Many have asked in recent days about the health of the Jordanian dinar, but last week, the rhetoric went into semi-panic when a newspaper quoted a senior government official as saying that if the prices of oil derivatives do not increase, the dinar will have to devalue.
The journalist who wrote the article and the official quoted, using a faulty analysis, caused an unnecessary worry about the dinar.
The dinar is extremely strong right now, as I will show below with numbers and basic economic analysis.
Jordan utilises reserves to cover the cost of imports in foreign currencies. This level of reserves ensures that Jordanians can pay for goods and services that are imported by exchanging dinars for other currencies without hampering or weakening the position of the dinar. Therefore, the size of reserves is measured by an importing country such as Jordan in terms of its being able to meet its payment commitments.
In 1989, foreign currency reserves reached the dangerous level of 10 days and hence, the dinar was devalued. Consequently, the IMF advised Jordan in the early 1990s to maintain a level of foreign currency reserves that equals 1.5 months of the value of imports.
Any level of reserves beyond this period is adding to the cost of reserves and can at best be considered an additional prudence. Foreign currency reserves at the Central Bank of Jordan reached $11,867.1 million, the equivalent of 7.6 months of imports, which is more than five times the level suggested by the IMF. This is important to remember.
Foreign reserves in 2011 have decreased slightly (by 7.1 per cent) from their level in 2010, which was the highest level of reserves ever. On the other hand, the level of reserves this year is twice that of 2006, which was an exceptional year in terms of real economic growth (7.9 per cent). Again, an excessive level of reserves would be disadvantageous in terms of the cost to government, since it has to pay interest on these reserves. Therefore, the dinar is extremely safe and the government can cover import payments from its foreign currency with extreme ease.
The significance of reserves relates to the value of imports. Jordan imports its inflation because 86 per cent of the calories it consumes and 96 per cent of its energy are imported. Will the value of such imports increase fivefold?
The answer regarding food, according to the Food and Agriculture Organisation and the World Food Programme, two UN organisations concerned with food supply, is that food prices will increase in 2011 but not to the levels of 2008. Furthermore, Brent oil price reached $126.7 per barrel since the beginning of the turmoil in the region, and is currently nearing $110 per barrel. In 2008, the oil prices exceeded the $150 per barrel mark, which was the highest oil price ever.
Hence, inflation in 2011 will probably reach 6 per cent due to rise in the value of food and oil imports, but such a level is nothing compared to the double-digit inflation rate of 2008.
The safety of the dinar was not in question in 2008. Furthermore, in 2008, when the developed world was facing its greatest economic crisis ever, and negative real economic growth rates, Jordan was enjoying a real growth rate of 7.6 per cent, one of its highest in the past decade. Again, in order for food and energy to pose a threat to the dinar, imports have to increase in value by 500 per cent of their current level, which is impossible and a faulty suggestion by any stretch of imagination.
Now to the journalist’s claim, based on the statement by the senior official, which was devoid of knowledge of basic economics and common sense.
Devaluing the dinar would increase the value of oil and make derivatives even more expensive. Hardly the correct solution; the government should increase the value of the dinar against major currencies in order to make imports cheaper, something I have been suggesting since 2007.
In fact, the Jordanian dinar is much undervalued (in terms of other currencies) right now since it is tied to the US dollar, which has fallen significantly against major currencies. For example, the euro was $1.2 in January 1, 2004; its exchange in May 1, 2011, is $1.47, a decrease of 22.5 per cent. The decrease makes the dinar less valued against other currencies.
Jordan could, and should, increase the exchange rate of its dinar against the US dollar and reduce the impact of the rise in oil and food prices. In other word, the dinar is strong enough right now to do exactly the opposite of what the senior official unofficially stated and the journalist wrote.
Nowadays, the dinar could not be safer. If a government official desires to increase the prices of oil derivatives but is afraid of a backlash from mainstream, he or she should avoid nonsensical statements about the dinar.
A wiser policy course of action would be to lower the taxes the government imposed since 2008 on oil derivatives, and allow the private sector to import fuel derivatives into the Jordanian market. This way, government will make more money through fees and taxes, as people consume more, and can stop cutting trees. Efficiency will be enhanced as prices fall, and with it the overall production, the GDP and the competitiveness of the Jordan Petroleum Refinery.
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