Central Bank attempts to protect currency

20 June 2011

Increase in interest rate to encourage market stability

Jordan’s Central Bank has made a series of changes to protect its currency and economy in light of the recent economic slowdown.

Following a 34 per cent drop in foreign direct investment (FDI), an 8 per cent decrease in foreign reserves, a 5 per cent drop in tourism and a 0.7 per cent drop in workers’ remittances, the Central Bank decided to increase the policy interest rate by 25 basis points to 2.25, which came into effect on 1 June.

The decision is intended to increase the attractiveness of the Jordanian Dinar (JD) and deal with rising inflation, which currently stands at 6.1 per cent.

“We studied the market to see how to stimulate the economy, while taking into consideration that this is not our main priority. Our main concern is ensuring monetary stability and the transferability of the JD,” says Kholoud Saqqaf, deputy governor of the Central Bank of Jordan. 

The move is expected to preserve the national savings and promote domestic and foreign investments.

“I’m not aware of any pressure on the currency that would have required the hike. It is too early to see the impact as interest rate moves in general take a long time to feed through, but with the decline in real economic indicators, an interest rate hike from that perspective won’t help,” says Liz Martins, an economist at HSBC Bank Middle East.

The main incentive is to contain inflationary pressures in times of political risk and change. Inflation has increased by 1 per cent since 2010 due to higher prices for food and oil. The country imports 87 per cent of food consumption and 96 per cent of fuel from abroad.

“The main challenge for the economy is inflation. The current account deficit and imports are going up, while exports are not growing at the same pace,” says Saqqaf.

Although the protests in Jordan have been relatively subdued, with the government and monarchy responding to demands, the country’s economy is still suffering.

 The growth rate has been revised from 4 per cent at the end of 2010 to 3.3 per cent. The government is also trying to cope with the deficit, which is expected to be 8 per cent of gross domestic product (GDP).

 “In 2010, we witnessed a tightness of credit and things started to pick up. We saw growth in remittances, FDI, tourism and the fourth quarter was very good with 3.1 per cent growth. Unfortunately, with the unrest in the region and the downgrading of the Jordanian economy by Moody’s, things started to move in an unexpected way,” says Saqqaf.

The Central Bank has employed conservative and prudent policies, which helped see it through the global financial crisis without too much damage.

It reduced the policy interest rate five times from 2009 until February 2010, along with the reserve requirement, which was reduced from 10 per cent to 7 per cent in a bid to inject more liquidity to the market.

 For now, the Central Bank has outlined a new plan that focuses on small-to-medium sized enterprises (SME), which make up 95 per cent of the economy, exports and the industrial sector. It has provided incentives for the banks to begin lending to these sectors to stimulate growth.

Jordan is hoping that its acceptance into the GCC will help bring back some stability to its markets, but as yet the process or the type of engagement is unclear.

 “We are still at the beginning of the process and it will take a long time. Being part of the union would be excellent for Jordan. We’re not new to them and they are used to our economy,” says Saqqaf.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications