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Austerity to Hit Jordan as Debt Spikes, Economy Slows

FILE - A general view of the downtown area of the Jordanian capital near the Grand Husseini mosque in Amman, Jan. 21, 2014.

Jordan's high and rising public debt has worried the International Monetary Fund and prompted a downgrade from Standard & Poor's. So the government is planning a blast of austerity by year-end.

Tax hikes and subsidy cuts —- likely to be highly unpopular —- are on the agenda as the country's debt to GDP ratio has reached a record 95 percent, from 71 percent in 2011.

"Postponing problems might increase the popularity of the government but would be a crime against the nation," Prime Minister Hani Mulki told a group of parliamentarians this week.

After an IMF standby arrangement that brought some fiscal stability, Jordan agreed last year to a more ambitious three-year program of long-delayed structural reforms to cut public debt to 77 percent of GDP by 2021.

The debt is at least in part due to successive governments adopting an expansionist fiscal policy characterized by job creation in the bloated public sector, and by lavish subsidies for bread and other staple goods.

It also hiked spending on welfare and public sector pay in a move to ensure stability in the aftermath of the "Arab Spring" protests in the region in 2011. But the economy has slowed, battered by the turmoil in neighboring Syria and Iraq.

The economic strains reduced local revenue and foreign aid, forcing Jordan to borrow heavily externally and also resort to more domestic financing.

Although there has been some progress this year with improving remittances, tourism and some rebound in exports, there has been no pickup in growth since 2015 — with the officials forecasting 2 percent growth this year from an earlier IMF 2.3 percent target.

"This year we are at a crossroads. Everything I am trying to do is to stop the hemorrhage and start breathing," Mulki was quoted as saying at another meeting to garner support.

The rising debt accentuated by the protracted regional conflicts on Jordan's borders was the main reason Standard and Poor last week downgraded its sovereign rating to B+.

Subsidy risk

Economists said Jordan’s ability to maintain a costly subsidy system and a large state bureaucracy was increasingly untenable in the absence of large foreign capital inflows or infusions of foreign aid, which have dwindled as the Syrian crisis has gone on.

Jordanian officials say they expect less donor support next year than any time since the crisis began. They are also concerned that Gulf states, hit by lower oil prices, have so far not committed any support funds given after the "Arab Spring" to be renewed.

Politicians and economists say the government's fiscal consolidation plan envisages a doubling of bread prices and raising sales taxes on basic food and fuel items.

This should cut into the estimated 850 million dinars ($1.2 billion) the government pays in annual subsidies from bread to electricity to water.

But economists reckon subsidy cuts are bound to worsen the plight of poorer Jordanians, a majority of the country's population, and removing subsidies has triggered civil unrest in the past.

As well as debt, the IMF has also pointed to the unemployment rate, which has risen sharply in the last two years to 16 percent, and to low tax collection.

The IMF says Jordan stands out among countries in the region with among the lowest tax collections. Personal taxes constituting only 0.4 percent of GDP, with nearly 95 percent of the population not subject to income tax.

Critics say any hikes would extract more from the segment of salaried employees that already pays while leaving influential business tycoons outside the tax net.

"The tax burden in comparison with countries of the region except the oil producers is low... there is big generosity in exemptions," said Jihad Azour, the IMF's director of the Middle East and Central Asia department during a recent visit to Jordan.

Economists fear that the IMF's tax recommendations endorsed by the government that range from expanding corporate income tax to dividends and tougher sanctions for tax evaders will hurt business sentiment in a country whose political stability has turned it a safe haven.

"It's important to activate growth to bolster stability and ensure a faster drop in debt," said the IMF's Azour adding that tackling Jordan debt problem was crucial for its future prosperity in a turbulent region.