Amman decides to go for easy economic fix

20 June 2011

Rate increase will support flagging currency, but more needs to be done for long-term economic growth

The Central Bank’s decision to increase interest rates by 25 basis points to 2.25 per cent on 1 June may have been needed to protect the Jordanian dinar, but it will do little to encourage domestic investment.

Without any oil reserves and few other natural resources, Jordan has depended greatly on large amounts of foreign direct investment (FDI) and tourism to cover its budget deficit.

The Arab uprisings have frightened foreign investors away from the region and created an atmosphere of uncertainty, which has resulted in a wait-and-see approach that is being adopted across all sectors and markets.

Increasing the interest rate will frustrate economic activity. Tourism, one of the largest sectors, contributing about 8 per cent of gross domestic product (GDP), declined by 5 per cent in the first five months of the year.

FDI has dropped by 34 per cent since the beginning of the year and by more than 60 per cent when compared with the same period in 2010. The government is under pressure to cut the deficit, which is expected to be at 8 per cent of GDP, up from 5 per cent in 2010. This has resulted in various austerity measures that have done little to appease a frustrated population, battling with rising inflation.

The markets have also been suffering due to an ongoing strike by employees of the capital markets institutions as a result of a 50 per cent pay cut.

The rise in Egyptian gas export prices will add to Jordan’s troubles. Gas prices have increased from $1.5 a million BTUs to $4 a million BTUs. The government will be under greater pressure to subsidise costs, while making cuts to the budget.

Long-term growth in Jordan is likely to suffer and the central bank and government will need to do more to stimulate economic activity.

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