Most governments borrow money, but it’s how they spend it that counts.
The Economist- Yusuf Mansur
Jordan’s current debt-to-GDP ratio has been much higher in the past, so why is it suddenly attracting more grumbling than ever before? Net public debt owed by Jordan at the end of February rose 1.6 percent to JD19.4 billion, compared with JD19.1 billion at the end of 2013. Jordanian public debt accounted for 75.8 percent of GDP, exceeding the maximum allowed of 60 percent (According to the IMF, the debt-to-GDP ratio in Jordan is actually 86 percent). The net domestic debt at the end of last year stood at JD12.1 billion, while external debt amounted to JD7.25 billion.
From the start of the year until the end of June, the government issued JD2.3 billion in bonds to finance its deficit. Last month, on behalf of the government, the Central Bank of Jordan sold JD50 million in treasury bonds at an interest rate of 3.79 percent. The government will issue Eurobonds that are guaranteed by the United States for $1 billion in the second half of the year.
National debt was 111 percent of the GDP, and remained above 100 percent of the GDP until 2000. So having a debt-to-GDP of 85 percent shouldn’t be a cause of panic, right? Wrong. Since 1998, when national debt was just under JD6.2 billion, the debt has been growing at an average of JD860 million per year to reach JD19.3 billion. The cost of servicing the debt is JD1 billion in a JD23 billion economy. Given a budget of JD8 billion, this means that servicing the debt alone would be as much as spending on education.
The worry isn’t the size of the debt but rather what the government is using the borrowed funds for. Had the spending been on projects that enhance the physical and intellectual capital of the nation, one would gladly put up with the mounting debt since the future return on such investments would more than compensate the debt and make Jordan a highly competitive economy. However, the spending is on salaries, pensions and the like. This also means that we’ll have to pay more and more taxes in the future, not only to pay for the debt with interest, but also for the growing salaries of the public sector employees as their salaries grow.
What is the dangerous debt-to-GDP level? In a lot of economic literature, it’s when a country’s debt level hits 200 percent. However, in Jordan’s special case, alarms should go off whenever a government has to borrow to pay salaries.