Foreign debt kills economic growth

A reasonable amount of public debt is normal. It is found at various degrees in most, if not all, countries of the world today. However, high indebtedness beyond certain limits measured as a percentage of the gross domestic product becomes a problem and a sign of weakness.

The increase in foreign debt, in particular, creates political and economic high-risk status.

Official statistics indicate that Jordan’s foreign debt service, in the form of interest and installments, paid in 2013 reached JD613 million, equal to 2.6 per cent of GDP. It may reach JD1 billion this year.

The service of domestic debt denominated in dinars forms a burden on the budget, but it is not that risky. In this case, Jordan is in debt to itself. Whatever is paid by the Treasury on local debt is received by Jordanian banks and recycled within the national economy.

On the contrary, external debt service in foreign currencies represents a net financial and economic exhaustion and a heavy burden not only on the budget but also on the current account of the balance of payments, and on the Central Bank reserve of foreign exchange.

One can conclude that the cost of foreign debt service reduces GDP. Therefore, the economic growth rate of 2.8 per cent that took place in 2013 would have been up to 5.4 per cent had it not been for the foreign debt service.

That is how we can identify one of the major reasons that lowered the economic growth rate in Jordan in recent years, which at one time used to range around 7 per cent in real terms when debt was much lower than it is now.

Unfortunately, Jordan’s economic growth rate dropped now to around 2.8 per cent, a very humble percentage that can hardly keep up with the natural growth of the population, let alone the raising standard of living and unemployment.

Despite these facts, the government shifted its attention during the past two years to foreign borrowing in US dollars, a trend that doubled foreign debt to exceed $10 billion, or 30 per cent of GDP.

It is approaching 40 per cent of all public debt and may exceed 50 per cent at the end of next year.

Borrowing in dollars from the world market is being presented by the government as a success to be proud of. It claims that foreign borrowing is an indication of the country’s strong financial position, reduces the cost of interest and prevents crowding out the private sector in getting credit facilities from local banks.

The government should realise that the need for an American guarantee is not an indication of a strong credit position and that interest rate on the dollar is poised to rise. 

No one can predict where it will stand during the coming years.

On the other hand, local banks curry a surplus cash of around JD3 billion and searching for qualified borrowers from the private sector, so the government need not worry about the availability of credit to the private sector.

It is unfortunate that the IMF keeps silent on this vital issue and the government does not seem to be ready to reconsider its manner of public-debt management.