Public debt is piling up

During the first seven months of the year, the budget deficit, after foreign grants, reached JD461.5 million.

However, public debt, net of deposits, rose at the same time by JD1,174 million.

The question is why should debt rise more than the budget deficit?

Where did the difference of about JD700 million go?

The answer is simple. The official budget does not recognise the cost of electricity and water subsidies.

The government’s cash injections to the National Electric Power Company and the water company (Miyahuna) are treated as advances.

When the government issues a guarantee to enable the two enterprises obtain bank credit to finance their losses, the amount concerned is added to the public debt, but not reflected in the budget as part of the current expenditure.

If this trend continues, and it seems it will, the debt will rise by at least JD2,145 million by December 2014, roughly equal to the debt increase last year.

In that case, the electricity and water subsidies during 2014 will pass the JD 1.5 billion mark, but the budget will show a deficit of only JD1 billion, as planned.

In its present form, the official budget does not reflect the real financial position of the government. Neither does it include all governmental recurring expenditures, such as the subsidies of electricity and water.

The basic problem lies in the policy of heavy subsidies to electricity and water, that eat up some 20 per cent of the budget and 6 per cent of GDP, not to mention other subsidies accounted for in the budget, related to bread, cooking gas, fodder and other food items, which may raise total subsidies to around 10 per cent of GDP.

Subsidies are the other side of public debt.

It is not logical for some political activists to criticise high debt while defending subsidies on social grounds.

In the absence of cash surpluses in the Treasury, subsidies have to be financed by debt.

Allowing debt to rise up to JD2.5 billion a year, or the equivalent of 10 per cent of GDP, is an irresponsible, unsustainable  policy.

Either the situation is corrected by strict economic reform or the harsh market forces will do it at a very harmful price to be paid by the limited-income group that the subsidies are meant to help.

It is strange that the International Monetary Fund is happy with this state of affairs, so much so that the head of the IMF mission, Kristina Kostial, congratulated the prime minister for the success of the reform programme, ignoring the rapid increase of public debt and the real deficit in the public sector.

The IMF did not object to the policy of borrowing externally in dollars instead of borrowing internally in dinars, a policy that raised foreign debt from 20 per cent to over 40 per cent of the total public debt.