The Impact of Domestic and External Public Debt on the Economic Growth of Jordan

Eman Abdel Khalek Fseifes,Talib Mohammad Warrad

doi:10.11648/j.ijber.20200904.22

Eman Abdel Khalek Fseifes, Talib Mohammad Warrad

Open Access

https://doi.org/10.11648/j.ijber.20200904.22

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Abstract

Since the beginning of the new millennium several developing countries have been making greater use of domestic bond markets, with a corresponding decline in gross and net foreign debt-to-GDP ratios. Jordan was not an exception; the structure of the public debt in Jordan has exhibited a similar shift towards the domestic borrowings after the year 2000. In order to assess the economic consequences of this change in the public debt structure, this study investigates the impact of the structure of the public debt and other determinants of growth on the economic growth in Jordan over the period 1980 – 2018. The analysis of the long-run relationship between the domestic and external public debt and the economic growth is reliant on the theoretical assumptions and the empirical concerns and it is conducted by applying the Fully Modified Ordinary Least Squares (FMOLS) method; the results indicate that the external and domestic public borrowings are negatively associated with economic growth with a greater magnitude of the domestic debt in the long-run; the greater magnitude of the negative implication of domestic debt on economic growth is attributed to the increased trend of domestic debt that has been increasing in excess of the external debt since 2008. On the other hand, investment, labor force growth, and openness of trade are found to be positively associated with economic growth in the long-run. Accordingly, this study recommends the need to reduce the public debt and budget deficit to moderate levels in the long-run through implementing austerity measures and fiscal discipline that are carefully planned to minimize the potential negative effect on economic growth, where they should be implemented along with fiscal reforms intended for increasing employment and boosting Jordan’s growth potential. It is also recommended that the government should thoroughly revise the debt management strategy, so as to avoid the deterring effects of the increased stock of domestic debt on capital accumulation and economic growth in the long-run.

Highlights

IntroductionAfter the accumulation of a substantial burden of public debt and its servicing in Jordan recently, the financial distress of the public sector has become a major concern for the Jordanians, which has put a pressure on the Jordanian government to restructure its debt, privatize and improve tax revenues collection [1].In addition to the adverse effects of financial crisis of 2008-09, the economic growth in Jordan was adversely influenced by a series of external shocks that followed the break of the Arab uprisings in 2011, including, but not limited to, the massive influx of Syrian refugees after 2012, the interruptions of Egyptian gas supplies to Jordan during 2013-2014, that forced the Jordanian government to switch to very costly alternative energy sources, and the trade route closures due to increased insecurity in neighboring countries of Syria and Iraq in 2015; these external shocks have been exaggerated by the long-lasting structural weaknesses of the economy, including high chronic fiscal deficit and high unemployment rate [1]
In addition to the adverse effects of financial crisis of 2008-09, the economic growth in Jordan was adversely influenced by a series of external shocks that followed the break of the Arab uprisings in 2011, including, but not limited to, the massive influx of Syrian refugees after 2012, the interruptions of Egyptian gas supplies to Jordan during 2013-2014, that forced the Jordanian government to switch to very costly alternative energy sources, and the trade route closures due to increased insecurity in neighboring countries of Syria and Iraq in 2015; these external shocks have been exaggerated by the long-lasting structural weaknesses of the economy, including high chronic fiscal deficit and high unemployment rate [1]
In the direction of this purpose, this study investigates the relationship between external and domestic debt and economic growth within a standard neoclassical growth framework, extended by a public debt indicator

Summary

Introduction

After the accumulation of a substantial burden of public debt and its servicing in Jordan recently, the financial distress of the public sector has become a major concern for the Jordanians, which has put a pressure on the Jordanian government to restructure its debt, privatize and improve tax revenues collection [1].In addition to the adverse effects of financial crisis of 2008-09, the economic growth in Jordan was adversely influenced by a series of external shocks that followed the break of the Arab uprisings in 2011, including, but not limited to, the massive influx of Syrian refugees after 2012, the interruptions of Egyptian gas supplies to Jordan during 2013-2014, that forced the Jordanian government to switch to very costly alternative energy sources, and the trade route closures due to increased insecurity in neighboring countries of Syria and Iraq in 2015; these external shocks have been exaggerated by the long-lasting structural weaknesses of the economy, including high chronic fiscal deficit and high unemployment rate [1]. This level of public debt requires a careful debt management to be adopted by the government in order to decrease the negative effects of the accumulated burden of public debt and its servicing on the Jordanian economy in the long-run, since that the channels of impact through which public debt might deter the long-term economic growth are various. The economic literatures emphasized the role of the increased distortionary taxation in decreasing the future physical capital accumulation; the increased long-term interest rates would slow down physical capital accumulation through crowding out private investments. The literature emphasized the role of high inflation especially in lowincome counties, where the governments in these countries used to monetize their debt that has serious negative implication on growth [2]

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