Demand for dinars rising
The Central Bank of Jordan adheres to a strict policy of maintaining the stability of the dinar exchange rate. This policy does not mean that the purpose is only to protect the national currency vis-ˆ-vis other currencies. It also means to prevent the dinar exchange rate from rising against other major currencies.
No fluctuation of the dinar exchange rate in terms of dollars has been allowed since 1995. During 15 years of fixed exchange rate of the dinar, it did not rise or decline, as measured in dollars, despite several circumstances which could have caused the rise or the decline at times, in accordance with changing circumstances, had the dinar been left free to fluctuate, according to supply and demand factors.
Under the present circumstances, demand on the dinar far exceeds supply, therefore the policy of maintaining stability prevents the dinar exchange rate from rising.
Supply and demand cannot affect the exchange rate of the dinar as long as the Central Bank stands ready to supply any amount of dinars to satisfy the extra demand and to buy any amount of offered dollars to absorb any excessive supply. That is why the foreign exchange reserves of the Central Bank have risen to an unprecedented level. They stand now at around $11.3 billion, an all time high.
The strong demand of dinars is not due only to its stability; it is in fact due to the interest differential. The dinar is pegged to the dollar at fixed rate. It is transferable into dollars and vice versa without any restrictions, yet the holder of the dinar earns between 3 to 5 per cent annual return while the dollar holders can hardly receive a fraction of one per cent a year.
Under the circumstances, there is no reason why many people would not like to shift their dollar deposits into dinars to receive higher yield, as long as they can go back to the dollar any time they wish without having to worry about any penalty or loss during exchange. That is why a fixed rate system, good as it may be, is sometimes very costly to the monetary authorities.
Generally speaking, the public believes that a strong currency is better but, in practice, this is not always the case. Major powers are waging currency wars against each other. Each country is trying to pressure others to revalue their currencies while pushing their own down to obtain trade advantages. America is working overtime to flood the market with cheap dollars and to convince China to raise the exchange rate of its currency.
The fluctuations of currencies exchange rates will not affect Jordan’s trade with the United States because the dinar is tightly connected to the dollar at a fixed rate. Whatever America is doing to the dollar for its advantage will be advantageous to Jordan as well. In fact, Jordanian exports are already rising sharply. What serves American exports automatically serves Jordanian exports.
A fixed exchange rate system is beneficial but it does not come without a price. It creates confidence in the domestic currency and thus encourages the incoming flow of foreign investments, which is happening now, but it makes capital flight of hot money much easier and without penalty. Such flight did not happen so far, and it might not happen at all if Jordan succeeds in reducing its budget deficit and controlling its public debt to remain within safe limits.