The new governor of the Central Bank of Jordan (CBJ) said on Tuesday, February 13, a record level of foreign reserves was underpinning a softer monetary policy aimed at prodding private banks to cut lending rates and boost growth. CBJ this month cut its benchmark discount rate by half a percentage point to six percent in the third drop since January 2000 when it was eight percent.
“The drop in the interest rate structure was prompted by a number of considerations, primarily the strength of the monetary situation as reflected by low inflation, sufficient foreign currency reserves and stability of the exchange rate,” Umayya Toukan told Reuters in his first media interview as head of the CBJ, a post he assumed at the start of the year.
Bankers and officials say a steady buildup in net foreign currency reserves, now at a record $2.9 billion, has enabled the CBJ over the last two years to gradually cut high interest rates which businesses blame for deepening corporate recession.
The repurchase rates on certificates of deposit (CD), a key interest rate indicator, were cut to seven percent from 7.50 percent, an over two percentage point drop in nearly a year. The relaxation of monetary policy, whose main plank is the defence of the dinar, was now possible despite a climate of political uncertainty with tension in Middle East peacemaking.
Toukan said the CBJ was enjoying unprecedented flexibility to fine-tune an interest rate policy geared to encourage growth, critical to raise living standards of low income Jordanians, a majority of the country's five million people. “The buildup in foreign reserves gives you flexibility to decide on your monetary policy. We need to have faster growth in the economy and we are seeing some signs of that,” Toukan added.
Accelerated privatization and further liberalizing of the economy in 2001 should ease the impact of a major setback to Middle East peace, officials say. An IMF-backed economic reform plan envisages a four percent growth rate in 2001 from an estimated three percent in 2000—above an average three percent annual population growth. The CBJ has consolidated the downward interest rate trend even at the risk of eliminating the differential between the dinar and the dollar—traditionally at least three percent to stem capital flight.
Toukan said the CBJ's flexible monetary policy was allowing it to respond more effectively to fiscal and monetary factors abroad and internally to “strike the right balance between monetary stability and needs of raising growth and incomes”. The latest round of interest rate cuts were inspired by the half point US rate cut at the start of January which restored a nearly one percentage point differential in favor of the dinar, that had been wiped out since last July. The US Federal Reserve also cut another half point off rates on Jan. 31.
The CBJ is now waiting for banks to respond more sufficiently to its softer monetary policy by reducing corporate lending rates, critical to spr domestic investments. “This reduction in interest rates is expected to reduce the interest rate structure in the banking sector which will expand credit and rejuvenate economic activity,” Toukan said.
But banks, whose profitability has been hurt by sluggish economic growth, have resisted lowering average lending rates to maintain margins, a main source of income. “You want to increase growth so you need an extension of credit to be accessible to all potential borrowers but at the same time the profitability of banks is one of the major concerns of the CBJ,” Toukan said.
Since last year, lending rates which averaged 14 percent fell by around one percentage point while rates on deposits have dropped by over three percentage points to around 6.5 percent. — ( Jordan Times )
By Suleiman Al Khalidi
© 2001 Mena Report (www.menareport.com)
