AMMAN — A 50 basis points rise in interest rates will negatively affect Jordan’s
economic growth, decreasing investments and hampering job creation, pundits
contend.
اضافة اعلان
On May 8, Jordanian commercial banks raised their
interest rates, following the footsteps of the
Central Bank of Jordan (CBJ),
which hiked the interest rates by 50 basis points on all monetary policy tools,
from loans and facilities provided to individuals and institutions.
The loans had varying rates, ranging between 5 and
10 percent, depending on the value, its term, and the details of the contract
between the bank and the customer, according to media reports.
CBJ increased interest rates on the Jordanian dinar
after the US Federal Reserve raised interest rates on the US dollar. The
Jordanian dinar has been pegged to the dollar since 1995.
Earlier this year, CBJ raised the interest rate by
0.25 percent after a similar decision by the US.
The CBJ said in a statement that its decision was in
line with its objective of “maintaining monetary and financial stability in the
Kingdom”. Another motive was to contain an expected domestic inflationary
pressure stemming from a continued rise in global inflation rates, in regional
and international financial markets.
But former
Minister for State of Economic Affairs
Yusuf Mansur told
Jordan News that the increase will potentially weaken
projected economic growth, as higher interest rates dampen consumption, or
demand, and production, or supply.
Public enthusiasm for products with a high
price-to-income ratio will fade as commodities become more expensive with the
rise of interest rates.
...Most banks do not borrow from the Central Bank and, therefore, have no reason to raise the interest rate on loans and deposits since they are using existing bank deposits.
“Producers and investors would shy away from
expansion or new investments as the cost of borrowing rises,” Mansur said.
“That would
weaken
economic growth and retard economic recovery. Furthermore, people would
worry about borrowing for fear that the Central Bank will authorize three more
hikes in interest rates in tandem with the announced future actions of the
Federal Reserve in the US.”
Mansur
emphasized that most banks do not borrow from the Central Bank and, therefore,
have no reason to raise the interest rate on loans and deposits since they are
using existing bank deposits.
The interest rate increases would lead to increased
profitability for banks, while the economy remains stagnant, Mansur pointed
out.
Tariq Al-Hijazi, director-general of the
Jordanian Businessmen Association said that interest rates are the “number one enemy” for
investors and business people.
The increase is also expected to negatively affect
investments in general, since people are more attracted to parking their money
in the banks to profit from high-interest rates on deposits, instead of
starting a new investment.
“Interest rates are connected to a big economic
wheel; increasing the interest rate will suck the cash from the market,
investments will decline, and so will investment expansion,” Hijazi said in an
interview.
Economic adviser and former president of the Banks
Association
Adli Kandah warned of negative repercussions on the economy and
people. But he explained that central banks worldwide increased interest rates
to fight inflation, like in the US, although their economic performance was
good.
But, he added, Jordan’s economic growth was already
weak, and as a result, commercial banks should have kept interest rates as they
were.
Kandah explained that CBJ was forced to increase the
interest rate because the dinar is pegged to the dollar. Since the US Federal
Reserve raised interest rates, CBJ had to do the same to maintain exchange
compatibility, preserve the value of the dinar, and protect foreign currency
reserves. With that, people would not take their deposits abroad, he added.
“This will harm both old and new borrowers, besides
impacting potential new investors,” Kandah said.
Former president of the
Jordan Investors Association
Bassam Hamad said the increased interest rates will hurt both industry and
commerce, decrease profit margins and reduce market competition.
“Interest
rates on loans are very high in Jordan, especially for merchants and investors,
so any increase, even if it was minor, will have a major impact,” Hamad said.
Those feeling the pain are clients who took personal
loans, to pay for a car, an apartment, a wedding, school university tution or
others, against fixed salaries. Ramzi Al-Karmi, a borrower, told
Jordan News that he did not expect the interest rate on his personal loan to be hiked twice
in few months.
“I had a certain monthly budget, and I do not understand why
this increase happened; my bank did not even inform me that it will happen, I
just noticed that they were deducting more money from my account,” Karmi said.
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