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How risky is public debt?

Feb 07,2016 - Last updated at Feb 07,2016

It is hard to believe that Japan’s public debt reached by the end of 2015 228.2 per cent of its the gross domestic product (GDP), that public debt in the United States exceeded 111.6 per cent of GDP and that the combined debt of the European Union members amounts to 110.2 per cent of the total GDP.

At little above 80 per cent of GDP, Jordan’s public debt is still lower, in relative terms, than that of these advanced, rich, strong and stable countries.

The high rates of debt in Japan, US and the EU are not causing any worry or raising doubts about their financial positions in the eyes of potential investors.

The reason is simple: these countries are borrowing in their own currencies and a major part of the debt is owned by their own citizens.

In other words, they are borrowing from themselves, hardly in debt to the outside world.

Their ability to issue as much local currency as needed takes only a stroke of the pen at their respective central banks, even if the outcome is a galloping inflation.

Japan’s economic problems are not confined to the high central government debt. Inflation in Japan is negative, at 0.6 per cent and economic growth is negative at 0.8 per cent.

Moreover, the Japanese population is shrinking steadily and the rate of those above 65 rose to 25 per cent, meaning that almost one quarter of the Japanese people are retired and live as a burden on the economy.

These figures are not quoted here to insinuate that Jordan’s public debt is not too high or should not cause any worry, or that there is room for more debt as long as the government is planning to borrow JD2 billion this year mostly in dollars.

On the contrary, Jordan’s public debt exceeded the safety line, so much so that the International Monetary Fund will not sponsor another economic reform programme for Jordan unless the government undertakes to reduce debt to below 70 per cent of GDP during the coming five years, a pledge the government will make and break.

The most risky and sensitive part of Jordan’s public debt is the part denominated in foreign exchange due to foreign banks and countries and regional or international institutions.

Foreign debt in Jordan by the end of 2015 made up 42 per cent of total debt and 35 per cent of GDP. It rose rapidly during the past three years.

Too much public debt is bad, whether denominated in dinars or dollars, but the risk is far higher in the foreign portion, which the government opted to tap, using unconvincing arguments such as lower interest rates, supporting the reserves of the Central Bank, and not crowding out the private sector from getting credit.

To help us swallow the bullet, such foreign loans are described as soft loans. The Ministry of Planning labels part of them as foreign aid, even though they must be repaid with interest.

 

The debt of the rich is a source of power, the debt of the poor is a source of risk.

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