Tue, 23 Apr 2019

With unemployment at 18%, Jordan looks to tax to aid finances

By Jay Jackson, Arkansas State News
10 Feb 2019, 20:22 GMT+10

AMMAN, Jordan - The kingdom of Jordan's financial state was laid bare this week with the visit of a team from the International Monetary Fund (IMF), led by Martin Cerisola.

The IMF crew were in Amman, the capital for a week ending on Thursday.

The report card was not good with the dinar depreciating and unemployment at 18 percent, but there were a few glimmers of hope remaining in the country's deficit-ridden balance sheet and the broader, struggling economy, other than for seeking greater international support.

One major turning point could be an Arab nation first, the introduction of an income tax. Considered necessary by the government, and its principal backer, the IMF, the proposed unpopular tax has drawn widespread strikes and protests.

Arab countries are famous for not having an income tax. It was only last year that a value-added tax was intrdoduced, and that was a modest 5%, which came into force in most Gulf countries including Saudi Arabia and the UAE on 1 January 2018.

Another key factor could be the re-opening of the border with Iraq. There is no doubt the conflict-ridden state of Iraq over the past 16 years, forcing displaced people into Jordan has put a strain on Jordanian infrastructure and its economy. Iraq even prior to that was heavily burdened by international sanctions, which in the end turned out to be ill-deserved.

The outlook for the Jordanian economy brings renewed momentum. The re-opening of the border with Iraq and associated trade and investment agreements; the extension and broadening of the trade agreement with the European Union; as well as other efforts to lower the cost of generating energy, all bode well for a steady recovery in investment, exports, competitiveness, and growth. However, challenges still remain, particularly from tighter and more volatile global financing conditions and elevated vulnerabilitie," the IMF said in a statement wrapping up its Amman visit on Thursday.

To successfully confront these challenges and improve economic performance, the IMF team and the Jordanian authorities have reached agreement on policies and reforms for 2019; anchored on a gradual and steady fiscal consolidation path and the continued implementation of reforms to enhance business conditions and employment prospects. These policies and reforms will also need to be supported by a significantly greater support from the international and regional donor community."

"The agreement on fiscal policy for 2019 centers on the need to firmly return the combined public deficit to a downward path. The sustained strong efforts to rein in the combined public deficit, from 3.8 percent of GDP in 2016 to 2.9 percent of GDP in 2017, proved more difficult in 2018, as the combined deficit rose to 4 percent of GDP. To reduce the combined deficit to 2.5 percent of GDP in 2019, the authorities have taken several measures, including the adoption of a new income tax law," said the IMF statement.

"Critical to this goal is the steadfast and unwavering implementation of the new income tax law, together with a significant strengthening of tax administration to overcome the marked revenue underperformance of 2018. The new income tax law improves the previous system--it expands the tax base in an equitable manner, by protecting the middle class and most vulnerable; closes some distortions and loopholes; and helps protect specific sectors severely affected by regional conditions and by the removal of non-World Trade Organization-compliant export subsidies. The law critically sets the stage for a greater and much-needed focus on reducing tax evasion in the years ahead. With increasing prospects for improved regional and domestic security conditions, greater efforts will also be needed to address the growth in public spending, to help partly accommodate other social needs, such as in health and education."

The new Jordanian tax which will tax employees 5 percent, and companies between 20 percent and 40 percent, will not apply to venture capital companies so as not to lose start-up businesses to other countries.

While Jordan is in a poor state, the wider Middle East region is also facing challenges, particularly for oil importing countries. Governments must strengthen fiscal policies to drive growth, the IMF head Christine Lagarde said Saturday.

The economic path ahead for the region is challenging, she told the Arab Fiscal Forum in Dubai on Saturday. This makes the task of fiscal policy that much harder, which in turn makes it even more important to build strong foundations to anchor fiscal policy.

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