There is an apparent and unnecessary separation of monetary and fiscal policies when it comes to the economic development of Jordan. Monetary policy and its tools are governed by the Central Bank of Jordan (CBJ), which acts independently of the government. The fiscal policy is administered by the Ministry of Finance (MOF) and its tools are government spending, taxation and fees.
The CBJ is unable to control
inflation since Jordanian imports make up around 60% of the GDP; hence, it
focuses on maintaining the JD-US$ peg by maintaining adequate levels of
reserves (they are more than adequate already) and an interest rate
differential between the US$ and JD deposits.
On the other hand, in terms of fiscal tools, spurred by the IMF to use
austerity measures (raising taxes and fees, increasing tax collection, and
reducing spending) throughout ten IMF so-called reform programs, and given the lack of fiscal space that the
government budget suffers from, the Ministry of Finance cannot cause
significant economic growth, never mind development.
So, why don’t they join hands to depart
from the Orthodox Money Theory (OMT) to the Modern Money Theory (MMT) and
better enable economic growth? Under the
OMT, money is neutral and interest rate policies are the key instrument to
guide the liquidity provision of money markets. MMT argues, among other things,
that a government that issues its own fiat money can pay for goods, services,
and financial assets without a need to raise taxes or issue bonds before such purchases
are enacted; cannot be forced to default on debt denominated in its own
currency; and is limited in its money creation and purchases only by inflation.
An implication for Jordan is that the government can lower the interest rate
and buy back its domestic debt.
Using the tenets of MMT, the CBJ
can lower the interest rates from their current high levels (yes, the real
interest rises when inflation is negative), and the government can borrow at
such low levels of interest to buy back its local debt (JD19.45 billion) from
banks and the Social Security Investment Fund. This would leave tremendous
amounts of money with banks and cause them to lower interest to borrowers, thus
reducing the cost of investment and doing business, and consumption, which
would cause both supply and demand to rise. In turn, this would push the
economy towards its natural rate of growth (growth last year was negative,
possibly around 5%), and lower unemployment (currently at 24.7%). Some may say,
what about inflation? Not to worry; in fact, we need some inflation right now.
In the past three years, inflation has been either negative or very close to
zero.
What about the impact of losing
the interest rate differential (around 3%) between JD and US$ deposits on
dollarization? A simple correlation coefficient exercise would
show that during periods of slow economic growth people maintain more dollar
deposits, and in periods of growth they go to the JD in favor of the higher
interest rate. In other words, the margin is only effective in years of high
growth, that is, when the public is confident about the economy. It has little
to no effect during the years of slow growth and low confidence.
Since we are in years of slow growth (Jordan has been in a recession for
over a decade), why not try like the US and Japan and many other countries to use
the MMT? Why not use the MMT to reduce government domestic debt, stop the crowding
out of the private sector through government borrowing at such high interest
rates thus pushing the interest rates at banks higher and crippling investors,
save the government the interest payments on domestic debt, and go into an
expansionary, counter cyclical fiscal policy. And this can only work out if all
work with a united economic vision for Jordan; hopefully, not that of the IMF.
