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

1

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.

2  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:

Source: Public Debt Bulletins & Government Public Finance Bulletins. Table (1) Evolution of outstanding balance of public debt (2007-2018) in millions Jordanian Dinar(JD), 1JD=1.4 USD Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Internal(Domest ic) Public Debt 3695 5754 7086 7980 9996 12678 13440 14622 15486 15794 15402 16221 External Public Debt 5253 3641 3869 4611 4487 4932 7235 8030 9391 10299 11867 12088 Total Public Debt 8948 9395 10955 12591 14483 17610 20675 22652 24877 26093 27269 28309

3

• 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:

• 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).

Table (2) The changes in the composition of the public debt for the years 2007-2018(%) Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (IPD)Domestic PD/GPD% 43 61 64 63 69 72 65 65 62 60 57 57 EPD/GPD% 57 39 36 37 31 28 35 35 38 40 43 43

4

• Internal (Domestic) Debt Instruments Movement:
• Government borrowing is carried out through government bonds, and

direct domestic borrowing is prohibited from commercial banks or any

• ther 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

• n 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.

5

• Table (3) shows the total movement of domestic debt instruments

(treasury bills and bonds) for 2007-2018:

• 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.

Table (3) Total Movement of Domestic Debt Instruments in millions Jordanian Dinar(JD), 1JD=1.4 USD Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Issue 1405 2977 4552 4824 4932 6159 5020 6018 3620 5546 3931 4166 Redemption 680 1714 3143 4016 3019 4368 4182 4755 3833 5317 4415 3412 Interest 174 257 319 333 366 550 710 810 752 658 625 684

6  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:

• 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 medium term.

Table (4) External Public Debt Service(Principal & Interest) in millions Jordanian Dinar(JD), 1JD=1.4 USD Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Principal 406 1827 288 346 398 438 469 702 1230 1434 888 922 Interest 213 145 104 104 117 121 130 205 232 237 292 378 Total 619 1972 392 450 515 559 599 907 1462 1671 1180 1300

7

• 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".

8

• 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):

• 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.

Table(5) Public Debt/GDP Ratio (%) Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 IPD/GDP (%) 30.5 36.9 41.9 42.5 48.9 57.7 56.3 57.5 58.1 56.8 53.3 53.9 EPD/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 GPD/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

9

• 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:
• 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.

Table(6) Public Debt Service/Domestic Revenues Ratio (%) in millions Jordanian Dinar(JD), 1JD=1.4 USD Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Debt Service(1) 793 2229 711 783 881 1109 1309 1717 2214 2329 1805 1984 Domestic Revenues(2) 3628 4375 4187 4261 4199 4727 5120 6031 5911 6234 6717 6945 (%) ( 2 ) ÷ ( 1 ) 21.9 % 50.9 % 17.0 % 18.4 % 21.0 % 23.5 % 25.6 % 28.5 % 37.5 % 37.4 % 26.9 % 28.6 %

10

• 3. External Debt Service / Exports Ratio:
• This indicator shows the level of external public debt service as a

percentage of the export of goods and services, and shows the degree of burden on foreign currencies resulting from export.

• Table (7) shows the data of this indicator:
• The index has declined significantly starting from 2014 because of the

increase in external debt service (Principal and interest) and declining in the exports or growth rate of export.

Table(7) External Debt Service / Exports Ratio (%) in millions Jordanian Dinar(JD), 1JD=1.4 USD Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 External Debt Service 619 1972 392 450 515 559 599 907 1462 1671 1180 1300 Exports 3184 4431 3579 4217 4806 4750 4805 5163 4798 4397 4504 4668 External Debt Service /Exports 19 % 45 % 11 % 11 % 11 % 12% 12% 18% 30% 38% 26% 28 %

11

• 4. Official (Foreign) Reserves / External Debt Service Ratio:
• This indicator represents the ability of foreign reserves to cover the external debt
• service. Table (8) shows the data of this indicator:

The indicator improved during 2009 and 2010 due to the decline in public external debt balances and consequently the decline in their services on the one hand, as well as the improvement in the level of the official reserves of the Central Bank. As a result of the increase in the balance of public debt and its service, and the decline in the balance of the Central Bank reserves in foreign currency, the index declined significantly during the years 2015-2018 compared to previous years.

Table(8) Official (Foreign) Reserves / External Debt Service Ratio (%) in millions Jordanian Dinar(JD), 1JD=1.4 USD

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Official (Foreign) Reserve 4871 5491 7713 8679 7465 4703 8512 9982 1003 5 9134 8687 8170 External Debt Service 619 1972 392 450 515 559 599 907 1462 1671 1180 1300 Official (Foreign) Reserves / External Debt Service 1020 % 279 % 1972 % 1931 % 1451 % % 844 1423 % 1101 % 686 % 547 % % 736 628 %

12

• 5. The Effect of the Exchange Rate on External Debt:

The external debt balance changes due to the exchange rate fluctuations of the foreign loan portfolio. Recalling that, the exchange rate between the Jordanian dinar and the US dollar is fixed, and that the change in balances is due to changes in the exchange rates of other currencies against the US

• dollar. In other words, if foreign exchange rates of other currencies rise

against the US dollar; this will lead to an increase in the balance of external public debt. Thus, the external debt ratio of the GDP will rise

• automatically. This will limit the ability to increase borrowing.
• In the case of Jordan, the GPD/GDP reached critical levels, which means

more difficulties in borrowing (minor margin is available to borrow).

13

• Table (9) shows the impact of exchange rate changes on the external debt balance as

stated in the public debt bulletins and the public government financial bulletin issued by the Ministry of Finance. The exchange rate is taken from the IMF website at the date of issue of each bulletin:

• The balance of external public debt increased in 2007-2011 as a result of the increase

in the exchange rate of foreign currencies against the US dollar. The increase in the cumulative effect of these years amounted to JD (469) million, it look liked that we had borrowed without getting the money.

• This of course was one of the difficulties faced by borrowing and led to a greater

service to the public debt, but the years following 2012-2016, and because of the Global conditions and the rise of the Us dollar against the rest of foreign currencies, Cumulative effect of JD (678) million as a decrease in the balance External public debt. In 2017, the balance increased by JD (221) million and then decreased by JD (64) million in 2018.

Table (9) The Effect of the Exchange Rate on External Debt in millions Jordanian Dinar(JD), 1JD=1.4 USD Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Amount, (+): increase, (-): decrease 232 + 100 + 15

• 104

+ 48 + 103

• 129
• 245
• 150
• 51
• 221

+ 64

14  The regulatory framework of Public Debt Management in Jordan: There are many entities responsible for the management of public debt, where the public debt is managed by:

• 1. The Ministry of Finance:

The Directorate of Public Debt of the Ministry manages the internal (domestic) debt in full and holds the external debt accounts. The Public Debt Directorate has a DMFAS system, which is dedicated to public debt management and financial analysis.

• 2. The Ministry of Planning and International Cooperation:

There are (3) directorates working in the field of external public debt

• management. The Directorate of International Cooperation undertakes the

procedures of obtaining funding, negotiations, reviewing and signing the agreements after the approval of the Public Debt Committee. The Directorate of Programs and Projects follows up part of the implementation of the projects financed by external loans. The Directorate of Finance and through the loan and re-lending sections withdraw from the external loans and register it within their

• wn cards and records, and then send the data to the Ministry of Finance.

15  Conclusions :

• As a result of the expansion of borrowing and the accompanying increase in

the cost of borrowing from installments and interests, the public debt ratio to the GDP increased to exceed the levels allowed under the Public Debt Law. Also this caused a declining in the most of Public debt indicators.

• The government's expanded internal borrowing has cause a snowballing

effect, that is rapidly increasing due to frequent and large issuances of government securities(Bonds and Bills), which have become out of control due to the repeated need for new issuances for redemption of matured bonds and interests. Also this may cause Crowding Out with the private sector, as the credit of domestic banking system is one of the main channels for increasing private investment.

• Borrowing has become within short and medium term terms, as the maturity
• f borrowings has been determined by resorting to internal borrowing.

16

• External debt has also changed in terms of maturity, mostly short and

medium term, as a result of the Government's use of Eurobonds in international markets since 2012, instead of borrowing in the form of long- term sovereign debt from financing institutions, Forcing the government to repeat the issuance of Euro bonds in US dollar, where the big portion went for redemption of matured bonds.

• The change in the Us dollar exchange rate will remain one of the reasons of

difficulty to borrow in the future, because of the fluctuating exchange rate with other foreign currencies, also any change in the exchange rate policy pursued by the central bank in the future will affect directly the balance of external public debt, and thus created difficulties in borrowing.

17  Recommendations:

• 1. The public debt shall be linked to a fixed ceiling (the maximum permitted

borrowing during the year), so that the ceiling of the debt will be determined, for example, when the General Budget Law of the State is adopted for the year.

• 2. Synthesizing the local secondary financial market to become the main body

in which government securities are traded, so that the government securities are negotiable by all traders in the financial market, and will not be limited to banks and financial institutions.

• 3. Review the policy of financing capital projects through internal borrowing

(short and medium term).

• 4. To work as far as possible to make the External borrowing in US dollar

currency (the fact that the exchange rate is fixed between JD & USD).

• 5. Financing the large projects (mega projects) through BOT and public-private-

partnership (PPP) contracts instead of direct borrowing to finance them.

18

• 6. The Central Bank to set limits on the credit concentration granted to the

government by banks and local financial institutions in order to put an end to the expansion of these banks in the ownership of government securities. This may lead to avoid the crowding out effect.

• 7. Adopting a medium-term public debt management strategy to diversify

sources of funding available to balance internal and external borrowing, publish government bond issuance plan, and future financing needs.

• 8. The government should consider the possibility of exchanging part of the

foreign loans with local investments, which would reduce the external debt balance, reduce its service, and contribute to the deterioration of the balance of payments deficit. It also increases the foreign investment balance in Jordan.

• 9. Unifying the entire responsibility of managing the public debt, whether

external or internal, in all its stages, to one entity, issuing regulations and instructions regulating its work, defining its functions and competences, and providing them with the necessary cadres, in order to ensure the effective management of the internal and external public debt.

END

=Thanks for Listening=

• Dr. Bil

ilal al J J Okash sheh eh