Public debt is defined as the money borrowed by a government to finance its expenditures, and it has various implications for the national economy. When borrowed funds are directed toward financing infrastructure and productive projects, borrowing can stimulate economic growth and positively affect different aspects of life. On the other hand, when borrowed funds are used for non-productive purposes, their impact on the economy can be negative. The accumulation of debt leads to higher costs and interest on domestic and international borrowing and may reduce government spending on healthcare and education, thereby slowing economic growth and harming the economy.

 

Economic analysis generally measures the size of public debt by comparing it with Gross Domestic Product (GDP), which represents the total value of goods and services produced by a country. The debt level is considered moderate and safe as long as the debt-to-GDP ratio remains within internationally accepted limits. However, when it rises significantly above those levels, it becomes a substantial burden. Therefore, the real risk does not lie merely in the total amount of debt, but rather in its size relative to the economy.

 

Public debt has different effects, including positive effects such as supporting economic growth, enabling governments to build infrastructure projects, creating employment opportunities, and financing responses to crises to overcome periods of economic recession. However, excessive borrowing can have negative consequences. These include increasing borrowing costs and crowding out the private sector in commercial lending to individuals and businesses, which contributes to higher financing costs. It also increases the government’s debt-servicing burden. Public debt may also affect inflation and taxation negatively. Governments may resort to printing money or raising taxes to meet debt obligations, which can reduce citizens’ purchasing power. Another negative consequence is the potential loss of economic sovereignty. When countries borrow excessively, creditors, such as international financial institutions, may impose strict conditions whose consequences can be borne directly by citizens.

 

For these reasons, public debt becomes a concern when it exceeds safe limits. Interest payments may consume a large share of government resources that could otherwise be spent on public services. Excessive debt can also expose a country to financial crises and drain the state budget because of the interest payment. These financial pressures may ultimately affect citizens directly on raising taxes or interest rates. However, Public debt should not necessarily be considered alarming when it is used to finance productive projects that increase government or national income, when the debt-to-GDP ratio remains within safe limits, and when government revenues grow faster than debt obligations.

 

Economic growth is decisive factor in the public debt equation. It is considered a positive indicator when the economy grows at a rate higher than the interest rate on the debt. This contributes to the strength of the local currency and demonstrates the country’s ability to meet its financial obligations more easily.

 

Therefore, debt-to-GDP ratio is important because a country’s ability to repay its debts is assessed by comparing its total debt with the overall size of its economy. Developed economies may be able to sustain debt levels equivalent to 70 per cent to 80 per cent of GDP, while emerging markets countries generally prefer lower ratios.

 

Reliance on domestic debt, is generally less risky than external debt because it is not exposed to fluctuations in foreign currencies and does not impose foreign-currency pressures on the domestic economy.

 

In general, the cost of servicing public debt, including the amounts allocated to paying debt principal and interest, should remain manageable and ideally represent only a limited proportion of total public expenditure.

 

At the local level, Jordan’s public debt balance has risen to approximately JD49.508 billion, including an increase of JD1.831 billion since beginning of the year, representing approximately 108.8 per cent of GDP when Social Security Investment Fund holdings are included. The debt balance excluding approximately JD11.821 billion of Social Security money stands at around JD37.687 billion, according to recently published government report. The data indicated that the calculation of the public debt balance follows internationally adopted standards.

 

The report also indicated that public debt levels have maintained a considerable degree of stability over recent years despite the challenges and geopolitical circumstances affecting the region. International agencies have praised Jordan’s measures and its ability to meet financial obligations both domestically and internationally. Furthermore, the report clarified that the increase in public debt has resulted from the government’s reliance on borrowing instruments to meet its financial requirements, finance the budget deficit, cover losses incurred by certain public institutions such as the National Electric Power Company, and issuance of new bonds.

 

I believe Jordan needs a constructive economic recovery and reform plan aimed at reducing the public debt ratio to below 70 per cent of GDP. Such a plan should be aligned with the Economic Modernization Vision and should focus on creating economic opportunities that contribute to increasing income levels. Meanwhile, the government has announced that it is working to reduce the public debt ratio to 80 per cent of GDP by 2028. However, the mechanism of reduction has not been clearly explained, nor have sufficient justifications been provided regarding the proposed action plan for reaching the stated target.

 

Haider Majali is Finance and Investment Expert