Jordan reserves healthy despite pressures

AMMAN: Jordan's $8.7 billion of foreign reserves, under pressure after a wave of Arab unrest, are still at comfortable levels and should pick up with higher capital inflows from tourism and development aid from Gulf Arab neighbors, the central bank governor said yesterday.
Jordan's foreign reserves fell 16.5 percent in the first quarter of 2012 from $10.9 billion at the end of last year, hit by a sharp reduction in capital inflows from foreign direct investments and a drop in remittances since last year.
"The Central Bank of Jordan (CBJ) continues to hold a comfortable and safe level of foreign reserves that allows it to face existing pressures," Ziad Fariz told Reuters in an interview.
Last year the bank's foreign reserves fell nearly 14 percent as the Arab Spring elsewhere in the Middle East hit confidence, worsening a deterioration in Jordan's current account of the balance of payments.
Fariz said current reserves cover five months' imports. Monetary stability was also cushioned by a profitable banking sector and total bank deposits had risen slightly to top 24.8 billion ($35 billion) in the first quarter of 2012 of which 5.6 billion dinars were foreign currency holdings, he said.
He said Jordan aimed to utilize by the end of this year part of a $5 billion financing facility set up by the Gulf Cooperation Council (GCC) last year to help alleviate the impact of the wave of Arab unrest on Jordan's aid-dependent economy.
"This will help bolster reserves of foreign currencies, a matter that will reflect positively on the balance of payments and growth rates," Fariz added.
Fariz said an improved outlook for this year was underpinned by a pickup in remittances of Jordanian workers in the Gulf over the last three months.
Tourism receipts rose 15.6 percent in the first five months of 2012 against the same period last year to $1.3 billion and jumped 40 percent in May against the previous month as travelers favored Jordan over other parts of the region hit by unrest, he said.
Fariz said Jordan should benefit from lower oil prices, reducing an energy import bill that reached $2.6 billion in the first quarter 2012 and was blamed for worsening public finances.
"Global oil prices have fallen nearly 20 percent recently and this drop is expected to continue in the short and medium term.. This will have a tangible impact," Fariz said.
The central bank governor defended the dinar dollar peg, saying it had provided stability in recent years as the kingdom still struggled to recover from the global downturn of 2008-2009 that was compounded by the climate of uncertainty due to the Arab Spring.
"The assessment of the central bank that corresponds totally with the evaluation of the International Monetary Fund (IMF) confirm the exchange rate of the dinar with the US dollar is still the best option and most suited to the characteristics of the Jordanian economy," Fariz said.
Bankers say the peg would also help the CBJ to maintain a tighter monetary policy that was primarily prompted to encourage savings in dinar-denominated assets.
The CBJ had raised interest rates in February to widen the differential between the dinar and the dollar — which is typically at least 4 percent — to stem capital flight.
"The peg also ensures the competitiveness of the dinar and it is the cornerstone of the policy to support economic growth and the basis of monetary and fiscal stability," Fariz said.
Some bankers have noted transfers to the dollar as a safe haven in recent months by jittery depositors.
Fariz also said recent measures to raise gasoline and electricity prices to reduce a costly subsidies' system was a step in the right direction toward fiscal consolidation that was essential to spur growth.
Jordan forecasts 2.7 percent economic growth this year, a slight pick-up from last year's 2.5 percent but almost half the levels it attained during a boom period before the financial crisis.
Fariz said that reforming the fuel subsidies' system was crucial to reduce the budget deficit to around 5 percent of GDP this year from 6 percent in 2011. Economists say the deficit could reach as high as 8 percent without aid from Western donors and Saudi Arabia.