An inflation rate of only 2%, a stable currency and reserves at
$3.5 billion demonstrate the stress Jordan has put on having a
tight and rigorously enforced monetary policy.
This has not always made Umayya Toukan, governor and chairman of
the board at the Central Bank of Jordan, popular with the business
community and some government ministers. He has been accused of
keeping interest rates so high that growth is strangled as
investment decisions are delayed. The country's best companies have
to borrow at between 7% and 8%.
Toukan is unrepentant and rejects suggestions that interest
rates are too high, pointing out that 5% growth is near the target
level. "We have also done an exercise with the IMF, comparing the
interest rates of countries with a similar economic structure. Our
level of interest was not out of line with the median level of
other countries," he says.
He remains committed to rigorous control of the money supply.
"Monetary policy aims to provide enough liquidity, but only just
enough liquidity, to finance the desired level of economic growth,
but not one Jordanian dinar more," he says.
The governor believes that "any excess liquidity will find its
way into creating inflation. We feel our monetary policy is working
well - inflation has been kept below 3% - and we will continue to
monitor the level of liquidity in the economy very closely and
absorb excess liquidity when we need to."
The central bank is now introducing more sophisticated ways of
mopping up excess liquidity. As there is a limited amount of
outstanding treasury bills, the bank conducts the equivalent of
open market operations by selling certificates of deposit to the
banking sector at a current rate of 3%.
Toukan is also happy about the pegging of the Jordanian dinar to
the dollar. He says that it is producing the right results in terms
of exports, GDP growth and foreign exchange reserves. "This year,
foreign exchange reserves were up $800 million, which is consistent
with the achievement of record export levels," he says.
Although the monetary statistics have continued to perform well,
it has been a less happy year on the regulatory front - Jordan is
planning to set up a financial services authority but until that
happens regulation remains the responsibility of the central
bank.
Rigorous about NPLs
Toukan is determined to enforce the regulations on
non-performing loans rigorously, a policy that has not always
endeared him to spending ministers as the provisions taken out hit
banks' taxable profits and reduce the government's take.
However, the importance of tight regulations was reinforced
early last year when an alleged fraud brought three banks - Jordan
National Bank, Jordan Gulf Bank and Jordan Investment & Finance
Bank - to their knees.
Toukan has received praise from local bankers and international
risk agencies for the way he has forced the banks to inject new
capital and to operate under strict rules. The amount of new
credits they issue is limited to the equivalent of the amount of
non-performing loans they have reduced and they have been obliged
to introduce much tighter internal controls.
The bank was also sufficiently concerned about a fourth
institution, Philadelphia Investment Bank, following an inspection,
that it dissolved the board and imposed a three-man senior
management committee from the outside with instructions to overhaul
the running of the bank.