Omar Malhas, Minister of Finance: Interview

Interview: Omar Malhas

How have the regional issues of recent years affected the economy of Jordan?

OMAR MALHAS: Regional instability has posed – and continues to pose – severe challenges to economic growth and employment creation.

First of all, the closure of borders has resulted in a reduced amount of transit trade, and less trade has the consequence of lower growth rates. For example, Iraq used to absorb around 20% of Jordanian exports, but this has now stopped. Syria was also a major trading partner of ours, but this has also been completely shut down.

In addition, the Syrian refugee crisis has definitely had a negative impact on Jordan’s economy. A recent study by the IMF showed that we have lost one percentage point of GDP growth per year since 2012 as a result of the crisis. This means that if, in a given year, we had seen a growth rate of 3%, we would have had 4% had it not been for the crisis. This is a substantial difference, and in financial terms, we are looking at close to JD2.5bn ($3.5bn) having been lost as a result of the crisis.

This is certainly a disappointing figure, and considering the pressure that the Syrian refugee crisis has put on our economy, it is clear that the world has to reassess the way it looks at Jordan.

To what extent do you think tax reform can increase revenue generation, and is this a viable strategy for economic growth?

MALHAS: At approximately 3% of national GDP, the kingdom’s budget deficit was JD694m ($979m) in 2017. Fiscal measures undertaken through the IMF’s Extended Fund Facility programme are worth an estimated JD450m ($634.8m).

As Jordan’s domestic revenues were not sufficient to finance the current level of expenditure, efforts were made to remove goods and services tax distortions by eliminating some of the exemptions.

We took the first step in this process by gradually removing sales tax exemptions. As a consequence of this action, whatever was previously being taxed at a rate of 8% is now being taxed at a rate of 16%. However, this increase did not apply to everything, as there were some exceptions. We maintained the previous rate for foodstuffs and basic materials.

Fiscal reform requires a consistent and continuous stream of revenue for the Treasury, and the graduated removal of tax exemptions was not enough to compensate foregone revenues.

In order for us to continue rebuilding government revenues, however, we need to continue our policy of fiscal reform. So far in 2017 we have partially removed exemptions and reductions in sales tax, in the hope that we will be able to fulfil the requirements of the IMF programme.

If we look at economic growth rates, the idea that higher taxes tend to lead to a lower rate of GDP growth is still a controversial one in economic theory and generates much debate, but you also need to establish equilibrium.

What ultimately drives economic growth in a country, besides government spending, is investment. In order for investment to happen, there needs to be a strong environment in place, and the fiscal affairs of the state must be stable. This combination is essential if we are to encourage people to invest, and although this is a very delicate issue, we need to strike the right balance.

Which international organisations has the country been working with in recent times, and in what areas of economic policy?

MALHAS: We are working with both the IMF and the US Agency for International Development towards various fiscal and economic goals. These include reform of both tax administration and tax collection, as well as improved combatting of tax evasion.