Is austerity the solution for Jordan’s economy?

The government raised the minimum wage a month ago in a precautionary movement to offset criticism for hiking taxes on consumable products, which came as part of a plan agreed with the IMF for a gradual fiscal consolidation led by reforms in the general tax system to tackle public debt. 

Austerity measures are a new trend in official media nowadays. The prime minister appeared on national TV, addressing the reforms measures, announcing the cut in public salaries and setting a salary ceiling, a step that was referred to as “populist”.

Public debt has been on an upwards path, reaching 95 per cent of GDP in 2016.

Looking at the economy from the demand side in the recent years, one visible number was the inverse of the 2.89 per cent inflation in 2014 to a -0.87 per cent and -0.80 per cent deflation in 2015 and 2016, respectively, due to the depression of total consumption.

The expenditure side of the economy was affected where consumption fell, leading to more savings. 

A simple calculation shows the effect of the declining consumption from 30.6 per cent to 19.68 per cent to 7.5 per cent of GDP, while investment went up from 74.4 per cent to 79 per cent to 90 per cent of GDP in the years 2013-2015.

It is important to note that in Jordan, consumption and investment are interchangeable, and include a significant weight from non-private sectors such as NGOs and other public organisations.

The exports’ share of GDP, on the other hand, fell from 23.4 per cent in 2014 to 20.9 per cent in 2015, further falling in 2016 to 19.8 per cent of GDP.

Total government revenues fell in 2015 from JD7.26 billion to JD6.79 billion, a drop of 6.5 per cent. This caused a decrease in government share of spending on the demand side from 30.8 per cent to 29 per cent of GDP.

Ironically, the drop of imports was the main driver of growth; they fell from -56.9 per cent to -48.5 per cent to -44 per cent of GDP in 2014-2016.

The twin deficit budget is the evolution of increased imports over exports and government spending over revenue, which made the domestic demand of growth fully dependent on foreign financing.

The country had excess savings of JD9.57 billion, JD9.09 billion and JD8.27 billion after subtracting investment in the years 2013-2015.

Economic uncertainty caused savings to go up, accompanied by the strict financing policy of commercial banks, which led to the fall of domestic demand variables. 

To conclude, Jordan is having problems on the demand side where most components are declining to the point that inflation became deflation.

The economy is facing a recessionary gap and growth is far under the potential GDP. Austerity measures would only work if a measure of growth could return, which is not the case.

Cutting back on government spending is not growth. 

Austerity in a depressed economy could work if the country were a net exporter, like Singapore. 

Every economy has its uniqueness and what works for a country may not work for another.

When Jordan needed to pursue an expansive counter-cyclical fiscal policy, it raised taxes instead.

The writer is chairman of Zarqa Chamber of Industry. He contributed this article to The Jordan Times.