Public Debt Worsening; How Can Jordan Overcome the ‘Negative Outlook’ of Its Future Economy?

Government debt rates in Jordan increased during the year 2020 by about 10 percent to reach 91 percent of the Gross Domestic Product (GDP), which puts the country in difficult economic challenges, at a time when it is difficult to bet on the ability of the local economy to recover quickly.

The Fitch Credit Ratings agency stated that the Jordanian economy in the long term will stand at “BB-” with a Negative Outlook, which confirms the challenges facing the Kingdom of Jordan’s public finances.

It explained, “The Negative Outlook reflects the risk that government debt deteriorates further amid an uncertain recovery and a difficult social context following the coronavirus pandemic.”

This was confirmed by the World Bank by saying: “While Jordan has maintained a fragile balancing act despite mounting regional and domestic pressures during the Country Partnership Framework (CPF) period, its economy has been hit hard by the COVID-19 pandemic.”

The Bank pointed out that these data came amid an “already low growth, high unemployment, and growing debt.”

According to World Bank analyzes, the unemployment rate rose to 24.7 percent in the last quarter of 2020.

The rates among Jordan’s youth reached an unprecedented 50 percent.

According to the latest figures of the Jordanian Ministry of Finance, the balance of public debt owed by Jordan until the end of February 2021 reached 26.7 billion dinars (37.6 billion dollars), compared to 26.49 billion at the end of 2020.

In July 2021, the Jordanian public debt amounted to about 47.7 billion dollars, an increase of 565 million dollars compared to its size at the end of 2020, constituting 107.9 percent of the GDP.

This chronic exacerbation of debt is due, according to economist Hussam Ayesh, to the fact that the Jordanian economic model calls for an increase in debt and with it an increase in taxes, as “debts are essentially deferred taxes in the end.”

In an interview with Al-Estiklal, Ayesh pointed out that when the budget records a continuous deficit, it either results in obtaining more debt, imposing more taxes or reducing spending.

Ayesh added that Jordan’s public revenues are originally few, and spending mostly goes to about 83 or 85 percent as current expenditures.

He pointed out that the ability to reduce spending remains limited. Therefore, debt comes as one of the important exits to compensate for the shortfall in revenues and to cover expenses, and thus this has become an ongoing and chronic issue.

Fitch estimates the general deficit of the Jordanian government to have risen to 5.4 percent of GDP in 2020 from 1.4 percent in 2019.

It expects the general deficit of the government in Jordan to decrease to 4.1 percent of GDP in 2021 and 2.7 percent in 2022.

For his part, the former Jordanian Prime Minister for Economic Affairs, Jawad Al-Anani, believes that one of the most important reasons for the exacerbation of debt is the decline in government income as a result of three things.

These matters stem from the Coronavirus pandemic crisis, which led to a decline in public revenues, especially taxes, due to the decline in imports and the movement of citizens from buying taxed clothes to food and drink.

Al-Anani added to Al-Estiklal newspaper that the second issue is the decline in the fuel tax, which represents a high percentage of its cost.

With the slowdown in economic activity and traffic, Jordan’s consumption decreased and oil prices fell globally, which affected the proportion of the tax imposed on it.

The value of Jordan’s imports fell during the year 2020 by 11.3 percent to 12.07 billion dinars (17 billion dollars), and the oil bill recorded a decline of 47.3 percent to 1.2 billion dinars (1.7 billion dollars).

Al-Anani explained that the third issue is the decline in the real estate tax (about 9 percent of each real estate transaction), which in turn also led to a decline in government revenues.

In addition to these matters, the government has raised some aspects of spending such as wages and COVID-19 vaccines, which were provided to citizens for free.

Therefore, all of these things made expenditures relatively high compared to revenues, so the government deficit that is paid through loans increased because the aid that comes to support the budget is very little, so the government found itself borrowing more, according to Al-Anani’s expression.

Public revenues recorded a decrease of 9.3 percent in the 2020 budget, to record 7.029 billion dinars (9.84 billion dollars), while the financial deficit in the general budget during the year 2020 amounted to 106 percent, to record 2.182 billion dinars (3.05 billion dollars).

Public expenditures rose by 4.5 percent in 2020 to record 9.211 billion dinars (13 billion dollars), and foreign grants recorded about 791 million dinars (1.1 billion dollars), according to the Minister of Finance’s Final Account for 2020.

In March 2021, Jordan approved the draft general budget for the year 2021, with total expenditures of 9.93 billion dinars (14 billion dollars), and a deficit of 2.05 billion dinars (2.89 billion dollars) after foreign grants.

Al-Anani stressed that these data led to very clear repercussions, and that citizens live in a state of confusion, as many shops close their doors, in addition to the high unemployment rate, which has negative repercussions on society and leads to congestion and unwanted social manifestations.

This comes as a result of the increase in the volume of loans with the decrease in the volume of revenues and the increase in the volume of expenditures. Consequently, the Hashemite Kingdom of Jordan has been forced to give up some service and support roles to repay the loans it owns.

In light of the current confusion in the Jordanian economy as a result of the increase in its loans, economic experts expect a further rise, especially with the rise in the balance of public debt owed by Jordan in the first two months of this year 2021 by about 0.8 percent.

Jordan intends to borrow about 9.8 billion dollars during the current year 2021, as this was included in the general budget, and about 1.15 billion dollars of loans will be in the form of international bonds to pay off the public budget deficit and the outstanding external and internal loan installments.

Ayesh expects Jordan’s debt to rise to 36 billion dinars (50.7 billion dollars) to reach 114 percent of GDP.

This means more economic burdens, in a society that suffers from social and political problems that prevent the imposition of more taxes, and therefore debt is the only solution.

He explained that Jordan’s budget for the year 2021 allocated for this debt about 1.45 billion dinars (2.04 billion dollars) of surplus, noting that this volume of allocations exceeds the allocations of any ministry, which creates a fundamental distortion in the economic process.

Ayesh pointed out that some of these loans are repaid through new ones with lower interest than the old debt, but they are repaid over a longer period, sometimes exceeding the years of the repaid debt.

Thus, in the end, the total interest of the new loan will exceed the old one, as if no positive result is achieved from the exchanges between the new and old loans, according to Ayesh.

These facts dictate work to reduce debt rates and search for ways to boost investment within the Kingdom to create job opportunities and stimulate the local economy, enabling it to direct the largest possible amount of revenue to the citizens.

Especially that the World Bank expected that the Coronavirus pandemic caused a rise in the poverty rate in the Kingdom of Jordan by an additional 11 percent.

Ayesh believes that debt reduction can be achieved through preventing tax evasion, which increases state revenues and integrating informal into formal economy.

As well as reducing budget waste by taking into account all items related to expenditure to get rid of everything that constitutes a burden on the budget, in addition to confronting corruption.

He also sees the importance of monitoring public expenditures, which every time exceeds the revenue growth rate, which means that with every positive growth in revenue, there is a greater negative growth in expenditures, and thus this deficit remains continuous.

For example, there are many institutions categorized as “independent” that drain a major part of the Jordanian state’s expenditures and bear burdens without return, according to Ayesh.

According to some estimates, the size of the informal economy in Jordan has ranged over the past years around the equivalent of 15 percent of the GDP.

In comparison with the Arab countries, the percentage of the informal sector in Jordan is considered the lowest in the Arab world.

He pointed out the need to direct Jordan to the real economy by giving priority to the productive sectors that create added value to the local economy, such as agriculture, industry, and information technology, which stimulates exports, creates new job opportunities and increases manpower skills.

For his part, Al-Anani stressed that debt reduction comes through revitalizing the economy and the presence of a strong private sector.

Therefore, he called for the necessity of encouraging investment and stimulating the private sector by reducing all kinds of taxes and interest rates, and increasing spending on and supporting investment projects, especially in light of global inflation.