Debt reduction — a realistic objective

At first look, it seems that the International Monetary Fund (IMF) was asking for the impossible when it demanded the reduction of public debt as a rate to the gross domestic product (GDP) from 94 per cent at the end of 2015 to 86.3 per cent at the end of 2016, and to 77.2 per cent at the end of 2021.

Such reduction seems drastic and the government may not be able to achieve it without jeopardising the national economy.

In practice, the government did accept this objective on the understanding that it is doable. But is it?

Actually the IMF did not require the government to reduce the debt in absolute figures. On the contrary, debt will be allowed to rise from JD24.9 billion by the end of 2015 to JD28 billion by the end of 2019, which is the fourth and last year under the economic reform programme agreed upon with the IMF.

The Economic Reform Programme allows the government to raise the outstanding public debt by JD1.4 billion in 2016, JD1.4 billion in 2017, JD900 million in 2018 and JD300 million in 2019, a total of JD4 billion during the four years of programme.

The question that may be asked in this respects is: How come that a net amount of JD4 billion will be added to the debt, yet it will drop as a percentage of the GDP from 94 per cent in 2015 to 86.3 per cent in 2019?

The answer is simple. 

The GDP will not stay the same, it will rise steadily due to two factors: first, the normal growth of GDP in real terms at between 2.8 per cent in 2016 to 4 per cent in 2019; second, inflation on the GDP, i.e., deflator, will range between 1.3 per cent to 2.8 per cent a year.

Based on the above assumptions, GDP at current prices will rise at a rate ranging between 4.1 per cent and 6.7 per cent, which is obviously higher than the growth rate of debt.

This means that a moderate growth of debt does not prevent a meaningful reduction of the debt as a ratio of the GDP, which hopefully will grow faster than the growth rate of debt.

If the government honours its commitment not to borrow in excess of the amounts agreed in the programme, debt will start to decline as a percentage of the GDP, maybe faster than what the IMF projected, as both growth and inflation rates are set to rise above their present low levels more than the IMF expected.