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CBJ’s decision to raise interest rate ‘necessary and timely’ — experts

‘The central bank cannot salvage economy single-handedly’

By Mohammad Ghazal - Dec 17,2016 - Last updated at Dec 17,2016

AMMAN—The Central Bank of Jordan’s (CBJ) decision to raise key interest rates last week was an attempt to boost the attractiveness of the Jordanian dinar, economists said Saturday.

However, more efforts are needed by the government to boost confidence in the local currency and address economic challenges.

On Thursday, the CBJ announced an increase in its main interest rate, the Jordanian dinar overnight deposit rate, and the rate of one-week deposit certificates by 25 basis points as of December 18. 

The bank said the decisions are in line with the CBJ’s aims of guaranteeing the competitiveness of the Jordanian dinar as a tool for local savings, and of preserving monetary and financial stability, the Jordan News Agency, Petra, reported Thursday.

Jordan, whose currency is pegged to the US dollar, was obliged to increase the interest rate on the dinar after last week's decision by the US Federal Reserve to increase its key interest rate by 0.25 per cent, one economist said Saturday.

"The pegging to the dollar has greatly helped the Jordanian currency,” said Economist Zayyan Zawaneh,

But there are concerns about the Jordanian economy and its performance amidst regional turmoil, he added. Therefore, the CBJ’s step is an attempt to strengthen confidence in the dinar and an attempt to counter any signs of dollarisation.

"The bank hopes through this move to control the situation and sustain the attractiveness of the dinar… It has done its part, but there are efforts that need to be done by the government to address other economic concerns and the gaps in the state budget," said Zawaneh.

"The CBJ cannot do it alone…the decision to raise interest rate will increase the cost of borrowing. Thus, there is a need for a clear plan on how to address loopholes in state budget and public finances. This increase is just one step of several that can be taken," he added.

According to the CBJ’s figures, deposits in foreign currencies rose by 4.4 per cent at the end of September compared to the end of 2015.

In its monthly report, the CBJ said deposits of residents in foreign currencies reached JD5.024 billion at the end of October.

“Jordan was obliged to take this step because the US Federal Reserve increased the interest rate on the dollar last week…. Jordan was also keen on this step to address the situation as there has been a growth in depositors’ appetite to make more of their deposits in dollars,” economist Hosam Ayesh told The Jordan Times on Saturday.

The increase is likely to affect the volume of credit facilities extended by banks, but at the same time will lower the cost of exports, Ayesh said.

The increase of the interest rate is not enough to address the current undesirable situation, and so more efforts are needed, the expert told The Jordan Times.

“There has been a drop in tourism revenues, remittances and a decline in exports… all these factors also affect depositors’ confidence in the currency and the economy and the government needs to address all these issues,” Ayesh said.

According to the CBJ, foreign currency reserve reached $12.5 billion. The country’s exports during the first 8 months dropped by 3.8 per cent to JD3.5 billion, according to the bank, whose figures also showed that Jordanians’ remittances in the first nine months also declined by 4 per cent compared to the same period of last year.

“The bank’s step reassures all as it leads to growth in the return on savings in dinar, but there is a need for a strategy to address the decline in several factors and sectors that affects the overall confidence in the growth of the economy,” said Ayesh, agreeing with Zawaneh’s analysis.

The CBJ’s main interest rate (one-week repurchase agreements) will rise to 2.75 per cent annually, and the Jordanian dinar overnight deposit rate will change to 1.75 per cent annually, while the rate of one-week deposit certificates will range between 2.5 and 2.75 per cent.

 

The annual interest rates of rediscount and of overnight repurchase agreements will remain at 3.75 and 3.5 per cent respectively.

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