While some commodity prices are dictated by world movements over which Jordan has no control, the managers of the economy are not totally helpless. The Kingdom, a net importer with a trade deficit that is more than half its GDP, and most of it in nondollar denominated currencies, should appreciate the dinar-dollar exchange rate to make its imports cheaper.

The US current account (the sum of exports minus imports of goods and services, net factor incomes, such as interest and dividends, and net transfer payments) deficit was $857 billion in 2007 and is rising. To finance its current account deficit, the US has incurred trillions of dollars of foreign debt, leaving its economy at the mercy of foreign investors, including those from Asia and petrodollar countries. Hence, many economists believe that the deficit in the US' economy current account is unsustainable and that a major correction involving a significant depreciation looms, otherwise the current account deficit could reach $1.6 trillion by 2012.

The worry about the US economy is such that renowned free trade advocates such as Paul Krugman are sounding like heavy-duty protectionists and worrying about the rising trade deficit with China. He and others are asking questions of a nature that should be asked in Jordan. Some economists predict a further decline of the dollar against the euro, by 10 per cent, over the next year.

Currently, the dollar is at an all time low against the euro, at its lowest level against the British pound, an 18-year low against the Australian dollar, and a 30-year low against the Canadian dollar.

CEOs from around the globe interviewed by McKinsey, the international consulting firm, indicated that 53 per cent of the price rises their companies are facing are due to the fall in the dollar exchange rate against major currencies.

With the Jordanian dinar pegged to the US dollar since 1995, Jordan has been paying more for its trade deficit with the world, which was JD5.26 billion in 2006. Of this trade deficit, JD2.5 billion was due to trade with the EU countries, Britain, Canada and Australia, whose currencies appreciated against the US dollar.

Therefore, we should not, through inaction, maintain a low value for the dinar by keeping the current peg rate. A clear policy should come out in the following format: maintain the peg, but appreciate the dinar versus the dollar.

Since the US dollar fell against the euro by over 42 per cent over the last five years, so did the dinar. In other words, Jordan is paying 42 per cent more for its goods imported from EU countries. So why keep the current exchange rate and let Jordanians pay more for what they import, especially since most our imports from Europe are capital goods (inputs used for production and job creation) and the majority of our exports are raw materials, with the exception of the beleaguered garment exports to the US from the QIZs which have very little national value added?

If the dinar-dollar peg is revised, the cost of fuel will also fall, as we use fewer dinars to pay for oil.

Our exports are less than one-third of our imports; a straight tradeoff would show a gain for Jordanians of two-thirds on the exchange rate alone. In economics, one looks at the total national gain.

What about foreign debt? We will be able to pay fewer dinars to pay back our euro, US dollar, Canadian dollar, Australian dollar and debt in any currency, and we can save money in the process, and give the budget some flexibility to strengthen our social safety network.

At the same time, the value of foreign reserves will be enhanced. These reserves enable Jordan to cover the cost of its imports. Currently, foreign reserves cover close to six months of imports. If we do not increase the value the dinar against world currencies, our foreign reserves will be less effective in dealing with imports. As the dinar appreciates, our reserves will go further in covering the cost of imports. Thus, we will improve our foreign reserves position and save Jordan hundreds of millions of dinars.

What if the US dollar evaluates again? It took several years for the US dollar to reach such lows and any upwards adjustment is not in the books and it would not be sudden.

Should we remove the peg completely? Absolutely not. We could have got away with it in 2004 when the economy was booming, but even then one would have worried. We should maintain the peg, but simply evaluate the dinar upwards.

Relatively rich countries such as Kuwait, worried about an inflation rate of 4 per cent, adjusted their Kuwaiti dinar upwards against the US dollar. Jordan, with an inflation rate that is triple that, is only recently debating the issue and with tremendous trepidation. This is possibly because we have a new government and a new Parliament and each is trying to tread carefully, which is understandable.

I suggest the following: since the US dollar fell by over 42 per cent against the euro, and with it the dinar, due to the peg, Jordan has a margin of 30 piasters (JD0.3) to adjust the dinar upwards. Every day of inaction costs Jordan hundreds of millions of dinars in lost opportunity. A risk-averse policy would adjust it by two piasters, a risk-neutral policy would probably do an adjustment of 4 piasters, a risky policy would go even higher to, say, 30 piasters.

The policy design is simple; all that is required is transparent action and a slight upwards adjustment that should be followed by further adjustments at set dates if the US dollar continues to fall; this way speculation will be preempted.

Policy announcements, however, should be transparent, announcing a schedule for evaluation so that businesses and consumers can rationally adjust their own expectations.

A slight upwards adjustment of the dinar will also increase faith in our currency, save money, lower prices, reduce the trade deficit, lower debt repayment and increase the GDP growth rate. The great economist John Maynard Keynes once said: "It is better to be roughly right than precisely wrong."

Questions and comments can be directed at: ymansur@enconsult.com

By Yusuf Mansur

© Jordan Times 2008

 

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