Egypt gas pipeline, Jordan-Iraq oil pipeline).

Ω Foreign investment recovery.Ω New socioeconomic development plan.

Inflation is expected within 3.5%. Fiscal deficit anticipated at 6.5% of GDP (7%

in year 2001).

Economy During 2002

(Cont’d): Economic policies:Ω Sustain economic growth in the face of

difficult regional situation.Ω Maintain price stability.Ω Increase foreign exchange reserves by a

moderate amount.Ω Achieve a further reduction in net public

debt.

Economic Re-adjustment: Long process of reform since 1989. Review shows strong macro rather than

microeconomic indicators, reflecting success of stabilization policies & need to further address structural reform policies.

Since 2000, the King has been successfully pushing forward structural re-adjustment policies (privatization, world integration, trade liberalization, financial deregulation).

Econ. Re-adjustment (Cont’d): Performance exceeding targets in many areas:

US$ Million2000 2001

Program Actual Program Actual

Real GDP (%) 2.5% 4.0% 3.5% 4.2%

Inflation (%) 2.8% 0.7% 2.4% 1.8%

Liquidity (%) 8.7% 10.2% 8.4% 5.8%

FOREX reserve change 485 772 -320 -184

Fiscal deficit / GDP 2.5% 4.7% 2.9% 3.2%

Current account / GDP -1.7% 0.7% -1.8% 0.6%

Exports growth 5.2% 3.7% 5.9% 20.7%

Imports growth 4.2% 12.9% 5.3% 10.3%

Econ. Re-adjustment (Cont’d): The current economic re-adjustment (1999/02)

expired in late April 2002. The process of re-adjustment to be extended

to an additional period of 3 years in the after math of the government subsidy cuts on some basic commodities (bread, kerosene, fuel oil, diesel, fodder, barely).

Banking Environment: Long process of reform (since early 1990s). More open & competitive environment. Demand for credit financing started to pick

up after a long period of retraction. Margins are getting slimmer due to fierce

market competition. Surplus liquidity without satisfactory &

profitable channels of investment. Income from public debt instruments & CDs

contributes a larger share of banks’ profits.

Banking Environment

(Cont’d): Banks’ financial results for 2001 showed a

healthy performance. Early 2002, three small banks experienced

difficulties due to a fraud case involving falsified contracts used as collateral against loans.

Loans still outstanding around US$ 100 mm. The crisis has been dealt with maximum care

and is about to be contained.

Financial Market (ASE): Despite regional & int’l instability, year 2001

proved to be one of ASE’s best. Trading volume doubled reaching JD 669

million, the highest level since 1994. Stock Price Index increased by 30%. The banking sector was the driver of growth

(30%), followed by industry (22%), insurance (11%) & services (10%).

Market capitalization surged by 28% to reach US$ 6.35 billion.

Financial Market / ASE

(Cont’d): Hopes of a better future performance with the

increase in export potentials, evidenced by:Ω Jordan-US Free Trade Agreement.Ω Partnership agreement with the E.U.Ω Spread of Qualifying Industrial Zones.Ω Launching of Aqaba Special Economic

Zone.Ω Continued privatization.

Economic Prospects: S&Ps maintained Jordan’s rating at BB-, with

a stable outlook rather than positive. The adverse regional politics will continue to

impair tourism & investments. Yet, with the reform process expedited & the

expected benefits of the new growth engines (ASEZ, privatization, Jordan-US FTA & QIZ), economic prospects seem more favorable.

Economic Prospects (Cont’d): However, maintaining regional political

stability remains crucial for Jordan to reap the benefits of its reform agenda & domestic strategy to boost economic growth.

LEGAL & REGULATORYENVIRONMENT

General Reforms: Comprehensive reform & overhaul of the

legal climate to adapt to more market deregulation, openness & globalization.

Tariff cuts on many industrial inputs. Custom ceiling reduced to 30%. General Sales Tax replaced by VAT. Property Rights & Competition Law. Investment Promotion Law equating foreign

with Jordanian investors. New Public Debt Law.

Banking Reforms: Obligatory Reserve Ratio down to 8%. Banks to publish their Prime Lending Rate. Deregulating lending rates & commissions. New Banking Law (enhance indirect control). Deposit Insurance Law. Un-cleared checks (new unit). National Payment System to be launched. New loan provisioning & credit concentration

instructions. Efforts to broaden E-banking services.

Global Integration: Partnership agreement with the E.U. Joined the WTO. Free Trade Area with the USA (Jordan is the

fourth country to sign such an agreement). QIZ status for selected industrial estates. Tariff ceiling reduced to 30% (25% by 2005). Bilateral treaties with Arab & foreign

countries. Joined Arab Free Trade Area (Jan., 1998).

Privatization Program: Commenced in 1996 and started to

aggressively roll in August 1998. Government shares in 44 companies have

been fully or partially privatized. Sale of 49% of government stake in Jordan

Cement Factories Co. to the French Lavarge. All other government shares sold to S.S.C.

40% of government shares in JTC sold to France Telecom & Arab Bank & 8% to S.S.C.

Management of Amman water & waste water networks awarded to the French LEMA.

Privatization Program

(Cont’d): Ma’in Spa leased to the French ACCOR. Bus routes in Amman partially handed over

to three private companies. Selling of R.J.’s (national carrier) non-core

businesses (Duty Free Shop, Flight Training Center, Catering Center, Alia Hotel & Engine Maintenance).

National Electric Power Co., sliced into a generating co. (CEGCO) & a distribution co. (EDCO) as a prerequisite for privatization.

Privatization Program

(Cont’d): The Dutch Nepostel was awarded a 4-year

contract to prepare postal services for privat-ization (RFP to be completed before 2003).

JPMC slated for privatization in 2002. Government to sell 26% of its shares in APC

(RFP to be completed by 9/2002). R.J.’s Air Academy to be restructured &

slated for privatization. Selected electricity & water projects to be

privatized on B.O.T. or B.O.O. bases.

Privatization Program

(Cont’d): A consortium has been selected to build &

operate the first independent power plant. New Privatization Law to regulate the use of

privatization proceeds.

Other Reforms: Further reforms are underway to address the

following issues:Ω Reduction & equality of treatment in tax

burden (new Income Tax Law).Ω Law on mortgage of moveable property.Ω Speeding up legal procedures.Ω Review of Evidence Law.Ω Financial Leasing Law.Ω Postal Services Law.