Jordan’s public debt has become a major policy concern for the government, the international community, and its key donors that support Amman.
اضافة اعلان
The Kingdom’s public debt has risen significantly over the past 15 years, reaching around 114.7 percent of GDP at the end of 2022.
What does this mean for Jordan’s future?This raises many questions about Jordan’s future macroeconomic stability, public debt sustainability, and the government’s ability to finance development projects.
The decline in foreign direct investment (FDI) has made maintaining the sustainability of Jordan’s public debt even more challenging, with the FDI to GDP ratio falling from around 7.4 percent in 2009 to 2.7 percent in 2022.
Moreover, sluggish economic growth may make it more difficult for the government to generate tax revenues from economic activities, as the International Monetary Fund forecasts economic growth rates of between 2.7 percent and 3 percent until 2027.
Therefore, maintaining the sustainability of Jordan’s public debt must remain a central concern for policymakers.
External shocks and domestic demands: How did Jordan get here?The available data shows that both external shocks and the sluggish pace of domestic economic reforms have put tremendous pressures on Jordan’s fiscal policy.
Externally, the interruption of Egyptian gas supplies to Jordan in 2011 to 2013 led to an increase in public debt of around $7.8 billion.
Followed by the closure of the Iraqi and Syrian borders in 2013 to 2018, this continued to put an increased pressure on Jordanian exports, and on government tax revenues.
Domestically, the government is currently burdened by around $4.23 billion in debt due to subsidizing water.
Jordan’s historical overreliance on foreign aid to finance the general budget has led to a weak capacity on the part of the state to collect taxes and widespread tax evasion among businesses.
Where are the taxpayers?Tax evasion is estimated to cost the state around $1.59 billion or 12.5 percent of total potential tax revenues.
The decline in foreign direct investment (FDI) has made maintaining the sustainability of Jordan’s public debt even more challenging, with the FDI to GDP ratio falling from around 7.4 percent in 2009 to 2.7percent in 2022.
Moreover, as a result, the government has become highly dependent on the regressive sales tax instead of generating income tax.
Government revenues from sales tax accounted for 68 percent of total tax revenues in 2022, while income taxes from freelance professionals, and small and medium-sized enterprises (SMEs) constituted only around 1.06 percent of the total in the same year.
How sustainable is Jordan’s public debt?The rise of public debt certainly raises several questions about the sustainability of the current trajectory and the Kingdom’s overall fiscal policy.
The Ministry of Finance data showed Interest payment on public debt make up around 14 percent of overall public expenditure, rising from around 1.6 percent of GDP in 2008 to 4.6 percent of GDP by the end of 2021.
The rising levels of external debt are putting an increasingly heavy burden on the foreign currency reserves.
How heavy of a burden?In 2021, External debt service constituted about 15.2 percent of Jordan’s foreign reserves balance and around 27.5 percent
Economic growth on holdThe rising levels of public debt are negatively affecting the government’s fiscal ability to promote economic growth.
In other words, the rising levels of public debt are leading to a shrinking of the fiscal space, reducing the government’s room for fiscal maneuvering. High levels of spending on civil servants’ wages and pensions (around 18.1 percent of total government expenditure) and the military (around 28.6 percent) further constrain the government’s finances.
Thus, around 60 percent of Jordan’s total public expenditure goes toward security, public sector wages, and public debt interest.
A beacon for hopeHowever, despite this challenging fiscal situation, the government was able to increase capital expenditure to promote economic growth and meet development demands. According to Central Bank of Jordan data, capital expenditure grew around 6.7 percent, on average, from 2008 to 2022, while current expenditure grew only 5.2 percent, on average, during the same period.
Jordanian officials acknowledge all of this and are clear-eyed about the need for urgent reforms.
This indicates that the Jordanian government is succeeding in its fiscal consolidation efforts. Yet, fiscal consolidation efforts and the limited fiscal space have had a negative impact on the country’s socioeconomic development, especially in terms of health and education.
For instance, Jordan scored below the regional average on the human capital index published by the World Bank in 2022. Jordanian school students also scored below the global average on the 2018 Program for International Student Assessment test.
Based on the above, Jordan is succeeding in maintaining the sustainability of public debt in the short and medium terms, albeit at a socio-economic cost due to its limited development spending.
Moreover, Jordan might still face public debt sustainability issues in the long run if external public debt growth rates were not met with a significant rise in both exports and foreign reserves.
Jordanian officials acknowledge all of this and are clear-eyed about the need for urgent reforms. Within this context, Jordan adopted a new economic and administrative modernization agenda under the direct supervision of His Majesty King Abdullah and HRH Crown Prince Hussein.
In a recent interview, HRH highlighted the importance of economic and administrative modernization in Jordan while calling for “transformation” and “making a qualitative leap in our performance”.
The modernization plan in question lays out a roadmap for major business environment reforms in the next 10 years and covers many sectors, including tourism, high-tech, agriculture, and many other industrial sectors.
The plan aims to add 1 million jobs during the period 2023–33 and includes 360 investment initiatives aimed at 35 economic sectors.
It also intends to accelerate digitization of the country through investments in tech infrastructure. Finally, the plan lists 13 mega-projects with investments worth around $12 billion.
Proper implementation of Jordan’s modernization agenda will be a necessity to improve the foreign account balance, FDI, and government tax revenues.
Therefore, addressing Jordan’s public debt problem will not only be dependent on carrying out mere fiscal reforms. It also needs to be addressed through comprehensive reforms of the business environment as outlined in the country’s modernization agenda.
Laith Alajlouni is a Jordanian political economist and social policy researcher specializing in the political economy of development in the Middle East region.
This article was previously published on the Middle East Institute website.
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