November 30 2022 12:46 AM E-paper Subscribe Sign in My Account Sign out

Rise in interest rates complicates efforts to overcome economic challenges

Inflation
(File photo: Jordan News)
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.


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