Recently, there have been calls in the media by officials and some
columnists to celebrate the decline in the
inflation rate in Jordan. Yet, the
complexity of the issue is not being addressed in most of what is being
published.
اضافة اعلان
Jordan: A mixed
economy
Jordan
possesses a mixed economy, amalgamating various private freedoms,
centralized economic planning, and government regulation. It has recently been reclassified
as a low-middle-income country. Additionally, the economy is small and reliant
on foreign loans, international aid, and remittances from expatriate workers.
From one school of economic thought to another
One can
also assert that, over the years and depending on the prime minister in office,
the type of economic interventions and instruments offered by the
government swing from one school of economic thought to another.
One can also assert that, over the years and depending on the prime minister in office, the type of economic interventions and instruments offered by the government swing from one school of economic thought to another.
Furthermore, the economy is viewed as an open
economy with a small production base.
Consecutive governments, without
providing substantial support to businesses and the manufacturing sector in
particular, have hastily entered into numerous trade-liberalizing agreements.
This has been done at a pace surpassing that of many other countries.
Measured by consumer prices
In
economics, inflation is defined as a rise in the general price level of goods
and services in an economy, which constitutes a crucial aspect of
macroeconomic governance in any economy. The inflation rate in Jordan, as measured by
consumer prices from 1970 to 2022, has ranged between -0.9 percent and 25.7
percent, with an average annual inflation rate of 5.8 percent. In 2022, the
inflation rate was 4.2 percent.
Interestingly,
when inflation is high, the Jordanian Dinar purchases fewer goods and services,
thereby diminishing the purchasing power of money. Conversely, when prices fall
(referred to as deflation), consumers may choose to wait and spend less in
anticipation of further price reductions. This phenomenon can be observed in
Jordan regarding
real estate purchases. Even as real estate prices have
declined, people seem to delay purchasing real estate in anticipation of future
deflationary pressures.
Inflation
is brought about by three types of variables, which are not mutually exclusive
and may occur simultaneously. The first is demand-pull inflation, which arises
when buyers' aggregate demand exceeds the
productive capacity (aggregate
supply) of a nation. This type of inflation can be caused by
easy money and low-cost liquidity, often due to low-interest rates. The second type is
cost-push inflation, which pertains to increases in the prices of inputs such
as wages or commodities necessary for production, like energy and equipment.
A third type of inflation: Expectations
The third
type is inflation expectations, wherein people's anticipation of higher or
lower future prices results in present price increases.
In Jordan,
one can readily argue that the economy's openness and the limited scope of its
industrial base have significantly impacted inflation. Jordan imports 87
percent of its caloric intake and 93 percent of its fuel demand. Historical
data spanning 1970 to 2022 demonstrates a strong positive correlation (91
percent) between inflation in Jordan and global inflation; that is,
prices in Jordan move in conjunction with world prices 91 percent of the time. Similarly,
prices align with those in the EU and the US at rates of 65 percent and 64
percent, respectively.
The third type is inflation expectations, wherein people's anticipation of higher or lower future prices results in present price increases.
It is
important to note that economists prefer a low (though not zero or negative)
and steady inflation rate, particularly since it affects salaried employees by
eroding the purchasing power of their fixed incomes. This, in turn, could
expedite the onset of a recession as aggregate demand dwindles. However, Jordan
presents an interesting case once again.
Allowing wages to easily adjust to inflation
A
substantial portion of wages in Jordan are non-contractual (informal), allowing
wages to easily adjust to inflation. According to the
International Monetary Fund (IMF), the informal economy in Jordan accounts for 26 percent of the
economy's size. In terms of employment, 46.1 percent of workers hold informal
jobs.
Consequently,
only 54 percent of workers (those formally employed) are directly and adversely
impacted by inflation, experiencing wage stickiness.
The remainder
may require immediate adjustments based on their employment type.
Unfortunately, the
Employment Cost Index (ECI), a quarterly economic series
delineating labor cost changes for businesses, is not measured in Jordan.
Otherwise, it would provide an estimate of the impact of inflation on labor
costs.
A surge in capital costs
Despite
all of the aforementioned points, one certainty remains: with over 90 percent
of formal credit acquired from banks, elevating borrowing costs raises
production expenses due to the surge in capital costs. This, in turn, affects
consumption, especially for significant purchases. In other words, both
Jordan's aggregate demand and supply will decrease at a time when the country
is grappling with a prolonged recession and one of the
world's highest unemployment rates.
So, before
one begins to celebrate the declining inflation rate, conducting thorough
research by trained economists is advisable. After all,
Jordan exports talent,
and its economists make positive contributions to institutions worldwide.
Yusuf Mansur is CEO of the Envision Consulting Group and former minister of state for economic affairs.
Read more Opinion and Analysis
Jordan News
.jpg)
.jpg)
