This paper is an output of the project on “Stabilization and Adjustment in MENA”. The project has been managed under the auspices of the Finance for Development Lab (FDL) and the Economic Research Forum. FDL acknowledges the financial support of the International Development Research Centre (IDRC) for this project.
Jordan’s economic trajectory has been characterized by long stop-go cycles. Real GDP per capita peaked in the early 1980s followed by a precipitous decline in 1992, then peaked again in the early 2010s. It has since declined to levels reached 20 and 40 years ago.
These long swings have been associated with an increasing reliance on borrowing and more so on external financing, resulting in an unprecedented level of the debt-to-GDP ratio and a threefold increase in servicing the debt in the last decade. The level of debt doubled during the 2000s, but this went largely unnoticed as the debt-to-GDP ratio was reduced by half due to the high economic growth rates of that decade. The reasons why “the roof was not fixed when the sun was out” reflect political economy considerations and weak macroeconomic management that, as a consequence or intent, have reduced completion and constrained private sector development. Moving forward, in addition to volatile external factors – from geopolitics to interest rates – economic growth and the debt-to-GDP ratio will depend on: long-known and currently acknowledged policies by the government aiming to improve governance; the rationalizing, not necessarily reduction, of public expenditures; the reduction of growing pension liabilities and expansion of the social safety net; the raising of revenues in a non-regressive way; the attraction of investments; the increase of economic and political contestability; and the gaining of social acceptance.
This paper examines debt sustainability in Jordan.
- First, it notes Jordan’s economic trajectory, which has been characterized by long stop-go cycles; real GDP per capita peaked in the early 1980s followed by a precipitous decline in 1992, then peaked again in the early 2010s and has since declined to levels last seen in the early 2000s.
- Second, these long swings have been associated with increasing reliance on international support. Much of this international support has contributed to increasing levels of public debt, the composition of which is shifting from domestic to external browning – something that should be examined against the exchange rate that has remained pegged for three decades.
- Third, due to unprecedented high rates of economic growth during the 2000s, the debt-to-GDP ratio was reduced by half during the 2000s even though the debt level doubled. Having nearly reached a fiscal cliff by the end of the 2010s, the government announced hundreds of reforms supported by Jordan’s international partner, which aim to improve macroeconomic management and accelerate private sector development. For now, debt sustainability seems feasible for the next three to four years, but in the future, it will depend on how quickly, consistently, and effectively the reforms will be pursued and whether there will be any adverse external shocks.
- We conclude that the right policy mix to reduce the debt-to-GDP ratio should focus on policies that promote economic growth, rationalize – not necessarily reduce – public expenditures, raise revenues in a non-regressive way, and take into account several implicit liabilities such as those arising from the pension system and climate change adaptation measures.