How are Jordanian CEOs interpreting the government’s budget reform efforts?
21 Jun 2018
Jordan has been a bastion of stability in an otherwise volatile region. It largely escaped the Arab Spring and, despite economic difficulties, has enacted reforms to meet IMF assistance requirements.
However, recent years have put increasing strain on the country’s finances, with a decline in its donations from Gulf Arab allies on the back of lower oil prices, as well as a huge influx of Syrian refugees, which has bolstered an already significant refugee population.
These factors have yielded mixed, and even contradictory, reactions from business leaders, as we found in Oxford Business Group’s most recent Business Barometer: Jordan CEO Survey, conducted in late 2017. Despite positive overall sentiment, we found 70% of the more than 100 CEOs we surveyed believe the level of investor confidence in the economy is not improving or definitely not improving.
Jordan is particularly resource-poor, with a relatively high debt-to-GDP ratio (95%), low average annual income (as little as $5000), a young population (average age of 22), elevated unemployment (18%) and a growing cost of living (inflation rose to 4.6% in April).
Like many countries in the region, Jordan has been battling to keep its finances in check amid growing deficits. There have been protests this year in Tunisia, Morocco and Egypt as governments seek to enact reforms. Now the same is happening in Jordan.
Protests against taxation and IMF-mandated reforms
Demonstrations recently flared up over the government’s IMF-mandated subsidy reductions and new tax laws. These resulted in the resignation of Prime Minister Hani Al Mulki on June 4. It is too early to say whether this will satisfy protesters, but it is undoubtedly a worrying development for a country known for its relative lack of political drama.
On the one hand, Jordan needs to ensure it can continue to tap IMF resources and roll out the loans it has with them and other organisations – the government said it needs additional revenue to cover the $1.5bn it pays per year to service its debt. On the other hand, political stability is paramount.
In response to this, King Abdullah II bin Al Hussein has asked Omar Razzaz – the widely respected former minister of education and ex-World Bank economist – to step in as prime minister and form a new government.
The proposed tax law would see an expansion in the tax base, lowering the taxable income threshold for a family from $34,000 to $22,500, and for an individual from $17,000 to $11,200. Tax on banks will also rise from 35% to 40%. Furthermore, tax evasion becomes a felony, rather than a criminal misdemeanour, under the law. The average Jordanian will, in fact, be unaffected by the taxes, as the average income is well below $11,200.
However, these changes come on the back of reductions in bread, fuel and electricity subsidies over recent years, which have hit the lowest earners hardest. This year alone, there has been an increase in tax of 50-100% on certain food staples, and income tax has changed four times in eight years.
The demonstrations have been coordinated by a youth organisation known as Hirak Shababi, but interestingly, a large number of private sector professional groupings and civil society bodies have played a role in their organisation as well, according to regional media.
Demonstrators argue that despite the previous government reform efforts and their resulting years of hardship, these policies have failed, exacerbated by corruption. They want the law dropped and economic policy overhauled. While protesters have voiced concerns about the level of openness at the government level, 62% of respondents to our survey say that the level of transparency for doing business is high or very high.
CEOs optimistic despite relatively uncompetitive tax environment
Looking at the results of the survey, it is striking that of the CEOs we spoke to, more than 63% of respondents say the tax environment is either uncompetitive of very uncompetitive. It is worth mentioning here that these results came in before the recent demonstrations.
Interestingly, and perhaps surprisingly on the back of this, 63% have positive or very positive expectations of local business conditions for the 12 months ahead. Again, this could have lowered since the recent upheavals.
Perhaps the positive sentiment is due to the key role of the private sector: compared to other countries in the region, it is relatively strong, and small and medium-sized enterprises account for roughly 40% of Jordan’s total nominal GDP, with small businesses making up 98% of all operational companies in the kingdom.
Government efforts to balance the budget and grow the private sector
Whether the new prime minister’s government withdraws the legislation – many members of Parliament have said they will not back it and are demanding its withdrawal – the thorny issue of balancing the books remains. Given the ongoing need for the fund facility with the IMF, this is not going away any time soon.
From a business perspective, it is not good news either way. The corporate sector – especially in telecoms – has been taxed particularly heavily, sending mixed messages to the business community. The government and economic planners want to see the private sector contribute more, not only by creating employment opportunities, but also through taxation. However, this cannot be too heavy handed, or it will stifle the very growth they need.
Similarly, as governments around the world that have imposed austerity have found in the post-financial crisis era, there comes a point at which cuts stifle growth, without which tax revenue – no matter how good the system of collection – diminishes. Sentiment is everything, particularly for those all-important foreign investors.
The new government has the unenviable task of achieving a goal the previous one has failed to meet: enacting economic reform that satisfies IMF donors, the business community and the Jordanian people alike.