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Abu Dhabi, UAETuesday 11 December 2018

Jordan's income tax law shows commitment to fiscal reforms, Fitch says

Fiscal deficit to narrow starting in 2019, according to its report

Resource-barren Jordan relies on foreign aid and remittances to prop up its economy. Courtesy: Four Seasons Hotel Amman
Resource-barren Jordan relies on foreign aid and remittances to prop up its economy. Courtesy: Four Seasons Hotel Amman

Jordan's new International Monetary Fund-backed tax law will be "positive" for its efforts to contain fiscal deficits and signals to investors the government's commitment to forge ahead with economic reforms, according to Fitch Solutions.

The debt-laden country's fiscal deficit is expected to narrow from 2019 onwards as the government slashes spending and increases tax revenues, Fitch Solutions, a unit of Fitch Ratings, said in a report on Thursday.

"Parliament’s approval of the government’s amended income tax law will be positive for Jordan’s fiscal trajectory," the report said. "Jordan’s income tax base is exceptionally low, covering just 4 per cent of the population, suggesting the new tax could potentially generate substantially greater windfalls over the medium-to-long term."

Jordan's parliament approved the income tax law on Sunday after introducing some changes to limit its impact on middle-class earners as it pushes ahead with fiscal reforms needed to lower public debt and get the economy back on track. Earlier this year, the government increased a general sales tax and removed a subsidy on bread as part of a three-year IMF-backed plan to cut a public debt burden of $37 billion or the equivalent to 95 per cent of gross domestic product.

Jordan's senate still has to approve the income tax law to become effective.

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The income tax is expected to raise only around 280 million dinars (Dh1.45 billion), or less than one per cent of GDP in 2019, and will therefore have a "limited" immediate effect on fiscal revenues, Fitch said. However, it signals the government's seriousness about the IMF programme, which will help reduce borrowing costs.

Fitch forecasts the fiscal deficit will narrow to 2.5 per cent of GDP in 2019 from 2.7 per cent of GDP this year but cautioned that progress will be "gradual" in light of protests against fiscal consolidation.

Jordan's persistent but narrowing deficit will be covered by debt issuance, mainly on capital markets abroad, where borrowing costs are relatively cheaper, it said.

Fitch forecasts the public debt to GDP ratio will reach 83.8 per cent in 2022, an improvement on the 95.8 per cent in 2017, but still remains above the 77 per cent government target for 2022.

The country's economic growth has been hurt by regional conflict weighing on investor sentiment since it hosts over a million Syrian and Iraqi refugees.

Saudi Arabia, the UAE and Kuwait pledged $2.5bn in aid to Jordan over the next five years to help it control its finances.