Challenges to implementing economic reforms mean the country's debt burden will not stabilise as expected
Jordan's delayed tax reform to hamper government's fiscal reforms, Moody's says
Delays to Jordan's proposed income-tax law could slow down the government's fiscal consolidation efforts and worsen the country's debt burden, according to Moody's Investors Service.
The tax delay following protests earlier this month could jeopardise the government's efforts to meet targets set by an International Monetary Fund-backed programme to reduce the fiscal deficit, the rating agency said in a report on Monday. Jordan is rated sub-investment grade of B1, with a stable outlook.
"While we ultimately believe that the delay and revision of the proposed tax reform is a more likely outcome than outright and permanent removal of the measures, the delay risks slowing progress achieved in consolidating government finances under the IMF programme since August 2016," Moody's said.
The proposed law to increase income taxes, part of an economic reform package, sparked mass protests last week that led to the removal of Prime Minister Hani Al Mulki. His successor, Omar Al Razzaz, has sidestepped a political minefield by withdrawing the tax bill for review. Saudi Arabia, the UAE and Kuwait pledged $2.5 billion in an aid package to prop up Jordan's economy. It will include a deposit to the central bank, guarantees to the World Bank on Jordan and annual support to the Jordanian government's budget for five years.
Jordan has relied on foreign aid from the United States and oil-rich Arabian Gulf nations for decades to support its economy. The arrival of 1.5 million Syrian and Iraqi refugees further stretched the country's finances by a nearly 50 per cent increase in social benefits.
In 2016, Jordan secured a $723 million loan from the IMF to stabilise its public finances, boost employment, attract investment, and improve private sector competitiveness. However, with dwindling foreign aid and a rise in fuel and utility prices combined with planned tax rises culminated in growing public anger.
"The protests underscore the social challenges that the government is facing while trying to ensure sustainability of public debt dynamics," the report said. "Policy reversal following the protests indicates that political room for further fiscal consolidation is limited."
The obstacles to continue fiscal consolidation will raise the risk that Jordan's debt burden, which jumped to 95.3 per cent of gross domestic product last year, will not stabilise as previously expected, Moody's said.
Further fiscal consolidation is needed to reduce Jordan’s high public sector gross financing needs, which is estimated at 20.6 per cent of GDP in 2018, largely due to the rollover of short-term domestic debt, it said.
Jordan's new government will likely revise and resubmit the draft income tax law but it will yield "significantly less" additional revenue compared to the original proposal, Moody's said. The government expected the earlier version to generate 300m Jordanian dinars (Dh1.55 billion) by the third year of coming into effect.