Global monetary tightening has been spearheaded by the Federal Reserve (Fed) — the central bank of the US — and the European Central Bank (ECB). Both have been aggressively fighting inflation caused by the Russia-Ukraine war, heightened post-COVID demand, and the disruption in supply chains, which peaked in the US at 9 percent in June 2022, followed with some lag by the euro zone at 10.7 percent in October 2022.
While the US and the EU have been facing high economic growth rates after the onset of COVID; Jordan has not. Here is a breakdown of the possible impact of the global monetary policy on the Jordanian economy in 2023.
At the start of 2023, the Fed had raised its federal funds rate by 425 basis points, and the ECB had raised its key interest rates by 250 basis points. Jordan, with the peg of its dinar to the US dollar, has followed the Fed policy almost perfectly. Moreover, with additional rate increases by the Fed and the ECB, the Jordan Central Bank is expected to increase the interest rate to its peak by June 2023.
While inflation has apparently subsided in the US and EU and is expected to drop further in 2023, interest rates have risen and Western economies do not seem to be heading toward a recession. Meanwhile, Jordan, which was facing an extremely long (13-year) depression as measured by the real per capita income, saw slight gains in terms of growth rates in 2022. This marginal growth was possibly driven by the increase in the value of potash and phosphate exports and a rise in tourism receipts and remittances.
Hence, Jordan may seem to buck the global trend so far, which should not be surprising since the Kingdom benefits when the world goes into a recession as the prices of imports, which are almost three times its exports, fall and thus provide a reprieve to aggregate production and consumption. Yes, one would expect exports to also decline, but two factors come into play here: Jordanian exports are mainly garments and raw materials such as potash and phosphate; and the trade balance has been markedly negative since the inception of the country.
Jordan’s economic growth rate in 2023 will likely fail to meet expectations. It will decrease as both demand and supply decrease with the rise of interest rates. Demand decreases as the final prices of large ticket items (those that take up a significant portion of an individual’s average income) become more expensive due to the increase in the cost of debt. Already, the number of returned checks has risen, credit card debt is on the rise, and savings have decreased as Jordanians have dipped into their nest-eggs to spend.
Some imports will become more expensive as the prices of certain commodities such as wheat may rise due to shrinking supply. Jordan lucked out in 2022 as wheat purchases had been made before the start of the Russian-Ukraine war. However, if the war goes on, the cost of wheat imports will rise.
On the other hand, suppliers, including current and would-be producers such as investors, will find production more expensive, and will thus curtail their output. Given that Jordan’s inflation is imported — 87 percent of all caloric intake and 93 percent of energy is imported — the upshot is a continued inflation rate with greater stagnation.
Weakened growth from costly consumption and production, and greater leakage due to balance of trade expansion, which siphons added value from the GDP, could lead to lower growth in 2023 than previously predicted. Let us hope that this will not be the case.
Published in Jordan News on Mar 06,2023
https://www.jordannews.jo/Section-36/Opinion/How-the-global-economy-will-impact-Jordan-in-2023-27369
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