In an interview with Al-Ghad Newspaper, the businessman and the economist emphasizes the necessity to handle government expenditures with the assistance of the private sector
Abu-Ghazaleh: It’s No Use Carrying an Umbrella, if Your Shoes Are Leaking
And talking about Jordan not being affected by the global crisis will not be helpful to us
By: Mohammad Al-Rawashdeh and Yousuf Damra
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Amman- The businessman and economist, Talal Abu-Ghazaleh, says that the global economic crisis will adversely affect the economies of all countries without any exception. This requires preventive and swift actions to alleviate the crisis’ impact and get out of it with the least damage.
Abu-Ghazaleh, who chairs an international organization working through 71 offices in the Middle East, South Africa, Turkey, India, Russia, Cyprus, Pakistan and China, calls the Jordanian government to resort to the protectionist procedures in order to reduce the negative effects of the financial crisis.
In this respect, Abu-Ghazaleh says that he does not encourage the protectionist procedures, “but my partners (Jordan’s partners) in the world do, and I cannot just watch and do nothing, Jordan must stop setting the tone for economic liberation, it should adopt the protectionist procedures.”
“Saying that we were not affected by the crisis will not be beneficial to us, because the world is entering a stage of recession and not retraction (depression), i.e. the goods will be accumulated and sold at loss and employees will be laid off. We should protect ourselves from that, and there is no reason not to take protectionist procedures to uphold any economic sector from collapse,” he added.
Mr. Abu Ghazaleh predicted that the oil price will increase to $100 per barrel by the end of the year, pointing out that oil companies and the US administration will not allow the continuous decrease in oil prices. He also called the government to make the necessary arrangements to encounter the increase in oil prices and their impact on the national economy.
Abu-Ghazaleh considered “aggravated budget deficit” as one of the problems that will appear in Jordan due to the global financial crisis, which requires borrowing. However, borrowing is not advisable because it adds extra burden to the economy. The referral to the idea of increasing taxes is not easy under the present circumstances which witness stagnation.
Therefore, he suggests “addressing the government expenditures” which he described as catastrophic, especially that it amounts to %55 of the gross domestic product. He indicated that this will be done through “seeking the assistance of the private sector to operate many projects on behalf of the government, which shall receive income tax instead of profits".
On the other hand, Abu-Ghazaleh- who filed lawsuits against expropriation of his property by the Greater Amman Municipality for the benefit of AL-Abdali project- denies that his defense of this property is of a personal character. Rather, it is a defense of the “ruling of law, as all people whom lands were unjustly expropriated kept silent, but Talal Abu-Ghazaleh does not accept injustice.”
He also believes that “Talal Abu-Ghazaleh Organization’s “position as a major and international institution and being the only institution which attended the G20 meeting of major accounting companies around the world and the only institution from outside the western countries, does not allow us to be personalized.”
Following are the details of the interview:
* How do you see the impact of the global financial crisis on Jordan? And what are the direct impacts?
- Talking about this serious and important issue makes anyone confused. Before we discuss it, we should answer this question: do we have to talk about it frankly and make people worry or do we have to wait? Because talking frankly may lead to negative reactions and may raise panic, anxiety and confusion. However, I will take a balanced point of view. Based on my observation, I believe that there is no adequate comprehension of this problem and its effects and there is always a trend to lessen its effects. In practice, all consequences of the global financial crisis that have appeared so far relate to the virtual market (the financial market), which are not included in the gross domestic product. Therefore, the basic economy has not been affected at the national and international levels yet, but our problem is far less than others.
In the global financial crisis, our role is still insignificant, because we do not have an international financial market like Dubai which was the most affected market.
The talks going on about rescue plans in the foreign markets are an attempt to absorb the overwhelming impacts which aim at supporting financial markets. However, these markets did not tackle the basic economic problem which hit them before and which relates to the producing companies, for example General Motors…etc.
We are in a critical stage in Jordan because our economy is small and depends on the foreign countries in many aspects as per the agreements concluded with the United States. One of the problems that will arise is the aggravated budget deficit, of which financing requires borrowing. However, the situation will be more difficult as time passes to find the needed financing, because the market now is not suitable for borrowing. It is known that borrowing adds an extra burden on the economy, and the referral to increasing taxes is not easy under the current circumstances witnessing stagnation.
I believe that the ideal solution is to address the catastrophic government expenditures particularly that they account for % 55 of the gross domestic product. These expenditures should be tackled through the private sector by operating many projects on behalf of the government, which shall receive income taxes instead of profits.
* In March 2008, the Jordanian government signed an agreement to buy back part of its debts to Paris Club. At that time, the circumstances were exceptional when the currency prices were high while the value of the dollar was falling, so do you support that deal?
- I should not express my opinion on this issue because I am not aware of all details. However, all countries borrow even the USA, which half of its national income comes from borrowing. Nevertheless, borrowing is not a sound economic policy as it is the reason for the current financial crisis or one of its important causes.
* You mentioned in your previous answer, the impact of the global financial crisis on the public financial sector, but there are other effects on citizens which they currently realize, would you talk about it?
- There is an argument in Jordan about whether we are in slowdown or recession and whether we will reach a negative growth after which the economy will begin to decline? We witness a shrinking growth and we will reach the recession phase as it is the case globally at 3%.
From my point of view, the international economy will witness a decline of 5 % by the end of this year. This percentage will be accompanied with suspended production capacity, increased unemployment rates and other negative impacts, i.e. the international economy will shrink and goods will remain unsold. Therefore, the productive economy will be directly affected by the problem, leading to decline in sales, importation and services. These are the matters we locally share with the world, even if we wait for thousand years and thought that Jordan will not witness recession, this shall be wrong.
* You mentioned the recession and shrinking of international economies, but there are many reports confirming the imminent end of the global financial crisis, especially that there are some promising signs?
-This is a part of the American media policy to cover the actual extent of the upcoming disaster, which is incorrect. We are talking about a financial crisis which will last for ten years, and the idea that there are only six months left for the crisis to end is not accurate, because the crisis has just started in the last quarter of the last year and will continue.
When considering some details and reading figures, we notice that banks’ capitals in the American economy amount to 1.3 trillion dollar, while the amount of their losses will reach 3.1 trillion dollar. Therefore, these banks are technically considered bankrupt. We, as an organization, work on drafting tests and exams to discover the institutions’ ability to survive.
All the US banks are bankrupt, that is why I laughed when I was watching the news reporting that the American banks will return the money paid thereto by the US government. By announcing that, these banks seek to evade the tests conducted by the US government to measure their ability to survive, but the fact is that all banks need to pump more money. Frankly speaking, the administration of President Barak Obama has inherited a huge problem, and all he has to do is to ease the effects of this catastrophe.
* In the crisis of 1929, it took the US economy a long time for recovery. So, do you think that Obama’s administration is historically similar to the administration of Franklin Roosevelt, who was elected after Herbart Hoover in 1933 under the circumstances of widespread recession and was able to solve the crisis, or will Obama fail?
- I have to indicate here that those who expect that the reduction of oil prices will continue are wrong. I expect that the oil price per barrel will reach 100 dollar prior to the end of this year. Otherwise, oil companies will go bankrupt. All what these companies did when the global financial crisis erupted is reducing prices. As for talking about supply and demand as a mechanism in markets and a determinant of oil prices, it is not true. In a simple example, the reduction in oil prices per barrel from $100 to $50 did not result in stopping two cars out of three, and the same applies to aircrafts and vessels. In fact, the oil market is monopolized and is not governed by supply and demand mechanisms. Neither oil companies nor the US government has any interests in the reduction of oil prices, noting that the US government revenues decreased due to loss in tax returns realized from high prices. I expect that the prices will rise up again to $100 per barrel prior to the end of this year.
* Some people say that capitalism will, or about to, end? To what extent we can trust such statement?
- Capitalism did not and will not end, and there is no alternative for it. The US economy problem lies in the absence of control, and if they had followed the policy applicable in the national economy, this crisis would not have happened. Jordan’s economy is capitalistic, but there are control laws and systems which can request bank budgets in the Kingdom. However, this is not allowed in the US, where US banks have lent 100 times their capitals and this is one of the reasons that gave these banks more competitiveness. Therefore, I say that this crisis is unprecedented, even the crisis of the year 1929 was not similar. The world economy needs 10 years to recover from the global financial crisis, because rearranging issues needs a long time.
Here we should talk about some efforts exerted by the international organizations to help solving the problem such as the International Monetary Fund and the World Bank. What will actually happen to solve the crisis during the next years is to remedy the current economic system and transform it from a free liberal economy into a controlled capitalistic one, where the government bodies are capable of controlling the financial sector and obliging it to comply with relevant standards. All these aspects must be discussed, but bank administrations and whoever has an interest in keeping the status as is will not allow this to happen. Obama’s administration will face conflict with these banks and their forces and I am worried about Obama from them, because in the US history there were three US presidents who had failed because of banks, particularly that they are dominated by Zionist investors.
I hope that Obama will win, and if that happened, legislative actions, US Congress voting and other procedures will take years to be completed and issued.
By the way, I have attended the Accountants Summit in the G20 meeting, where we found that half of the decisions taken were related to accounting and its method of functioning, particularly values calculation. I was also a member of the International Accounting Standards Board. From my experience in such Board, I can say that drafting one standard needs three years because the relevant procedures are lengthy and need international discussions.
* Do you expect the collapse of more US banks, especially leading banks such as City Group or Bank of America, as a consequence of the crisis, as happened with Lehman Brothers?
- There are two issues, whether to control banks or get into a conflict. In this case, the republicans will take advantage of this and will take banks side. Therefore, a political crisis will occur in the US.
The rescue plans that were developed are like a woman suffering cancer disease who wears makeup to cover the symptoms. This is what really happens now. Therefore, banks need restructuring, i.e. to increase their capital, rectify their status and amortize their losses, noting that these banks are aware that they need an additional capital. The biggest problem faced by the global financial sector is the financial derivatives that these banks deal with. The real global economy accounts for 60 trillion dollar, while the virtual one accounts for 120 trillion dollar. This situation needs rectification and re-calculation of losses instead of fraud, because what happened is the biggest scam in the history.
* Let us go back to the economic systems. Some people called for going back to socialism and others highlighted the importance of the Islamic economic system, what do you think?
- The socialistic system has vanished, and those who promote for these sayings do not want to accept the change. The state’s ownership of everything and giving people money according to the socialistic system is out of date and impossible. The Islamic system is the acceptable system which prevents all the elements that led to the crisis, particularly the interest which was the engine for such institutions. However, the Islamic system is not perfect but it is one of the good trading methods with a volume of 60 billion dollar.
* What is required on the local level to deal with the crisis with a view to alleviating its impacts on the national economy?
- At the beginning of the crisis, some people were happy because we in Jordan were the least affected. But in the crisis of the real economy which impacted all economies, there are other considerations. I would like to attract the attention to all recommendations that countries all over the world call for and at the same time do the opposite. All the conferences of the G20 meeting and the European Union confirm that they will not resort to protectionism, but every country practices it. Here we should point out that when Obama announced a plan to spend 800 billion dollar on infrastructure projects, he made clear that these projects will not be operated by non US companies. This is protectionism in itself and the world is going back to it.
Personally, I do not call for protectionism, but my partners in the world do and I cannot just watch and do nothing. Jordan must stop playing on the tone of economic liberation and should take protectionism procedures. This can be achieved through the executive authority which shall take this project to all productive sectors and ask them how can we protect you? And come up with recommendations from one sector to a broader one to be able to say that we protect our economy. I recall here the saying of “Warren Buffett”- the richest person in the world- “It’s no use carrying an umbrella, if your shoes are leaking.” and we will not benefit from denying that we have been affected by the crisis. The world is entering a stage of recession and not shrinking, i.e. the goods will be accumulated and sold at loss and employees will be laid off. We must protect ourselves from that, and there is no reason not to take protectionism procedures to protect any economic sector from collapse.
Although I hear such statements from the World Bank in every international conference I attend, i.e. anti-protectionism, but this is still a statement. They cannot conclude any effective agreements in their meetings and there is no single plan in any group in the world including the countries of the European Union. Experts must gather and agree on these procedures and on supporting the economic sectors. Lebanon now has the strongest financial position in the region because it followed protectionism procedures. On the local level, furniture manufacturing is one of the sectors that should be supported in order not to face a fierce competition. Since Al-Doha Summit, the World Trade Organization has collapsed and it is now in a clinical death, but no one wants to end it.
* Can’t Arabs find a solution to face the consequences of the crisis?
- I am a national Arab and being Jordanian is part of my nationality, but the European Union does not act or plan all together. Talking about an Arab solution is good, but the reality forces each country to take its own protectionism procedures. Let us start from the bottom, and not to give solutions from the top.
* You mentioned that Lebanon reaps benefits from protectionism and the laws it applied, how is that?
- Lebanon is hosting deposits from Switzerland because it is a guaranteed system and is stronger than ever.
* Why Jordan did not attract such deposits?
- This question should be addressed to the Jordanian banking system. Maybe Lebanon has its own difficult circumstances that made it adopt a strict system.
* As you know, a standard draft of the income tax law has been introduced? What do you think about it?
- This draft law should be discussed with the concerned sectors. Also a real research and a detailed study should be conducted to examine its effects on the economic activity. For example, when taking fees from the occupant, its effects on the property against giving 30 dinars to the treasury should be known. However, I am not with any increase or decrease in tax before knowing its effects on each sector, because I am worried about the economy and I want the less impact taxes. Therefore, we should not think that nothing happened and that we do not have hand in this crisis. We are part of the world, and we will be victims of the crisis at different levels. In Jordan, we are victims of a medium level as our dependence on the western world is limited.
* We would like to ask you about the latest developments regarding the conflict between your organization and the Greater Amman Municipality about the expropriation of lands and buildings located within Al-Abdali development project?
- The case has not finished yet. The project will be completed but the issue will not, because the project constitutes a burden on the state and on the economy, as it involves social and traffic problems and other aspects. You have seen that they started with constructing this road (Al-Shmeisani subway) which caused a traffic jam. The problem will aggravate when the actual implementation of the project starts. We filed a lawsuit with the Higher Court of Justice to prevent the Municipality from taking over 500 meters owned by us which was forgotten in the previous expropriation decision. They literally said that their problem is how to expropriate the 500 meters. They will cost the country and the Amman Municipality additional roads and subways network just to take the 500 meters which the Municipality forgot in the first expropriation decision. It should be noted that this expansion ends with 20 to 2 meters road. The question here is what do we benefit from a road that will bring us back to the bottle-neck? The street will begin from my land with a 20 meters width and ends at 2 meters angle, so what is the advantage? Now we have filed two lawsuits, one to claim damages and the other is a penal lawsuit against the Mayor of Amman Municipality.
* Some people feel that the case has become personal?
- How could it be personal? I must say that one should stand to defend the rule of the law. All people whose lands were unlawfully expropriated kept silent and did not take any action, but Talal Abu-Ghazaleh does not accept injustice. You cannot take over a land to sell it and say it is an expropriation for public interest. It is impermissible. That is the only reason.
We are a major and international institution, and we are the only institution which attended the G20 meeting among other major accounting companies around the world and the only institution from outside the Western countries. Thus, our position does not allow us to be personal. But the case is that the Municipality has expropriated these lands to sell them to Al-Abdali Project and I have evidence from the Department of Lands & Survey which said that it has certified documents for lands sold to Al-Abdali Project after being expropriated. In addition, after taking over the land and selling it, the Al-Abdali Project mortgaged the land to the bank and took loans to pay for it. All these facts are documented in title deeds including the date of expropriation, the date of selling lands to Al-Abdali Project and the date of land mortgage to the bank. The Al-Abdali project did not pay for the land expropriation, it mortgaged the land and took mortgage money and paid them to the owner, and this is unacceptable. Now I am asking, who pays the costs for the bridges and subways that are being constructed around the project, the Municipality or Al- Abdali project? Will the Al-Abdali Project compensate the Municipality for the construction costs of such bridges and subways?
* What are the losses that you incurred due to the expropriation decision?
- Thank God that I am the one who incurred the losses and not other people who cannot deal with the repercussions of the decision. The expropriation decision made me distracted in four locations, which forced me to pay for services of four locations rather than one.