The state of the Foreign Exchange Reserve

The decline of Foreign Exchange Reserves in any country affects investors’ confidence in its economy. In 2017 the Foreign Exchange Reserves in Jordan declined significantly. What are the reasons and what are the solutions? We are looking for answers on these questions with the economist Salameh Daraawi.

The Foreign Exchange Reserves in any economic system is a guarantee of its stability in the first place, in addition, it is a real indication of economic stability and safety of the national economy’s activity. At the beginning of 2018, we had to tackle this File and discuss the future expectations related to Foreign Exchange Reserves in Jordan, but prior to that we had to know whether these reserves are within safe levels in 2017 or not.

Salameh Daraawi: In fact, the Kingdom’s reserves of foreign exchange witnessed several variations in 2017. Perhaps the most prominent was at the beginning of last year, which witnessed severe negative fluctuations as results of investors’ lack of confidence in the Jordanian economy and the lack of a driving force by incomes abroad, represented mainly by expatriate remittances and investment and tourism incomes flows. On the other hand, the government represented by the Central Bank, started taking a number of quick measures in order to rectify the situation and strengthen the Kingdom’s reserves of foreign exchange through using monetary policy and increasing interest rates in a deliberate and gradual manner. This has significantly contributed to the adjustment of the foreign exchange reserves that returned to safe levels.

According to the latest data issued by the Jordanian Central Bank, the amount of foreign exchange reserves reaches around $12 billion which is sufficient to cover the Kingdom’s imports for 7 months. These levels are considered safe in general. However, the question that comes to mind here, is there a plan in Jordan to face any negative possibilities when it comes to foreign exchange rates?

Salameh Daraawi: The Kingdom’s coverage of its imports for 7 months is a safe and good level. In Jordan, we have previous negative experiences and accumulations which took place during the past but the most prominent was in 2012 when the foreign exchange reserves reached less than $6 billion and was able to cover the Kingdom’s imports for no longer than 3 months. This happened as a result of decreasing income or the major decline in the economic income and the deceleration of the national economy. That is why we noticed at the end of 2012 that the government insisted on increasing the Kingdom’s income and returning the foreign exchange reserves to safe levels. If you remember, this was achieved through cutting subsidies on petrol, except for gas, cutting support and going back to the general sales tax system to its normal levels of 16% on several goods and services. In addition to that, great efforts were made regarding investment promotion and maintaining the expatriates’ remittances flow abroad, which at times slightly declined but today is back to its safe and normal levels as it used to be.

Talking about foreign exchange reserves will lead us to talking about the levels of confidence in the Jordanian Dinar which we will leave our guest Salameh Daraawi to comment on.

Salameh Daraawi: At the beginning of last year, we witnessed a dollarization of 27% and this was a matter of concern, of course. This happened as a result of unclear vision regarding the Jordanian economy, regression of aids and the lack of clarity regarding Jordan’s relationship with donors. This process, which we call dollarization, has later returned to its normal level at around 19%. In case the situation remains similar to how it was in 2017, I think the economic situation regarding foreign exchange reserves would be positive because it is growing positively since last year and the constancy of previous indicators will contribute in achieving stability. Moreover, the government is committed to implementing the correction program with International Monetary Fund, which will improve the situation or financial strength of the Jordanian State Treasury.