Minister of Finance Omar Malhas on Jordan's Economy in 2017

The Economy in 2017

Jordan’s Finance Minister, Omar Malhas, says the country will have to make some tough economic choices in 2017.

By Dina Al Wakeel

Jordan’s public debt now stands at almost 95 percent of GDP, and unemployment is running at around 16 percent. This has set off alarm bells at the IMF and World Bank, who are both calling on the government to make further painful structural and fiscal reforms.

Minister of Finance Omar Malhas appears to be well aware of the arduous task ahead and the difficult choices he will soon have to make, many of which won’t be popular. Speaking exclusively to Venture in the final days of 2016, the minister mapped out how he plans to get the country’s economy back on track.

What were the main economic issues and events of 2016?

It was a very difficult year. It’s not a secret that economic growth was not as expected. It was expected to be 2.8 percent. But in the best-case scenario, we will probably end the year at 2.3 to 2.4 percent. The second issue is unemployment. It’s north of 15 percent, which is not a comfortable sign. The unfortunate regional conflict has negatively impacted the economy as well, and we should never forget the impact of the Syrian refugee crisis that has negatively impacted growth and put a lot of strain on our infrastructure. The host communities have seriously suffered as a result.

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What about the high levels of debt?

The high levels of debt have been accumulating for a number of years, so it was not the story of 2016. Let me talk about gross debt and not net debt. Previously the Jordanian government looked at debt as net debt. But in other countries evaluation is done on gross debt. So on gross debt we did increase, but a number of issues have impacted the debt. One is the Arab Spring and the [populist] decisions governments had to make. I won’t go into details because I don’t want to judge whether they were right or wrong. Maybe at the time they took these decisions they were the best. But if we look at the structure of the debt you will see that there are about JD5.5 billion to JD6 billion that are the accumulated losses of NEPCO as a result of failing to adjust the prices based on the changes in oil prices. So that accumulation has caused the debt to reach these levels; because if we factor out the losses of NEPCO, we would have hardly been at 70 percent debt to GDP, which would have been a very comfortable level even in today’s situation. We’re not going to cry over spilt milk. We have to face the facts. We cannot just keep debt growing, so we need to take steps in order to first of all neutralize the deficit because the more we lower the budget deficit, the less need there will be to borrow.

Do we mainly borrow to pay salaries?

What do we borrow? We borrow the deficit. The deficit has two components; it’s caused by current expenditure and capital expenditure. [Economists] are right—we are borrowing not only to pay salaries but also to pay for our current expenditure. This cannot continue. And I did mention that in my budget speech that we are aiming to achieve what you call self-sufficiency and that means that our local revenues have to equal or be higher than current expenditure. If we achieve that then whatever we raise locally in revenue will pay for salaries and will pay for the day-to-day running of the government. What we’re left with then is the capital expenditure. Now if we have money or we were able to either secure grants or soft loans, or what they now call concessionary financing, we can do projects. But usually capital expenditure is not an urgent life or death kind of situation, but you cannot tell people we are not going to pay you salaries. Or we’re not going to spend for the day-to-day running of the government. And if you look at our new National Program—the fiscal and structural adjustment that we have agreed on with the IMF but we look at it more as our national program—we’re expecting to achieve this level where our local revenues equal or are higher than current expenditure by 2019. Now that is assuming all goes well and all that we plan for happens. But you know, sometimes things do happen and we need to adjust. Because in budgets you do a forecast, projections, and these are based on a list of assumptions. And you always state your assumptions, and based on them we expect the budget to look this way.

You also said recently that Jordan needed revenues of almost JD450 million this year, but that we still don’t know where it was going to come from. Are you planning to raise it through increased taxation?

Where else would we get revenue? We don’t have oil, we don’t have any natural resources, we only have our pockets. I did state that we needed extra revenue via extra measures for 2017 to secure JD450 million and about JD513 to JD520 million in 2018, and JD570 million in 2019. How? You can do it in multiple ways. You can raise taxes and fees. I don’t think this is doable at this point in time because you cannot raise the level of taxes without a law, and I don’t think at this point in time this is what we are seeking. What we are seeking is to look at the lost revenue, or what we call tax expenditure. The generous exemptions the various sectors of the economy are getting, and some of these exemptions are not really having any added value to the economy.

If you go to page 12 of the budget and it is on our website as well, which is the very first time in the history of Jordan such a thing is published, you will find the cost of tax expenditure. In 2015, the level of tax exemptions was above JD3 billion; the direct exemptions were worth JD1 billion, and the indirect ones JD2.6 billion. Certain items are subject to zero sales tax, others are exempted, while others are subjected to 7 percent or 8 percent. This is where it has to come from. The law says [sales tax is] 16 percent but the cabinet has the right to reduce [that number]—so everything is reduced.

When will we see these hikes?

As soon as the cabinet approves them. But they have to start at the beginning of 2017.

Under the new IMF agreement, you promised to improve the business environment for the private sector. What will this entail in practice?

The program has four pillars. The single most alarming thing for us is debt. This is the biggest problem we have today so we need to deal with debt, which also means we need to deal with budget deficit. These would require fiscal measures. Simultaneously you need to deal with unemployment and economic growth, [which is impacted by] multiple factors. One is efficiency. Two is the ease of doing business, by which I mean the level of complexity of laws and regulations and the way they are implemented, as well as the various aspects that would encourage people to come to Jordan and invest or locals to invest. This is the engine that moves the economy. There are a number of factors that impact this, maybe inspection and this is one of the most talked about issues. You have multiple agencies that inspect factories or businesses, so a new law has to be presented to parliament to unify the inspection process. The other thing is the empowerment of women and having more women in the labor force and this is one of the major issues facing our economy. That helps growth, so the program is talking about doing business at your house, or part time jobs from your house, which means that certain laws need to change.

Will you also be revisiting the Income Tax Law, especially since the IMF wasn’t very happy about the changes you introduced?

The IMF said it wasn’t in line with what they had recommended. The lower and the upper houses also asked for the law to be changed to widen the base of taxpayers and they all say that only 3 percent of individuals in Jordan pay income tax, which is not fair. That is the basic change that would take place. But we only would send the recommendation to change the law to parliament, which makes us uncertain about the outcome. The program says that we undertake to submit to parliament. This is the democratic process.

What structural changes did Jordan promise to undertake under the new EFF agreement?

As far as structural changes are concerned, we need to set up the Public Investment Management Unit, which is the unit that looks at national projects, then prioritize what we need to do at a national level rather than at a ministerial level. Like building hospitals and schools. That would mean we’re channeling financing in a more effective manner. The other thing is to establish a macro-fiscal unit at this ministry. Today there are different sets of numbers that are required by the IMF, the World Bank, the EU, Japan, the United States, and all other donors, and each would want their numbers in a different format. This has been a tedious waste of time process, every time you have to do it differently. We will start producing the numbers based on international standards.

Do you think the first agreement with the IMF was a success?

It was a success. It was negotiated in 2012 and started at that time. Things were completely different and things were rosier than they are today. We were at the end of the so-called Arab Spring, and then nobody had projected that oil prices would change, and that we would have a big influx of Syrians in Jordan. This has put a lot of strain on our infrastructure. As I said, the way you build a program or a budget is based on assumptions. Were the assumptions correct when the program was launched? The answer is yes.

The plummeting oil prices have put the GCC’s economies under a lot of strain. Are we expecting any aid at all from the Gulf this year?

The economies of the Gulf are dependent on oil prices. The way oil prices are today and even the projections are not very promising for them. Saudi Arabia just recently tapped the market and issued Euro bonds to the magnitude of $17.5 billion. Qatar has published its 2017 budget with a deficit of $8.5 billion. So things are not really looking very rosy. At the same time, the world economy is not doing great as well and we’re seeing deceleration in aid. We’re not getting the level of aid we were promised, so we shouldn’t expect more than previous years. We need to realize that aid will not be at the levels that we’re used to.

Does this mean we can rule out a renewal of the $5 billion Gulf grant?

Honestly, I don’t know. To my knowledge this hasn’t been discussed. But the indications are that if there’s a renewal it won’t be immediate.

When will we see projects funded by the new Saudi-Jordanian Investment Fund getting the go ahead?

This is not my domain. It’s with the Deputy Prime Minister. There was a special law that was passed for that fund and the bylaws now have been approved. And we’re waiting for the Saudis to make the first step in saying we’re committing a specific amount to the fund. They said they are committed but they will not be able to set the amount. His Majesty the Custodian of the Holy Mosques is supposed to come to Jordan soon and that’s when an announcement is expected.

How do you see our economy in 2017 and what will growth be like?

The experts—the IMF and the World Bank—are expecting something between 3 to 3.3 percent. I hope that happens because that’s what we put in the budget. Whether it happens or not that all depends on what’s happening around us and what’s happening here. For 2016, the estimate was 2.8, it was changed to 2.4 due to weak growth in the first two quarters of the year. But Jordan’s economy is a satellite economy for bigger economies around us. So if the Saudi economy is not doing well, I don’t expect we will be doing well. Plus the closure of the Iraqi border specifically did not help. Close to 20 percent of what we produced was exported to Iraq, a lot of that has subdued.