Amman, Asharq Al-Awsat—During the recent visit by Christine Lagarde to Amman, the IMF’s managing director said there were signs the economies of countries in the region currently transitioning to democracy, such as Egypt, Libya, Jordan and Tunisia, were beginning to stabilize after a period of turbulence following the outbreak of the Arab Spring in early 2011.
But Lagarde also stressed the work that remains to be done in these countries, especially enacting major structural reforms such as those relating to subsidies and creating jobs for what are demographically young populations. She said the latter goal could only be achieved once average growth rates in the region doubled from 3 to 6 percent.
With growth at just under 3 percent, and with public debt set to reach some 83 percent of GDP by year’s end as the government struggles to foot an increasingly burdensome subsidies bill while having to spend some 1.4 billion dinars (2 billion US dollars) this year as a result of the influx of Syrian refugees, Jordan is exemplar of the challenges facing Arab economies.
The country signed a Stand-By Arrangement with the IMF in 2012 for a 2 billion US dollar loan—seen as key to opening further sources of funding—and the international lender relaxing its fiscal targets for the Hashemite Kingdom in light of the strain it is currently suffering.
Asharq Al-Awsat spoke to Jordan’s Minister of Finance, Umayya Toukan, regarding the recent meetings with the IMF in the Jordanian capital, the Syrian refugee situation, plans to scrap state subsidies on energy and food, and the country’s growing debt problem.
Asharq Al-Awsat: Talks were held a few days ago with the IMF. What were the most important decisions reached? Did you have any differences of opinion?
Umayya Toukan: The IMF paid a visit to Jordan last March in order to conduct the third and fourth reviews of Jordan’s economic performance, as stipulated by our Stand-By Arrangement [which allows Jordan exceptional access to around 2 billion US dollars in funding] . . . According to the reviews, Jordan was able to meet the IMF’s performance criteria. The IMF issued a press statement commending the performance of the Jordanian economy, despite increasing economic burdens resulting from the interruption of Egyptian gas supplies and the growing influx of Syrian refugees. The adoption of these reviews came from a decision taken on April 28 last year by the IMF Executive Board.
Q: How much public debt does Jordan currently carry? How much does it spend servicing that debt?
At the end of 2013, the net public debt was 19.097 billion Jordan dinars [27 billion US dollars, at 1.00 Jordanian dinar = 1.41183 US dollar], representing 79.6 percent of GDP in 2013. It is expected to reach 83 percent of GDP at the end of 2014.
With regard to public debt service, it is estimated that the interest accrued on the public debt will reach 1.1 billion dinars in 2014, of which 885 million dinars is internal debt interest, and 215 million dinars is external debt interest.
Q: Why is the government increasingly borrowing from abroad?
Due to the interruption of the Egyptian gas supply and the arrival of more than 750,000 Syrian refugees in Jordan, financial needs have increased by leaps and bounds. These are impossible to cover through local revenues—especially in the absence of subsidies. It was therefore necessary to borrow in order to fulfill our current monetary obligations. The Ministry of Finance’s strategies to manage public debt aim to diversify sources of available funding. Accordingly, the government has had to borrow from abroad. Conditions have been favorable in terms of maturities and low interest rates. The ministry has done so to ease pressure on the local market and to avoid overcrowding among private sector companies looking to secure bank debt.
Public debt in 2012 amounted to 16.6 billion dinars. In 2013, this debt rose to about 19.1 billion dinars. This was due mainly to a rise in government borrowing to cover the National Electric Power Company’s losses, which amounted to 1.1 billion dinars through 2012 and 1.3 billion dinars in 2013, as well as to cover the cost of accommodating Syrian refugees, estimated at 1.4 billion dinars according to a 2013 United Nations Development Program report.
Q: How long will the state budget deficit continue to affect the government? When will Jordan have a balanced budget?
We hope that fiscal and structural reforms, especially in the energy and water sectors, will address the issue of the budget deficit, especially in the medium term. Indeed, we began to witness the impact these reforms have had on the public debt throughout 2013, which decreased by 516.8 million dinars, compared to the public debt in 2012, which was 1.3072 billion dinars. The fiscal deficit stood at 1.824 billion dinars in 2012. This is an indication of the success of the financial reforms adopted by the government, which are expected to contribute to restoring balance to public finances in the medium term.
In addition, it was estimated that the fiscal deficit in 2014 after external grants was about 1.1144 billion dinars, or 4.3 percent of estimated GDP for 2014—compared to 1.3072 billion dinars, or 5.4 percent of GDP in 2013. This is expected to continue to fall after grants fall to 3.3 percent of GDP in 2016. There is medium-term plan to return the budget deficit, and therefore to keep the debt at targeted and acceptable levels.
Q: Is there a timetable to end government subsidies on petroleum products, bread and animal feed?
The government has redirected subsidies for petroleum derivatives, and subsidies for commodities have been replaced by cash handouts to citizens. The tariff on electricity prices was adjusted so that electricity will be sold at market prices by 2017. With respect to subsidizing other products, the government is studying the best ways to manage these subsidies and provide them to those who deserve them.
Q: Why didn’t the government decide to support the elimination of all subsidies and work to increase salaries or provide cash handouts for Jordanians?
The elimination of subsidies all at once would represent a burden that the citizen, and the national economy in general, would not be able to handle. Thus the government has adopted a gradual program set within a specific timeframe to remove all forms of public subsidization but keep subsidies for appropriate products and sectors. And, of course, with the increase in GDP growth and thereby the increase in taxable and non-taxable government revenues, and the continued fiscal discipline in government spending, the coming years will show a significant improvement in the budget deficit and debt as a percentage of GDP.
Q: When will electricity subsidies be eliminated? Will electricity prices be raised in light of Jordan beginning nuclear power and oil shale projects?
As I mentioned earlier, electricity subsidies will be eliminated by 2017. Electricity subsidies have been the biggest burden on the public debt in recent years and especially since 2011. The National Electric Power Company’s losses reached about 3.5 billion dinars at the end of 2013. So far, more than 40 companies have been licensedto build alternative electricity production facilities, such as solar and wind power projects. We have also invested in oil shale in order to generate electricity, and the government is building a floating port in Aqaba for importing liquefied natural gas. That port is expected to begin operating at the beginning of next year.
Q: Has the Gulf particularly helpful in funding capital projects? What has affected your relationship with Qatar in terms of its contribution to the grant?
First of all, I can only express my gratitude towards the members of the Gulf Cooperation Council for their continuous support to the Jordanian government in bearing the additional burden arising from local and regional conditions. The Gulf grant has contributed to the implementation of capital projects in the overall budget, and the government will continue the implementation of such projects as agreed upon with the Gulf countries, in order to benefit more from the grant.
As for Qatar’s contribution to the grant, talks are still ongoing with Qatari representatives on this topic.
Q: What is the real cost borne by the government as a result of Jordan hosting so many Syrian refugees?
The Syrian crisis is one of the most significant challenges Jordan is facing at various levels. Today, Jordan hosts about 1.3 million Syrian citizens, including 750,000 who have taken refuge in Jordan since the outbreak of the crisis in Syria. This accounts for 10 percent of the population of Jordan. The total direct cost borne by Jordan in hosting Syrian refugees was about 1.8 billion dollars in 2013, according to United Nations reports . . . The estimated cost for the next three years is about 4.1 billion dollars overall, including the cost of infrastructure, security and other adjustments.
On the one hand, the Syrian crisis has indirectly led to the interruption of transit trade through neighboring countries, a decrease in foreign direct investment, and a decline in exports. On the other hand, hosting Syrian refugees has resulted in high rent and real estate prices in Jordan, pressure on the local labor market and, in general, pressure on the infrastructure [serving] all sectors, particularly health and education, and scarce resources in Jordan, most important of which are electricity and water.
Q: Has there been an increase in US aid to Jordan? How will Jordan benefit from the 1 billion dollar loan guarantee provided by the US government?
There is an additional increase of about 270 million dollars in US grants for this year, as the US government is providing a loan guarantee for the current year amounting to 1 billion dollars in Jordanian government bonds repayable within five years.
An agreement with the US was signed in this regard in Amman on May 5, 2014, and these bonds will be sold in capital markets in New York before the end of next month. The importance of these secure bonds lies in that fact that the cost to the Jordanian, or the return on these bonds to the bearer, is estimated to be less than 2.5 percent. This is a modest cost for borrowing from the global markets, as opposed to borrowing without the US government’s sponsorship, which would cost up to 6 or 7 percent. All additional funding sources will be used to cover the deficit in balancing funding and thus meet our needs for current and capital expenditure in different sectors. This will lead to the achievement of the target growth rates in GDP, estimated to be 3.5 percent in 2014.
This is an abridged version of an interview originally conducted in Arabic.