|Lower interest rates fail to arouse business community
|The decision last week of the Central Bank of Jordan to reduce interest rates on the dinar is stirring controversy among economists and businessmen in the Kingdom.
The CBJ move is a significant step to improve the local economy. However, it is still early days.
Commercial banks are reluctant to comply with the CBJ regulations, as each is still cautious from what is being dubbed as the “Shamayleh gate.” Bankers assert interest rates on loans are still high.
They note, however, the current stagnation in the economy doesn’t help the banks to bring in more investors but rather may have an undeclared policy of wanting investors to keep their deposits in these financial institutions rather than withdraw them. Banks’ fears could be justified despite official guarantees of the potency of the financial system in Jordan.
The CBJ’s decision to reduce interest rates is the eighth of its kind in nine months. Omayya Touqan, CBJ’s governor, explained the procedure allows for the efficiency of the Jordanian financial system and its correspondence with the latest developments in world markets. He added the reduction in interest rates reflects the competence and flexibility of the local economy.
The CBJ decision is applicable on interest rates that are applied on deposit and credit programs. According to the decision, deposits obtained in the Jordanian dinar will be subject to an interest rate of 3.5 percent. Today, deposits in local banks are increasing, currently standing at JD 10 billion. This massive liquid reserve needs to be employed in social and economic development projects.
Economy Minister Samer Al Tawil appealed to local banks to reduce interest rates on loaning schemes. His appeals were made twice in less than 72 hours, something that reflects the seriousness of the financial situation in the Kingdom.
Al Tawil warns the variance between the interest rates applied on deposits and credit is widening following CBJ’s decision. This variance is estimated at 8 percent in favor of credits. The CBJ move provides more incentives for depositors to open new accounts, while debtors are still facing the ordeal of their rising refunds on their loans.
The HSBC Bank in Jordan was the first to respond to the CBJ’s decision. It reduced, Tuesday, the interest rate on its loan schemes by half a point. Major institutions, like the Arab Bank and the Housing Bank, are expected to comply with the CBJ decision and reduce their interest rates on credit facilities.
Still, economists are divided on the CBJ’s move. Many of them agree the decision is an essential step to revive the sluggishness in the economy. They stress the main objective behind the Central Bank’s decision is to promote investment in the Kingdom. The CBJ aimed at adjusting the variance in the interest rates applied on deposits by the US dollar and those of the dinar said Wajdi Makhamra, director of the Securities Unit at the Atlas Investment Group. It encourages investors to obtain more credits valued in the Jordanian dinar as the interest rates on the US dollar rapidly decreased in recent months.
What economists are most critical of is the financial policy the government is pursuing in regard to the latest developments in the world financial markets. They argue the CBJ decision was made following that of the US Federal Reserve to reduce the interest rate to 1.25 percent, the lowest in 40 years. Economists stress Jordan’s financial market is much different from the American one and requires more assessment and efficient handling. Mifleh Aqel, chief economist at the Arab Bank, rebuffed the CBJ decision saying the current interest rates are good. He warned that any further reduction on the interest rates in future would create problems in the financial market.
“For deposits in Sterling pound the interest rate is four percent, while in the euro it is 3.25 percent. It is not health for the financial market to have the interest rate on the dinar in-between these two currencies,” Aqel said. “The current economic situation in Jordan doesn’t allow for reduction of interest rates. We have to maintain the current situation until circumstances get better,” he added.
Economist Mohammed Saleh Jaber believes the Central Bank has made a wrong move in the wrong time. “The economy in Jordan is being overshadowed by the political instability in the region. Hence, the banks will not find businessmen who are interested in obtaining sizable loans,” Jaber told The Star. The economist noted depositors are the main beneficiaries from the CBJ move. He added the current financial standing at the Amman Stock Market (ASE) is a clear illustration of the current economic conditions in the Kingdom.
“The CBJ’s objective is also aimed at making the ASE more favored by investors. I guess it will fail because of the current political and economic circumstances.” Economists, meanwhile, believe the Central Bank must loosen more of its limitations on the investment tools that are available for the commercial banks in Jordan. “New investment tools must include facilities given for financial institutions to provide easy loans and development warranties to ease the deficiency in liquid assets and sustain economic development in the Kingdom,” Jaber said.
Hatem Al Halawani, president of the Amman Chamber of Industry, warns the gap in interest rates on deposits and credits hinder economic development. He said the industrial sector in Jordan is facing mounting challenges due to the competition from the open-market policy.
“Arab industries get better funding programs made for lesser refunds than those in Jordan. The rising interest rates on credits in Jordan stand in the way of industrial development,” Halawani explained. Many Jordanian investors refrain from having new businesses or even expand their current ones because of the rising interest rates on loans. Halawani believes many of the Jordanian investments won’t survive the current situation if the banks don’t rectify their policies. Halawani notes that many of the Jordanian investments won’t survive the current situation if the banks didn’t rectify their policies soon.