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July 2 2022 2:21 AM ˚
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Inflation – should one worry?

Yusuf Mansur
Yusuf Mansur is CEO of the Envision Consulting Group and former minister of state for economic affairs.(Photo: Jordan News)
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At the beginning of the COVID-19 pandemic, policy makers worldwide acted aggressively to sustain their economies. The global operating view was to sustain the economy and jobs at all cost. One of these costs has been inflation as fiscal and monetary stimulus policies were deployed with haste. Now that inflation has come into play in the world economy, one should wonder about the impact on Jordan.اضافة اعلان

The eurozone consumer prices had risen by 5 percent by December 2021, and the US inflation rate hit 7.5 percent. The expansionary economic (fiscal and monetary) policies were behind most of the rise in prices (the US, for example, pumped $2.5 trillion in 18 months into the economy), but other factors also played into this. These include: supply chains disruptions due to shipping and/or unobtainability of components, refusal to work (unemployment in the US is at 3.6 percent and 2.5 million workers left the job market not wanting to return), and jump in demand for travel (increased by 25 percent in 2021 but subsided later on). Many sources claim that inflation could last for years, not months as originally predicted, as adjustments require more time than initially forecast.

Jordan also partook in activities to downgrade the impact of the pandemic. The main arrangements in Jordan were undertaken by the Social Security Corporation and the Central Bank of Jordan (CBJ). Still, the economy was plagued by higher unemployment rates in 2020 and 2021 than it was in the past 30 years. Meanwhile, the consumer price index in Jordan rose modestly, by 0.4 percent in 2020 and 1.5 percent in 2021.

What would cause inflation in Jordan? Obviously, the cause of inflation in Jordan is not the same as in the US and other countries. Jordan suffered from closures, curfews, furloughs, monopolistic practices, disrupted domestic supply chains, hoarding, and the fact that it is a net importer economy. The latter is extremely important: in the first 11 months of 2021, national exports reached JD5,447 million, while imports reached JD13,821 million; thus, the trade deficit was JD8,374 million. Actually, 87 percent of the average caloric intake and 90 percent of energy consumed in Jordan are imported.

According to a study done by the CBJ in 2004, 60 percent of the inflation in Jordan is imported. Therefore, it is most likely that the global inflationary pressures will be felt in Jordan while painfully high unemployment rates persist during this year.
The government in Jordan should lower the interest rate to encourage investment, production and consumption at lower costs as the cost of borrowing decreases.

The good news is that the government budget for 2022 depends, among other things, on an assumption that the inflation rate in 2022 will be 2.5 percent. This will be achieved and may be exceeded. However, the bad news is that inflation comes with high unemployment. Obviously, consumers will be hard hit, and so will producers, and the government will have to worry about this double vortex.

So, what can the government do? First, it must expand the money supply by lowering the interest rates. Yes, this should hold true even if the US Federal Reserve attempts to curb inflation by increasing the interest rate in the US.

The government in Jordan should lower the interest rate to encourage investment, production and consumption at lower costs as the cost of borrowing decreases. The cost of energy must decrease further to help businesses become more competitive and help the manufacturing industry and other productive venues return to some form of profitability. Mishaps in local supply chains should be addressed and weak links should be strengthened or removed. Monopolistic practices, which have been drivers of inefficiency in production and consumption, must be curtailed to encourage also greater employment. In fact, there is a host of policy measures to be taken, not to lower inflation (because small developing countries cannot – as the Noble laureate Joseph Stiglitz asserted on many occasions) but to increase employment and, thus, citizen welfare.

Time to act is now.


The writer is CEO of the Envision Consulting Group and former minister of state for economic affairs.


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