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INTERVIEW-Jordan's central bank urges sticking with IMF reforms

* Power subsidies seen as biggest burden on budget deficit

* Reforms could push budget deficit to 4% of GDP in 2014

* Many signs that reforms are bringing economic recovery

AMMAN, Jan 26 (Reuters) - Jordan must persist with economic reforms to ensure its economy keeps growing and its budget deficit is under control, the central bank governor said, warning against slackening as financial pressures ease and political pressures mount.

Governor Ziyad Fariz said the kingdom needed to move ahead with the main monetary and fiscal targets designed under a three-year standby deal with the International Monetary Fund (IMF) to rejuvenate the aid-dependent economy as it struggles with an influx of Syrian refugees and disruption of energy supplies.

"If we do not take these measures, our ability to continue sustained growth is jeopardized, and we will face a lot of difficulties. Foreign investment will not come and the budget deficit will increase," Fariz told Reuters on Sunday.

In 2011, a sudden jump in Jordan's energy bill as cheap Egyptian gas supplies dried up, a drop in foreign aid, and soaring payments to accommodate over 600,000 refugees from the civil war in neighbouring Syria pushed the kingdom into a financial crisis. Jordan was forced to take a $2 billion IMF loan in 2012.

Under the IMF programme, the government eliminated fuel subsidies, sparking widescale civil unrest. It raised electricity prices for industrial consumers last year, and this year began raising power prices for households in a phased programme.

It is now moving ahead with an IMF-backed income tax reform law that would increase government revenue by about one percent of gross domestic product. Other measures include ending heavily subsidised water prices and a controversial plan to streamline bread subsidies through cash transfers.

SIGNS OF PROGRESS

Fariz cited signs of recovery last year under the programme including a 20 percent rise in investment in the first nine months, improved confidence in the currency, more aid from other countries in the Gulf, a revival of exports and a near doubling of reserves to $12 billion in one year alone.

"Jordan has succeeded in containing the negative repercussions of these last two years. But progress needs to be maintained if Jordan is to get back on its feet and get out safely from this crisis," he said.

Fariz said further reforms would help raise the economic growth rate to 5 percent in two years from over 3 percent estimated for 2014.

They would slash the budget deficit by nearly half to 4 percent of GDP this year, he said, from around 8 to 9 percent since 2011, excluding foreign aid that covers some of the financing gap.

They would reduce public debt to a manageable 60 percent of GDP, about Jordan's level before heavy borrowing in the 2011 crisis pushed the debt to its current level of around 75 percent, Fariz said.

POLITICAL COSTS

Economists and politicians warn, however, that streamlining a costly subsidy system is a politically fraught move. Pressures to resist any more cuts to subsidies are rising in parliament and on the street, with a risk of widespread civil disturbance..

The government backtracked on implementing steep household electricity price hikes last year for fear of social unrest. Instead it raised tariffs slightly this month and plans to proceed slowly with further increases in stages, without hurting low-income families.

The IMF has now loosened the targets for how quickly Jordan would have to raise electricity tariffs, praising the government's commitment to reforms.

"The losses of the state electricity firm have grown exponentially. Electricity subsidies had accentuated the financing gap, and this is now the biggest burden on the budget," Fariz warned.

Meanwhile, now that the Central Bank of Jordan has healthy reserves and the dinar has been stable, the bank has the flexibility to fine tune its interest rate policy to encourage growth, Fariz said.

After raising rates in the crisis to guard against capital flight, the central bank in August started cutting them again. Three rate cuts since then have reduced the benchmark rate by a total of 75 basis points to 4.25 percent.

Fariz urged private banks, which have total assets of over $55 billion, to respond more to the easing in monetary policy by lowering their lending costs, which critical to spur investment.

"This will increase lending and activate the economy," he said.

(editing by Jane Baird)