AMMAN — Increasing interest rates in Jordan, although “unavoidable”, will lead to slower economic growth, according to economists.

The Central Bank of Jordan (CBJ) on Thursday announced that the interest rate of its various monetary policy instruments will increase by 25 basis points, effective this Sunday, as part of its efforts to maintain monetary stability in the Kingdom.

Speaking with The Jordan Times, economic experts noted that this measure, although necessary, should be accompanied by other monetary policies that can help mitigate its socioeconomic impacts.

Economist Hosam Ayesh explained that the increase in interest rates is “justified” because the Jordanian dinar is pegged to the US dollar, which means that the CBJ must keep up with any interest rate increases decided by the US Federal Reserve.

He warned that any devaluation of the dinar would prove “disastrous” to the economy.

The CBJ decision is necessary to maintain an interest rate differential against the US dollar in favour of the Jordanian dinar, and preserve dinar-denominated assets to prevent dollarisation and ensure the Kingdom’s monetary stability, Ayesh said.

The Federal Reserve’s consecutive interest rate hikes are impacting other markets around the world, not just in Jordan, he added.

“This measure is promoting central banks in roughly 65 countries to increase their interest rates to match that of the Fed, because their currencies are either tightly or loosely pegged to the US dollar,” Ayesh said.

In general, increasing interest rates is a monetary policy that is used to curb rising inflation, according to Ayesh.

“The problem here is that the Fed’s decisions match the needs and priorities of the US economy, which is slowing growth and boosting unemployment to bring down inflation,” he said.

However, increasing interest rates, although “necessary”, is not aligned with the current needs of the Kingdom’s economy, Ayesh added.

“The Jordanian economy is already approaching a recession. Boosting its growth and reducing its soaring rates of unemployment would require reducing costs by decreasing interest rates to boost spending and stimulate the market,” Ayesh continued.

Higher interest rates lead to increased costs, which decreases the productivity of economic sectors and leads to higher prices, lower spending and less investment.

This will also increase unemployment rates, as many sectors will try to adapt to the increasing costs and reduced production needs through layoffs, he said.

According to Ayesh, the high margin between the interest rate for loans and deposits must be reviewed, “taking into consideration Jordan’s economic situation”, to help mitigate the increased burden on borrowers.

The interest rate spread, defined as the lending rate minus the deposit rate, stood at 3.6 per cent in Jordan in 2021, according to the World Bank’s website.

Director of the Phenix Centre for Economics and Informatics Studies (PCEIS) Ahmad Awad also noted that because the Jordanian dinar is linked to the US dollar, these consecutive increases in interest rates are “unavoidable” to prevent devaluation of the Jordanian dinar.

Changing interest rates is a monetary policy used to create a balance between inflation levels and economic growth, he explained.

While economic growth is necessary to create jobs, inflation at a certain level — around 2 to 3 per cent — is considered “healthy” for the economy, according to Awad.

Despite being “unavoidable”, increasing interest rates is “not the right policy” for the Jordanian economy, which needs to prioritise growth and job creation, he said.

There are socioeconomic repercussions to this step, which will impact people’s standard of living, Awad added.

“People are now spending over 50 per cent of their income to pay off loans, which is impacting their ability to cover necessary expenses related to food, education and health,” he continued.

The move also comes at a time when wages, which have “barely” increased in both the private and the public sector over the past 12 years, fall short of living costs, Awad noted.

High interest rates impact not only consumers, but also businesses, undermining their ability to take out loans in order to expand, which slows economic growth and increases unemployment rates, he added.

Awad also recommended reducing the interest rate margin between loans and deposits, which is “extremely high” compared to global levels, in order to mitigate the impact of higher interest rates.

 

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