Public debt interest hurts growth

During the first six months of this year, the Treasury paid interest on local bonds amounting to JD362.1 million and paid JD85.6 million as interest on foreign debt, a total of JD447.7 million.

Interest on public debt payable in 2015 is expected to reach JD1 billion, equal to 12.5 per cent of the total public expenditure of the central government’s budget, or 3.7 per cent of the gross domestic product.

This is obviously a heavy burden. It has been rising year after year and it may rise further if the interest rates on the dinar and the dollar rise, as expected.

The above figures are too high for a small economy like Jordan’s.

They do not include repayment of principal debt installments, otherwise total debt service would be very high indeed, especially for a budget plagued by chronic deficit and a national economy that has slowed down, if it is not in recession.

Some economists seeking popularity claim that borrowing enables the government to increase its public expenditure which, in turn, will spur economic growth and eventually cause the Treasury’s revenue to increase in a way that will take care of the debt service.

This claim did not prove to be right in practice.

Economic growth rate this year was a bare minimum of 2 per cent, hardly enough to take care of the population growth, let alone the extra costs resulting from the influx of Syrian refugees.

On the contrary, the fact that 3.7 per cent of GDP will go to creditors means that the economic growth rate could have been much higher had it not been for the paid interest.

Jordan’s Treasury receives around JD1 billion in Arab and foreign grants a year. This means that interest on public debt is eating up all the grants received by the Treasury.

In other words, had it not been for the interest that the government has to pay to the creditors, it could have achieved self-sufficiency and managed without foreign aid.

This writer and many others have said a lot against indulging in debt and pointed out the cost and risk involved.

There was no shortage of loud warnings against too much borrowing, but the governments continued to draw on domestic and foreign loans simply because they are available. 

Thus, it will carry problems forward, allowing problems to get bigger.

Borrowing extends the life of the government, which can remain comfortable in power as long as the crisis will happen in the future under another government. 

Borrowing and spending relieves a government of the difficult task of taking the right decisions that may hurt its popularity.