AMMAN — The
weighted average interest rate on credit facilities issued by licensed banks in
the form of loans has been declining overall in the past 22 years, from 12.18
percent in January 2000 to 7.77 percent in September 2022, according to the
Central Bank of Jordan’s (CBJ) statistics made available to
Jordan News.اضافة اعلان
The decline has been
steady over two decades, due to various economic hurdles and the stock market
crash of 2008.
Traditionally,
when dealing with economic challenges, such as those facing Jordan in the wake
of the COVID-19 pandemic, central banks resort to expansionary monetary policy
to stimulate the economy.
Such policies
increase money supply, lower interest rates, and increase demand by lowering
the value of the currency and thereby decreasing the exchange rate, encouraging
foreign investment as well as borrowing and financing operations domestically.
Nonetheless, the
Central Bank of Jordan has not resorted to any such policies. In fact, despite
just recovering from the repercussions of the pandemic this year, interest
rates have been rising since the beginning of 2022, from 7.17 percent in
January to 7.77 percent by September 2022.
In statement
sent to
Jordan News, the CBJ said that the decision was taken to “preserve
fiscal stability” in Jordan and highlight the “attractiveness of liberated
assets in the local currency, consistent with the increasing interest rates
regionally and internationally”.
“What the
statement does not say is that the Jordanian dinar is pegged to the US dollar,”
economist Mazin Marji told
Jordan News, adding that the announced reasoning for
increasing the interest rate in Jordan is to protect the purchasing power and
exchange value of the Jordanian dinar, as well as hedge against dollarization.
“But the truth
is that the recent six interest rate hikes in Jordan were a result of the
increase in interest rates in the US,” he added.
The US
government seeks to protect the value of the dollar, both in terms of
purchasing power domestically and against foreign currencies, by combating the
rising inflation rates, which reached 9 percent in the US and more than 10
percent in the euro zone, according to Marji.
He added that
many factors drove inflation and interest rates up in the US, chief among them
is the $6.25 trillion that the government pumped into the economy to support
individuals and businesses during the pandemic, which increased the supply of
money in the economy, and the effect of the sanctions imposed on
Russia, which
made the cost of commodities worldwide sky rocket.
Marji noted that
when central banks raise interest rates, they do it to absorb the excess money
in the economy by encouraging deposits in the local currency with high pay back
rates, “to preserve the purchasing power of the currency, and to lower the
costs of imports, by increasing the exchange value of the local currency
against foreign currencies”.
In Jordan’s
case, however, increasing interest rates affects the economy at large in a
different way from the US economy, given the difference in the scale of the two
economies.
“Jordan’s
economy needs the perks that come from lower interest rates to encourage
investments and consumption, which fuel the economic engine and drive growth,”
Marji stressed.
He stressed that
raising interest rates raises the cost of borrowing and financing at all
levels, individual and corporate, which weighs down on the growth of the
economy across all sectors, and in turn contributes to recession.
On the other
hand, according to economic researcher and academic Mohammad Al-Hadab, lowering
the interest rates in Jordan “may have disastrous repercussions on the economy
and the people”.
“Not raising
interest rates could endanger the purchasing power of the Jordanian dinar,
drive inflation through the roof, and push people to deposit their money in
hard currencies instead of local currencies, which is called ‘dollarization’”,
he told
Jordan News.
He added that
the economic disadvantages of lowering interest rates in Jordan outweigh the
benefits.
“We do not want
to end up in a situation like Lebanon’s,” Hadab said.
“The government
is repeatedly finding itself stuck between a rock and a hard place: lowering
interest rates to encourage investment and consumption or increasing interest
rates to preserve the local currency’s exchange value and attractiveness,” he
said.
“Both options
carry huge costs, but the government has to take the decision that incurs the
lowest possible cost in the long run,” he said.
Read more Features
Jordan News
.jpg)
.jpg)
