The cost of delaying policy

[Yusuf Mansur]

Hesitating in setting and executing economic policies is costly and brings to question the effectiveness of policy makers’ roles as economy managers.

The assumption that policies can be executed according to the adage “better late than never” is for the reticent and wrongly considers that economic policies are costless to the economy and its constituents. A quick analysis, however, can show that this type of thinking is flawed and expensive, especially for a poor country.

A delayed serious reaction by the government to the global credit crisis and a sequence of faulty actions that created a negative, worrisome atmosphere throughout the economy, coupled with a hands-off approach by the Central Bank of Jordan (CBJ) when it comes to extending credit to the private sector, may have been behind Jordan’s economic woes in the first place.

Having said this, one must also assert that the safety of the dinar or the banking sector where never in question; reserves were high (they are now at an all time high) and banks in Jordan are not global players.

Let’s review the chronology of government action since September 2008: The CBJ warned banks against extending credit and asked them to employ caution; it also emphasised the maintenance of a credit ceiling on real estate loans, raised the required reserves provision to 12 per cent, and maintained the already high discount rate, in spite of calls from every direction to lower interest to the pre-boom years that started in 2004.

Such a position was contrary to the reaction of central banks worldwide.

Private banks responded adversely to the late and insufficient CBJ reductions of the discount rate. Moreover, some industrialists claimed that their accounts were hounded in banks by government officials, causing the latter not to extend credit to them. Furthermore, false rumours spread that certain large companies that were not exceedingly leveraged at all were on the verge of bankruptcy and bankers needed to be aware.

The CBJ is yet to strongly interfere with banks to increase credit or lower discount rates, even though its law allows it a variety of tools and powers.

The government, in my, view took several unnecessary months to react to the fears of citizens re the financial contagion and only gave assurances to depositors regarding their accounts after several Arab countries more adversely affected by the crisis made such announcements.

The Ministry of Finance announced a fiscal stimulation package, which it continued to reduce and then forgot about it. Also, the funds of those harmed by the bourse scandal were never completely returned, and only several weeks ago, the second installment was finally paid. A sizeable portion of the funds was never returned to the bourse victims although the government had confiscated all assets of the bourse company owners over a year ago.

Several ministers came out in the media claiming that Jordan was a victim of the global credit crisis, since tourism and remittance proceeds would fall dramatically. The fact remains that the tourism proceeds this year were almost as high as those of 2008, which was an exceptional year. The claimed hordes of repatriated Jordanians never materialised and remittances only declined by a few percentage points from the previous year, possibly because banks in Jordan were giving lower interest rates on deposits.

Few days ago, the government announced that it would reduce spending next year, instead of increasing it or improving its quality. It seems our managers forgot that countries are not run like companies. Budgets should be increased in times of a lowdown to jumpstart the recovery. Announcements that budget cuts will follow, even if the government spending has little impact on the economy, as in the case of Jordan, harm to future expectations.

Since the external flows did not falter significantly, as originally claimed, the failure of the economy to achieve past growth rates had to be because of internal factor. Amidst the 30 per cent fall in prices of stocks and 39 per cent fall in real estate prices, the fall in GDP growth rate from 7.9 per cent last year to 2.9 per cent this year, and the rise in unemployment from 12 per cent to 14 per cent, the government finally formed a committee to advise on the state of the economy.

Couldn’t the government, with all its bodies that consume almost 60 per cent of the economy, have seen the light before and resolve the economic malaise it had created?

So what is the cost of inaction? Overall income dropped by 5 per cent, Jordanian accumulated savings (wealth), which is the underpinning of domestic investment, dropped by 30 per cent, 28,000 workers lost their jobs and 120,000 Jordanians (their families) were left without a source of work-related income. Bankrupt businesses cannot recoup their losses after having dispersed their workers, sold their machinery and equipment, and their land and buildings. Some will never be able to restart again.

Now, as oil prices continue to rise, the Jordanian economy should quickly recover. Needed actions include: returning optimism to all economic players (producers, investors, consumers, banks, workers and government); quick injections of credit by the private banks; spending should be increased to quickly create jobs. Simply put, when the going gets tough, the tough get going.

JordanTimes, 24 November 2009