Reform fails to curb growing public debt

The basic weak point in Jordan’s economy is the public finance, as demonstrated in the budget’s bottom line and the public debt.

The budget is plagued by acute deficit that is covered by borrowing internally in dinars and externally in foreign currencies, which caused the debt to grow to the ceiling.

Jordan is not alone in experiencing this state of affairs. Most countries in the world are in debt, in various degrees, but Jordan’s special circumstances render it more sensitive to high public debt.

The reason is the unbalanced financial structure.

The problem does not lie only in the big amount of debt, which stands at around 80 per cent of the GDP, or the fact that it exceeds the legal limit of 60 per cent of GDP. The problem lies in the trend and in allowing it to grow year after year, creating a bubble waiting to burst.

During 1989-2004, Jordan underwent an economic reform programme supervised by the IMF. That was the only period in Jordan’s modern history when public debt declined steadily as a percentage of GDP.

Since then, debt has been expanding, not only in absolute figures, but also as a percentage of GDP.

Take, for instance, 2013, the year that was supposed to witness economic reform, but when public debt rose by JD2,517 million.

Debt was rising at the rate of JD210 million a month, or JD10 million every working day!

Debt is not an independent phenomenon. It would be unreasonable to ask the Ministry of Finance not to borrow in order to pay staff salaries, debt interest, and other unavoidable recurring expenses.

To deal with debt, we have to go direct to the source, which is the budget deficit.

There is a race between domestic revenues and public expenditure. The latter is always the winner, not only because expenditure exceeds revenues, but also because it is growing at a higher rate than the revenues.

This brings in the concept of self-sufficiency, which would mean covering 100 per cent of the current operational expenditure of the government from domestic revenues. In this case, borrowed money should be used only to finance capital expenditure and meet contingent unforeseen situations.

Using this measure, it can be seen that self sufficiency in 2013 was only 84.7 per cent, meaning that the Ministry of Finance was using foreign grants and loans not only to finance all capital expenditure but also 15.3 per cent of the current expenditure, including salaries of ministers and members of Parliament.

This state of affairs is neither acceptable nor sustainable. It is a prescription for a looming crisis, bound to happen unless the present economic reform programme is strengthened and strictly implemented.

Realistically, public debt cannot be expected to decline in absolute figures. It may even grow, but at a rate lower than the growth rate of the economy in current prices, thus reducing debt as a rate of a fast-growing economy.

The government shifted its borrowing from domestic sources, in local currency, to foreign loans, in dollars, making things more sensitive and risky.