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Public debt — moment of truth

Mar 09,2014 - Last updated at Mar 09,2014

During 2013, Jordan’s volume of public debt rose to JD2.5 billion, a level of annual borrowing that was never recorded in the country’s modern history.

At the same time, central budget deficit did not exceed the planned target of JD1.1 billion, financed by loans and bonds, a fact that needs to be explained.

The government was not borrowing only to finance its own budget deficit, but also to finance the deficit of the National Electric Power Company (NEPCO) and the Water Authority, which, between them, managed to lose around JD1.5 billion in 2013, an amount that, for window dressing, was not included in the current expenditure of the central budget.

Thus the government borrowed the equivalent of 5 per cent of the gross domestic product for the purpose of its own budget, and around 6.5 per cent to subsidise electricity and water, a total of 11.5 per cent of GDP.

This is obviously an unacceptable state of fiscal affairs. It is not sustainable, and never happened before in Jordan. It should not be allowed to reach the natural conclusion.

The structure of borrowing indicates that the bulk of the new borrowing was obtained from foreign lenders in US dollars. The net borrowing in dinars from local banks, for the purpose of the budget, was as little as JD214 million, while external borrowing amounted to $3.25 billion (JD2.3 billion).

This situation gives rise to at least three possible consequences that are worth dwelling on a little bit.

The first is that the official budget, which is issued as a law, is no more depicting the actual financial position of the country.

To understand the real position, it is necessary to prepare a unified budget for the public sector as a whole, including the independent governmental units.

The second is that the government does not want or need to borrow from local banks anymore as long as foreign loans and American guarantees secure all the needs of the Treasury for funds.

Therefore, it is quite possible that the government will not borrow locally during 2014 more than the amounts necessary to roll over the old, maturing local loans.

This practice suggests that liquidity in local banks will rise, motivating them to look harder for qualified borrowers and to accept lower interest rate on credit.

The Treasury is no more the preferred customer and borrower of banks, except in as much as it will guarantee the borrowing of NEPCO and the Water Authority to finance their losses.

The third is that the new trend of borrowing externally will cause the foreign component of public debt to rise.

In fact, foreign debt rose by 47 per cent in 2013, to reach $10 billion, an amount which exceeds foreign debt as it stood in 1989 when an acute financial crisis took place and sent us knocking at the door of the International Monetary Fund for help.

I am pretty sure that the government of the day understands the seriousness of the situation, but does it have the will to deal with it?

Passage of time will only make things worse; it only postpones the moment of truth.

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