Jun. 26, 2019
When the Jordanian government first introduced tax reforms in June 2018, the public responded with street protests that led to the resignation of then-Prime Minister Hani al-Mulki. It was a rough start to implementing tax reforms recommended by the IMF, but the fiscal package was reworked and approved by both houses of Parliament in Nov. 2018 under the leadership of newly appointed Prime Minister Omar al-Razzaz, a former World Bank economist and Harvard graduate.
Despite the threat sparking more popular unrest, Razzaz warned that failure to pass the legislation would create a long-term recession for the economy, which had been struggling after the 2011 Arab Spring brought turmoil to the region. For the past three years, GDP growth had stagnated at 2.0% due to extended border closures with both Syria and Iraq, while a large influx of Syrian refugees put additional pressure on limited state resources.
Earlier in 2018, the initial implementation of the reform package increased the general sales tax, which accounts for roughly 70% of overall government tax revenues, and cut a key subsidy on bread in an attempt to reduce the nation's USD40 billion debt—the equivalent to 95% of Jordan's GDP. While such austerity measures were met with protest, government officials claim the fiscal package will reduce income disparities by increasing the tax burden on high-income earners while leaving lower-income segments of the society untouched.
In response to the June 2018 protests, Razzaz eliminated a clause in the tax reforms that would have required every citizen above 18 years of age to register with the national tax bureau. He also moved to exempt families earning less than JOD18,000 (USD25,400) annually from filing a tax return. The same measure was extended to individual citizens earning less than JOD9,000 (USD12,700). The restructured reforms also abolished taxes on the agricultural sector as an incentive to encourage farmers, while increasing taxes on medium-to-high wage earners by at least 5% to recover lost revenue. In addition, some private enterprises will see a tax increase between 20 and 40%.
The rebalancing is part of the IMF's three-year Extended Fund Facility (EFF), which was introduced in 2016 with a USD723-million program aimed at reducing the budget deficit, containing public debt and fostering inclusive growth. Preliminary impacts proved positive as Jordan's combined public deficit fell from 3.8% of the GDP in 2016 to 2.9% of the GDP in 2017, but progress proved more difficult in 2018 when the deficit rose back to 4% of the GDP.
“To reduce the combined deficit to 2.5% of GDP in 2019, the authorities have taken several measures, including the adoption of a new Income Tax Law," said Martin Cerisola, the IMF mission to Jordan, in statement issued during a visit in February 2019. Yet citing the extension and broadening of agreements with the European Union, as well as efforts to lower the cost of generating energy, Cerisola said recent developments “bode well for a steady recovery in investment, exports, competitiveness and growth."
Like many emerging markets in 2018, Jordan faced challenges in attracting foreign direct investment due to tighter and more volatile global financing conditions. The nation is exposed to international market fluctuations while its stable domestic inflation rate—just under 4%—and slow growth have been insufficient in generating the jobs needed to put its growing population to work. Unemployment in Jordan hovers around 18.5%, while unemployment for citizens below 24 years of age rose above 40% in 2018, according to World Bank figures.
High unemployment is a key issue for Razzaz and has been seen as one of the main drivers behind the 2018 protests. Citizens complained they would not be able to pay higher taxes and higher bread prices without real gains in income and job growth. Yet by implementing fiscal reforms, Razzaz is seeking to restore public trust in state institutions. He has pledged to curtail corruption and tax avoidance to create a more equitable economy for Jordanian residents, who he believes will benefit from the tax reforms after an initial phase, in which debt service is expected to peak between 2019-2020 at about 6.5% of GDP.