Jordan running out of options; running from the IMF is not one

This year has not been a boring one. A fiscal nightmare that showed the people’s mettle is what brings us here. The government, tasked with the job of executing the International Monetary Fund’s (IMF) programme while implementing fiscal austerity and maximising revenue measures, proved a failure. The events of the past week have highlighted that the Jordanian people’s pocket has been exhausted, and yet, Jordan cannot turn its back on the existing fiscal situation. In short, the solution lies somewhere in between, there is a middle ground, and I will outline it below.

Our story begins in August 2016, when the government signed a three-year arrangement under the Extended Fund Facility (EFF) with the IMF, without thoroughly acclimatising it to a Jordan centric one. The IMF approved the deal for $723 million to support Jordan’s economic financial reform programme. At first, all was well with the world; the first review was completed successfully in June 2017, enabling the disbursement of an initial $71 million. However, all good things must come to an end.

In 2017, the government began increasing taxes and successfully generated JD450 million in additional revenues. However, these efforts failed to achieve the IMF programme’s targets and the fiscal cliff began looming. The budget deficit increased and gross public debt grew. In addition, the continuous increase in taxes had a negative impact on consumption and household income, causing tax revenues to drop.

In 2018, the government had to raise approximately $450 million to meet the EFF requirements. Therefore, additional measures, such as the elimination of sales tax exemptions, tax increases and the new income tax draft law were put in place. This proved counterproductive, as almost all subcomponents of revenue dropped. This is where the government should have paused and reevaluated, as evidently, taxation reached a point where increased revenue can only be obtained at lower rates. A “flat lining” sales tax highlights the diminishing purchase power and lack of liquidity, which translates to slower, possibly negative, GDP growth. In the holy month of Ramadan, a month where both historically, and ironically, consumption skyrockets, sales of basic items, such as bread and poultry dropped by 20 per cent. 

The road ahead entails more of the same, and considering the pulse of street, this obviously is not an option. The government can no longer place a Band-Aid on a tumor and hope for the best. If such measures would get the country out of the hole for good, the Jordanian people would play along. But that is not the case, and to say that Jordan should opt out of the IMF programme is not an option either.

The solution is difficult, but simple. Jordan needs to reengage the IMF in order to chart a new course. Jordan should highlight its positive track record and unwavering commitment, despite the need to restructure the deal. The many exogenous factors, that did not exist at the time of signing the agreement, such as the continuous refugee influx and expired Arab grants, which were never paid in full, must be pointed out. Jordan should request an extension, as simple as that. An additional two years will afford Jordan additional time to meet IMF targets at an attainable pace.

In terms of approach, the government should shift the fundamentals towards a new demand-stimulating proposition, supplemented by an economic-stimulus plan. Such measures include quick fixes that will increase revenue progressively, signalling a shift from conventional regressive taxes. Such measures could include: restimulating the automotive sector, done by the US, by reinstating hybrid tax exemptions. The said sector generated upward of JD300-JD450 million in revenue in 2017. Since February to date, the sector’s revenue has declined by over 90 per cent and that is serious wasted potential income. Licensing the estimated 20,000 Uber and Careem application operators by introducing a onetime JD10,000 fee per car. This will generate about JD200 million, provide employment for 20,000 Jordanians and will increase Uber and Careem price points, thus resolving the issue with yellow cab lobby. Placing a cap on government salaries alone could create savings of hundreds of millions annually.

Another part of the plan also focuses on loss-leading revenue increasing measures that will culminate in a sustainable future. Suggested tactics include reducing the bluntest regressive tax instrument, the sales tax, which will ultimately increase revenue, liquidity and stimulate the economy. Another option includes lowering the formal cost of labour (e.g. reduce social security tax rate as suggested in the IMF report) to promote employment.

Jordan should also inform the IMF of its plan to overhaul the legislative framework. An improved framework delivers foreign direct investment, revenues and improved international ratings. The Regulatory Guillotine could be an option; it eliminates and simplifies regulations in around one year, and if successful, costs and risks of doing business in the economy will be visibly reduced, improving competitiveness, investment and job creation. The guillotine was used by Hungary and Mexico in their noteworthy reforms. Countries have used the Guillotine as a tool to help with EU accession. In addition, South Korea reviewed over 11,000 regulations in 11 months and eliminated 50 per cent of them, producing over 1 million new jobs and $36 billion in new Foreign Direct Investment. The Guillotine could be what is needed to show Jordan’s dogged determination to the IMF and the world.

I could go on, but the bottom line is: Jordan successfully renegotiated previously the terms of an IMF loan. The recent release of $70 million by the IMF is also highly encouraging. Finally, the IMF website’s Jordan country page states that the IMF will “continue to evaluate changes to the macroeconomic projections as warranted by new developments”, showing that nothing is carved in stone and hinting at the possibility of reconsidering the IMF conditions in light of all the unforeseen that Jordan is facing, very much alone.

The writer is a business owner and former public sector servant in the fields investment and economy