Monday, March 12, 2007

Inflated Economy

The Department of Statistics announced last month that Jordan's inflation rate for consumer prices has soared to 6.25%. This comes against a backdrop of widespread public complaints of increasing prices and diminishing incomes. Oula Farawati gauges economists' views on how to help the economy escape a looming recession.The numbers are reminiscent of periods of rising inflation Jordan witnessed in the early 90s. In 1988 and 1989, the Jordanian economy received continuous economic shocks and saw the inflation rate reach 25.7%, and negative economic growth touch 16.7%. At that time, Jordan adopted an economic adjustment program aimed to achieve economic stability by adopting a tight monetary policy, mainly by raising the interest rate to control demand and consequently lower prices.The Central Bank of Jordan (CBJ) is heading in the same direction now by raising key interest rates to offset inflation. Following the lead of the U.S. Federal Reserve, the CBJ has raised interest rates 17 times in the past two years."This is catastrophic," economist Hani Khalili said. "We are shooting ourselves in the foot. Curbing inflation by raising the interest rates is only going to discourage investments, and drain liquidity in the market, further pressuring ordinary Jordanians." .The current inflation problem in Jordan has been set off by rising oil prices, as well as a government decision to gradually lift subsidies on oil derivatives. Any hike in petrol prices is always followed by a rise in the prices of basic commodities and services, because higher oil prices raise production costs."Inflation is such a dangerous problem in Jordan as we can see the purchasing power of people decreasing sharply," economist Husam Ayesh told Jordan Business. "The problem is there isn't much we can do if our economy continues to be dependent on what happens externally. We are currently catching all the ills of external economies such as the U.S. and having to pay a high price of our lack of economic independence," Mr. Ayesh said. (The Jordanian dinar has been pegged to the dollar since 1996, which according to the CBJ is necessary to maintain a stable exchange rate for the dinar and subsequently protect Jordan's exports.)Misleading numbers?Some economists question the inflation rate that the DOS announced, arguing that inflation must be higher than 6.25%, estimating the number at over 10%."I am not sure if the percentage [supplied by the DOS] mirrors reality. I can feel the purchasing power of the Jordanian dinar decreasing so quickly," said Mr. Khalili.Economist Ayesh concurs with that point of view. He argues that the basket of commodities according to which the CBJ calculates inflation is different every year, and the weight of commodities in the inflation calculation formula was changed to make the inflation rate lower. "I know that this game was played several times to cover up the rise in inflation, but I think prices have gone up so high that the government can’t hide the facts any more," said Mr. Ayesh.Hani Dawaghreh of the DOS denies that the basket of commodities has changed. "We have been using the same basket since 2002; nothing has changed and we based our calculations on the Family Spending Survey we carried out then," he said.The high inflation rate according to Mr. Ayesh was also making interest rates on deposits seem unsatisfactory for people wishing to keep their money in the bank. "If the inflation rate is 6.25% and the interest rate on deposits is 4%; that means that people lose money by making bank deposits. The inflation rate should always be less to make depositing money at the bank a positive investment," he said.The X factorOther than spiraling oil prices, inflation in Jordan was also compounded by an increase of demand that was driven by the influx of Iraqi refugees. Government statistics put the number of Iraqi refugees in Jordan at 500,000, but many say the number might have exceeded 800,000. Real-estate prices have more than tripled since the start of the war, as the market has been filled with wealthy Iraqis. According to local economists, prices of basic commodities, clothes and other merchandise went up by more than 25%, putting more pressure on the pockets of Jordanians, more than half of whom live under the poverty line. The hike in the prices of basic commodities was, once again, the talk of the country last month, especially with a steady but quick rise in the prices of vegetables. The prices of tomatoes, cucumbers, eggplants and zucchini, all basic ingredients in the Jordanian kitchen, soared to unprecedented highs, prompting widespread complaints."The biggest losers in this equation are the ordinary citizens, especially those living on fixed incomes and managing their expenses paycheck to paycheck," said economist Mr. Khalili.A vicious circleOne major adverse effect of high inflation is rising unemployment. The decrease of purchasing power of citizens affects companies and their profits, which discourages local and foreign investments, in turn increasing unemployment."I think this is the worst consequence of all…the entire economy will be suffering if investors shy away from putting their money in Jordan," said Mr. Ayesh.He added that a high inflation rate also affects the gross domestic product and economic growth. Jordan's economic growth hovered around 6% last year, which is less than the inflation rate. "It is very worrying to see inflation exceeding growth. This means that all the efforts to improve the economy are not working out, and that actually, the economy is worsening," added Mr. Ayesh.The policy of raising interest rates is not going to help Jordan escape the inflation bubble, economists argue. Opinion writer Isam Qadamani said in an article published in Al Rai newspaper on January 22, that raising interest rates will only pressure small investors and ordinary citizens. "This will also increase liquidity in the coffers of Jordanian banks already suffering from high liquidity. It will also curb investments because the return on deposits is higher than the return on real investments, which will further hurt the economy and the production cycle," Mr. Qadamani wrote.Resorting to "cosmetic" and temporary measures will only worsen the situation. The only way to offset inflation is to raise production and achieve more independence for the economy.