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Why The Jordanian Dinar being Pegged To The U.S Dollar Is A Smart Idea
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The political volatility in the Middle Eastern region has increased drastically over the course of the last 20 years. Jordan sitting at the heart of the Middle East has stood strong next to its regional neighbors Lebanon, Syria, Palestine and Iraq as they experienced civil wars. This undoubtedly has led to may political and economic difficulties in the region, and placed Jordan in the midst of political unrest that affected the country severely. The Middle East conflict has pushed Jordan to a reduction in productivity, and increase of military expenditure at the cost of a different economical focus; leading to an increase of unemployment rates and an unhealthy increase in foreign aid rather than foreign investment.

Foreign remittances and foreign aid gave Jordan “large inflows of capital” until the 1980s, and supported Jordan’s previous fixed exchange rate with the SDR. However, the country soon saw an economic downfall with the fall in world oil prices in the Gulf region, halving foreign grants “from their peak of JD 210 million in 1979 to JD 106 million in 1984”. That is when in 1995, the IMF and Jordanian King Hussein I made the decision of pegging the Jordanian Dinar to the United States Dollar, the decision changed the country’s economic standing. Whether the implementation of a dollar peg was the right call for Jordan or not has been high debated with the many political factors that have come to effect the economy.

Theoretically speaking, a falling dollar could reduce import value and promote Jordanian exports, a national growth would become expensive. The World Bank Operations Evaluation Department evaluates that “inflation has been consistently low in  recent years, although the peg could have hurt export performance”. Despite that, when looking at Jordan’s exports, is it not affected as much by the exchange rate as it is by bilateral trade agreements and the surrounding political unrest in two of Jordan’s previously essential notions for exportation: Syria and Iraq. With the closure of both Syria and Iraq’s borders, two of Jordan’s most prominent export and import exchange routes, the limitations of exports lead to a much slower growth rate than previously expected by the International Monetary Fund.

On the other hand, Jordan imports are 80% of its GPD. Thus, the inflation impact due to high price importation may clash with Jordan's central bank (Central Bank of Jordan) trying to control retail prices level and inflation. As importation goods will always be demanded and can't be replaced by importing from other countries, which will continue raising the inflation rate and deficit in trade balance.

According to The World Bank Operations Evaluation Department, “optimal currency area” suggests that “floating exchange rates protect a country from shocks originating abroad”. Despite that, in Jordan’s case, the multitude of workers abroad in fact allows a fixed exchange rate to have merit. The Central Bank of Jordan’s (CBJ) previous experience with floating rates in the 1980s showed that pegging the Jordanian Dinar to the United States Dollar proves appropriate due to a large amount of Jordanian workers in dollar-based countries such as Kuwait and Saudi Arabia; where oil prices in those nations are also determined by the dollar.

Moreover, the significance of the stability of the exchange rate between the U.S and Jordan has had the important advantage of gaining investor’s confidence as it decreases the risk of possible loss of exchange. More investments and worker  remittances - which is a prominent factor and role in the Jordanian economy – will be more attracted. Mahmoud al-Faqi, Egyptian economic advisor, said: "The main reason behind the dinar peg to the dollar was to maintain stability and increase confidence in it by local and foreign investors, and to reassure citizens as well so that they do not evade the local currency towards another more stable currency.”

So, what would happen is there were a disengagement between the Jordanian Dinar and U.S dollar? The depreciation of the JD exchange rate would result in high inflation levels. Already with a high poverty rate, poverty in Jordan would increase with a rise in prices of imported raw materials and cost of local industry. Purchasing power would notably decrease, and government employees salaries would not be increased to the increasing price of services and needs.

The question of why the Jordanian economy has still not seen notable development over the course of the last 20 years does not lie on the dollar peg – which has arguably saved Jordan from inflation under political unrest - but rather in regional instability. The International Monetary Fund in its 2019 report on Jordan highlights the importance of recognizing Jordan’s great ability in “maintaining macroeconomic stability against a difficult economic environment and complex socio-political challenges”. This includes an influx of over 3 million refugees, disrupted export routes and borrowing costs. Although unemployment rates in Jordan have seen a rise since 2016, and corruption due to nepotism in the government is along standing issue, the Jordanian economic stability compared to what it could have been is worth recognizing.

As of January 2020, the International Monetary Fund and Jordan authorities have reached a staff-level agreement that is “centered on increasing growth and stimulating job creation, strengthening external and fiscal stability, increasing transparency, and improving social spending” until 2024.

Sara Alghanmeh is a pre-law student at George Washington University, hoping to graduate with a Major in International Affairs and a concentration in International Development.

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Wed, December 23, 2020 06:21 PM (about 29977 hours ago)
we like your text - congrats fro an excellent read.
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