Foreign debt out of control

The speedy increase of the public debt, in Jordanian dinars borrowed from domestic banks, is bad enough, but not as risky as that in dollars borrowed from foreign banks.

Default in repaying this debt is not possible as the government, through the Central Bank, has unlimited capacity to create dinars and use them to repay debt, even at the cost of causing  hyperinflation.

If somehow the Treasury fails to service local debts, the International Monetary Fund will not interfere. Its help, accompanied by harsh conditions, will not be needed.

On the contrary, foreign debt, denominated in dollars and other foreign currencies, represents quite a different case and may endanger the economic stability and financial security of the country.

Failure to repay foreign debt is possible as the Central Bank cannot create dollars and other foreign currencies to pay lenders, and a crisis will ensue.

In other words, public debt in all forms is bad if allowed to exceed the red line, but the foreign portion of the debt is more serious. It should not be allowed to exceed a certain limit.

In this respect, one should not forget Jordan’s bitter experience of 1989, when foreign currencies at the Central Bank all but dried out, and the exchange rate of the dollar in the local market was growing by the day and all but disappeared except for the black market.

International banks closed the credit lines of Jordanian banks and started to demand 100 per cent cash deposits before opening a documentary letter of credit requested by Jordanian banks on behalf of importers.

The government of the day bad no alternative but to call on the IMF and submit to is conditions. The IMF stayed on our backs for 15 years, till 2004.

Official figures show that the external public debt started to rise rapidly during the last two years, with unprecedented speed.

It rose from $7 billion by the end of 2012 to $10.2 billion in 2013. It stood at $11.2 billion by the end of September 2014 and is expected to exceed $12 billion before the end of this year.

Two years ago, foreign debt used to be 20 per cent of total debt; it rose to 38 per cent by now and counting.

Even before starting to pay instalments of the new loans due to grace periods, foreign debt service, in interest and instalments, rose in 12 months, to September 2014, by 80 per cent, putting pressure on the balance of payments.

Warning bells did not so far succeed in waking up our economic ministerial team.

The government is still searching for foreign loans and foreign guarantees, simply to buy time and carry the problems into the future, postponing the moment of truth.

In its recent report on the Jordanian economy, the World Bank described the speed at which Jordan’s foreign debt has been rising during the last two years as shocking.

Hopefully the government will take notice.