Internal versus External Borrowing in Jordan (2007-2018) - PowerPoint PPT Presentation

Internal versus External Borrowing in Jordan (2007-2018) (Analytical Approach) Dr. Bilal J. Okasheh Director of Companies-Audit and Financial Analysis Directorate Audit Bureau - Jordan

Internal versus External Borrowing in Jordan 2007-2018 (Analytical Approach) (The role that SAIs can play to reduce the vulnerability of governments to financial risks is to develop sound public debt management practices) . The Audit and Analysis of Public Debt by the Audit Bureau aims at ensuring that the public debt is managed efficiently, effectively and economically, and verifying compliance with the laws, legislations, instructions and procedures governing the work of the relevant bodies in the public debt through conducting audits of samples of public debt files, Internal control, analysis of public debt data and related indicators, and make appropriate recommendations as to what is reached. 1

 Evolution of Public Debt Balance for 2007-2018: - The total balance of public debt continued to increase during the period from 2007 to 2018, to reach Jordanian Dinar (JD) (28309) million, the increase during this period was (19361) million JD, which means that, within 10 years, it increased by more than three times. - Table (1) shows the evolution of the public debt balance for the years 2007-2018: Table (1) Evolution of outstanding balance of public debt (2007-2018) in millions Jordanian Dinar(JD), 1JD=1.4 USD 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Internal(Domest 3695 5754 7086 7980 9996 12678 13440 14622 15486 15794 15402 16221 ic) Public Debt External Public 5253 3641 3869 4611 4487 4932 7235 8030 9391 10299 11867 12088 Debt Total Public 8948 9395 10955 12591 14483 17610 20675 22652 24877 26093 27269 28309 Debt Source: Public Debt Bulletins & Government Public Finance Bulletins. 2

• Public Debt Composition : - The composition of the public debt (internal / external) gradually changed, and the largest change was between 2007 and 2008. The Internal (Domestic) debt (IPD) ratio reached 61% of the total outstanding balance of Gross Public Debt (GPD) in 2008, compared with 43% in the previous year. This was due to settlement of Paris Club loans (external debt) out of privatization proceeds, and issuance of domestic debt during the same year. - Table (2) shows the changes in the composition of the public debt for the years 2007-2018: Table (2) The changes in the composition of the public debt for the years 2007-2018(%) 2007 2008 2009 2010 2011 2012 2015 2016 2017 2018 2013 2014 Year (IPD)Domestic 43 61 64 63 69 72 65 65 62 60 57 57 PD/GPD% EPD/GPD% 57 39 36 37 31 28 35 35 38 40 43 43 - As a result of the continued reliance on Internal (domestic) debt, the domestic debt ratio reached (72%) of the total public debt in 2012, although this percentage declined in subsequent years, but the internal public debt stocks increased but less than the increase in External debt(EPD). 3

• Internal (Domestic) Debt Instruments Movement: - Government borrowing is carried out through government bonds, and direct domestic borrowing is prohibited from commercial banks or any other institution. Government securities are bought by banks and financial institutions in the Primary Financial Market, where they are offered through auctions conducted by the Central Bank of Jordan. - Government Bonds for one year to five years (medium term), and Treasury Bills for a term not exceeding one year (short term). - As a result of the increasing volume of issues of domestic public debt, the interest on domestic debt increased gradually. While the interest paid on domestic debt was JD 174 million in 2007, these interests began to increase starting from 2008, the year in which External debt (Paris Club debt) has been buyback (settled) through privatization proceeds. 4

- Table (3) shows the total movement of domestic debt instruments (treasury bills and bonds) for 2007-2018: Table (3) Total Movement of Domestic Debt Instruments in millions Jordanian Dinar(JD), 1JD=1.4 USD 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year 1405 2977 4552 4824 4932 6159 5020 6018 3620 5546 3931 4166 Issue 680 1714 3143 4016 3019 4368 4182 4755 3833 5317 4415 3412 Redemption 174 257 319 333 366 550 710 810 752 658 625 684 Interest - The movement of debt instruments has begun to accumulate as Snowballing Effect, where government has repeatedly issued treasury bills and bonds in extra and high amounts for the redemption of the bonds that previously issued by the government in previous periods, in addition to paying the interest of these bonds and bills. - Interest paid (810) million dinars in 2012, and this was because banks raise interest on government bonds due to lack of liquidity. 5

 External Debt Service: - External debt service represents both installments and interest paid and scheduled. Table (4) shows the external public debt service data for 2007-2018: Table (4) External Public Debt Service(Principal & Interest) in millions Jordanian Dinar(JD), 1JD=1.4 USD 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year 406 1827 288 346 398 438 469 702 1230 1434 888 922 Principal 213 145 104 104 117 121 130 205 232 237 292 378 Interest 619 1972 392 450 515 559 599 907 1462 1671 1180 1300 Total - As of 2014, the external debt service has increased, with interest payments on External Debt amounting to JD (292, 378) million and principal payments amounting to JD (1180, 1300) million during 2017 and 2018 respectively. This was a major result of the issuance of Eurobonds bonds in US dollars on global markets and loan facilities from the International Monetary Fund (IMF) during 2012-2015. Therefore, these issues have repayment dates (Maturities). For example, the 2012 issue started maturing in 2014, resulting in a higher debt service (Interest & Principal). The 2013 issue started maturing in 2015, resulting in an accumulation of external debt service of Interest & Principal, and became overlapping with other maturities, concentrated in the short and 6 medium term.

• Indicators of Public Debt in Jordan: 1. Public Debt / GDP Ratio: - This indicator measures the ability of the national economy to bear the burden of public debt, and measures the level of debt for economic activity, which is a vulnerability index. - Jordan's public debt law defines the Internal (Domestic) debt as the debt that to be paid in Jordanian dinars, whereas the External debt is the debt to be in other currencies. - According to the Public Debt Management law, "the internal public debt balance should not at any one time exceed 60% of GDP." In addition, "the balance of the external public debt shall not at any time exceed 60% of GDP". Moreover "the total balance of the Gross public debt (both Internal &External) should not at any one time exceed (80%) of GDP". 7

- As a result of the steady increase in the balance of both internal and external public debt for the years 2007-2018, and the composition changes, there have been significant changes in the public debt ratios of GDP, as shown in Table (5): Table(5) Public Debt/GDP Ratio (%) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year 30.5 36.9 41.9 42.5 48.9 57.7 56.3 57.5 58.1 56.8 53.3 53.9 IPD/GDP (%) 43.3 23.3 22.9 24.6 21.9 22.5 30.3 31.6 35.3 37.0 41.1 40.2 EPD/GDP (%) 73.8 60.2 64.7 67.1 70.7 80.2 86.6 89.1 93.4 93.8 94.3 94.1 GPD/GDP (%) - The index is declining and the sub-ratios did not exceed the percentages stipulated by the law, but their total exceeded the limits set by the law starting in 2012, and reached (94.3%) in 2017, which is very high, indicating the significant increase in the balance of gross public debt, and growth With higher rates than growth in GDP. 8

2. Public Debt Service /Domestic Revenues Ratio: - This indicator shows the government's ability to pay and service debt from domestic revenues. - Table (6) shows the data of this indicator: Table(6) Public Debt Service/Domestic Revenues Ratio (%) in millions Jordanian Dinar(JD), 1JD=1.4 USD 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Total Debt 793 2229 711 783 881 1109 1309 1717 2214 2329 1805 1984 Service(1) Domestic 3628 4375 4187 4261 4199 4727 5120 6031 5911 6234 6717 6945 Revenues(2) ) ( ÷ ) ( 21.9 50.9 17.0 18.4 23.5 25.6 37.5 26.9 28.6 1 2 (%) % 21.0 % 28.5 % 37.4 % % % % % % % % % - The above table shows that during the years (2007-2016), this indicator has declined gradually and significantly, in 2016 the total debt service reach (37.5%) of the domestic revenue. indicating the increasing burden of public debt and the gradual decrease in the ability of domestic revenues to pay, because of the expansion of borrowing more than the growth in domestic revenues. 9