National debt: Causes and possible solutions

The main driver of national debt in any country is the structural mismatch between the amount of revenues that a government collects and the amount of spending it makes. National debt basically represents the sum of past annual budget deficits. Beside financing budget deficits, there are several reasons that cause governments to borrow and accumulate debt; like financing huge capital projects, meeting the cost of national emergencies, reducing the economic burden on taxpayers, servicing some loans and mitigating the impact of business cycles.

However, many issues arise as national debt increases. Questions like debt sustainability, practical impact of debt, level of foreign debt and its effect on foreign reserves and exchange rate. To answer these questions among others, each country must have an estimate of its debt threshold level; i.e., the level of debt ratio to GDP where any increase in debt beyond that level will have a negative impact on the economy. This debt threshold level is different across countries and over time.

In Jordan, like many countries, national debt has been growing because of a structural mismatch between government revenues and spending. By end of 1980s, the country’s national debt reached an unprecedented level of 220 per cent of GDP. As a result, a severe economic crisis was imminent. Since then, the government has adopted many short, medium- and long-term measures and policies that resulted in lowering the debt to GDP ratio from 220 per cent in 1990 to 60 per cent in 2008. Among these were public sector restructuring measures like privatisation and commercialisation. But, trimming the public sector and unleashing the private sector objectives are not fully accomplished till now.

In 2001, a national debt law was issued that sets a ceiling on domestic and foreign debt as none of which separately should exceed 40 per cent of GDP at any time. Furthermore, article 23 of the law sets the ceiling of the total debt (domestic & foreign) to GDP ratio at 60 per cent, but article 24 of the law left the resolution to the Cabinet to enforce article 23, which never took place after 2008.

For the last 15 year, Jordan’s national debt has been creeping at worrying rate. On average, the national debt has grown by 10.2 per cent annually, while nominal GDP grew at 5.5 per cent annually during 2009-May 2023. Therefore, the national debt has tapped JD 39.4 billion and its ratio to GDP has reached 114 per cent by the end of May 2023. What is more worrying is the fact that the central government debt service (interest and installments) has surpassed the budget deficit over the last 5 years. On average, the debt service was JD 2.8 billion per year while the budget deficit was JD 1.5 billion per year; i.e., JD 1.3 billion higher during the period 2018-2022. What does it mean? Cutting debt by 50 per cent would mean erasing the budget deficit!

Is there a way out? Debt relief or debt swap are not options for Jordan. Therefore, several structural reform policies and measures including unorthodox ones must be implemented. To name few as follows:

Public sector restructuring and trimming is vitally needed over the medium to long term three to ten years. This would cut current expenditures and lowers the budget deficit.

More reliance on Public Private Partnership, PPP to implement public utility and infrastructure projects. This approach can hit three birds, not two, in one stone; relieving the financial burden on the government in particular capital expenditures, unleashing the private sector investments, and utilising the private sector efficiencies. Queen Alia International Airport and Disi Water Conveyance projects are great examples of PPPs.

Establishing the suggested new city near Amman as a PPP project. The government can utilize the proceeds to settle at least 50 per cent of the national debt.

Hamzah Jaradat is a former senior economist at the International Monetary Fund