SUN 16 - 6 - 2019
Jun 22, 2018
The Daily Star
Razzaz faces rough road ahead in Jordan
Kirk H. Sowell
On June 5, one day after King Abdullah II had accepted the resignation of Prime Minister Hani al-Mulki, Omar al-Razzaz was designated as Jordan’s new prime minister, and the Cabinet was formed by royal decree on June 15. Razzaz comes into office under the most inauspicious of circumstances: having run in no election and having no popular mandate, Razzaz, the outgoing government’s education minister, will be taking over for a prime minister who was driven from office after several days of sustained protests that were more intense than those of 2011. In particular, Razzaz faces the challenge of stopping recent deterioration in the state’s fiscal condition, and yet the protests against Mulki were driven precisely by his austerity measures aimed at slowing Jordan’s fiscal collapse.
When Mulki came into office in mid-2016, Jordan was headed toward insolvency, with the debt-to-GDP ratio increasing at a pace of about 5 percent per year, reaching over 93 percent of GDP. Mulki successfully pulled Jordan out of the freefall, reducing the increase in the debt-to-GDP ratio to 1 percent per year by restraining spending growth while dramatically increasing revenues and cutting electricity subsidies. Meanwhile Jordan’s already weak economy grew weaker. Growth between 2014 and 2016 was already anemic at 2.8 percent and slowed to just 2 percent in 2016 – Mulki’s last budget year – and 2.1 percent during 2017 even despite a significant upswing in tourism that year.
The recent protests, which began on May 30, were directly prompted by the government’s introduction of a new income tax law, but also included demands to reverse reductions in electricity, fuel, and bread subsidies. The proposed changes to the income tax law itself are hardly radical; Jordan is traditionally a lightly-taxed country, and the most recent amendment would have reduced the minimum income at which individuals can be taxed from 12,000 Jordanian dinars ($16,910) to 8,000 dinars per year, and for families from 24,000 Jordanian dinars per year to 16,000 dinars. Protests also targeted recent changes in the bread subsidy, but this subsidy has not been abolished, as some reports inaccurately claim. Instead, market prices have increased and Jordanian citizens will receive direct compensation to avoid subsidizing consumption by foreigners. Only citizens with incomes over 1,500 dinars per month, which is three times the average income, are excluded from the subsidy.
The protests passed peacefully but were so intense in the capital and elsewhere in the country that it became impractical for Mulki to continue in office. Even before Razzaz’s appointment, King Abdullah rescinded the most recent price increases on electricity and fuel on June 1, and Razzaz’s first act as prime minister-designate was to declare that he would withdraw the new tax bill and conduct a round of negotiations on its provisions – though neither has he promised not to reintroduce it in some form.
So far Razzaz has spoken with a conciliatory voice, conscious of the example of his predecessor. Mulki was widely criticized for a February interview in which he vigorously defended his record but declared in seeming indifference to popular opinion, “I do not seek popularity” – and indeed was shown in a poll in April to be the most unpopular head of government since Jordan began modern polling, with an approval rating of just 31 percent. Razzaz, by contrast, met with party leaders on June 11 and praised the civility and aspirations of Jordanian protesters and the necessity of dialogue going forward, though noted after his cabinet was formed on June 14 that in the face of the suffering of ordinary Jordanians the government had hard choices to make.
Unfortunately, the most recent monthly report by the Finance Ministry shows that Jordan’s fiscal condition is deteriorating at an ever faster rate. According to the report, which covers through April, spending during the first four months of 2018 increased by 255 million dinars, while domestically generated revenues (i.e. not counting foreign aid) increased by only 24.3 million dinars. More directly relevant to the new tax law, revenues from customs and fees increased by 32.8 million dinars but were offset by a decline of 8.5 million dinars in tax revenue. This creates a net increase in deficit spending of 231 million dinars that has already increased the debt-to-GDP ratio from 95.3 percent to 96.4 percent in just four months.
Assuming this pattern continues throughout the year, this would add roughly 700 million dinars to Jordan’s debt, causing the debt-to-GDP ratio to increase by three percent instead of 1 percent. Although spending increased 358.4 million dinars during the first four months, the report emphasizes that this was partly due to the government making an entire year’s social welfare payment of 155 million dinars at once, and the figures above take this into account. These figures also do not take into account the impact of the June 1 cancellation of the planned cuts to electricity subsidies, which should increase spending, or increases in foreign aid, which would decrease it.
Seemingly just in time, a new aid package from Arab Gulf states has been put together to help Jordan. The June 11 Mecca Summit between the monarchies of Saudi Arabia, the United Arab Emirates, Kuwait, and Jordan agreed upon a five-year, $2.5-billion aid package. It included four categories (in unspecified amounts for each): a deposit in the Jordanian Central Bank to reinforce currency reserves, guarantees of World Bank loans, annual budget support, and funding through existing infrastructural investment funds. This was naturally accompanied by copious amounts of praise in domestic and pan-Arab media for the monarchs’ concern for Jordan.
Yet this aid package will not have as large an impact as expected. Two of the articles, the promises to the Central Bank and investment funds, are contingent on future decisions by these monarchies, which could withdraw their deposits at any time, giving them leverage over Jordan. And more World Bank loans, even at lower rates, are only of value if they replace current high-interest loans and are used effectively.
The key element, budget support, will be just a portion of this $500-million-per-year package. For context, a $5 billion GCC aid program spread over five years from 2013 to 2017 left no measurable impact on Jordanian employment. Jawad al-Anani, a former Jordanian deputy prime minister, has suggested that the Mecca Summit’s budget support will be no more than $200 million per year, not even enough to cover Jordan’s deficit spending in the first four months of 2018. For example, assuming the debt-to-GDP ratio would otherwise continue to grow three percent per year over five years, by the end of 2022 this external budget support would see the ratio rise to 107 percent of GDP instead of 110 percent of GDP.1
Qatar, perhaps to avoid appearing left out, sent Minister of Foreign Affairs Mohammed bin Abdul-Rahman Al-Thani to meet with King Abdullah on June 13. The Qatari offer includes no grant assistance, but contains instead a promise to spend $500 million on investment projects and offer 10,000 unspecified job opportunities for Jordanians in Doha. As with project investment promises from other states, this commitment could have some tangible benefit, or turn out to be nothing at all if Qataris later decide not to invest.
Like Mulki, Razzaz has a mandate coming into office to address problems that are beyond the government’s ability to resolve. Jordan has long since passed the point at which it can ensure its own solvency through policy decisions it controls. Razzaz’s writings on rentierism and past work as head of the Jordan Strategy Forum show he has thought a lot about the task at hand. Yet with just two years left on this parliamentary term and no popular base, at best he will be able to begin structural reforms to build a new socio-economic model – and be dependent on the monarchy to do so. Otherwise the Razzaz government will only be remembered as another government that got by on aid while passing on even greater problems to its successor.
Kirk H. Sowell is the proprietor of Utica Risk Services, a Middle East-focused risk consultancy. Follow him @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 June 22, 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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