Let us dig deep into all of its impacts and implications
Recently, there have been calls in the media by officials and
some columnists to celebrate the decline in the inflation rate in Jordan. Yet, the complexity of the issue is
not being addressed in most of what is being published.
Jordan: A mixed economy
Jordan possesses a mixed economy, amalgamating various private freedoms, centralized economic planning, and government regulation. It has recently been reclassified as a low-middle-income country. Additionally, the economy is small and reliant on foreign loans, international aid, and remittances from expatriate workers.
From one school of economic thought to another
One can also assert that, over the years and depending on the
prime minister in office, the type of economic interventions and instruments
offered by the government swing from one school of economic thought to
another.
Furthermore, the economy is viewed as an open economy with a
small production base. Consecutive governments, without providing substantial support
to businesses and the manufacturing sector in particular, have hastily entered
into numerous trade-liberalizing agreements. This has been done at a pace
surpassing that of many other countries.
Measured by consumer prices
In economics, inflation is
defined as a rise in the general price level of goods and services in an
economy, which constitutes a crucial aspect of macroeconomic governance in any economy. The inflation
rate in Jordan, as measured by consumer prices from 1970 to 2022, has ranged
between -0.9 percent and 25.7 percent, with an average annual inflation rate of
5.8 percent. In 2022, the inflation rate was 4.2 percent.
Interestingly, when inflation is high, the Jordanian Dinar purchases fewer goods
and services, thereby diminishing the purchasing power of money. Conversely,
when prices fall (referred to as deflation), consumers may choose to wait and
spend less in anticipation of further price reductions. This phenomenon can be
observed in Jordan regarding real estate purchases. Even as real estate prices have
declined, people seem to delay purchasing real estate in anticipation of future
deflationary pressures.
Inflation is brought about by three types of variables, which are not mutually
exclusive and may occur simultaneously. The first is demand-pull inflation,
which arises when buyers' aggregate demand exceeds the productive capacity (aggregate supply) of a nation.
This type of inflation can be caused by easy money and
low-cost liquidity, often due to low-interest rates. The second type
is cost-push inflation, which pertains to increases in the prices of inputs
such as wages or commodities necessary for production, like energy and
equipment.
A third type of inflation: Expectations
The third type is inflation expectations, wherein people's
anticipation of higher or lower future prices results in present price
increases.
In Jordan, one can readily argue that the economy's openness and the limited
scope of its industrial base have significantly impacted inflation. Jordan
imports 87 percent of its caloric intake and 93 percent of its fuel demand.
Historical data spanning 1970 to 2022 demonstrates a strong positive
correlation (91 percent) between inflation in Jordan and global inflation; that
is, prices in Jordan move in conjunction with world prices 91
percent of the time. Similarly, prices align with those in the EU and the US at
rates of 65 percent and 64 percent, respectively.
It is important to note that economists prefer a low (though not
zero or negative) and steady inflation rate, particularly since it affects
salaried employees by eroding the purchasing power of their fixed incomes.
This, in turn, could expedite the onset of a recession as aggregate demand
dwindles. However, Jordan presents an interesting case once again.
Allowing wages to easily adjust to inflation
A substantial portion of wages in Jordan are non-contractual
(informal), allowing wages to easily adjust to inflation. According to
the International
Monetary Fund (IMF), the informal economy in Jordan accounts
for 26 percent of the economy's size. In terms of employment, 46.1 percent of
workers hold informal jobs.
Consequently, only 54 percent of workers (those formally employed) are directly
and adversely impacted by inflation, experiencing wage stickiness.
The remainder may require immediate adjustments based on their employment type.
Unfortunately, the Employment Cost Index (ECI), a quarterly economic series
delineating labor cost changes for businesses, is not measured in Jordan.
Otherwise, it would provide an estimate of the impact of inflation on labor
costs.
A surge in capital costs
Despite all of the aforementioned points, one certainty remains:
with over 90 percent of formal credit acquired from banks, elevating borrowing
costs raises production expenses due to the surge in capital costs. This, in
turn, affects consumption, especially for significant purchases. In other
words, both Jordan's aggregate demand and supply will decrease at a time when
the country is grappling with a prolonged recession and one of the world's highest unemployment rates.
So, before one begins to celebrate the declining inflation rate, conducting
thorough research by trained economists is advisable. After all, Jordan exports talent, and its economists make positive
contributions to institutions worldwide.
Published in Jordan News:
https://www.jordannews.jo/Section-36/Opinion/Jordan-s-decreasing-inflation-rate-celebration-or-more-work-ahead-30296
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