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Abu Dhabi, UAETuesday 18 December 2018

Jordanian parliament approves new tax law

Prime minister says poor and middle class will not be affected

Jordan's Prime Minister Omar Razzaz assured MPs the new tax law would not hurt the poor and middle class. Reuters
Jordan's Prime Minister Omar Razzaz assured MPs the new tax law would not hurt the poor and middle class. Reuters

Jordan's parliament has approved a new tax law in a move to push ahead with fiscal reforms needed to lower record public debt.

A majority of deputies in the chamber approved the 36-article bill after a series of amendments that included raising family exemptions to mitigate its impact on the middle class.

Prime Minister Omar Razzaz earlier warned deputies the kingdom would pay a heavy price if parliament failed to approve the legislation, a main plank of austerity measures to ease a fiscal crunch and spur stagnant growth hovering at around 2 per cent in recent years.

The bill will still need to go to the upper house for approval before it is enacted as law. It is expected to be effective early next year, officials said.

Mr Razzaz told deputies who were debating the legislation that failure to approve the bill would mean the kingdom would have to pay even higher interest rates on its substantial foreign debt.

He said the law promotes social justice by targeting the wealthy and combats long-time corporate tax evaders, but opposition deputies argue it will hurt the already stagnant economy and diminish middle-class incomes.

"The individuals who will be affected are the top 12 per cent income earners, it won't affect middle and low income earners," Mr Razzaz said.

The government sent the bill to parliament in September after withdrawing an earlier draft submitted by a previous government that triggered protests over the summer.

Earlier this year, Jordan increased a general sales tax and scrapped a subsidy on bread as part of a three-year fiscal plan agreed with the International Monetary Fund, which aims to cut public debt of $37 billion, equivalent to 95 per cent of gross domestic product.

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The debt is at least in part due to successive governments adopting an expansionist fiscal policy characterised by job creation in the bloated public sector, and by lavish subsidies for bread and other staple goods.

Mr Razzaz said rejection of the tax legislation would have pushed up the cost of servicing more than 1 billion dinars ($1.4 billion) of foreign debt due in 2019, raising the prospect of rating agencies downgrading Jordan's credit ratings.

"We will pay a heavy price if we don't approve this law," he said before the vote.

The government has also echoed IMF concerns that without these reforms public external debt will spiral.

Debt service would peak in 2019-2020 at about 6.5 per cent of GDP with the Eurobonds that will be due.

The country's economic growth has been hit in the past few years by high unemployment and regional conflict weighing on investor sentiment and as demand generated from Syrian refugees receded, according to the IMF.

Economists said Jordan's ability to maintain a costly subsidy system and a large state bureaucracy was increasingly untenable in the absence of large foreign capital inflows or injections of foreign aid, which have dwindled as the Syrian crisis has gone on.