Economic Report Chapter 1: Public Finance

Transcription

1 Economic Report Chapter 1: Public Finance * This is the first chapter in a series of publications involving an extended discussions of the Jordanian economic performance

2 TABLE OF CONTENTS 1. Key Findings & Conclusions Fiscal Management Domestic Revenues 2.2 Foreign Grants 2.3 Public Expenditures Current Expenditures Capital Expenditures 2.4 Budget Deficit 3. Highlights of the General Budget Law for Year Fiscal Performance During the Year

3 1. Key Findings & Conclusions: Falling commodity prices in the wake of the global financial crisis are likely to contribute to easing pressures on the fiscal management for 2009 through lowering subsidy expenditures, while on the other hand, the forecasted slower GDP growth for the Kingdom will result in lower government revenues; a decline that is expected to more than counterbalance the savings on the subsidies during This comes with rising concerns regarding the vulnerability of Jordan s public finances to fluctuating foreign grant inflows, the prospects of which are likely to be hindered given the prevailing difficult global economic conditions. Maintaining that Jordan s limited integration with the global financial markets has protected it from the worst of the financial crisis, the country s strong trade links with the region and the rest of the world mean that Jordan is more likely to feel the impact of the global recession according to the International Monetary Fund (IMF). The Fund expects economic activity to witness a significant slowdown during 2009, thus reflecting a much weaker global and regional outlook, and real GDP growth is projected to ease to 3-4%. The fiscal management in 2008 recorded a budget deficit standing at JD724 million (5.6% of GDP), which is 12.6% or JD77.7 million higher compared to the deficit recorded in When excluding foreign grants for the two years in comparison, the 2008 deficit jumps to JD1,410.9 million, however, recording a more significant percentage increase of 47% compared to the previous year. The latter percentage is more representative of the fiscal performance of the government during 2008 as it exposes the vulnerability of the budget deficit to foreign grants, especially that such grants have a tendency to fluctuate and are highly dependant on the regional and global political and economical developments. The significant increase in public expenditures during 2008 and the decline in total revenues compared to their estimates in the Budget Law caused the actual fiscal deficit to deviate significantly from the one projected in the 2008 General Budget Law. In fact, the 2008 budget deficit (not including foreign grants) recorded at JD1,410.9 million exceeded the budgeted amount of JD1,164 million by over JD245 million. fortunately enough, the amounts received as foreign grants during 2008 were against all expectations; as grants were recorded at JD278 million over their estimates in the budget law, coming at JD718 million compared to an estimated figure of only of JD440 million. The widening in the budget deficit in 2008 was attributed to an increase of over 18% in expenditures, while domestic revenues have witnessed a growth of 10.8%. Although capital expenditures rose 12.7% to JD949.6 million, they still represent around 17.5% of total expenditures, while the bulk of the expenditures were in the form of recurrent outlays reflecting the government s move to execute the Social Safety Net (SSN) and raising salaries for public employees and pensioners in both the civil and military services. The government has taken this step to alleviate the effects of soaring commodity prices, especially during the first half of Oil prices continued to hit new historical levels as they have jumped over US$ 140 per barrel during July On the other hand, the general government finance bulletin issued by the Ministry of Finance showed zero oil subsidies in the original budgetary expenditures for the year Yet, and due to delays in 3

4 liberalizing oil products prices resulted in a subsidy to these products during the first five months of 2008, which was latter settled after the approval of a budget supplementary in July of the same year, of which oil subsidies were allocated JD160 million. The government s current expenditures rose during 2008 to JD4,481.4 million compared to JD3,743.9 million in 2007 pertaining an increase in almost all items under current expenditures. In particular, current expenditures classified under Compensation for employees and Military expenditures including wages, salaries, allowances and pensions were targeted with an extra JD541 million in layouts, bringing total expenditures under these two items to JD2,274 million constituting therefore a little over 50% of all current expenditures. On the other hand, Oil Subsidies declined by 35.6%, thus dropping from JD306 million in 2007 to reach JD197 million by the end of Faced with heavy pressures arising from soaring international prices of imported goods, especially oil and cereals, the government was obliged to issue a two budget supplementary; the first in July and the second in September amounting to JD500 million and JD75 million, respectively. Both budgets supplementary were mainly intended to cover the expenses of restructuring the salaries of civil and army servants as well as pensioners in light of the adjustments bearing higher oil prices in the local market. The single item that was targeted with the largest current expenditures among all other items was by far the item of Military Expenditures. A huge amount of JD1,510.2 million were allocated for military expenditures in 2008, a growth of almost 34% over 2007, which is translated into over JD381 million in extra expenditures for that item. This was on top of an increase of another JD355 million during 2007 compared to In other words, military expenditures in 2008 have almost doubled their levels recorded in Part of this increase reflects the increase in salaries for employees and pensioners in the military service. Yet, the larger part of military expenditures are likely to have come about in order to meet the requirements of the national security, which has become a major concern for the Kingdom within the context of the latest developments in the region and the ongoing unrest in Iraq. The growing share of internal interest payments relative to external interest payments during the last 3 years exemplifies the shift in financing towards domestic resources as opposed to external loans. The government is very likely to continue with this path through issuing more of government bonds and bills on one hand, and on the other hand minimizing future external borrowing. As such, the government might very well benefit from the relatively lower interest payments it offers on its borrowing instruments, while restraining external borrowing to facilitated and long-term loans. Again, this seems to fall in line with the objective of mobilizing domestic resources and moving towards self-reliance in funding public expenditures and financing the budget deficit. Although domestic revenues have increased by over JD390 million, they nevertheless have come short of covering current expenditures leaving a gap of JD461 million. Accordingly, part of foreign grants was channeled to finance the gap in current expenditures, thus leaving around JD257 million in foreign grants to be channeled into capital expenditures that were recorded at JD949.6 million, limiting therefore the fiscal deficit to only million by the end of

5 The budget deficit in 2008 marks an increase of JD77.7 million over the deficit recorded in In terms of GDP, the deficit (including foreign grants) was recorded at 4.9% of GDP in 2008 compared to a deficit constituting 5.2% of GDP in The overall picture reflecting the fiscal performance in 2008 demonstrates a drawback to the government s efforts in moving towards a form of what is referred to as a sustainable fiscal deficit, which in its simplistic manner underlines the methodology of borrowing to finance capital expenditures rather than current expenditures. However, this has been previously achieved by providing a better domestic revenuesto-current expenditures coverage ratio during However, in 2008, soaring international oil prices have distorted the balance among domestic revenues and current expenditures. Hence, the government had to borrow to finance its current expenditures, while limiting to some extent the funds directed towards capital expenditures. Jordan is expected to return wide deficits over As such, growth in domestic revenue, having reached an estimated 10% in 2008, led by growing general sales tax receipts, is forecast to slow sharply in 2009, as tax receipts decline in the wake of slower economic growth according to the Economist Intelligence Unit report issued in April Expenditure growth is also likely to ease, largely as a result of the removal of nearly all fuel subsides in March As a result, the fiscal deficit (excluding grants) will widen from 10% of GDP in 2008 to an average of 11.4% of GDP in However, the deficit including grants will be lower, averaging around 8.7% of GDP, although Saudi and US bilateral aid, which surged in 2008, is likely to fall back to normal levels as a result of a worsening global economic situation and falling oil prices. Nonetheless, the government will remain heavily reliant on foreign grants to cover its deficits due to the increased risk aversion of private businesses and the financial sector in light of the unfolding economic downturn. On the other hand, the government policy during 2009 will likely to be increasingly focusing on cushioning the population from the gathering economic downturn, while maintaining commitment to carrying out its new National Investment Strategy (NIS), hence concentrating not only on easing bureaucratic restrictions, including by simplifying rules for business start-ups and easing hiring and firing regulations, but also on overhauling the tax system. 5

6 2. Fiscal Management Maintaining that Jordan s limited integration with the global financial markets had protected it from the worst of the financial crisis, the country s strong trade links with the region and the rest of the world mean that Jordan is more likely to feel the impact of the global recession according to the International Monetary Fund (IMF). The Fund expects economic activity to witness a significant slowdown during 2009, thus reflecting a much weaker global and regional outlook, and real GDP growth is projected to ease to 3-4%. In terms of the government>s fiscal policy during 2009, falling commodity prices in the wake of the crisis could help reduce the cost of subsidies, thus easing pressures on the fiscal deficit. Yet on the other hand, the forecasted slower GDP growth will result in lower government revenues; a decline that is expected to more than counterbalance the savings on the subsidies during This comes with rising concerns regarding the vulnerability of the country>s public finances to fluctuating foreign grant inflows, the prospects of which are likely to be hindered given the prevailing difficult global economic conditions. Fiscal Management 2008 The fiscal management in 2008 recorded a budget deficit standing at JD724 million (5.6% of GDP), which is 12.6% or JD77.7 million higher compared to the deficit recorded in When excluding foreign grants for the two years in comparison, the 2008 deficit jumps to JD1,410.9 million, however, recording a more significant percentage increase of 47% compared to the previous year. The latter percentage is more representative of the fiscal performance of the government during 2008 as it exposes the vulnerability of the budget deficit to foreign grants, especially that such grants have a tendency to fluctuate and are highly dependant on the regional and global political and economical developments. The estimates of the General Budget Law for the year 2008 were based on a number of assumptions, mainly, estimating a 6% growth of GDP at current market prices, while estimating the inflation rate at 8-9% measured by the GDP deflator. This comes in addition to estimating an increase in foreign grants, especially form the Kingdom of Saudi Arabia. As such, total expenditures were estimated at JD5,225 million, while domestic revenues and foreign grants were estimated at JD4,060 million and JD440 million, respectively. Based on these estimates, the overall budget deficit for 2008 commitment basis was projected to reach JD724 million (5.6% of estimated GDP). Excluding foreign grants, the budget deficit for 2008 was estimated to reach JD1,164 million (9.1% of estimated GDP). However, actual figures for 2008 show that total expenditures exceeded their budgeted amount by 4%, reaching JD5,431 million, while on the other hand, aggregate revenue receipts came in 1% lower compared to their budgeted estimates, topping JD4020 million. 6

7 The significant increase in public expenditures during 2008 (over JD200 million) and the decline in total revenues (falling short by JD40 million) compared to their estimates in the Budget Law caused the actual fiscal deficit to deviate significantly from the one projected in the 2008 General Budget Law. In fact, the 2008 budget deficit (not including foreign grants) recorded at JD1,410.9 million exceeded the budgeted amount of JD1,164 million by over JD245 million. Fortunately enough, the amounts received as foreign grants during 2008 were against all expectations; as grants were recorded at JD278 million over their estimates in the budget law, coming at JD718 million compared to an estimated figure of only of JD440 million. More importantly, foreign grants during 2008 were more than double their levels during The widening in the budget deficit in 2008 was attributed to an increase of over 18% in expenditures, while domestic revenues have witnessed a growth of 10.8%. Although capital expenditures rose 12.7% to JD949.6 million, they still represent around 17.5% of total expenditures, while the bulk of the expenditures were in the form of recurrent outlays reflecting the government>s move to execute the Social Safety Net (SSN) and raising salaries for public employees and pensioners in both the civil and military services. The government has taken this step to alleviate the effects of soaring commodity prices, especially during the first half of In doing so, the government announced its commitment to adopt a comprehensive and equitable Social Safety Net (SSN) that targets support to needy citizens. «The government>s objective from adopting this SSN package, estimated at JD301 million annually, is to raise living standards of needy segments in a manner that exceeds and compensates for the negative impact on these segments resulting from subsidy removal for certain commodities» 1. Central Government Budget 7,000 Total Revenues & Grants Total Public Expenditure Budget Deficit (Commitment Basis) 6,156 6,000 5,431 5,467 5,000 4,586 4,738 4,000 3,000 3,181 2,959 3,062 3,539 3,469 3,912 3,972 2,000 1, ,000- (222.0) (476.8) (443.6) (614.5) (692.7) (688.6) 2, Budget 1 Ministry of Finance -Budget Speech

8 In terms of coverage ratio of domestic revenues to current expenditures, this ratio has deteriorated to 89.7% in 2008 compared to a ratio of 96.8% in This development becomes more significant when considering the fact that this ratio was recorded at 101.5% in 2006, as domestic revenues generated by the government have actually covered all current expenditures leaving an excess of around JD46 million. It is imperative here to mention that the budget for 2008 was initially drawn on according to the Result Oriented Budgeting (ROB) concept within an approved medium-term Fiscal Framework (MTFF). As such, the Budget Law for 2008 incorporates specific indicators for measuring the performance of government ministries and departments, with a view to enhancing the efficiency of public expenditures, and ensuring that such expenditures achieve the intended objectives. 2.1 Domestic Revenues Domestic revenues coming at JD million in 2008 were 10.8% higher compared to their level of JD3,628.1 million in the preceding year. Accordingly, tax revenues and non-tax revenues increased by 11.6% and 9% to JD2,758.1 million and JD1,240.8 million, respectively, while foreign grants soared by 109% recording JD718.2 million. On the other hand, the share of tax revenues as opposed to non-tax revenues continued to improve as a percentage of total domestic revenues, thus capturing a share of 68.6% in 2008, compared to 62.3% and 61.5% during 2007 and 2006, respectively. Within the group of Tax Revenues, taxes on income and profits improved by a significant 21.9% to JD603.2 million, of which corporate income tax receipts accounted for JD475.4 million or 79%, thus reflecting the expansion in corporate earnings in As a source of government revenue, income tax receipts accounted for a 20% share of total tax revenue in Tax Revenues / 2008 Additional Taxes 2% Taxes on Income & Profits 22% Taxes on International Trade & Transactions 11% Taxes on Goods and Services 61% Taxes on Financial Transactions (Real Estate Tax) 4% 8

9 The General Sales Tax rose by a significant JD206 million to stand at JD1,671 million, posting a 14.1% growth over the preceding year and reflecting the buildup in demand for both domestic and imported goods in parallel to improvements in tax collection efficiency according to the Ministry of Finance. As such, the General Sales Tax remains the major source of government revenue contributing almost 60.6% to total domestic revenues by end of More specifically, sales tax on imported goods were recorded at JD758.4 million, representing an increase of 11.5%, while sales tax targeting the commercial sector had more than doubled during 2008 compared to its levels in 2007, thus coming at JD315.2 million compared to JD155.2 million. Non-Tax Revenues / 2008 Other non-tax revenues 23% Mining Revenues 2% Revenues from sellin goods & services 34% Pensions Contributions 2% Property Income 22% Land Registration 17% Within the group of Non-tax Revenues land registration fees came in 8.3% higher in 2008, standing at JD216.1 million compared to JD199.5 million recorded in The increase in land selling fees during 2008, albeit higher than the 6.2% increase recorded in 2007, still marks a slowdown when compared to an increase of more than 30% during The anticipated slowdown becomes even more significant when considering the fact that land registration fees grew by a much larger 81.7% during 2005, which corresponded directly to the increasing activity witnessed in the real estate sector that soared remarkably during that period, yet seems to have slowed down during 2007 and Other non-tax revenues, excluding land registration fees jumped to JD1,024.7 million in 2008, registering a growth of almost 9.3% compared to the preceding year. 2.2 Foreign Grants 9 The successive Jordanian governments have been running a chronic deficit that has been largely financed by foreign grants. As such, the government used to draw in foreign grants to finance 82.6% of its deficit in year The finance ratio went down to 78.5% and 51.2% in 2004 and 2005, respectively. In 2006, 40% of the fiscal deficit was financed by foreign grants. This marks a trend towards minimum

10 reliance on foreign grants. The year 2007, marked a continuation of this pattern as only 35.8% of the general budget deficit was in fact financed by foreign grants, which have in fact increased by a little over 12% in 2007, yet falling short of their estimated amount in the General Budget law for 2007 by JD230 million, thus coming at JD343.4 million compared to the budgeted amount of JD574 million. The situation as it stood in 2007, illustrates the central governments progress in reinforcing a selffinancing management and further imitates their efforts in utilizing domestic sources towards funding the fiscal deficits. Similar to past years, the dwindling size of foreign grants imposed a cumbersome mission over the local government, calling forth an urgent necessity to fuel the public budget by incorporating other domestic sources such as internal debt in addition to motivating the trend of privatization. The diagram presented below mirrors the aforementioned government policy, underlying the growth in tax revenues by almost 128% from the period of 2003 until the end of Likewise, non-tax revenues have witnessed a growth close to 105% during the same period. In parallel to this, foreign grants recorded a gradual 63.4% drop since 2003, thus falling from a high of JD937.4 million in 2003 to a low of JD343.4 million by the end of The fiscal developments in 2008, however, illustrate a reversal in this trend; as 50.9% of the deficit was in fact financed by foreign grants. As mentioned earlier in this report, foreign grants were recorded at JD718.2 million by the end of 2008, nevertheless, the budget deficit (including grants) for last year came in at JD692.7 million, albeit soaring foreign grants by over 100% compared to their levels by the end of Tax Revenues Non-tax Revenues Goverment's Main Sources of Income JD Million 3,257.4 Foreign Grants 2, , , , , , , , , , Budget 10

11 2.3 Public Expenditures Total expenditures stood at JD5,431 million by the end of 2008, adding JD844.5 million more and representing an 18.4% growth over the preceding year as both current and capital expenditures went up. Current expenditures witnessed a notable increase of 19.7% reaching JD4,481.4 million, while capital expenditures increased by 12.7% to JD949.6 million. In terms of compositional share, current expenditure represented 82.5% of total public expenditures, while capital expenditure contributed to the remaining 17.5% during Budgetary Central Government Expenditures Current Expenditures Capital Expenditures 4, , , , , , , Budget Current Expenditures The government s current expenditures rose during 2008 to JD4,481.4 million compared to JD3,743.9 million in 2007 pertaining an increase in almost all items under current expenditures. In particular, current expenditures classified under «Compensation for employees» and «Military expenditures» including wages, salaries, allowances and pensions were targeted with an extra JD541 million in layouts, bringing total expenditures under these two items to JD2,274 million constituting therefore a little over 50% of all current expenditures. On the other hand, Oil Subsidies declined by 35.6%, thus dropping from JD306 million in 2007 to reach JD197 million by the end of The issue of oil subsidies has typically been a huge burden in the context of the Jordanian fiscal management. Accordingly, the decision by the government to abolish all oil subsidies that has taken effect during 2008 was a major cornerstone in a strategy intended to clear the distortions in the Jordanian chronic budget deficit, the threats of which, have raised eligible concerns regarding the Kingdom>s fiscal and monetary stability. 11

12 The following discussions will shed light the government s plan to liberalize oil prices in the domestic market and the subsequent reshuffling of expenditures priorities in light of the said plan. The pressures arising from the allocation of oil subsidies became increasingly exaggerated during 2004 and 2005; as oil subsidies were recorded at JD262.4 million and JD530.8 million, respectively. These figures are put into context, knowing that the budget deficit for the two years specified was recorded at JD222 million and JD476.8 million. In other words, in a scenario where there are no oil subsidies, the fiscal management during 2004 and 2005 would have struck a surplus of JD40.4 million and JD54 million. Falling on this background, the government has initiated a strategy of a gradual lift of all oil subsidies by year Accordingly, the government increased local oil prices on more than one occasion during 2006 in preparation for the plan to fully take effect in By doing so, current expenditures targeting oil subsidies were effectively lowered by 59.4% by the end of 2006 compared to In addition to that, a supplementary package of additional expenditures, which was passed by the government, included an additional JD250 million that were intended for oil subsidies, thus bringing the total oil subsidies in the General Budget Law for 2006 and its supplementary to JD375 million. On the other hand, the fiscal management for 2006 showed total oil subsidies at only JD215.7 million. This gap between the budgeted and the actual oil subsidies was in part due to the initial assumption of a high average oil price of US$ 70 per barrel within the supplementary budget for 2006, while the actual average oil price for 2006 worked out to only US$ per barrel. Nonetheless, oil subsidies were allocated only 6.9% share of 2006 current expenditures compared to 18.2% allocated in the previous year. Within this context, the government was taking serious steps on the path of completely phasing out oil subsidies, which is an objective the government announced would be achieved by year Considering the fact that oil subsidies used to contribute JD530.8 million to government expenditures in 2005, abolishing them would leave more scope to stretch out government expenditures to other areas. As such, the signs of the reshuffle in the government expenditure priorities following the reduction of oil subsidies by almost 60% were starting to surface during The government followed a strategy of strengthening the social safety network to compensate for its decision to raise oil prices in the local market. This measure can be detected in the item of Social Protection, as expenditures targeting this item accounted for the largest share of current expenditures (29.5%) during Social protection items, which typically incorporate oil subsidies, were placed at JD1,089 million and JD923 million in 2005 and 2006, respectively. Yet, excluding oil subsidies for both years, the 2006 figure shows an increase of JD149.1 million over that of On the other hand, the government s savings resulting from cutting its oil subsidies in 2006 work out to JD314.3 million 12

13 compared to an oil subsidy bill of JD530 million in As such, it would be argued that almost 47.4% of the oil subsidy savings were channeled into social protection to compensate for the rise in local oil prices. Consequently, both items Compensation of Employees and Pension witnessed an increase of JD31.8 million and JD73.9 million in 2006, respectively. Reviewing historical data reveals that social protection item (excluding oil subsidies) grew by JD30.3 million and JD20.3 million during 2003 and The notable increase of JD149.6 million was recorded for the first time in 2005, following the initial stages of raising oil prices during that year. Although a similar increase of JD149.1 million was recorded during 2006, oil subsidies for that year were less than half their amount in 2005, despite the increase in local oil prices on two occasions in Again, this illustrates the government>s initiative to tackle rising oil prices, while moving closer to abolishing oil subsidies, in an effort to lessen the pressure on the fiscal deficit. In 2007, however, oil subsidies increased by almost 43% relative to 2006, as the government decided to maintain some level of oil subsidies, postponing therefore its plan to fully eliminate oil subsidies until beginning of However, oil subsidies share of current expenditures in 2007 came in at 8.1%, which is significantly below its 2005 level, as oil subsidies used to constitute over 18% of current expenditures. That is, at an average oil price of US$50.6 per barrel in 2005, the government allocated JD530.8 million in oil subsidies, while at an average oil price of almost US$70 per barrel in 2007, oil subsidies were only targeted with JD306 million. The situation was destined to escalate even further during 2008, as oil prices continue to hit new historical levels as they have jumped over US$ 140 per barrel during July On the other hand, the general government finance bulletin issued by the Ministry of Finance showed zero oil subsidies in the original budgetary expenditures for the year Yet, and due to delays in liberalizing oil products prices resulted in a subsidy to these products during the first five months of 2008, which was latter settled after the approval of a budget supplementary in July of the same year, of which oil subsidies were allocated JD160 million. 13

14 US Dollar Yearly Average Price of Oil Opec Basket (ORB)* Source: * The new OPEC Reference Basket (ORB), introduced on 16 June 2005, is currently made up of the following: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and BCF 17 (Venezuela). Faced with heavy pressures arising from soaring international prices of imported goods, especially oil and cereals, the government was obliged to issue two budget supplementary; the first in July and the second in September amounting to JD500 million and JD75 million, respectively. Both budgets supplementary were mainly intended to cover the expenses of restructuring the salaries of civil and army servants as well as pensioners in light of the adjustments bearing higher oil prices in the local market. It has been also assumed that the government shall implement a program of phasing out all other forms of subsidy (including grain and institution subsidies) over a period of 4 years that ends in This being said, we now turn to study government priorities in light of the above mentioned developments pertaining higher oil prices in the local market and diminishing oil subsidies in overall current expenditures. As mentioned earlier in this report, the signs of the reshuffle in government expenditure priorities following the reduction of oil subsidies by almost 60% during 2006 were starting to surface during that year thus leaving more scope for stretching out government expenditures to other areas. In that respect and in a similar manner to what happened in 2006, the government vowed to strengthen the social safety net to compensate for its decision to raise oil prices in the local market. This measure can be detected in current expenditures of budgetary central government targeting Social Protection. In such context, during 2008, expenditures against Social Protection as it appears in the general government finance bulletin issued by the Ministry of Finance accounted for the largest share of current expenditures 14

15 (35.4%). Social protection items, which typically incorporate oil subsidies, were placed at JD920.5 million, JD1,160.8 million and JD1,642.8 million in 2006, 2007 and 2008, respectively. 1,800 Current Expenditures Targeting Social Protection 1,600 1,400 1,200 JD Million 1, Budget Oil Subsidies Other Items within Social Protection In that respect, with the decline in oil subsidies by more than 50% in 2006, the government has channeled more funds towards the enhancement of the social safety net, which was allocated a sum of JD113 million. Such expenditure item targeting the social safety net appeared for the first time in As such, it could be argued that the government in 2006 arrived at some sort of balance, hence lowering oil subsidies on one hand, while on the other hand, reinforcing social protection items with more funds. The interesting point is that although the government has channeled more funds towards the social safety net and other items of social protection, such as, compensation for employees and pensions, however, not all savings from the abolishment of oil subsidies were channeled into social protection expenditures. Yet the policy is still in favor of strengthening the social safety net along with other expenditures targeting social assistance. 15 The above notion is maybe best illustrated in some of the statements shown in the Budget Speech for the year In particular, the point made in the speech highlighting some of the distortions in the general budget during 2007 entailing the subsidizing mechanism, which was described as «not fair» whereby «the largest part of the subsidy works for the benefit of the rich the non-jordanians, whereas the poor and limited-income citizens receive only a small portion of the government subsidies provided therefore, the government believes that changing the subsidizing mechanism through targeting the deserving citizens has become one of the most urgent priorities.» 2 2 Ministry of Finance Budget Speech 2008,.

16 The single item that was targeted with the largest current expenditures among all other items was by far the item of «Military Expenditures». A huge amount of JD1,510.2 million were allocated for military expenditures in 2008, a growth of almost 34% over 2007, which is translated into over JD381 million in extra expenditures for that item. This was on top of an increase of another JD355 million during 2007 compared to In other words, military expenditures in 2008 have almost doubled their levels recorded in Part of this increase reflects the increase in salaries for employees and pensioners in the military service. Yet, the larger part of military expenditures are likely to have come about in order to meet the requirements of the national security, which has become a major concern for the Kingdom within the context of the latest developments in the region and the ongoing unrest in Iraq. Another interesting development in terms of current expenditures relates to loan interest payments that came at JD377.4 million registering an increase of 2.7% or JD10 million during This is regarded as a significant achievement considering the fact that interest payments witnessed an increase of 16% - the equivalent of JD49.5 million - during 2007 relative to their level in Internal interest payments contributed almost 65.8% to total payments on loan interests during 2008, compared with a share of 34.2% for external interest payments. Going back to 2005 and 2006, internal interest payments used to comprise only 35.3% and 41%, respectively. The decline in external external interest payments was directly attributed to the government>s Paris Club US$2 billion debt buy-back that took place end of March 2008, hence reducing the large external debt burden. The operation was financed by saved privatization proceeds (about $1.5 billion) and external grants ($0.5 billion). As can be seen, the growing share of internal interest payments during the last 3 years exemplifies the shift in financing towards domestic resources as opposed to external loans. The government is very likely to continue with this path through issuing more of government bonds and bills on one hand, and on the other hand, minimizing future external borrowing. As such, the government might very well benefit from the relatively lower interest payments it offers on its borrowing instruments, while restraining external borrowing to facilitated and long-term loans. Again, this seems to fall in line with the objective of mobilizing domestic resources and moving towards self-reliance in funding public expenditures and financing the budget deficit. It remains, however, that aggregate interest payment on loans (internal and external) in 2008 represented 8.4% of that year s current expenditures, marking an advancement compared to a ratio of 10.2% recorded in

17 2.3.2 Capital Expenditures Capital expenditures witnessed a 12.7% growth or JD107 million in 2008 topping JD949.6 million compared to JD842.6 million by the end of 2007, constituting therefore 17.5% of total expenditures by the end of 2008 versus a share of 18.4% in the previous year. Back in 2006, capital expenditures were pumped up by a little over 25% compared to 2005, as they were targeted with an extra JD163.2 million. In addition, the government s domestic revenues covered all its current expenditures leaving an excess of JD46.3 million in domestic revenues to be directed towards capital expenditures. In 2008, domestic revenues, although rising by JD392 million, have come short of covering current expenditures leaving a gap of JD461 million. Accordingly, part of foreign grants was channeled to finance the gap in current expenditures, thus leaving around JD257 million in foreign grants to be channeled into capital expenditures. As such, JD257 million went for the financing of capital expenditures that were recorded at JD949.6 million, limiting therefore the fiscal deficit to only million by the end of Distribution of Capital Expenditures According to Functional Type Budget General public services Defense Public order & safety Economic affairs Environmental protection Housing and community amenities Health Recreation, culture & religion Education Social protection (including goods subsidies) Total ,158.2 The table presented above shows the distribution of capital expenditures according to functional type as they appear in the general government finance bulletin issued by the Ministry of Finance. Four items, namely, general public services, economic affairs, health and education constitute 74.5% and 73.5% of total capital expenditure during 2006 and 2007, respectively. These four items are allocated around 70% of total capital expenditures as pertained in the budget for The item of housing and community amenities which used to be targeted with an average of JD26 million during the past three 17

18 years will be targeted with a total of JD188.2 million in 2008 budget. This is very likely to be a direct result of a Royal decree initiative directed at providing housing units for poor and low-income citizens. 2.4 Budget Deficit The budget deficit in 2008 marks an increase of JD77.7 million over the deficit recorded in In terms of GDP, the deficit (including foreign grants) was recorded at 4.9% of GDP in 2008 compared to a deficit constituting 5.2% of GDP in Budget Deficit (Including Grants) Budget Deficit Budget Deficit in Terms of GDP % 4.2% 5.2% 4.9% 4.5% 6.0% 5.0% % % % 2.0% % Budget 0.0% The overall picture reflecting the fiscal performance in 2008 demonstrates a drawback to the government s efforts in moving towards a form of what is referred to as a sustainable fiscal deficit, which in its simplistic manner underlines the methodology of borrowing to finance capital expenditures rather than current expenditures. However, this has been previously achieved by providing a better domestic revenues-to-current expenditures coverage ratio during However, in 2008, soaring international oil prices, especially in the 1st half of the year have distorted the balance among domestic revenues and current expenditures. Hence, the government had to borrow to finance its current expenditures, while limiting to some extent the funds directed towards capital expenditures. 18

19 3. Highlights of the General Budget Law For Year 2009 The estimates of the General Budget Law for the year 2009 were based on a number of assumptions, mainly, estimating the growth of GDP at current market prices at 5-6% in 2009, estimating the inflation rate at 6-7% measured by the GDP deflator. Estimating the overall deficit on a commitment basis to reach JD688.6 million (4.5% of estimated GDP for the year 2009), compared to a deficit of JD692.7 million (4.9% of GDP) in Excluding foreign grants, the budget deficit is estimated to reach JD1,372.6 million (9.2% of estimated GDP for the year 2009), compared to a deficit of JD1,410.9 million (9.9% of GDP) in Estimating the growth in public revenues to reach 5,466.9 million (38.7% of estimated GDP for the year 2009), which is 15.4% or JD728.6 million more than their levels in Such estimation was based on: Estimating 18.9% growth in domestic revenues to reach JD4,782.9 million, based on estimating tax revenues to grow by 18% along side an increase in non-tax revenues by 21.3%. Estimating a decline in foreign grants to JD684 million. Estimating the public expenditures to reach 6,156 million or 43.5% of GDP, which is JD724 million or 13% higher than Such estimation was based on: Growth of current expenditures by 6.9% over their 2008 levels to reach JD4,790 million, representing 32% of GDP for Growth of capital expenditures by 43.7% to reach JD1,365 million. 19

20 4. The Fiscal Perfromance during 2009 Jordan is expected to return wide deficits over As such, growth in domestic revenue, having reached an estimated 10% in 2008, led by growing general sales tax receipts, is forecast to slow sharply in 2009, as tax receipts are anticipated to decline in the wake of slower economic growth according to the Economist Intelligence Unit report issued in April Expenditure growth is also likely to ease, largely as a result of the removal of nearly all fuel subsides in March However, the fiscal policy is likely to remain expansionary with the government introducing a (relatively modest) fiscal stimulus package later this year. As a result, the fiscal deficit (excluding grants) will widen from 10% of GDP in 2008 to an average of 11.4% of GDP in However, the deficit including grants will be lower, averaging around 8.7% of GDP, although Saudi and US bilateral aid, which surged in 2008, is likely to fall back to normal levels as a result of a worsening global economic situation and falling oil prices. Nonetheless, the government will remain heavily reliant on foreign grants to cover its deficits due to the increased risk aversion of private businesses and the financial sector in light of the unfolding economic downturn. On the other hand, the government policy during 2009 will likely to be increasingly focusing on cushioning the population from the gathering economic downturn, while maintaining commitment to carrying out its new National Investment Strategy (NIS), hence concentrating not only on easing bureaucratic restrictions, including by simplifying rules for business start-ups and easing hiring and firing regulations, but also on overhauling the tax system. The latest figures issued by the Ministry of Finance (MOF) show that the fiscal management for year 2009 has arrived at a deficit of JD348.3 million (after including foreign grants) by the end of May compared to a deficit of JD97.3 million recorded for the same period of last year. Central Government Budget Total Revenues & Grants Total Public Expenditure Budget Deficit (Commitment Basis) 2,500 2, ,000 1, , , ,500 JD Million 1, (97.30) (Jan - May) 2008 (Jan - May) 2009 (348.30) 20

21 When excluding foreign grants, the budget deficit by the end of May stood at JD444.2 million compared to a deficit of JD223.5 million for the same period of last year, thus representing an increase of almost 100%. A government deficit excluding grants provides a clearer picture of the performance of the government and its ability to coordinate and match the revenue inflows and the outflows of expenditures. Therefore, a better judgment of the fiscal performance ought not to account for foreign grants that may not keep a steady course throughout the years, especially amid the gathering economic crisis. In this context, foreign grants for the first five months of 2009 were recorded at JD95.9 million relative to JD126.2 million recorded during the same period of however, according to official estimates foreign grants are forecasted to jump to over JD700 million by the end of Nonetheless, the fiscal management arrived at a budget deficit despite the fact that domestic revenues have exceeded current expenditures by a JD52 million, which came in line with government policies to control current expenditures. As such, domestic revenues witnessed an increase of JD116.9 million during the first five months of 2009, which was almost matched by the JD117.4 million increase in current expenditures during the same period. The increase in domestic revenues was mainly attributed to the increase in tax revenues that recorded a growth of JD121 million, while other non-tax revenues retracted by almost JD4 million. Tax Revenues (Jan-May) 2009 Non-Tax Revenues (Jan-May) 2009 Other Additional Taxes 3% Taxes on Goods & Services 48% Revenues from selling goods & services 46% Property income 23% Taxes on Income & Profits 41% Taxes on International Trade & Transactions 8% Miscellaneous revenues 29% Pensions Contributions 2% 21

22 On the other hand, total public expenditures rose to JD2,338.8 million, representing a growth of 16.9% or JD337.6 million by the end of May The larger increase in total expenditures was attributed to higher capital expenditures, which have been raised by a huge JD220 million, while current expenditures were targeted with only JD117 million in extra expenditures compared to the same period of Accordingly, current expenditures contributed to a share of almost 80% of total expenditures by the end of May 2009, of which 37% or JD692.7 million was allocated for Military Expenditures. It is worth noting here that the item of military expenditures was granted an allocation of JD692.7 million in expenditures according to the 2009 Budget Law, representing an estimated JD110.3 million increase over 2008 levels. The military expenditures budget represents, by far, the largest expenditure allocation in the 2009 Budget Law, comprising a little over 1/3 of the budgeted current expenditures for that year. As such, military expenditures budget has more than doubled since the year Internal and external interest payments have dropped by 13.3% or JD21.1 million, of which JD104.1 million were attributed to interest payments on internal loans, while external loans interest payments came at JD33.7 million. Again, this reflects the policy shift entailing more emphasis on domestic borrowing as opposed to external borrowing in financing the budget deficit, which marks a continuation of the strategy adopted in the recent years. 22

23 Ahli Investment Banking Group P.O. Box 3103 Amman Jordan Tel: (962) /2 (962) Fax: (962) investment@ahlibank.com.jo Basel Khraisheh Executive Manager Ahli Investment Banking Group Basel.khraisheh@ahlinbank.com.jo Rabe Al-Bataineh Research & Studies Department Ahli Investment Banking Group Researchdept@ahlibank.com.jo Emad Ammari Research Analyst Ahli Investment Banking Group Emad.Ammari@ahlibank.com.jo 23

24 Disclaimer: The financial and descriptive data contained in this research report of the Jordanian Economy have been obtained from sources considered by Jordan Ahli Bank to be reliable in all material respects. However, the accuracy, fairness and completeness thereof are not guaranteed by Jordan Ahli Bank and its third-party suppliers shall have no liability for errors or omissions with respect to the service or its delivery, regardless of the cause or source of such error or omission. This report is a copyright of the Jordan Ahli Bank and should not be reproduced or redistributed partially or fully in any shape or manner without the express written consent of the Jordan Ahli Bank. Sources: - Central Bank of Jordan (CBJ) Monthly Bulletins - Department of Statistics (DOS) Jordan - Ministry of Finance (MOF) General Government Finance Bulletins - Ministry of Industry and Trade - Jordan 24