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Debt and growth in Jordan: This time should not be different

Feb 26,2019 - Last updated at Feb 26,2019

When talking to an old colleague from an international organisation, he expressed concern about giving, again, more money to Jordan. This money is needed to reduce the debt and the debt service that are choking the economy, both the private sector and public investments and, eventually, growth. His argument was that “debt relief has been supported in many countries many times before, including Jordan, but such support has often failed to make the debt sustainable with little, if any, effect on competitiveness, domestic production and exports”, after which he asked the question: “Why should this time be any different?”

This argument is statistically right. Historically, after bilateral support and support from the International Monetary Fund and the World Bank, many countries ended up where they started and, in some cases, more indebted than before. And economic growth failed to pick up.

Do these concerns apply to Jordan today? Though nobody knows what the future holds, one can make some predictions based on Jordan’s recent history.

Jordan has been before where it is today. Not going further back into the past, I first visited Jordan in 1991/1992 as a member of a World Bank team that came to assist Jordan in weathering the fallout from the war in Kuwait. I recall the debt was high, the population had increased overnight by 10 per cent, from the returnees from Kuwait, and unemployment peaked at 20 per cent. Today, we are in a similar situation: The debt has reached unsustainable levels, the population has increased by another 10 per cent, this time from Syrian refugees, and unemployment is approaching 20 per cent.

Did Jordan fail to reduce the debt and resume growth in the 1990s? It did not, and the facts are clear. By 2008, the debt had been reduced to only 55 per cent of GDP, and unemployment reached 13 per cent that, although high by international standards, seems to be around Jordan’s “natural rate”, given the size and structure of the economy, population growth and gender differences.

Moreover, during the 5-10 years preceding the global financial crisis of 2008, the first of many shocks that followed, the Jordanian economy had been growing annually by 7 per cent, exports by more than double this rate, 17 per cent, and foreign direct investment (FDI), a sign of international confidence, averaged an enviable 13 per cent of GDP. Impressively, the population had increased by another 10 per cent in the meantime from another influx of refugees, this time Iraqis in the mid-2000s. Not a small feat.

How did that happen? According to the World Economic Forum Competitiveness Index 2017/2018, Jordan has the most competitive Arab economy, the Gulf Cooperation Council excluded. More importantly, Jordan has been the only Arab economy that improved its global rank since 2007. And one should not forget that Jordan’s security and stability levels are the highest in the region.

Since 2008, Jordan has been hit by a series of well-acknowledged external shocks. In addition to the already mentioned financial crisis and influx of refugees, there have closures of the borders with dear effects on exports, disruptions in energy supply from Egypt and fears about security, all of which have affected adversely investments, including FDI, and tourism, among other sectors. These effects have in turn taken a toll on public finances by affecting the size of the tax base, and this has called for a tax reform.

Despite these adversities, public debt today stands at “only 95 per cent of GDP”. This is a shadow of its level in the early 1990s, when it peaked at 220 per cent. The support given to Jordan then has obviously been put to good use.

Why should one then not expect Jordan’s established record to be repeated again?

Firstly, Jordan has now reduced the public deficit to 5 per cent from more than 12 per cent in 2011 through increasing revenues, eliminating subsidies and cutting down expenditures. This reduction is a massive one. It is more than that of Spain and Portugal, and almost on par with Greece; countries that were hard hit by the euro crisis with debt-to-GDP rates much higher than those in Jordan. This is on the fiscal side regarding public finance.

Second, regarding the private sector, Jordan has introduced dozens of far-reaching reforms in the last year or so, and more are planned for 2020 and 2021. Altogether, the reforms aim to eliminate red tape, reduce cost to business, create a supportive financial system and make energy supply secure and cheaper for producers and consumers alike. They can be realistically expected to increase competitiveness, boost business development, expand opportunities for the private sector, improve the investment climate, promote exports and open sectors to FDI. Their effects can be amplified by expected improvements in governance, combating corruption, increasing transparency and the development of a culture of entrepreneurship and active citizenship.

Third, the risk of failure due to external factors is small. It is unlikely that there will be three more wars, each increasing the size of the population by 10 per cent. There should be no closure of trade routes or disruptions in energy supply. There is no financial crisis in sight, one never knows, though there could be a slowdown in global trade, the effects of which many not be that significant on Jordan.

So, all will depend on developments on the domestic front, provided that Jordan gets adequate debt relief immediately for its manageable debt in the intermediary term and beyond.

However, two issues predictably of concern to citizens are the need for a fair tax system and reducing unemployment. With the expected economic growth, the public revenue base will hopefully increase without additional tax changes.

The case of unemployment is a bit trickier. Reducing unemployment takes time. The International Labour Organisation’s research suggests that it takes on average 11 years for unemployment to revert to its pre-crisis levels. Jordan has done better than this: It took about half that long to get the unemployment rate from its 1992 peak to 13 per cent in 1998 that was also the rate before the Syrian crisis.

So it may take another five years before unemployment is substantially reduced, unless the public sector acts again as an employer of last resort, something to be avoided both for fiscal and quality of governance’s sake. Citizens’ understanding and patience will be critical in this respect but they would need to be convinced that real and inclusive progress is coming soon.

All in all, Jordan has proven itself in terms of both managing crises and its ability to create conditions for fast economic growth. With citizen dialogue and involvement, this time should not be different and the government can do it again. Alternatively: This time there will be no excuse for failure. 

 

Zafiris Tzannatos has held senior positions in international organisations, served as resident adviser to regional governments and has a long academic career, including in Europe, as well as being full professor and chair at the American University of Beirut

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