Ziad Fariz
Governor of the Central Bank of Jordan
/ Jordan
“Banks in Jordan are healthy and compete domestically and abroad”
Appointed governor of the Central Bank of Jordan in 2012, Ziad Fariz has overseen a challenging chapter in the region that has tested the country’s economic stability. He explains how the central bank has worked to mitigate these external shocks.
How would you assess Jordan’s current macroeconomic developments?
Jordan has achieved substantial success in dealing with adverse shocks over the past several years. The economy has remained resilient and enjoys strong fundamentals, despite the regional instability. The GDP grew by 2 percent during the first three quarters of 2016, compared with 2.3 percent during the same period in 2015. To overcome challenges, the government has adopted a national program for economic reform (2012-2015) mainly supported by the IMF. This program was a success and was complemented by another program (2016-2018) to further strengthen structure reforms and mitigate external and internal imbalances. No doubt, these reforms will provide a solid foundation for higher inclusive growth.
In what ways have external shocks affected the Kingdom’s economy and how is the CBJ mitigating these pressures?
Jordan’s economy has been hit by several shocks over the past few years. The Syrian conflict and instability in several parts of the region continues to affect the Jordanian economy, given the high cost to accommodate refugees, and with continuous pressures on the quality of public services. According to estimates published by the IMF and the USAID, the fiscal cost of the Syrian crisis is estimated between 1.8 percent and 2.4 percent of the Kingdom’s GDP in 2013 and 2014 respectively. To mitigate these shocks, the CBJ adjusted the operational framework of its monetary policy. The first phase, in 2012, provided tools to inject liquidity, by introducing new tools. The second phase, in February 2015, aims to help banks to enhance their capacity to manage liquidity in order to meet operational requirements and respond to the growing financing needs of economic sectors. Furthermore, since August 2013, the CBJ eased its monetary policy and conducted a series of interest rate cuts for a total of 250 basis points to provide impetus for investment and reduce the cost of lending to expand spaces of financing for economic activity. As a gradual easing of the Syria and Iraq conflicts is expected during the next few years, growth, supported by public and private investment and a rebound in exports and tourism, is expected to reach 2.8 percent in 2017 and to reach its potential at 3.5 percent in 2018.
How would you rate the health of the banking system and its ability to service the economy?
The banking sector remains the main engine of growth in the Kingdom, and constitutes around 175 percent of GDP in 2016. It is also well capitalized, profitable and has strong asset quality when compared to its regional peers. Banks in Jordan are healthy and compete domestically and abroad. Financial soundness indicators illustrate that during 2016, the total banking system’s assets grew by (2.7 percent) to reach $68 billion; capital adequacy ratio was 18.4% higher than those imposed by the central bank’s requirement (12 percent) and the Basel II Committee (8 percent); and non-performing loans fell to 4.8% from approximately 8.5% in 2011. Based on that performance, the sector has proved to be highly resilient to a broad range of economic shocks.
Why has the fixed/semi-fixed exchange rate regime worked so well for Jordan?
The CBJ has pegged the exchange rate regime of the Jordanian dinar to the US dollar since 1995. This regime has served us well over the past two decades, and it continues to underpin stability in Jordan’s open economy. In addition, it contributes to strengthening the confidence in the Jordan dinar as an attractive gauge for domestic savings, enhancing the competitiveness of domestic exports, attracting domestic and foreign investments, and maintaining monetary stability.
What measures are being taken to sustain the appetite of Jordanian dinar-denominated assets?
The CBJ has been hiking interest rates since December 2016, when the CBJ raised the interest rates on its key monetary policy instruments by 75 basis points to preserve the attractiveness of the Jordanian dinar, and maintain monetary stability in the Kingdom. Moreover, the CBJ will maintain a comfortable interest rate margin between the JD and the US dollar.
In what ways will the government’s current reform path assist Jordan growth trajectory?
Several legislative reforms have been adopted under this program aimed at enhancing the business environment, and reforming the energy and fiscal sectors as that are considered to be the core for providing macroeconomic stability, bolstering investor confidence, and lessening vulnerabilities. Consequently, the budget deficit has fallen from 8.2% of GDP in 2012 to 3% in 2016, the CA deficit dropped to 9.1 percent of GDP in 2015 compared with 15.2 in 2012, while CBJ foreign reserves registered U.S billion 14.2 in 2015 compared to U.S billion 6.6 in 2012.
How are Gulf investors contributing to Jordan’s economy?
Jordan deems the GCC a “significant strategic partner,” and Gulf nations have strong economic ties with the Kingdom. Historically, the Jordanian economy has benefited from massive investment by the Gulf countries in vital sectors; namely construction, hotels and tourism, telecommunications, healthcare, and banking and insurance, among others. Investors from the GCC own around 23% of the total market value of outstanding shares in the stock market. Further, it is estimated that FDI inflows from the GCC comprise around 45% from total FDI inflows to the Kingdom during the period 2014-2016. Meanwhile, Jordan occupies a strategic location in the Middle East, and could be considered a gateway to the Arab world. Jordan is indeed an oasis of stability in a troubled region.
