MON 16 - 7 - 2018
 
Date: Mar 28, 2018
Source: The Daily Star
Can Mulki keep slowing Jordan’s slide into debt without foreign aid?
Kirk H. Sowell

Jordan’s 2018 budget, which became law on Jan. 18, appears to be a success for Prime Minister Hani al-Mulki. When he assumed office in 2016, Jordan was headed toward insolvency, with the debt-to-GDP ratio having increased from just over 60 percent to 93.4 percent between 2011 and 2015, an increase of about six percentage points per year. Over the course of two budgets Mulki has dramatically slowed the slide, keeping the debt-to-GDP ratio from rising above 95.3 percent with the help of significant foreign aid. Yet this fiscal discipline is squeezing an already weak economy, and Jordan has barely begun the process of economic restructuring necessary for a sustainable economy.

Jordan’s budget consists of two parts. For 2018, the main “public” budget was 9.02 billion Jordanian dinars ($12.7 billion), funded by 8.50 billion dinars in internal revenue and foreign aid, leaving a deficit of 523 million dinars. The “government units” budget, which contains a range of official institutions but is dominated by electric and water utilities, is 1.81 billion dinars, funded by 1.42 billion in revenue, 191 million in subsidies from the main budget and 55 million in foreign aid, leaving a 148 million dinar deficit. This left a total deficit of 671 million, or a relatively respectable 2.5 percent of GDP, thus explaining the slow growth rate of the debt-to-GDP ratio. Of course, without the 755 million dinars in foreign aid, the deficit more than doubles and the debt-to-GDP ratio quickly goes over 100 percent.

Mulki’s success at slowing Jordan’s slide into debt is due not to cuts in spending in the main budget, but to increased internal revenues and, to a lesser extent, reduced spending on electricity subsidies. However, the Jordanian government will be hard-pressed to make such dramatic changes in future budgets.

Domestically generated revenues such as taxes, customs and fees increased dramatically from 6.2 billion dinars in 2016 to 6.9 billion in 2017, and are projected to increase further in 2018. Because Jordan has historically been under-taxed, its political model relying on foreign aid, it was able to nearly double domestic revenues from just 4.2 billion dinars in 2011 to 7.8 billion in 2018. However, this means the government is taking an extra 14 percent of GDP out of an already weak economy each year. Higher rates combined with the negative impact of regional conflicts on Jordan’s trade and tourism sectors have killed off domestic growth.

While Jordan’s GDP growth has for years hovered just above 2 percent – already a low figure for a developing country – even this growth can be entirely accounted for by external aid. During 2017 Jordan received $1.78 billion in compensatory aid for hosting Syrian refugees, and combined with the $1.1 billion in direct budget aid for 2018 and $1.5 billion in remittances from citizens working abroad, these external stimuli account for 11 percent of GDP.

Meanwhile, external economic impacts on Jordan from instability have improved only modestly. Tourism is recovering from its post-2011 collapse, increasing from 4.8 million tourists in 2016 to 5.2 million in 2017. Yet this figure remains short of the 2010 peak of 8.2 million; in early 2016, the government estimated that it had lost 6.9 million tourists total due to the Arab Spring. Likewise, the collapse in trade with Syria and Iraq has yet to show any real recovery. The 2014 security collapse contributed to a nearly two-thirds decline in Jordanian exports to Iraq from $2 billion in 2014 to $695 million in 2017. While security has improved to a degree, and the Turaibil border crossing into Anbar reopened last September, Iraq’s imposing of a 30 percent tariff to protect its own producers in late 2016 has made recovery slow. Although Amman and Baghdad agreed on Feb. 28 to exempt certain Jordanian products, it is unclear whether this partial tariff reduction, if implemented, will revive trade.

However, overall operational spending increased in 2017 by 523 million dinars and is projected to increase in 2018 by an additional 426 million, driven primarily by rising costs for the military, internal security forces, pensions and interest on debt. These four sectors account for two-thirds of operational spending, while capital spending for 2017 actually declined slightly to 1.025 billion dinars from 1.029 billion. Military spending in particular increased rapidly, up from 1.24 billion in 2017 to 1.43 billion in 2018. Furthermore, the fact that most spending growth is in these non-productive sectors means vital long-term sectors such as education and infrastructure will continue to be squeezed.

The government will also not be able to replicate the dramatic decline in utilities spending. A combination of better management of energy purchases and steady increases in what consumers pay for electricity has brought the utilities deficit way down from a high of 1.29 billion dinars in 2014 – after Egypt cut off its exports of below-market natural gas and Jordanian policymakers scrambled to find cheap alternatives – to just 114 million dinars in 2017 and 148 million dinars in 2018.

Any efforts to reduce spending further through austerity measures are likely to be met with domestic backlash. Already, reductions in subsidies for bread in particular have brought weekly protests and garnered more media attention than any other issue. In January the Muslim Brotherhood bloc called the National Alliance for Reform, pushed a no-confidence vote in Mulki’s government on this basis, although it failed because Parliament is structured to guarantee a pro-government majority. Yet Mulki’s bread subsidy reduction is modest. Whereas before the government subsidized bread generally, which also benefited non-citizens, who are nearly one-third of the population, now prices are higher but citizens receive direct payments to compensate. And even though the 2018 budget includes an increase of between 67 and 100 percent for three kinds of bread, this raises the prices merely to Egyptian levels. Furthermore, the direct cash payments will not only compensate poorer Jordanians, but also all government employees, regardless of how highly paid.

In response to the protests, on Feb. 13 Mulki declared openly that his predecessors had left the country at the brink of insolvency and that the failure to take tough revenue-raising measures would lead to a debt crisis, which would destroy the country. And he is correct. What is more doubtful is Mulki’s assertion that Jordan “will get out of the bottleneck” in 2019. While the measures to raise taxes and reduce subsidies buy time, they leave Jordan struggling to stay afloat and dependent on the continued flow of extensive aid. And since the Arab Gulf states have scaled back the foreign aid they extended to Jordan after 2011, the kingdom is ever more dependent upon U.S. foreign aid. Aid to Jordan already accounted for 40 percent of all U.S. aid to the Middle East, and then-Secretary of State Rex Tillerson committed Feb. 14 to increasing U.S. economic aid even further, from $1 billion annually to $1.3 billion. At over 10 percent of Jordan’s annual budget, this is a bailout in all but name.

To survive, Jordan needs to find a way to reduce military spending, the only discretionary part of the budget that is increasing rapidly, and radically restructure its economic model – or else get used to living permanently on the edge of economic ruin.

Kirk H. Sowell is the principal of Utica Risk Services, a Middle East-focused political risk firm. Follow him on Twitter @Uticarisk. This commentary first appeared at Sada, an online journal published by the Carnegie Endowment for International Peace (www.carnegieendowment.org/sada).

A version of this article appeared in the print edition of The Daily Star on March 26, 2018, on page 7.

The views and opinions of authors expressed herein do not necessarily state or reflect those of the Arab Network for the Study of Democracy
 
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