November 18, 2018 / 2:12 PM / 24 days ago

Jordan's parliament passes IMF-backed tax law to reduce public debt

AMMAN (Reuters) - Jordan’s parliament approved a new IMF-backed tax law on Sunday after introducing some changes in a move to push ahead with crucial fiscal reforms to lower record public debt needed to get the economy hit by regional conflict back on track.

Jordan's Prime Minister Omar al-Razzaz speaks during a news conference in Amman, Jordan June 19, 2018. REUTERS/Muhammad Hamed

A majority of deputies in the chamber approved a series of amendments in the 36-article bill that included raising family exemptions to mitigate its impact on middle class income earners.

Jordan’s Prime Minister Omar al Razzaz earlier warned deputies the kingdom will pay a heavy price if parliament failed to approve the legislation, a main plank of austerity measures to ease a fiscal crunch and spur stagnant growth hovering at around 2 percent in recent years.

The bill will still need to go to the upper house or senate for approval before it is enacted as law. It is expected to be effective early next year, officials said.

Razzaz told deputies who were debating the legislation that failure to approve the bill would mean the kingdom would have to pay even higher interest rates on its substantial foreign debt.

Razzaz said the law promotes social justice by targeting the wealthy and combats long-time corporate tax evaders, but opposition deputies argue it will hurt the already stagnant economy and diminish middle-class incomes.

“The individuals who will be affected are the top 12 percent income earners, it won’t affect middle and low income earners,” Razzaz told deputies.

The government sent the bill to parliament in September after withdrawing an earlier draft submitted by a previous government that triggered protests over the summer.

Earlier this year, Jordan increased a general sales tax and scrapped a subsidy on bread as part of a three-year fiscal plan agreed with the International Monetary Fund, which aims to cut public debt of $37 billion, equivalent to 95 percent of gross domestic product.

The debt is at least in part due to successive governments adopting an expansionist fiscal policy characterized by job creation in the bloated public sector, and by lavish subsidies for bread and other staple goods.

Razzaz said rejection of the tax legislation would have pushed higher the cost of servicing over 1 billion dinars ($1.4 billion) of foreign debt due in 2019, raising the prospect of rating agencies downgrading Jordan’s credit ratings.

“We will pay a heavy price if we don’t approve this law,” he said before the vote.

The government has also echoed IMF concerns that without these reforms public external debt will spiral.

Debt service would peak in 2019-2020 at about 6.5 percent of GDP with the Eurobonds that will be due.

The country’s economic growth has been hit in the last few years by high unemployment and regional conflict weighing on investor sentiment and as demand generated from Syrian refugee receded, according to the IMF.

Economists said Jordan’s ability to maintain a costly subsidy system and a large state bureaucracy was increasingly untenable in the absence of large foreign capital inflows or injections of foreign aid, which have dwindled as the Syrian crisis has gone on.

Reporting by Suleiman Al-Khalidi; Editing by Susan Fenton and David Evans

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