CBJ plans to phase out subsidized program from lending to SMEs

[23-01-2023 10:55 AM]

Ammon News - Rahaf Noghai- The World Band said that the Central Bank of Jordan (CBJ) plans to phase out a subsidized program from lending to Small and medium-sized enterprises (SMEs) by the end of 2023, to support the “strong recovery” of Jordan's economy.

The bank added in the “Jordan Economic Monitor report” that this disposal would help avoid potential unintended negative effects of the program.

The value of the program amounts to JD 700 million, to support SMEs, professionals, craftspeople and basic commodity importers, stipulating specific borrower limits for each sector.

Within this program; The government bears the interest cost on loans in case SMEs use the loans to pay employee salaries. While in March 2022, the CBJ utilized this lending scheme to mitigate the impact of rising international commodity prices on importers by raising the borrowing limits for firms that import basic commodities, such as wheat, sugar, and oil.

Regarding the second program launched by the CBJ, the terms of an existing JD 1.3 billion program have been adjusted to refinance 10 vital economic sectors through preferential interest rates, the World Band said in its report that “the CBJ still sees itself beneficial to the economy, and plans to review the interest rate for this system in the medium term.”

The 10 sectors are: industry, tourism, agriculture, renewable energy, information technology, transportation, health, technical and vocational education, engineering and consulting.

The World Bank pointed out that "these programs for lending at subsidized interest are quasi-fiscal operations, as they represent a transfer of public resources to specific economic sectors, thus carrying out a fiscal policy that falls outside of the fiscal budget."

“Although these activities fall outside of central banks’ regular mandate, quasi-fiscal operations often become crisis tools, because they are easier to administer, faster to implement than typical budget financed subsidies, or are simply considered financial operations which fall within the scope of the central bank’s realm”, according to the report.

The World Bank pointed out that limited fiscal space and large liquidity needs of the hard-hit private sector gave rise to the CBJ’s quasi-fiscal operations at the onset of the pandemic. During 2022, they allowed the CBJ to safeguard the peg by closely aligning its policy rate with the U.S. Fed funds rate while maintaining support for selected sectors.

The report indicated that during 2022, the CBJ has gradually increased the interest rates on its policy instruments but left preferential rates for its refinancing programs unchanged to maintain its support to the private sector.

The program effectively provides lending to selected sectors at below-market interest rates, a form of administered interest rate and the funds are lent from the CBJ at a low rate (1% for projects within the capital governorate, and 0.5% for projects within the other governorates), which private banks then on-lend with a small margin.

“This hampers banks’ ability to price the risk adequately and may undermine the development of this market segment, a guarantee of 85 percent by the Jordan Loan Guarantee Corporation (JLGC) allows commercial banks to be more comfortable to lend with these low administered lending rates”, the report added.

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