Following a wave of protests over IMF-driven austerity measures, the need to find a path out of Jordan’s economic morass has taken on a new urgency.
By Dina Al Wakeel
Photography by Ala’a Al Sukhni
A western diplomat perfectly summed up the Kingdom’s policy in facing its challenges as follows: “Jordan is brilliant at analyzing the nature of the challenges it faces, but implementation is always a challenge of its own.”
The policy successive governments adopted over several decades has led to shelving of economic, political and social problems, thus prolonging and exacerbating them. The public debt constitutes 95.6 percent of GDP, inflation is 5 percent, and unemployment is running at 18.4 percent (and 37.6 percent among those between 20 and 24), according to the Department of Statistics.
In response, the government increased the sales tax on a large number of items in early January and lifted subsidies on bread—a move that even the International Monetary Fund advised against. These policies have made Amman the most expensive city in the region, ranking 28 worldwide, according to the Economist Intelligence Unit’s Cost of Living Survey.
It was perhaps therefore unsurprising that in early June, when trade unions and professional associations called for a general strike in response to the attempted introduction of the controversial Income Tax Law which was immediately followed by a hike in fuel prices, thousands complied across the Kingdom.
This was followed by a week of demonstrations held outside the Prime Ministry in Amman by Jordanians fed up with unemployment, poverty, and most importantly, an overriding sense the government was indifferent to their economic woes.
This public anger has successfully led to change. HM King Abdullah asked Prime Minister Hani al-Mulki to step down, and replaced him with Omar Razzaz. The Harvard-educated economist promised widespread reforms, to start dialogue with the Parliament, the professional associations, businesses and the general public, and most importantly, to withdraw and review the divisive tax law.
Those close to Razzaz say he acknowledges the enormity of the task ahead. Those who Venture spoke to agreed Razzaz needed to start his term by addressing the fundamental perception of unfairness regarding the widening gap between the rich and the poor and a general anger about social injustice.
A PASSING STORM?
There is a general consensus on the success of the recent civic movement. The strike and the demonstrations that ensued, with the participation of thousands of youth, including students and employees, members of civic movements and of the Kingdom’s 14 professional associations led even HM King Abdullah to express his pride at the civilized manner and the discipline of the protesters.
Some observers and analysts said the protests were an inevitable result of the government’s unwillingness to heed the warning signs. “What happened was only natural,” said Ahmad Awad, founder and managing director of the Phenix Center for Economic and Informatics Studies, who also took part in the demonstrations. “When people are hurt they will defend their interests and rights.”
Zeid Hamzeh, a former health minister and member of the doctor’s association, agreed. “Nobody can predict a society’s boiling point, but the Jordanian society has endured a lot of economic, financial and administrative hardships.”
Similar to their predecessors in Egypt and Tunisia, the Jordanian civic movement benefited a great deal from Facebook, believes Emad al Hmoud, an independent business analyst. “Facebook has created history in Jordan and managed to create movement within a segment that was stagnant before. Due to the new Income Tax Law, they organized themselves through social media thus their message was swiftly delivered and received.”
One of the main issues that brought these demonstrators together was the amended Income Tax bill, which was only endorsed in 2014. The law failed to meet its original goal to expand the base of taxpayers and increase their number to much more than the current 3 percent. The new draft increased corporate income tax rates in most industry sectors, including increasing the tax on banks to 40 percent from 35 percent, and mining companies to 30 percent from 24 percent. Goods manufactured in the Kingdom will also be subject to income tax.
What struck a nerve with most Jordanians from the lower and middle classes were the proposed changes to lower annual exemptions for families and individuals as well as the removal of additional exemptions related to education, medical treatment and others. To make things worse, the taxes levied on the different segments were widely considered unjust; the proposed changes imposed a 5 percent tax on JD1-5,000, 10 percent on 5,001-10,000, all the way to 25 percent on 20,001 and every salary that’s above.
“None of the difficult circumstances that Jordan is going through justify not putting together a fair tax law,” said Awad. The law should have included “policies that would reduce the burden on the middle and lower classes and the various segments within them. We should have created a tax system that’s truly progressive, not in a narrow manner that mainly affects the middle class.”
Awad also cited the country’s 16 percent sales tax, customs and the special tax, which he said exhausted the public, as well as the industrial and commercial sectors, weakening their ability to create jobs and compete in the regional and international markets.
He believes progressive taxes should mean starting with small deductions of no more than 2 to 3 percent to prevent tax evasion, and to have those who make hundreds of thousands or even millions a year to pay more than the rest of the brackets. The same concept, he argued, could be implemented in the general sales tax, which Awad believes is too high. “The current 16 percent on most goods and services is astronomical as well as unfair; it does not distinguish between the rich and poor.”
In most countries, noted Awad, it is between 8 and 10 percent depending on the levels of incomes and economic growth. He also criticized subjecting most goods to this high tax, arguing that certain food staples should be exempt, as was the case before the recent hikes, while luxurious items should be subject to even higher rates than the 16 percent.
Hmoud cited the word that many of the demonstrators chanted during the week-long protests, which was “maanash” or “we don’t have.” “Their income is being eroded, the purchasing power of the dinar is being eroded while living expenses are higher by the day which is why they chanted this slogan,” said Hmoud.
For his part, the Western diplomat, who asked to remain anonymous, blamed the communication gap between the government and the public for the anger that ensued the law’s issuance. “We all knew that the introduction of the tax law was going to be controversial, and I think an effort was made at communication but it wasn’t received by the people as it should have, including the man in Tafileh and other governorates. There was a communication issue.” He also believes the law could be amended but not entirely ripped up, and in exchange the government could put more investments in the health and education sectors. Only then will people have more confidence, he argued.
GETTING OUT OF THE BOTTLENECK
Mulki promised Jordanians the tax law was going to be one of the last hikes that will help the Kingdom ease through its economic “bottleneck” by middle of next year. But many Jordanians remained skeptical. “Governments have been very stubborn when dealing with the public, believing they understood better what’s in people’s interest and the public must implemented what they say,” said Awad. “We’ve been hearing this since 1989 that there will be a series of austerity measures for a certain period of time with promises that things will improve afterwards. But that hasn’t happened for the past 30 years.”
Although everyone we spoke to commended the appointment of Razzaz, they all agreed he will not be able to do much on his own. “I think Razzaz is a very reflective, thoughtful man who is extremely conscious of the economic realities but is also a good listener and a sympathizer of the people’s needs,” said the diplomat, who promised the international community’s support.
“It will be important that he shows he is really listening to the views of ordinary people, the parliament and the unions. It is not going to be easy and people will be asking for more than he can provide, but he cannot create 500 million to close the budget gap.”
Nonetheless, he believes Jordanians will give Razzaz the benefit of the doubt to implement the King’s directives. Another former minister, who preferred not to be named, said Razzaz should focus on helping the Kingdom’s economy to mature into self-reliance and move away from its dependence on foreign aid. His advice for the incumbent PM was to develop the infrastructure and attract investors based on a BOT basis.
With a sluggish economic growth of around 2 percent and a refugee crisis that has tested most of the country’s infrastructure and services, Jordan remains heavily dependent on foreign aid. The Kingdom receives more than $1 billion each year from the United States to support its budget. While the Gulf States, including Saudi Arabia, Kuwait and the UAE, recently pledged a $2.5 billion aid package to offset economic risks. Following the demonstrations, Qatar also extended a $500 million aid package that includes investments, project finance and job opportunities for Jordanians.
“It is of utmost importance right now that the government utilizes these funds to help the private sector assume its role as an engine of growth and job creation,” said the former minister. “The public sector is saturated in terms of jobs, which is why both sectors should work together to train young Jordanians and help them acquire the skills needed in the job market.” This can be achieved, he stressed, by focusing on vocational training which he doesn’t believe was a successful experience in the Kingdom, and convincing local labor to replace the thousands of foreign workers in the Kingdom.
Awad agreed, citing the government’s allocated budget for vocational training in 2018, which was JD18 million only, most of which will be running costs. Additionally, he criticized the continuous talk about encouraging Jordanians to become entrepreneurs like Facebook’s founder Mark Zuckerberg as unrealistic. “We do have entrepreneurs but this is not the policies through which we can solve the unemployment problem of thousands of young Jordanians.”
He went on to criticize the government’s pretense that it has been cutting spending. “Despite all the austerity measures and poor public spending, the government failed to convince people that it is abstemious … The luxury cars, salaries, rewards and treatment in the best hospitals all come from the government’s coffers,” said Awad.
“The most blatant mistake was postponing finding solutions for our economic issues until they became exacerbated,” said the former minister. “Even lifting the subsidies should have happened gradually instead of all at once.”
The problems are many, but observers believe the recent demonstrations and anger have shocked the Kingdom’s systems, prompting the long awaited change. While many are hopeful, everyone observes the developments cautiously hoping Razzaz and his new team will successfully navigate through the needed change.
“Razzaz was a good choice but alone he will not be able to create the needed change. A few years back he wrote about changing the state from rentier to productive, and Jordan is a clear example of a rentier state,” said Hamzeh. “He is capable if given the chance and authority.”