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Using the Modern Monetary Theory

Apr 24,2021 - Last updated at Apr 24,2021

There is an apparent and unnecessary separation of monetary and fiscal policies when it comes to the economic development of Jordan. Monetary policy and its tools are governed by the Central Bank of Jordan (CBJ), which acts independently of the government. The fiscal policy is administered by the Ministry of Finance (MoF) and its tools are government spending, taxation and fees.

The CBJ is unable to control inflation since Jordanian imports make up around 60 per cent of the GDP; hence, it focuses on maintaining the JD-US$ peg by maintaining adequate levels of reserves (they are more than adequate already) and an interest rate differential between the US$ and JD deposits.  On the other hand, in terms of fiscal tools, spurred by the IMF to use austerity measures (raising taxes and fees, increasing tax collection, and reducing spending) throughout ten IMF so-called reform programmes, and given the lack of fiscal space that the government budget suffers from, the Ministry of Finance cannot cause significant economic growth, never mind development.

So, why don’t they join hands to depart from the Orthodox Money Theory (OMT) to the Modern Money Theory (MMT) and better enable economic growth?  Under the OMT, money is neutral and interest rate policies are the key instrument to guide the liquidity provision of money markets. MMT argues, among other things, that a government that issues its own fiat money can pay for goods, services and financial assets without a need to raise taxes or issue bonds before such purchases are enacted; cannot be forced to default on debt denominated in its own currency; and is limited in its money creation and purchases only by inflation. An implication for Jordan is that the government can lower the interest rate and buy back its domestic debt.

Using the tenets of MMT, the CBJ can lower the interest rates from their current high levels (yes, the real interest rises when inflation is negative), and the government can borrow at such low levels of interest to buy back its local debt (JD19.45 billion) from banks and the Social Security Investment Fund. This would leave tremendous amounts of money with banks and cause them to lower interest to borrowers, thus reducing the cost of investment and doing business and consumption, which would cause both supply and demand to rise. In turn, this would push the economy towards its natural rate of growth (growth last year was negative, possibly around 5per cent), and lower unemployment (currently at 24.7per cent). Some may say, what about inflation? Not to worry; in fact, we need some inflation right now. In the past three years, inflation has been either negative or very close to zero.

What about the impact of losing the interest rate differential (around 3per cent) between JD and US$ deposits on dollarisation? A simple correlation coefficient exercise would show that during periods of slow economic growth people maintain more dollar deposits, and in periods of growth they go to the JD in favour of the higher interest rate. In other words, the margin is only effective in years of high growth, that is, when the public is confident about the economy. It has little to no effect during the years of slow growth and low confidence. 

Since we are in years of slow growth (Jordan has been in a recession for over a decade), why not try like the US and Japan and many other countries to use the MMT? Why not use the MMT to reduce government domestic debt, stop the crowding out of the private sector through government borrowing at such high interest rates thus pushing the interest rates at banks higher and crippling investors, save the government the interest payments on domestic debt, and go into an expansionary, counter cyclical fiscal policy. And this can only work out if all work with a united economic vision for Jordan; hopefully, not that of the IMF.

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