Indulging in foreign borrowing leads to a risky direction

There is a clear government tendency nowadays to shift its deficit financing from local borrowing in Jordanian dinars to foreign borrowing in dollars, in the form of Eurodollar bonds, with or without the guarantee of the American treasury.

Those who agree with or encourage this trend offer at least three arguments to support their point of view. The first is that the Treasury should refrain from crowding out the private sector, thus depriving businesses of badly needed bank credit.

The second is that foreign borrowing in foreign exchange helps the Central Bank reserve. The third is that borrowing from the world market reflects positively on Jordan’s image as a credit-worthy country, because it indicates that international investors trust the Jordanian economy and its ability to repay on time.

The first argument is weak because Jordanian commercial banks carry huge amounts of free liquidity, available for lending, but do not have qualified private sector borrowers.

The second argument is not convincing. Foreign borrowing may help the Central Bank’s reserve of foreign exchange, but only temporarily. One should take into account the burden of repaying those loans with interest, which will obviously reduce the reserve. It is only buying time.

A bigger reserve has no meaning if its source is foreign loans, and not the proceeds of exports of goods and services, expatriates’ remittances, receipts from tourists, and the like.

The third argument does not stand after starting to borrow under American guarantee. On the contrary, such borrowing gives a negative image concerning the strength of the financial position of the country and its ability to repay on time. It shows that the country’s risk is not acceptable on its own.

Foreign indebtedness is extremely risky. Sooner or later, it leads to a crisis and creates the need to call on the International Monetary Fund to salvage the situation.

At this stage, political populists will want to target the IMF and its economic programmes, instead of blaming the government officials who are responsible for bringing the situation to a crisis due to their bad management.

The Jordanian government, like most others, owns land, buildings, shares, cars and other assets, the value of which far exceeds the total domestic public debt. 

In theory and in practice, governments can repay the domestic debt denominated in local currency by auctioning such real estate, financial and other assets.

In fact, the Central Bank can in theory and practice repay all the Treasury’s debt instalments denominated in dinars simply by issuing dinars and crediting the accounts of the lending banks, even if this may cause hyper inflation, which is bad but not as bad as bankruptcy.

To the contrary, the Treasury cannot issue or generate dollars to honour its commitments in foreign exchange, which may lead to default, with all its disastrous consequences.

The conclusion is that foreign debt is dangerous and risky. It should not be allowed to exceed safe limits. It is not the right substitute for domestic debt to see Jordan indebted to itself.