Counting on foreign grants to plug fiscal gaps is a moral hazard - World Bank

Published May 9th, 2013 - 11:24 GMT
World Bank Building
World Bank Building

A World Bank report released Wednesday cautioned Jordan of a “moral hazard” phenomenon.

World Bank experts termed the persistence of counting upon foreign grants to plug fiscal gaps in the budget a moral hazard phenomenon.

According to the report, prepared in collaboration with the Ministry of Planning and International Cooperation, Jordan should reduce dependence on foreign grants which relax the Kingdom’s budget constraint but delay fiscal reforms.

“Foreign grants also expose Jordan, a recipient of financial aid from the Gulf Arab countries and the US, to changes in the political and economic fortunes of its partners,” the World Bank said.

“The availability of large foreign grants encourages fiscal current expenditures and deficits, thus delaying important fiscal reforms,” added the 44-page Development Policy Review report, which cited 2006 as the only year in the last decade when domestic revenues fully covered current expenditures.

Grants are volatile and are mainly influenced by factors beyond the control of Jordanian authorities, continued the study, which stressed decisive fiscal adjustment as a requirement for reducing dependence on foreign grants.

For instance, one of the key sources of fiscal savings is subsidies. In 2011, they represented 22.4 per cent of total revenues or 5.9 per cent of gross domestic product (GDP), which is the equivalent of foreign grants received that year.

Another avenue of fiscal reform, the report pointed to the public sector’s spiraling wage bill by making sure they grow at lower rates than the GDP.

The overall compensation of employees increased at 6 per cent per annum since 2006, against 5.3 per cent for GDP.

“This rapid growth reflects successive wage increases granted to civil servants and military personnel in the past five years,” according to the study, which referred to what it called generous pension and retirement packages offered to employees of the defence sector.

The report, launched in the presence of government and World Bank officials, stressed that fiscal adjustment should aim at reducing Jordan’s large tax exemptions used as instruments to stimulate foreign investments, subsidise some domestic sectors in bad times and as a mechanism to enlarge the social safety net through reduced sales tax on products deemed important socially.

Poor fiscal policies a threat to macroeconomic stability

Throughout the last decade, the World Bank experts said Jordan’s fiscal situation worsened and fiscal policy proved unable to protect the country from large shocks.
“Fiscal policy has been largely pro-cyclical, expanding in booms and contracting in recessions — a pattern that has made it a major source of macroeconomic instability,” the report indicated.

The report praised monetary and exchange rate policies as sound but described fiscal policies as poor and often a threat to macroeconomic stability.

Fiscal policies have remained, over the last 30 years, overly pro-cyclical for a country so open and so exposed to exogenous shocks; too reliant on foreign grants, too focused on the short-term, according to the international financial institution.

Jordan is currently facing a challenging fiscal crisis, driven partly by fiscal policies and partly by exogenous shocks, including explosions of the Egyptian gas pipeline that provides Jordan with the gas needed to generate electricity. The fiscal deficit rose to 11.9 per cent in 2011, from 7.7 per cent in 2010.

Following commendable efforts to reduce public debt in 2000–2008, the latter is on the rise again (71 per cent of GDP in 2011 in gross terms, against 58 per cent in 2010). Unfortunately, major downside risks emanating from the political situation in Jordan, the regional situation, and the impact of the eurozone crisis on the global economy weigh negatively on short-term growth.

“Unfortunately, Jordan has no choice but to address the fiscal situation urgently. Indeed, with low growth and higher borrowing costs, a reduction of the primary fiscal balance is required to avoid public debt growing to crisis levels,” the report said.
Unstable economic strategies

The World Bank study found that the implementation of policies and strategies, particularly in the area of economic growth, has been frustrated by several factors including the frequent changes in governments (average life of a government is less than two years); the frequent changes in policy priorities; the relatively weak technical capacity and internal accountability of parts of the public bureaucracy, and weak parliament and other institutions that ensure that the government is accountable.

“Meeting important strategic goals such as sustainable growth, structural transformation and employment require time consistency, continuity and frequent monitoring and evaluation, and this has been a key weakness in Jordan,” the report concluded.

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