Throwing Good Money After Bad

The IMF continues to provide Jordan with huge loans. But it will be for nothing if the country doesn’t face up to the real problems holding its economy back.

Around four years ago, Jordan signed up to a long overdue reform program with the IMF. The need to correct many of the economic distortions in government spending, such as fuel subsidies, was the driving force behind the move.

However, just before graduating from that program, the government began negotiating another program with the IMF. The reason? It needed help to correct the mistakes made implementing the previous program.

Nobody expects a country to apply a full reform program and still end up with negative results in almost all KPIs. But somehow Jordan managed it.

Real growth regressed to a level that was even worse than the situation in the early 90s, when the country rushed to the IMF for the first time for a lifeline. Instead of achieving a real growth rate close to 4 percent at the end of 2015 and 2016, it dived to less than 2 percent, even much less than the growth rate before starting the program in 2012 when the real growth rate was close to 3 percent. Public debt to GDP rose from less than 80 percent to almost 100 percent. While unemployment went up from around 12 percent to almost 16 percent.

The bitter medicine that we swallowed over the last four years should have led to a better off economy. So what went wrong?

It’s important to note that the demand management reforms the IMF program asked for back in 2012 were sorely needed, as the distortion in fuel subsidies was simply unsustainable. But the program was entirely conditional on the demand side KPIs, such as lifting fuel subsidies, and came with no conditions at all in terms of supply incentive KPIs, such as enhancing the investment environment in the Kingdom and inducing new FDIs.

The IMF held off releasing some tranches of the program because of the delay in imposing new taxes on fuel derivatives. But at the same time, it seemed to ignore signs that Jordan has been regressing in all major global competitiveness indicators over recent years.

Because of this, I really can’t imagine the IMF is just interested in extending more credit to Jordan under the current economic situation, except if it’s clear to them the country is capable of settling its debts. This means the fund is either expecting more foreign assistance that can be used to repay foreign debt, or it really thinks everyday Jordanians can somehow afford to pay more in taxes and fees.

The only way forward is to create an emergency economic committee made up of members of both the private and public sectors, as well as some civil society groups and universities. They would be tasked with coming up with real supply enhancement policies that can help expand current investment and attract new ones, and put in place a genuine plan for pushing up the role of SMEs in the economy.

Once the supply enhancement plan is in place, it should only take a couple of years before the economy showed real signs of improvement, including a reduction in the budget deficit.