Jordan is not experiencing an economic boom that leads to an extraordinarily higher demand. On the other hand, the rate of unemployment is very high by all measures. These two facts should produce a lower rate of inflation not a higher one.
Jordan is wide open to the world market. Jordan’s imports of commodities amount to two thirds of the gross domestic product. They make more than 50 per cent of the private consumption.
Since prices at origin are depressed, imports should reduce the inflation rate in Jordan, or at least keep it at bay.
At one time Jordan used to get inflation boost from imports, now Jordan is importing price stability. Imports of foreign goods should cause inflation to be moderate.
True, there are some reasons that cause prices to rise, such as the hike in the prices of fuel and electricity, but those two items are not by themselves able to justify the prevailing high level of inflation.
It is surprising to find that inflation was at its lowest rate in regard to food items and at its highest in regard to household expenditures, such as rent, electricity, water, fuel, etc.
In the past, it was customary to find prices of food items ahead of the prices of other categories of consumption.
Aside from the above-mentioned factors that should have suppressed consumer prices, one should look for other reasons behind high inflation, especially the general indicators of the aggregate economy, to find out that the culprit could be the expansionist fiscal policy.
According to the draft budget for 2014, the government will collect from the people some JD5.8 billion in fees and taxes. It will spend JD8.1 billion and cover the gap with foreign grants and loans.
In other words, the government is pumping into the market an amount of cash exceeding JD2 billion a year. This practice raises the amount of money that is not accompanied by production increased at the same rate.
On the other hand, one can point a finger at the fast-rising money supply, encouraged by the Central Bank.
Statistics show that the amount of total current accounts at commercial banks rose by 11.3 per cent in the last 12 months, and paper money in circulation rose by 10.1 per cent.
Thus, liquidity is growing faster than the real economy, a state of affairs that creates a distortion in the relation between money, representing demand, and products, representing supply.
In other words, consumers have more dinars in their hands chasing the same amounts of goods and services, a prescription for inflation.
Statistics by the Social Security Corporation showed that the index of salaries and wages was rising at 6 per cent a year. Higher wages are not met with higher volumes of produced goods and services. In that case, higher prices would come in to restore balance between supply and demand. This is how the relation between salaries and prices is built.
In this respect, one cannot ignore other factors, such as the inefficiency of a small market and the weakness of competition due to monopoly and semi-monopoly in certain fields of imports, production and marketing.
By Fahed Fanek