INTERNATIONAL MONETARY FUND Jordan: Fiscal Sustainability and Debt Dynamics

1
INTERNATIONAL MONETARY FUND Jordan Fiscal
Sustainability and Debt Dynamics

• Ahsan Mansur
• Advisor
• Middle Eastern DepartmentJune 18, 2003

2
I. Introduction

• Twin perspectives on fiscal policy
• To provide vital public services and social
  safety net while limiting distortions to the real
  economy through efficient and equitable taxation
  and non-interference with price signals and
  dampening economic cycles through countercyclical
  policies
• To ensure fiscal and public debt sustainability
  and, thereby, support and build sovereign
  creditworthiness and market confidence

3
II. Measures of SustainabilityA. Theoretical
Perspectives

• Fiscal policy may be viewed as sustainable if it
  can be maintained indefinitely without leading
  the government into insolvency
• The current stock of debt must be offset by the
  net present value of future budget surpluses
• Requires a medium-term framework in which primary
  surpluses finance interest costs given growth,
  inflation, and exchange rate assumptions
• Two key conditions for debt sustainability
• Primary fuscal balancedefined as the fiscal
  balance excluding interest payments-- to be in
  surplus or
• Nominal GDP growth rate higher than the effective
  nominal interest rate on the public debt over the
  long run

4
II. Measures of SustainabilityA. Theoretical
Perspectives

• We can calculate the level of primary balance,
  p, needed to hold the net debt ratio, d, constant
  given actual rates of real GDP growth, y,
  inflation, , and the effective interest rate on
  public debt, i

where is the velocity of base money (nominal
GDP divided by base money).
5
Summary Indicators of Fiscal Policy
6
International ComparaisonSummary Indicators of
Fiscal Policy 19902001
7
II. Measures of SustainabilityA. Theoretical
Perspectives
8
II. Measures of SustainabilityA. Theoretical
Perspectives
9
II. Measures of SustainabilityB. Market
Perspectives

• The markets generally view fiscal policy as
  sustainable based on (i) whether debt ratios are
  in line with those of peer sovereigns (ii)
  capacity to pay and (iii) debt dynamics i.e.,
  stable or falling debt and debt service burden
• The time horizon for credit ratings is
  three-to-five years, which is much shorter than
  that of the theoretical long-run solvency
  criterion
• Capacity to pay is often measured by determining
  debt service in relation to GDP revenue and
  exports of goods and services (for external
  debt). Rollover issue is also important for
  cetain countries.
• The market approach reflects difficulties in
  predicting economic and fiscal performance over
  the long run, and relies on stress testing

10
International Trends in Debt Burdens
Average 2001
11
International Trends in Debt Burdens
Average 2001
12
Jordan Public Debt Dynamics, 19922001(In
millions of JD)
13
III. The Case of JordanA. Achievements in Review

• Jordan has halved its central government debt
  ratios in the space of a decade
• The debt-to-GDP ratio has been brought down from
  200 percent in 1990 to 101 percent in 2002
• The debt-to-exports ratio has been brought down
  from 317 percent in 1990 to 222 percent in 2002

14
III. The Case of JordanA. Achievements in Review

• Four factors have contributed to the substantial
  debt reduction
• Sustained fiscal consolidation, with the overall
  deficit (after grants) having been constrained to
  an average of 3.4 percent of GDP in 19932002
• Ongoing economic growth, with the annual growth
  rates of real and nominal GDP having averaged
  4 percent and 6.2 percent, respectively, in
  19932002

15
III. The Case of JordanA. Achievements in Review

• Active below-the-line debt operations under the
  aegis of
• six Paris Club agreements
• Brady bond buybacks debt-for-development swaps
• debt write-offs having contributed a cumulative
  24 percent of GDP toward debt reduction in
  19922002
• Privatization, which has raised cumulative
  proceeds equivalent to 8 percent of GDP in
  19982002, most of which has been used for debt
  reduction

16
III. The Case of JordanA. Achievements in Review
17
III. The Case of JordanA. Achievements in Review
18
III. The Case of JordanA. Achievements in Review

• Public debt servicing poses no problems now
• External debt service (commitment basis) amounted
  to 19 percent of exports in 2002, while total
  interest payments amounted to 13 percent of
  budgetary revenues (including grants)
• The absence of short term external debt (by
  original maturity) precludes external rollover
  risk
• Jordans July 2002 Paris Club agreement provides
  for the rescheduling of about 1.3 billion of
  debt service obligations on pre-cutoff date
  bilateral debt falling due in the period to
  end-2007 so, debt service on a cash basis was
  much less

19
III. The Case of JordanB. Challenges for the
Future

• Jordans medium-term debt strategy aims to build
  on progress already made, and will continue to
  have six key elements
• Zero recourse to short term external borrowings
• Zero recourse to external market borrowings of
  any sort
• Accelerated privatization, with the bulk of the
  proceeds to be earmarked for debt reduction

20
III. The Case of JordanB. Challenges for the
Future

• Further fiscal consolidation, with the fiscal
  deficit (after grants) to be maintained in the
  range of 34 percent of GDP, supported by ongoing
  tax reforms and expenditure control
• Greater reliance on domestic borrowing, in order
  to accelerate the reduction of external debt,
  soak up excess domestic liquidity, and create a
  domestic bond market and yield curve
• Avoid macroeconomic crises through proper
  macroeconomic management

21
II. Measures of Sustainability Stress Test
22
III. The Case of JordanB. Challenges for the
Future
23
IV. Conclusion

• Fiscal and public debt sustainability is hard
  won but easily squandered
• Jordan has made good progress in fiscal
  consolidation and debt reduction, and debt
  servicing is now not a problem
• But the public debt burden, and its external
  component in particular, remains high,
  constraining Jordans sovereign credit ratings to
  within the speculative grade
• Meeting the debt-reduction targets under the
  Public Debt Management Law 2001 (80 percent of
  GDP for total debt and 60 percent of GDP for
  external debt by 2006) will require sustained
  fiscal effort, but the payoffs can be substantial