Ensuring fiscal sustainability is a fundamental criterion for evaluating future trends and financial burdens. It serves as a gauge of the government's capacity to fulfill its obligations and fund its expenditure operations. This type of assessment is typically conducted by well-respected international institutions such as the International Monetary Fund (IMF) and other rating agencies.
Economists commonly use the debt-to-GDP ratio to evaluate a nation’s ability to settle its debt. The comparison of public debt to an implicit target, such as what a nation produces, varies according to each country’s economic circumstances and is essential in determining whether the debt is on a sustainable trajectory. Previously, maintaining a manageable or sustainable debt entailed remaining below a fixed debt-to-GDP ratio. However, this paradigm shifted in 2013 when the debt-to-GDP ratios for the US and other nations surpassed 100%. A ratio of higher than 100% may be considered sustainable depending on the specific economic context (i.e., Japan (263%), Singapore (162.1%), Italy (137.3%), and Bahrain (124.6%), the United States (122.2%) countries with ratios well over 100%). Countries classified as having unsustainable debt levels face heightened credit risks, resulting in increasing financing costs.
While there is no universally applicable debt threshold in macroeconomic theory, the IMF’s Debt Sustainability Analysis (DSA) provides a structured framework for conducting assessments of public and external debt sustainability. According to the DSA, for a debt to be deemed sustainable, the effective interest rate must not exceed GDP growth insufficient to ascertain sustainability; several other factors, such as debt’s maturity structure, currency denomination, and whether it is market-based or concessional, influence the effective interest rate and consequently a debt’s sustainability.
In recent years, Jordan’s public debt has emerged as a significant economic challenge for the government, the international community, and key donors supporting the Kingdom. Over the past two decades, the debt has surged considerably. As of the end of June this year, the total debt amounted to JD 42,525.4 million, equivalent to 114.7% of GDP. Of this amount, JD 18,943 million is owed to foreign creditors, while the remainder (JD 23,582.4 million) is held by domestic creditors, such as the Social Security Investment Fund (SSIF), and the banking sector. Excluding SSIF’s holdings, the public debt in 2023 stood at JD 32,289.3 million or 89.2% of the GDP. By the end of June 2024, the public debt excluding SSIF holdings was JD 32,989.2 million or 89% of GDP.
By the end of June 2024, the Social Security Investment Fund's (SSIF) government bond holdings accounted for around 25.7% of GDP (approximately JD 9.5 billion), up from 24.6% of GDP (about JD 8.9 billion) at the end of 2023.
The aforementioned increase in Jordan's public debt raises concerns regarding Jordan’s future macroeconomic and financial sustainability, as well as the government’s capacity to finance development projects. Additionally, slow economic growth may hinder the government’s ability to generate sufficient tax revenues from economic activities. The IMF projects economic growth rates of 2.4% for 2024, 2.9% for 2025, and 3% thereafter, which is significantly lower than the Economic Modernization Vision’s forecasts. Therefore, with apparent challenges to Jordan’s ability to grow its way out of debt, policymakers must prioritize the sustainability of Jordan’s public debt.
اضافة اعلان
While foreign aid from the United States, IMF, and the Gulf Cooperation Council (GCC) plays a crucial role in the Jordanian economy, aid levels have stagnated or decreased recently. Jordan may be experiencing donor fatigue and increased competition for limited aid resources from other countries, such as Ukraine. Despite challenges, Jordan has shown resilience, as evidenced by credit rating upgrades from Moody's and S&P, despite ongoing conflict in Gaza and regional instability.
While the debt indicator is important, it is not the sole factor in assessing indebtedness and associated risks. Various indicators and factors, such as public debt sustainability, debt source diversity, debt service level, maturity structure, and the mix of concessionary and market-rate debt must be considered. Jordan has consistently met its financial obligations, instilling confidence in both local and international investors. This reliability has played a crucial role in maintaining stability within the domestic economy and avoiding a potential financial crisis. By upholding this reputation, Jordan has accessed financial markets internationally and domestically, securing funding at competitive rates.
In its pursuit of economic reform, Jordan has proactively addressed challenges and strengthened the resilience of its national economy. The completion of reviews under fiscal and structural reform programs with the IMF has been timely, and a new four-year economic reform program (2024-2027) has been formulated to further this agenda. The government has outlined a clear plan to gradually reduce the debt-to-GDP ratio (excluding SSIF holdings) to 75.2% by the end of 2029, considering the financial costs associated with debt in the upcoming years.
Following fiscal consolidation and economic recovery post-pandemic, Jordan has witnessed a decrease in the annual change in the debt balance, showcasing its ability to navigate crises with resilience. This highlights the robustness of its macroeconomic fundamentals, serving as a solid foundation for addressing various challenges.
Rather than opting for quick fixes, the government has prioritized enhancing the efficiency of public financial management to tackle these challenges. The post-pandemic period has seen an improvement in the collection rate of domestic revenues, surpassing targeted estimates in projected budget laws. Notably, revenue collections exceeded 100% of estimates for the years 2021-2022, and reached 96.2% in 2023, contrasting with an average collection rate of 89.2% from 2017 to 2019.
Moreover, growth-inducing capital expenditures have not been curtailed; instead, they have increased as a percentage of GDP post-pandemic. This rise, averaging 3.9% of GDP, compared to 3.2% during the period from 2017 to 2019, peaked at 4.4% in 2022. The share of total public spending allocated to capital expenditures also saw an increase of approximately 1.3 percentage points post-pandemic, averaging 12.8% compared to 11.5% during the 2017-2019 period.
Current Debt Portfolio and Fiscal Stability:
The current debt portfolio of the Kingdom plays a crucial role in maintaining fiscal stability by effectively managing short-term and long-term debt obligations. The weighted average maturity of public debt stands at around 6.4 years, with external debt at 8.3 years and domestic debt at 4.3 years. This provides the government with a comfortable timeframe for repaying its debt, reducing the risks associated with refinancing and debt exposure.
Furthermore, the government has a wide range of local financing options available, including banking and non-banking sources, which offer flexibility in securing the necessary funds. In terms of central government domestic debt, banking sources make up 52.6% of the total, while non-banking sources contribute 47.4%. The largest portion of external public debt is denominated in US dollars, accounting for 72.0% of the total, which helps to mitigate risks related to fluctuations in currency exchange rates.
Over half of the external debt (55.2%) consists of concessional loans with favorable interest rates, long maturities, and potential grace periods. The economy can generate sufficient foreign currency resources through exports, remittances, and foreign direct investment to cover its external debt servicing obligations. In 2023, external debt servicing amounted to approximately 20% of exports of goods and services, indicating the ability to repay debt without straining other economic resources.
The ratio of total foreign reserves, including gold and Special Drawing Rights (SDRs) at the IMF, to the outstanding external debt balance was 70.1% at the end of June 2024, showing an increase from 68.7% at the end of 2023. This rise is attributed to foreign reserves growing at a faster rate than external debt, with reserves increasing by 3.4% compared to a 1.4% increase in external debt.
When comparing Jordan’s ratio of total foreign reserves to outstanding external debt balance with other World Bank lower middle-income group countries, Jordan consistently maintains a notably higher ratio from 2019 to 2024. This reflects the government’s strategic approach to accessing global markets through meticulous planning, monitoring market trends, and assessing the economic landscape accurately. Given the current peak in the interest rate cycle and the anticipated decrease in the future, securing financing is expected to be more cost-effective moving forward. The reduced refinancing risks are further supported by the ample liquidity available for lending at banks, surpassing JD 5 billion as of the end of June 2024, and the adequate reserves in the Social Security Investment Fund (SSIF).
Summary and Conclusion
Jordan's approach to managing its public debt through strategic borrowing, fiscal reforms, and maintaining a balanced debt structure ensures long-term sustainability and economic stability. This is evident by the following facts, as discussed above:
● Jordan's economic and fiscal approach is validated by credit rating agencies, providing a strong vote of confidence in the country’s economic policies and reforms, such as the Economic Modernization Vision (EMV) and the subsequent Government of Jordan’s action plan to implement the “Vision”.
● Despite the ongoing war in Gaza and regional unrest, Moody’s recently upgraded Jordan's credit rating from B1 to Ba3, making the first credit rating upgrade for Jordan in 21 years, and changed the outlook from Positive to Stable affirming Jordan’s sound economic strategies and optimistic outlook.
● Capital Intelligence, a provider of credit analysis and ratings since 1982, raised the credit rating for Jordan’s long-term sovereign assets in both local and foreign currencies from +B to -BB, with a Stable outlook. Meanwhile, Fitch, another leading provider of credit ratings, maintained Jordan’s long-term sovereign credit rating at -BB with a Stable outlook.
● Most recently, on Sept. 6, 2024, S&P Global Ratings raised its long-term foreign and local currency sovereign credit ratings on Jordan to 'BB-' from 'B+'. The outlook is stable.
● The upgrades in Jordan’s credit rating is expected to contribute to reducing future borrowing costs, improving investor confidence, and enhancing access to international capital markets. This could lead to improving investor confidence, increasing investment, and bolstering economic growth.
● Jordan has successfully financed part of its finance needs from global capital markets on a near-regular basis in recent years through issuing Eurobonds. This helps avoid crowding out the private sector from local funding sources and injects liquidity into the domestic market. It also aligns with the public debt management strategy by extending debt maturities compared to local government securities, diversifying funding sources, and reducing borrowing costs.
● A clear illustration of this was Jordan’s ability to issue Eurobonds at the height of the COVID-19 pandemic in two tranches: one tranche valued at $500 million with a 5-year maturity and an interest rate of 4.95%, and the second valued at $1.25 billion with a 10-year maturity and an interest rate of 5.85%. This issuance saw unprecedented subscription levels, with demand exceeding the issuance size by 6.25 times (approximately $6.25 billion). This allowed the government to negotiate very competitive interest rates compared to similarly rated countries.
In conclusion, Jordan's public debt sustainability is supported by the Kingdom’s fiscal prudence and economic stability. The Central Bank of Jordan (CBJ) and the Ministry of Finance (MOF) have implemented prudent monetary and fiscal policies that have reduced deficits, strengthened foreign reserve buffers, preserved financial stability, and maintained market confidence. These efforts have enhanced Jordan’s ability to meet debt-servicing obligations and foster confidence in its economic future. The Kingdom remains focused on maintaining macroeconomic stability and building resilience, gradually consolidating fiscal policy to reduce public debt while maintaining the exchange rate peg through appropriate monetary measures. The ultimate goal of the Kingdom’s structural reform is to achieve stronger, more inclusive growth and job creation, to tackle high unemployment.
.jpg)
.jpg)
