Who will pay the public debt?

The government is about to sign for a new $1.9 billion loan from the World Bank, in accordance with the recent commitments issued by the Donor Conference held in London.

Jordan is also about to borrow $700 to 900 million from the International Monetary Fund (IMF) under the recently agreed three-year economic reform programme and is applying for a $300 million loan from Japan.

The Treasury is about to float a local issue of government bonds, to be available to local banks for $650 million.

Loans, loans, loans, but who will repay these loans when they come due?

The answer is obvious: lenders will pay each other by providing yet more loans, the proceeds of which will be used to pay the maturing loans. 

Debt can thus be rolled over and never repaid, but until when.

Both lenders and borrowers or aware of this fact. The interesting game can go on, and loans accumulate, until it reaches the point where lenders are not willing to go on with this game anymore. 

This is when the bubble will burst and a crisis will erupt.

In order for public debt to be replayed properly, in such a way as to reduce its outstanding balance, a surplus in the budget must be achieved and used to repay the debt.

As far as Jordan is concerned, this development is out of the question, at least in the foreseeable future. 

The budget deficit will continue to be financed by additional loans, pending a loaming crisis and default.

The IMF is of course aware of this fact, and, accordingly, did not ask for the impossible. 

It did not require Jordan to reduce its debt in absolute figures. If anything, the fund will tolerate an additional net borrowing of JD1.5 billion ($2 billion) during the coming three years, on the assumption that the gross domestic product will rise at the same time by at least JD5.5 billion.

This way, public debt expressed in dollars will rise in absolute figures, but may drop as a percentage of GDP.

The situation was further aggravated by the new trend of borrowing externally in dollars, so that the government would not crowd out the private sector or deprive it of obtaining the necessary credit facilities.

The result was that the share of foreign loans, denominated in dollars, rose quickly to reach 40 per cent of all debt. It is expected to reach 50 per cent by the end of this year.

Too much local or foreign debt is bad enough, but foreign debt is riskier.

Countries do not default on their local loans because they can issue local money to pay lenders. They cannot print dollars.