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A scenario to reduce public debt

Jun 19,2016 - Last updated at Jun 19,2016

A recent trend is the rapid growth of Jordan’s public debt. The record confirms this statement.

Public debt rose in absolute figures in each of the last five years; the growth rate of debt was in all these years higher than the growth rate of the gross domestic product.

This state of affairs caused debt to rise steadily, not only in absolute figures, but also as a percentage of GDP.

If this trend is allowed to continue unabated, debt will rise, year after year, in absolute figures as well as relative to GDP, a situation that is obviously unacceptable, unsustainable and a sure prescription for a major crisis.

Now comes the reform programme sponsored by the International Monetary Fund (IMF), calling for a major reduction of gross debt as a percentage of GDP, from the current 93 per cent to only 77 per cent over four or five years.

Is that possible? And what is the scenario that can lead to this desired outcome? 

Let us take 2015 as a base year, and assume that gross debt at year end stood at JD25 billion, while GDP was JD27 billion, which made the debt/GDP rate 93 per cent: too high for an economy like Jordan’s.

According to the IMF, this percentage should go down to 77 per cent in four years.

To achieve this objective, the debt/GDP ratio must drop by 4 percentage points each year for four years.

The IMF mission is not saying that the volume of debt should be reduced in absolute figures. It may be allowed to rise a little bit, provided that the growth of GDP is higher and faster than the growth of debt.

If that is the case, it is possible for debt to rise in absolute figures and drop as a percentage of GDP.

Since GDP, measured in current prices, may rise at an annual rate of 6 per cent, of which 3.5 per cent real growth in constant prices and 2.5 per cent inflation, debt is allowed to rise in the first year by 2 per cent to bring down debt/GDP ratio to 89 per cent, and so on.

Under the best circumstances, GDP in current prices should rise at an annual rate of 6 per cent to allow debt to rise to JD25.5 billion, i.e., at 2 per cent, or approximately JD500 million a year.

This tight scenario requires that the combined budget of the central government and 59 independent governmental units should not exceed JD500 million.

Admittedly, achieving this objective is by no means easy, but it is not impossible.

It can be achieved if Arab and foreign grants rise in a substantial manner and the current budget expenditure is seriously curbed.

 

One wonders if the IMF and the World Bank will use their influence to urge donor countries to do so.

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