Ammon News - AMMONNEWS - Jordan's foreign exchange reserves have witnessed a leap, reaching more than $14 billion at the end of last year, compared to $12 billion at the end of 2013. The International Monetary Fund (IMF) expects the reserves to amount to $17 billion this year, and reach around $18 billion at the end of 2016. This continuous increase is an important indicator to the trust in the Jordanian economy and dinar as a saving and investment currency, and the trust in the political, security and social stability that the kingdom enjoys.

It is known that the political and security instability witnessed in Arab countries in the last years has led to a recession in the flow of foreign currencies and a decrease in the exchange rate of their national currencies, requiring the imposition of limitations on the flow of foreign currencies outside these countries. It is also known that foreign exchange reserves of any state play an important role, since a solid base of foreign currencies renders the national economy more resilient to external risks. Such a base also plays a role in reinforcing the monetary policy and exchange rate of national currencies, and increases the trust of markets in the ability of the state to fulfill its commitments and external debts. All of the aforementioned contributes to reinforcing the credit ranking.

What is more, foreign exchange reserves help countries perform different transactions easily, without fear of the national currency exchange rate falling. These reserves are an indicator to the financial cover the economy has and constitute a safety net that protects from crises.

The Jordanian foreign exchange reserves cover the needs of goods and services imports for more than seven months — a period of time that is considered reassuring according to international applicable standards, and the widely adopted banking principles. Further reinforcing trust in the Jordanian dinar is the pegging between its exchange rate and that of the US dollar. This pegging policy, which has been in place for 20 years, largely contributed to entrenching monetary stability by maintaining a low inflation rate, increasing the competitiveness of exports, and boasting the value of foreign exchange reserves.

The pegging policy also played a prominent role in increasing the flow of transactions, savings and investments of Jordanian expatriates in the Gulf countries for different reasons: the national currency exchange rates of these countries is pegged to the US dollar; the disparity between the interest rate of the dinar and that of the dollar; and the flow of Gulf investments, whether directly in real Jordanian economic sectors, such as real estate and industry, or indirectly in the stock exchange of Amman or bonds.

What further made Jordan appealing for Gulf investments is that the risks imposed on exchange rates in Arab Spring countries — mainly Libya, Yemen, Iraq, Syria, Egypt and Tunisia — are not found in Jordan. The large decrease in the exchange rates of the national currencies of these countries has led to high inflation rates and external indebtedness, coupled with a decrease in the transactions, savings and investments of expatriates. Tourism income in the majority of Arab Spring countries suffered a setback due to political and security instability, adversely affecting the flow of foreign currencies into this important sector, as the recession of this flow has several negative effects.

When Jordan pegged its national currency to the US dollar in 1995, the country took into consideration that the dollar represented the biggest economy in the world and constituted the international reserve currency. Central banks in the majority of countries around the world have large reserves in US dollars to meet their needs of goods and services. The US dollar also constitutes one third of foreign monetary reserves in the world, knowing that 80% of foreign exchange rates and 50% of world exports, including oil, are priced in US dollars.


*Al-monitor