Combatting the effects of Jordanian inflation (page 2 of 2)

In a dollar pegged economy such as Jordan, this is not a viable option.

The dollar peg has served the Jordanian economy well since it was put in place in 1995, lending credibility to the Central Bank's commitment to maintaining the currency's external stability, enhancing investor confidence as well as controlling inflation.

This contributed to economic stability, and allowed for increased foreign investments and accordingly paved the way for economic growth.

In a report recently released by Jordinvest, we determined that there is no clear misalignment between the US dollar and the dinar given the currency composition of the kingdom's debt and its trade position.

We have therefore concluded that we are in favour of maintaining the status quo regarding the dollar peg; especially in light of institutional constraints and considering the lack of financial market depth to cover the higher exchange rate risk associated with a flexible exchange rate regime.

However, in our report we stated that we would endorse a slight appreciation of the dinar against the greenback. This would mean servicing Jordan's non-dollar denominated debt becomes cheaper as would our US dollar denominated imports.

The government has taken a number of measures, outlined below, to address what is now one of the prime challenges facing the economy.

While a one-off appreciation of the dinar against the dollar might contribute significantly to easing inflation as suggested above, the government may also resort to fiscal measures, such as cutting back on public spending, so as to break the inflationary spiral underway.

While this may have the effect of dampening economic growth, the negative impact on economic growth of rising inflation, via reducing both local and foreign investor confidence and accordingly investment levels, is greater.