Foreign exchange regime most credible among alternatives - CBJ chief
By Omar Obeidat
AMMAN - Central Bank of Jordan (CBJ) is closely monitoring global economic developments and foreign exchange markets to assess any potential impact on the Kingdom’s monetary and economic stability, CBJ Governor Faris Sharaf said.
Sharaf made the remarks in an e-mail interview with The Jordan Times to comment on the impact of the Standard & Poor’s (S&P) decision to drop US debt from its top AAA rating to AA+ on Jordan’s economy, particularly since the Jordanian dinar is pegged to the US dollar.
Asked whether he sees any risk on the exchange rate of the local currency and the volume of foreign reserves, the CBJ governor said the current exchange rate regime provides a “credible nominal anchor and remains the key pillar of both monetary and financial stability in the country”.
This regime, he elaborated, has eliminated uncertainty for both investors and exporters and helped create an attractive climate for foreign and domestic investment.
“In addition, the exchange rate regime has improved international competitiveness, lowered transaction costs and allowed for a more transparent monetary policy and payments mechanism,” Sharaf explained.
“It is important to note that our choice of the exchange rate regime and the composition of our foreign reserves has to be seen in the context of the structural characteristics of our economy, in particular Jordan’s foreign obligations,” he noted.
Sharaf explained that 80 per cent of payments for imports are in US dollars, as well as 30 per cent of external debt, 87 per cent of investment payments and 100 per cent of the private sector’s foreign liabilities.
“Within this structure of obligations, the peg of the Jordanian dinar to the US dollar is appropriate and has served our economy well,” he stressed, adding foreign reserves, which currently stand at $11.8 billion, provide a strong line of defence against capital outflows and covers more than seven months’ worth of imports.
The CBJ, he added, must also consider the compatibility of the exchange rate with gross domestic product growth rates, private sector credit growth, changes in broad money aggregates, inflation and the country’s risk premium compared with those of its trading partners. These variables are determined simultaneously, the governor said.
“If serious disparity in these fundamentals is present, then the Jordanian dinar may be misaligned, and the current peg should be reconsidered. So far, these indicators have not suggested any misalignments.”
Asked whether a currency basket as a peg, which can also be heavily dollar-weighed, can be an alternative to the dollar peg, he replied that the current peg to the dollar has proved its credibility and continues to satisfy Jordan’s economic needs, particularly with regard to external competitiveness and macroeconomic stability.
“Every decision is a trade-off between two alternatives, or two or more objectives. And the decision regarding the exchange rate regime must consider the medium and long term - not only the immediate or the short term - impact,” he remarked.
For example, he elaborated, compared with fixing to a single currency, pegging to a basket of currencies has the disadvantage of greater exchange rate risk, higher transaction costs and challenges to competitiveness.
Sharaf stated that basket pegs also tend to be less transparent since the weights attached to the basket have to be managed and adjusted frequently to ensure competitiveness.
“This lack of visibility could encourage speculative behaviour.”
Jordan has experienced several exchange rate regimes since the inception of the Jordan Currency Board in 1950 and these various exchange rate regimes over the past 50 years attest to the level of experience the CBJ has on the subject, Sharaf highlighted.
“Given our past experience in dealing with various exchange rate regimes, and in light of the structural characteristics of Jordan’s economy, we believe that the current peg to the dollar continues to satisfy Jordan’s economic needs.”
On the current difficult economic and financial time for the US, which is the biggest economy in the world, and whether there may be a risk on global growth, Sharaf said the effect of a US slowdown on the world economy will be substantial and normally precedes a general slowdown in other developed economies.
Signs of this slowdown are already apparent, evidenced by the most recent economic indicators for growth and unemployment in the US, he said, adding, however, whether or not the shock of the unprecedented credit rating downgrade is big enough to tip the economy into another recession remains to be seen.
“We also have to look at the other side of the Atlantic, where the European Union is still facing difficulties caused by the near-default of Greece and the continuously rising worry about the health of the economies of other troubled European nations such as Ireland, Portugal, Spain and Italy,” he indicated.
“The CBJ believes that the commitment to limiting government borrowing and cut the budget deficits in both the US and in Europe is crucial,” Sharaf stated, adding that fiscal consolidation and responsibility on the part of the major industrialised nations is paramount to reducing uncertainty in the global capital markets and bolstering world economic growth.
Sure is a chatty fellow....LOL
By Omar Obeidat
AMMAN - Central Bank of Jordan (CBJ) is closely monitoring global economic developments and foreign exchange markets to assess any potential impact on the Kingdom’s monetary and economic stability, CBJ Governor Faris Sharaf said.
Sharaf made the remarks in an e-mail interview with The Jordan Times to comment on the impact of the Standard & Poor’s (S&P) decision to drop US debt from its top AAA rating to AA+ on Jordan’s economy, particularly since the Jordanian dinar is pegged to the US dollar.
Asked whether he sees any risk on the exchange rate of the local currency and the volume of foreign reserves, the CBJ governor said the current exchange rate regime provides a “credible nominal anchor and remains the key pillar of both monetary and financial stability in the country”.
This regime, he elaborated, has eliminated uncertainty for both investors and exporters and helped create an attractive climate for foreign and domestic investment.
“In addition, the exchange rate regime has improved international competitiveness, lowered transaction costs and allowed for a more transparent monetary policy and payments mechanism,” Sharaf explained.
“It is important to note that our choice of the exchange rate regime and the composition of our foreign reserves has to be seen in the context of the structural characteristics of our economy, in particular Jordan’s foreign obligations,” he noted.
Sharaf explained that 80 per cent of payments for imports are in US dollars, as well as 30 per cent of external debt, 87 per cent of investment payments and 100 per cent of the private sector’s foreign liabilities.
“Within this structure of obligations, the peg of the Jordanian dinar to the US dollar is appropriate and has served our economy well,” he stressed, adding foreign reserves, which currently stand at $11.8 billion, provide a strong line of defence against capital outflows and covers more than seven months’ worth of imports.
The CBJ, he added, must also consider the compatibility of the exchange rate with gross domestic product growth rates, private sector credit growth, changes in broad money aggregates, inflation and the country’s risk premium compared with those of its trading partners. These variables are determined simultaneously, the governor said.
“If serious disparity in these fundamentals is present, then the Jordanian dinar may be misaligned, and the current peg should be reconsidered. So far, these indicators have not suggested any misalignments.”
Asked whether a currency basket as a peg, which can also be heavily dollar-weighed, can be an alternative to the dollar peg, he replied that the current peg to the dollar has proved its credibility and continues to satisfy Jordan’s economic needs, particularly with regard to external competitiveness and macroeconomic stability.
“Every decision is a trade-off between two alternatives, or two or more objectives. And the decision regarding the exchange rate regime must consider the medium and long term - not only the immediate or the short term - impact,” he remarked.
For example, he elaborated, compared with fixing to a single currency, pegging to a basket of currencies has the disadvantage of greater exchange rate risk, higher transaction costs and challenges to competitiveness.
Sharaf stated that basket pegs also tend to be less transparent since the weights attached to the basket have to be managed and adjusted frequently to ensure competitiveness.
“This lack of visibility could encourage speculative behaviour.”
Jordan has experienced several exchange rate regimes since the inception of the Jordan Currency Board in 1950 and these various exchange rate regimes over the past 50 years attest to the level of experience the CBJ has on the subject, Sharaf highlighted.
“Given our past experience in dealing with various exchange rate regimes, and in light of the structural characteristics of Jordan’s economy, we believe that the current peg to the dollar continues to satisfy Jordan’s economic needs.”
On the current difficult economic and financial time for the US, which is the biggest economy in the world, and whether there may be a risk on global growth, Sharaf said the effect of a US slowdown on the world economy will be substantial and normally precedes a general slowdown in other developed economies.
Signs of this slowdown are already apparent, evidenced by the most recent economic indicators for growth and unemployment in the US, he said, adding, however, whether or not the shock of the unprecedented credit rating downgrade is big enough to tip the economy into another recession remains to be seen.
“We also have to look at the other side of the Atlantic, where the European Union is still facing difficulties caused by the near-default of Greece and the continuously rising worry about the health of the economies of other troubled European nations such as Ireland, Portugal, Spain and Italy,” he indicated.
“The CBJ believes that the commitment to limiting government borrowing and cut the budget deficits in both the US and in Europe is crucial,” Sharaf stated, adding that fiscal consolidation and responsibility on the part of the major industrialised nations is paramount to reducing uncertainty in the global capital markets and bolstering world economic growth.
Sure is a chatty fellow....LOL