There is a call for the introduction of a measure of flexibility in the determination of the exchange rate of the dinar, especially when removing the dollar peg now comes from a position of strength.
What is implied is that floating the dinar, or pegging it to a basket of several foreign currencies, may lead to a higher value, rather than lower. This is an obvious deception that should not be allowed to pass unchecked. The exchange rate should not be dealt with lightly in a developing country like Jordan. It is too important to be left to economists, even if they belong to the International Monetary Fund.
This call comes packaged in a clever language that tempts the decision makers and the public to concur. Flexibility has favourable overtones and sounds nice; it has a positive meaning. On the other hand, talking about a current position of strength tempts decision makers to take the risk. But all these expressions, nice as they may be, would not change the hard fact that the practical experience of Third World countries proved namely that, when it comes to exchange rate, flotation or flexibility leads to effective devaluation and the shaking of public confidence.
The best living example is Egypt; recently, when the Egyptian pound was floated, it sank badly, lost one third of its value in no time and gave rise to a strong inflation which brought down the government.
Admittedly, pegging the dinar to the US dollar has its costs, but in practice, it gave positive results that cannot be denied even by those who call for flexibility. The exchange rate of the dinar has been fixed in dollars at $1.41 since October 1995. This fixed exchange rate continued unchanged for nine years and served the Jordanian economy well. Following are some of the positive results: long-term stability of exchange rate, reinforcing public confidence, improvement in the competitiveness of the Jordanian industry, as demonstrated by the high growth of national exports, the phenomenal rise in the Central Bank's foreign exchange reserves, almost tenfold, bringing inflation under control and reducing it to the level prevailing in industrialised countries, and putting an end to rumours that used to rock the Jordanian society and to lead to capital flight or more dollarisation.
The dollar was, and still is, the most important currency with which most countries maintain the bulk of their reserves and with which most international transactions and cross-border payments are made. If the link between the dinar and the dollar meant all the positive results mentioned above, why should anyone flirt with the unneeded idea of flexibility or suggest the deceptive position of strength.
Let us call a spade a spade. The flexibility they are talking about is nothing but the return to the state of uncertainty regarding the exchange rate of the dinar in what it may look like tomorrow or the day after. This will be the right environment for destructive rumours about an imminent devaluation, taking positions in foreign currencies, and speculation against the dinar, acts we were familiar with before October 1995.
Those who raise the banner of flexibility should tell us in precise language what are the desired results they are after, which could come about only through the so called flexibility. They should tell us why we should abandon the system that served us well for more years in the absence of any indication of overvaluation of the dinar and the absence of any complaints from exporters, at a time when the current account of the balance of payments shows a surplus and Jordan's competitiveness in world markets is at its best.
If there is no trouble, why should we look for it?
Fahed Fanek
© Jordan Times 2004
