Jordan Needs Deep, Structural Reforms to the Economy. Can the New Prime Minister Deliver?

Kirk H Sowell

On June 5, Jordan’s King Abdullah II appointed Omar Al Razzaz to head a new government, a day after Prime Minister Hani Al Mulqi resigned. The decision came following a week of protests over austerity measures imposed by Al Mulqi’s government, mostly in the form of subsidy cuts and a tax law. Clearly, one of Al Razzaz responsibilities, if not the key one, is to address Jordan’s economic issues. The question is, what must, and can, he do?

The standard line among Jordanian officials is that the country’s economic problems are simply beyond their control. Foreign Minister Ayman Al Safadi expressed this in a TV interview, where he said the international community needed to “step up to the plate” and give the country more aid, as Jordan’s “very difficult economic situation” is “not due to failure within the country.” It is, he continued, a result of external factors that include the cut-off of trade with Iraq and Syria due to conflicts, the Syrian refugee burden and increased oil prices. There is some truth to this. But the factors that have driven Jordan to borderline insolvency stretch back to a hollow economic model existing over decades.

Looking beyond the immediate crisis, a different way to contemplate Jordan’s problems is to consider three major policy failures involving: the country’s long-term fiscal management; its labor policy and its massive employment deficit; and the failure of its educational policy to match the country’s real needs.

To begin with, Jordan’s present fiscal predicament, with debt-to-GDP recently going over 96 percent, is part of a decades-long pattern. The country has been heavily dependent on foreign aid and never developed either a strong domestic economy or a tax system able to bring in revenue to support expenditures. By 2010, the year before the Arab Spring, Jordan’s fiscal deficit was already 1.56 billion dinars ($2 billion), or about 5 percent of GDP. It exploded further afterward in part because of the cut-off of below-market-price gas Jordan was receiving from Egypt, and also because of a surge of spending. By the middle of 2016, when Al Mulqi became premier, the debt-to-GDP ratio had ballooned to over 90 percent from below 60 percent in 2010.

The fiscal austerity of Al Mulqi’s two years were thus a necessary structural reform. Most of the progress he made was in the form of increased non-tax revenues and subsidy cuts. Jordan has traditionally been a lightly taxed country, at least in terms of direct taxation. Al Mulqi’s tax law, which was the direct impetus for the protests that drove him from office, would have lowered the family threshold for paying tax to 16,000 dinars from 24,000 dinars, a figure still nearly three times the per capita income (the new threshold for individuals was 8,000 dinars). Most Jordanians would still be untaxed.

A second accumulated problem relates to the labor market. For decades Jordan has relied heavily on Egyptian labor to fill many low-paying jobs, and more recently foreign nationals accounted for three quarters of workers in the special trade zone manufacturing sector. The latter workers mainly came from South Asian countries. Thus, despite Jordan’s high unemployment rate, foreigners make up between a quarter and two-fifths of the workforce, depending on the estimate of how many are working illegally.

The outgoing Al Mulqi government deserves credit for taking measures to try and reduce this dependency, but it faced intense resistance. Some of this came from businesses, which understandably preferred cheap foreign labor. But there is also the phenomenon referred to as the “culture of shame,” by which citizens, especially those of East Bank origin, simply refuse to take jobs involving manual labor.

A third accumulated problem is, in a sense, an achievement in excess: the overproduction of graduates by the higher-education system. Given that no formal education existed in Jordan prior to the 1940s, having universities at all is an achievement. The problem is, over the past generation the college population exploded, and now fewer than half of college graduates report getting jobs that require any form of higher education.

Thus, there are four key areas of reform that are ripe for structural readjustment, with changes so deep that Al Razzaz will only be able to use his time in office to begin them. One, the government must double down on Al Mulqi’s labor reforms, and expand them to cover manufacturing. Two, education will have to be restructured to include more vocational courses and to produce fewer college graduates. Next, given Jordan’s lack of conventional military enemies, the defense budget is especially ripe for reduction, and should be cut in absolute terms by as much as the nation’s psychology will allow. Lastly, the tax law will need to be reintroduced, and following a series of dialogue sessions and some modest changes, it will probably need to look like Al Mulqi’s bill.

Yet even these measures, as tough as they would be, will not be enough. They would slow the growth of the debt-to-GDP ratio and pave the way for a healthier economy in the long term. But they won’t keep the debt-to-GDP ratio from breaching the 100 percent mark, or get Jordan to the point where it could remain solvent without much larger amounts of foreign aid than it received before 2011.

Whether or not the term “bailout” is used, one will be needed. And if that extra aid is to be justified, Jordan will need to do much better with structural reforms than it has in the past.

Kirk H Sowell is a political-risk analyst and publisher of the biweekly newsletter, Inside Iraqi Politics.