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Jordan’s fiscal and monetary policies

Jul 30,2018 - Last updated at Jul 30,2018

Fiscal policy in Jordan has run its course. It is very tight. The government levies about sixty different types of direct and indirect taxes, excluding punitive fines. The tax burden that Jordanians shoulder has reached beyond-optional levels, and an increase in taxes will set the Laffer curve into motion, causing a decrease in total government receipts.

The recent “tobacco factory scandal” attests to this conclusion. The high taxes imposed on cigarettes made it worthwhile for smugglers and illegal producers to take the risk of violating the law. As a result, these smugglers and black-marketers helped themselves to the government stash of cash and took what was not theirs to take.

Thus, the tax profile of Jordan needs to be totally re-visited and re-arranged. It seems, however, that the government’s need for cash is too acute to afford the time required to do that comprehensive tax revision and restructuring.

On the other hand, monetary policy has been performing very well. Yet, it is doing so at the expense of fiscal policy, which has taken the full brunt of economic adjustment as envisaged by the International Monetary Fund.

The rigidity of the monetary policy, and its strict adherence to the rules pegging the Jordan dinar to the US dollar, brought monetary and exchange rate stability. Yet, it made the dinar, both at home and abroad, expensive to both Jordanians and foreigners who want to buy from Jordan.

As a result of higher taxation and soaring cost of oil derivatives, water and electricity, the cost of living went up, while the incremental increase has been cushioned by the strong dinar against major currencies, except the US dollar.

The stickiness upward of the exchange rate and interest rate to both consumers and business is evident.

We cannot afford contractionary monetary and fiscal policies in Jordan. This is a formula of stagnation in the short-run (this year) and it poses a threat of stagflation in the medium run.

Both fiscal and monetary policies are in acute need for new approaches.

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