Bad for some, but good for others: Are lower interest rates the remedy for Jordan's economy?
Many banks failed to anticipate that Jordan's Ministry of Finance would shift its borrowing targets from local banks in dinars to foreign sources in dollars (File Archive)
There is no doubt that interest rates on the Jordanian dinar will go down rapidly, not only because the Central Bank brought down the scale of interest rates in its dealings with commercial banks, but also because the Ministry of Finance shifted its borrowing targets from local banks in dinars to foreign sources in dollars.
Pointing in this direction is the fierce competition among banks to take shares of the latest issue of Treasury bonds floated recently by the Central Bank on behalf of the Ministry of Finance at an interest rate as low as 4 per cent, while the rate reached 8 per cent a year ago.
Banks failed to anticipate the new behaviour of the Ministry of Finance.
The ministry started to repay its local bonds on maturities without having to issue new bonds at larger amounts as used to be the case.
The obvious result is the rising rate of liquidity in the banks.
Higher liquidity at banks reduces their appetite to attract more deposits, which in turn leads to lower interest rates offered by banks to potential depositors.
Depositors are therefore advised to lock in their time deposits for a longer period, to benefit from the current relatively high interest rates before they go down, as expected.
On the other hand, banks will become more willing to lend more money to more customers in order to invest their surplus cash. Obviously this state of affairs will result in lowering interest rates for prime borrowers as a benchmark for interest rates on credit facilities.
A lower interest rate on the dinar has a negative impact on depositors and a positive impact on borrowers.
The Treasury will also benefit from the lower cost of debt service.
As far as the country’s overall national economy is concerned, a lower interest rate may motivate investors, and encourage economic growth and business expansion.
The deep economic recession in America and the European Union over the past five years was rightly treated by lowering the interest rate on the dollar and the euro to close to zero by injecting liquidity into the market on large scale. The result was that the country avoided an economic depression.
I am not a borrower, I am a depositor in banks, so I expect to be hurt by a lower interest rate on the dinar, but the step will be welcome if it means energising the Amman Stock Exchange, raising share prices and improving the economic growth rate this year, with all the positive consequences, such as more jobs and reduced rate of unemployment, and perhaps of poverty as well.
What encourages a declining rate of interest is the fact that the inflation rate is declining. It may not be much higher than 3 per cent in 2014, which is the ideal rate for inflation, and interest rate and inflation rate usually go hand in hand.
By Fahed Fanek
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