Jordan: Austere measures

Looking to a bit of belt-tightening in its public spending scheme, the Jordanian government is working to mitigate the effects of recent turmoil in the global financial markets, the Arab Spring uprisings and the eurozone sovereign debt crisis on the local economy.

With this in mind, last month the government proposed a budget for fiscal year 2012 that forecasts public spending of JD6.84bn ($9.66bn) and an estimated deficit of JD1.03bn ($1.45bn), or 4.6% of Jordan’s GDP.

Estimated annual GDP growth for 2011 was 3%, and expansion is expected to remain around that level in 2012, according to the budget statement. The country saw inflation of 5% in 2011, and the unemployment rate is expected to remain at around 13% into 2012, according to the World Bank.

Presenting the draft budget to the lower house of Parliament, the minister of finance, Umayya Toukan, told lawmakers that the national economy was expected to grow in 2012. However, he indicated that a variety of challenges made it necessary to take measures to ease the burden on the public purse, such as re-evaluating the energy subsidies put in place in 2011.

In 2012, projected public spending will account for 30.9% of the country’s GDP, compared with 33.6% in 2011, Toukan said. The finance minister told the House that supporting military and security agencies will continue to be the main focus of public expenditure this year, in addition to the social safety network, which includes subsidies, the social productivity programme, medical insurance, financial aid for university students, vocational training and a school nutrition programme.

Toukan also touched on a plan to restructure the civil service’s salary scheme, which will see government employees receive a pay rise of a so far undisclosed amount, coupled with a plan to increase military retirees’ pensions.

The budget incorporates a new mechanism for managing subsidies that consumed an estimated JD2.3bn ($3.23bn) in 2011, an amount that included the cost of supporting citizens’ energy needs at a time when the country experienced costly disruptions in supplies of Egyptian gas.

The government thus subsidised imported energy products under these special circumstances for nine months in 2011, but the 2012 budget calls for allocating the fuel and electricity subsidies in a more organised manner, as the current subsidy mechanism is seen to be distorting prices.

Revenue, including foreign assistance, is expected to reach about JD5.8bn ($8.15bn), or 26.2% of GDP, while current expenditures will slightly surpass that figure in 2012, comprising 26.4% of GDP. Capital expenditure, meanwhile, is estimated to reach about JD995m ($1.4bn).

Continued foreign aid will be key to keeping the country’s deficit as low as possible. Jordan’s key foreign aid country donors include the US, the EU, Japan, Canada, China and South Korea. The US is Jordan’s biggest donor, disbursing grants totalling $635m in 2010, and although the US government has decided to cut foreign aid to several countries, it has pledged to keep Jordan’s levels unchanged.

US assistance in 2012 is therefore expected to maintain its 2011 level of $660m, according to the Ministry of Planning and International Cooperation. The aid will include $360m in economic aid and $300m in military assistance, according to the US embassy in Amman.

If foreign aid – forecasted at JD852m ($1.19bn) in 2012 – were excluded from the budget, Jordan’s deficit would rise to JD1.9bn ($2.67bn), or 8.6% of GDP. International Monetary Fund (IMF) guidelines advise that countries’ budget deficits not exceed 3% as a ratio of GDP.

The country’s balance of payments deficit was expected to hit 9.8% for 2011. Putting Jordan’s total foreign and domestic debt at JD13.17bn ($18.51bn), or 61% of GDP, Toukan said the country’s debt level and budget deficit “should not continue because they involve negative repercussions on the stability of the economy, particularly the monetary and banking sectors” and could trigger downgrades by rating agencies.

With the ongoing turbulent conditions in the region, especially in neighbouring Egypt and Syria, the government will have to walk a tightrope to ensure the country’s economic situation does not decline further – a scenario which could see the government forced to raise taxes and lower subsidies to address a rapidly increasing budget deficit. The year ahead could thus be a challenging one for Jordan, although the country has also done well to maintain growth through some difficult periods in 2011.