As the impact of the global financial crisis continues to resonate, here at home people have been left to wonder where Jordan lies amidst the chaos. This month, economist Marwan A. Kardoosh went straight to the country’s most eminent financial expert, Central Bank Governor Umayya Toukan, to find out just how the Kingdom will fare in these turbulent times.

While it may feel like ages ago, it was only several weeks back that global markets began to tumble like dominos. What began as a sub-prime lending problem in America has now spread like wildfire, transcending international barriers and causing money markets the world over to seize up, as banks refused to lend to each other. In a year where US elections, natural disasters, wars and conflicts reigned supreme, it was the unpredictable mother of all financial crises that gripped the world, leaving scores of people across the globe glued to their television screens as stock tickers dove. In between, a rash of banking and insurance-company failures broke out, and some of the most dramatic government interventions in financial markets since the 1930s followed.

Today, the world awakes to an unstable and rather unpredictable globalized market, and in this fog of uncertainty we are left wondering about the impact closer to home. Even though the Jordanian economy has seen rapid growth in recent years, inquiries as to its future have arisen in the past few weeks. Of course, predicting the consequences of a still-unfolding crisis is highly dangerous, but if anyone comes close to providing an intelligent answer, it is Umayya Toukan, one of Jordan’s most seasoned economists and its central bank governor.

Born in Amman in 1946, Umayya Toukan is a graduate of the American University of Beirut (bachelor’s in economics, MBA), Oxford University (master’s in economic development) and of New York’s Columbia University (a doctorate in economics, with special focus on monetary policy and financial markets). Toukan started his professional career in 1967 at the Central Bank of Jordan (CBJ) and then went on to serve as economic advisor to the prime minister of Jordan, head of the economic research department at the Central Bank, and chief executive officer of the Amman Stock Exchange. In 2001, Toukan was appointed governor of the CBJ for a five-year term, which was extended for a similar period of time in 2006. It is this distinguished background that makes Toukan an obvious choice when it comes to questions that plague these troubled financial times. Jordan Business was privileged to sit down with Toukan for an exclusive interview, in search of answers perhaps only he could provide.

JB: Your Excellency, economists seem divided on the depth of the likely effect of the financial crisis on Jordan. While some expect the impact on economic activity to be profound, in line with international trends, others say the current disruptions are unlikely to have a lasting impact on growth, citing lower oil prices and a more positive inflationary outlook as important factors in this regard. What are your thoughts on these views? Are there any policies being pursued, specifically on the monetary front, to ensure sustained growth after the crisis subsides?
UT: As you rightly mention, there are some positive aspects as well as some serious concerns regarding the impact of the global financial crisis on Jordan. In the immediate and short term, the decline in the prices of oil, food, and other basic commodities should have a positive impact on our inflation rate, balance of payments position, and the government’s fiscal deficit.
 
Looking ahead, and in the medium and longer term, the slowdown in the global economy raises concerns regarding the impact on our exports of goods and services, including tourism, as well as on capital flows like remittances from Jordanians working abroad, foreign direct investment and portfolio flows. The overall impact on our current account will depend, of course, on the relative strength of the two effects. This is an empirical issue and credible answers will have to be the outcome of a serious investigation. At the moment, and with the help of the International Monetary Fund (IMF), we at the CBJ are conducting empirical studies to identify the quantitative impact of the expected global economic slowdown on all sectors of the Jordanian economy, the channels of transmission, and the measures that could be considered. Clearly, the studies will be forward-looking or estimates utilizing expected global growth rates for 2009, as projected and issued by the IMF last month during the annual meetings of the IMF and World Bank. The IMF estimated growth rates of less than 1% for the developed economies in 2009, and 6% for the developing and emerging economies, including China and India. What is important for us in Jordan, I believe, is to continue with our reform process and proceed to use good economics, in which case we will be able to respond to any external shock or supply shock with ease and at a minimum cost. On our part as a central bank, we will continue to follow a dynamic monetary policy aimed at price stability and a strong national currency. This monetary environment will, in our view, provide the right environment for economic growth without undesired inflationary pressures. Also, by maintaining a sound and healthy banking system and an efficient national-payments system, we will be contributing to having the right environment for attracting investments and stimulating higher rates of economic growth.  

JB: Another term has recently been added to the vocabulary of economists: “contagion.” Financial problems that had been festering in the US real-estate market for years erupted dramatically a few weeks ago, and then spread like a pandemic through world markets. This was not just a case of some or even many countries in turmoil, but of a global system in crisis due to the risks of globalization. Jordan seems to be no exception to this general pattern, with the Amman Stock Exchange (ASE) sinking fast as of late. Do you think that this panic has been due to fundamental economic problems in Jordan or is it just a case of investors escaping the markets?
UT: The recent decline in the ASE has been due to a global phenomenon in which there has been a total breakdown of confidence and nothing to do with the fundamentals of the Jordanian economy. Indeed, the month of October witnessed the greatest stock-market volatility ever recorded in history. The indiscriminate selling was clearly a panic attack that lasted for almost a month. In response, the Federal Reserve Bank of America, together with the Bank of England and other central banks, slashed interest rates 50 basis points and injected hundreds of billions of liquidity dollars into banks and financial markets. Unfortunately, stock markets were not impressed with these major measures and the decline continued simply because the drop was not related to any fundamental reason but due to panic fuelled by extreme uncertainty. The same phenomenon occurred in Jordan. As of today, stock markets seem to have generally stabilized.
Our position at the CBJ was that no measure could stop the decline and we had to, therefore, sustain the panic attack. As you might agree, recent upward performance of the ASE gives support to our position.

JB: The last few years have seen banks in Jordan go on a lending binge, be it via credit cards, long-term mortgage lending, car financing and/or personal loans. However, with many now adhering to the thesis that irresponsible lending practices have been the main cause behind the current financial debacle, will we begin to see Jordanian banks shrinking away from granting loans? If so, what kind of an impact could this have on the level of economic activity in the country? What measures would need to be in place to keep the sector prudent?
UT: Let me first emphasize that we, in Jordan, have no liquidity problem or credit facilities problem. Credit has been growing at high annual rates of around 17% in 2008. Excess liquidity in the banking system is over JD600 million, in addition to JD5 billion in certificates of deposit, treasury bills, as well as treasury bonds that are liquid assets. Furthermore, the CBJ offers several facilities to provide liquidity to the banking system as a lender of last resort. The data indicates that inter-bank interest rates have eased in recent weeks, suggesting comfort regarding the perceived counterparty risk. Having said that, and given the global banking problem and liquidity crunch, it may be understandable if, looking ahead, our banks would be more restrictive in granting credit facilities. This need not be bad news. In fact, this means a further improvement in the quality of credit.

Highly-rated borrowers would get priority in lending. Given the high competition between banks to increase their market share, I am confident that all eligible borrowers will have no difficulty getting access to credit facilities. On our part here at the CBJ, we will continue to implement strict bank supervision to ensure that banks continue with their prudent policies.

JB: Fueled by soaring regional incomes and encouraged by extensive economic reforms, foreign direct investment (FDI) into Jordan has boomed in the past few years. This has been especially true of neighboring Gulf countries riding a tide of petrodollar-powered incomes. However, as real-estate and marketplace stocks continue to tumble in the US, will we begin to see Gulf investments diverting away from Jordan and moving instead to the attractive opportunities the US markets are currently presenting?
UT: As I had mentioned earlier, the global economic slowdown poses serious challenges to our economy, including the sustainability of FDI and portfolio flows. On the face of it, it does seem possible that slower economic growth rates in Jordan’s trading-partner countries, estimated by the IMF at 2.25% for 2009, may affect FDI and portfolio flows to Jordan. However, as I tried to emphasize earlier, the important issue for Jordan is to continue to have our internal affairs in order; a sound banking system, a strong currency, low inflation, as well as disciplined monetary and fiscal policies.

I strongly believe that if we continue to follow sound policies and good governance, we will be able to contain external or supply shocks with ease and minimum cost. We will, however, continue to monitor closely, in particular, movements in the inter-bank market, deposits in the banking system, banks’ foreign operations, and the balance of payments, as these are the first indicators to signal the transmission of any impact from the global crisis.
 
JB: Rapid growth in the real-estate sector since 2003 has underpinned gross domestic product (GDP) expansion and has also attracted massive amounts of foreign direct investment. However, some skeptics argue that the current, and still-ensuing, credit crunch may put an abrupt end to this growth. What are your thoughts on this? 
UT: The decline in real and financial assets’ prices, including real estate or equities, will be a challenge due to the wealth effect that results from a change in asset prices and the impact on the balance sheets of banks. As I had mentioned earlier, this is an empirical question and we are studying at the moment the likely impact on the real-estate market of a global or regional slowdown. Under the circumstances, any correction in asset prices need not be a bad thing. It may well be that asset prices were inflated, and there may have been a speculative element in the big rise in asset prices witnessed in the last few years. As such, a reasonable correction could be a natural and healthy response by markets.
JB: A number of economic and political considerations have kept Jordan wedded to a fixed exchange rate that pegs the Jordanian dinar to the US dollar. The current global financial crisis, meanwhile, has massively impacted the value of international currencies, with many now fleeing towards the financial security of the Japanese yen and the US dollar, the latter of which is experiencing a three-year high. In your opinion, what is the precise impact of this still-emerging situation likely to be? Also, as late as June 2007, you claimed that the issue of the peg was “not for discussion.” Do you think this is likely to change given the new circumstances?
UT: Let me recall that the mandate of central banks is primarily price stability. Price stability does not refer only to the change in the general price level of goods and services, which is commonly referred to as inflation. Price stability also means a stable price for our currency, the exchange rate, as well as the price of money, credit, or the interest rate. These three prices are determined simultaneously and jointly affect our real terms of trade and balance of payments, our external balance. Stability in this context does not mean non-movement or being stationary. It means movement within desired ranges that are usually compatible with the level of economic activity. We have seen, in particular during the month of October of this year, wild fluctuations in the exchange rates of major currencies, including the US dollar. Under such circumstances, it is not timely or justified to question our stable exchange rate regime in Jordan. The present peg of the JD to the US dollar has served Jordan well and has produced high rates of export growth of around 35%, high levels of foreign-exchange reserves of around $8 billion, and high economic growth rates of around 6%. This is clear evidence of the competitiveness of the exchange rate of the JD at its present level.
Looking ahead, we are closely monitoring all developments in the foreign-exchange markets and in the global real economy and will continue to assess any likely impact on our macro situation. To that end, an operations arm has been set up at the CBJ with a clear mandate.
JB: The CBJ’s interest-rate policy latitude is typically constrained by the need to keep a gap between US dollar and JD interest rates, in order to induce savings in the latter. This is also a defensive differential to stave off pressures on currency devaluation. With interest rates now falling in the US and Europe, what is the current outlook for JD interest rates?
UT: As you very well know, the interest rate and the associated volume of liquidity are important monetary-policy instruments used by central banks to maintain price stability. These instruments can be used to control inflationary pressures if need be, as well as to stimulate economic activity in the case of a slowdown. Thus, central banks, in assessing their decisions on interest rates or the volume of liquidity, look mainly at the inflation rate, prevailing as well as expected, and the GDP-growth rate, again, prevailing and expected. The available data in Jordan indicates that we have a robust GDP-growth rate of 6%, but with a high inflation rate amounting to 15.5%. This high inflation rate harms mostly the low-income groups and the most vulnerable groups in society. As such, our direction is clear. Unless we start to see evidence of a declining inflation rate, we will continue our efforts to contain inflationary pressures as a first priority.

JB: In the past several weeks we have seen many of the world’s central banks coming together to harmonize policy. Is the CBJ playing any role within this loop?
UT: I think this is a very important question. Since the accession of His Majesty King Abdullah II to the Hashemite throne, Jordan has opened up to the global economy and we are benefiting from, as well as contributing to, the global economy. Obviously, international cooperation efforts are essential as a source of sharing knowledge and information, as well as in comparing country experiences.
To that effect, the CBJ is actively engaged with our regional and international counterparts with a view to arriving at the best policy options given the different scenarios for expected developments in the global economy.
To give you a flavor of this aspect of our activities, during the annual meetings of the IMF/World Bank, held in Washington last month, we had the opportunity to meet with a number of governors from developed and developing countries, as well with as IMF senior staff, including the deputy managing director. The CBJ was present at the International Monetary and Financial Committee meeting, the Group of Thirty meeting, and the Bretton Woods Committee meeting. The CBJ was also present at the annual meeting of the Bank for International Settlements in Basle (the central bank of central banks), as well as at the Jackson Hole meeting in Wyoming. All those major meetings are concerned with issues similar to those raised by your questions and the participants are the cream of world monetary economists and central bankers, including the chairman of the Federal Reserve Bank and the president of the European Central Bank, among other central banks from the world over. Furthermore, the CBJ was recently present in Dubai at a meeting with Gulf Cooperation Council governors of central banks for discussions on the present global crisis and its impact on the region.

Clearly, this wealth of information and related documentation are being transferred to our staff at the CBJ, placing them in a better position to provide the empirical work that will be essential for well-informed decisions by Jordanian policy makers. Another equally important aspect of our international cooperation efforts relates to the participation in major central banks’ workshops and training seminars. Members of our staff frequently participate in training programs at the US Federal Reserve, the Bank of England, the European Central Bank, the Arab Monetary Fund, as well as at major universities. On the other hand, we offer training programs at the CBJ, mainly for central banks’ staff in neighboring Arab countries.

JB: The current financial crisis has also solidified arguments that neo-liberal economic models of little government intervention do not work, calling for greater market regulation. Will we begin to see any significant changes with regards to banking regulation in Jordan?
UT: As you might agree, recent events suggest that the CBJ regulations are quite adequate. I should also point out that our banks have shown an admirable performance in risk management and good governance, as well as in strict compliance with CBJ regulations. Due to the recent global financial crisis, which is still unfolding, I expect that new approaches to regulations may soon be developing. In fact, the present global discussions speak of reshaping the whole international monetary system. This process is still evolving and we are monitoring it closely through our international cooperation efforts, as I had tried to explain in your previous question. However, we should remember that the events since August 2007 have been unprecedented in history and it may take years to understand how what began as a decline in home prices in the US ended in a meltdown of the global economic and financial systems.
JB: Large-scale economic and military assistance has been the cornerstone of US foreign policy in Jordan in recent years, providing an important cushion to the ailing state coffers. With the US economy now in a tailspin, foreign assistance to Jordan is likely to drop. To what extent will this decrease affect the government budget and the Jordanian economy more broadly? What policy measures are being taken to address these effects?
UT: As you very well know, Jordan enjoys tremendous goodwill due to its positive role in the international community and because of its established record in good management and good governance. The wise and humane leadership of the Hashemite Royal Family is very much appreciated by the international community. This appreciation has been translated in the past into increasing support for Jordan and I am confident this will continue to be the case.
JB: Worker remittances form a credible source of supplementary income for Jordan, contributing significantly to its GDP and helping in the Kingdom’s strategy for poverty alleviation, trade-deficit reduction and access to hard currency. With Gulf economies in recent weeks starting to feel the pinch of the credit crunch, do you expect remittances to fall in the short to medium term? What about Gulf demand for Jordanian exports of services?
UT: Again, this is an empirical issue and we, at the CBJ, are studying the likely impact on remittances due to the global financial crisis. In this regard, I would reiterate that if we continue to do all the right things in terms of reforms and maintaining an attractive investment climate while preserving macroeconomic stability, we will be in a better position to contain and coexist with any external or supply shocks. It is very important to maintain confidence in our macroeconomic management and banking system. Change, as well as supply shocks, will continue to take place. This is in the nature of things. It is also in the nature of things that if certain industries or technologies mature, new industries or technologies will develop. Similarly, if certain markets dry up, new markets will be found. The point I am trying to make is that we should always view the world with a dynamic outlook and be prepared for evolving developments.