The exchange rate of the Jordanian dinar is receiving support from positive external developments that were not present at the beginning of 2012. This should enable the foreign reserves at the Central Bank of Jordan (CBT) to become even more robust as a monetary tool for maintaining the exchange rate peg to the US dollar. Such favourable development should not go unnoted.
The balance of payments of a nation is made up of the difference between the payments it receives and pays. Because the value of imports in Jordan has traditionally been double that of exports, receipts from foreign investment inflows, workers’ remittances and tourism have made up the difference between exports and imports. Meanwhile, in case such receipts are unable to make up for the deficit, foreign currency reserves at the Central Bank are there to help cover the remaining deficit.
The IMF had advised Jordan in the 1990s to maintain a level of reserves that covers 1.5 months of imports in order to maintain the dinar-dollar peg, which was formally adopted in 1994. Based on the trade figures of last year, annual imports amounted to approximately JD13 billion, or around $1.5 billion per month. Current foreign reserves at the CBJ stand at around $8 billion, which would cover over five months of imports, based on the trade figures of 2011. This also means that the level of foreign reserves is almost four times the level of reserves that was stipulated by the IMF to safeguard the current exchange rate peg of the dinar, which means that the maintenance of the peg is absolutely assured based on the current level of foreign reserves alone.
In addition, the gloomy global outlook and expected slowdown in global markets, particularly in the EU, led to a decrease in the value of the oil and euro.
The fall in oil prices from over $118 per barrel in the first quarter of 2012 to under $97 now means that the Jordanian oil import bill, which makes up 29 per cent of all imports, will fall this year by 20 per cent. Furthermore, imports from the EU, which made up 21 per cent of all imports last year, will also fall by about 10 per cent, if not more, due to the decrease in the value of the euro; thus, the increase of the purchasing power of the dinar in the EU markets should cause a drop in the import bill (most imports from the EU are necessary goods) from the EU by at least 10 per cent. Hence, over 50 per cent of Jordanian imports will become cheaper by 10-20 per cent, which should enable the reserves to cover over seven, not five, months of imports.
On the home front, relative to last year, remittances from Jordanians working in the GCC countries, which make up 10 per cent of the GDP, are on the increase and have been rising again for some time. Proceeds from tourism are expected to rise this year due to upheavals in Syria, Lebanon and Egypt, which traditionally competed for Arab tourists. Foreign direct investment is also on the rise relative to last year, according to the Jordan Investment Board. In addition, billions of dollars have been promised to Jordan in aid, which will further relieve the budget strain and enable enhanced economic activity with the start of projects and resumed economic activity, particularly outside Amman.
Put together, the balance of payments outlook is going to be much better this year than it was last year and the financial position of Jordan is much stronger than it was.
Jordan will pay less and receive more than previously predicted, which is excellent news for any country and should assure us all of the stability of the economy and its future outlook. JordanTimes 19/6/2012
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