Jordan Central Bank Statement

Author: | Published: 19 Oct 2018
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Despite regional instability, the Jordanian economy has remained resilient and enjoys strong fundamentals. GDP grew by 2.0% during 2017, maintaining its growth pattern of 2016.

Since the start of 2018, some indicators showed improvement. For example, during the first four months of 2018, tourism income and total workers' remittances grew by 11.8% and 1.2%, respectively. Consequently, the economic outlook in Jordan remains positive and growth is expected to gradually improve, in light of local economic reforms and initiatives and a positive global and regional economic outlook.

GDP is projected to grow 2.3% and 2.5% in 2018 and 2019, respectively. The inflation rate reached 3.3% in 2017, compared to a 0.8% contraction in 2016. The drivers were mainly the rise in the oil price and a set of government measures that included abolishing sales tax exemptions on many goods and services and raising taxes and fees on a number of other goods and services. As for the first four months of 2018, inflation was at 3.9%, compared to 3.7% during the same period of 2017.

The operational framework for monetary policy depends on the "corridor" system, which directs overnight interbank rates. This system consists of an overnight deposit interest rate and an overnight repurchase agreement (repo) interest rate. Banks deposit their surpluses with the Central Bank at the deposit interest rate and if they need liquidity, they borrow from the Central Bank via repos. The overnight deposit interest rate represents the system's floor, while the repo interest rate represents the system's ceiling.

The fixed exchange rate regime with the US dollar, adopted in 1995, is the nominal pillar of monetary policy. It has effectively served the Jordanian economy and boosted trust in the Jordanian dinar as an enticing vessel for savings. Moreover, it has positively contributed to increasing investment cash inflows to the Kingdom, raising the competitiveness of domestic exports and to continuing inflation.

Taking into consideration the importance of the banking sector, which remains the main engine of growth in Jordan, the Central Bank of Jordan (CBJ) has been working to strengthen the domestic banking system. In this regard, the CBJ is in the final stages of drafting regulations for a liquidity coverage ratio (LCR) based on Basel III principles, which will improve current liquidity requirements regulations.

To that end, we have established a separate department for financial stability and reinforced the role of banking supervision with the implementation of prudential regulations such as Basel III and corporate governance. Most recently, we have also issued our 'Dealing with Domestic Systemically Important Banks (DSIBs)' instructions and new stress testing regulations. We pay special care to the liquidity and capital positions of banks; our banks' capital adequacy ratio average is around 17.6% as of end-2017 (above our minimum 12% requirement) and bank liquidity is currently at comfortable levels while being constantly monitored. It is worth noting that such procedures are part of an ongoing national strategy for sustainable growth; an aim that might be considered a little optimistic given the unrest our region is facing, yet it is entirely justifiable in light of the results we have witnessed in banks' profitability and asset quality.

The non-performing loan (NPL) ratio is low (around 4.2%), while the provisions coverage ratio is high and reached 75.4% of NPLs. As for profitability, the return on equity (ROE) and return on assets (ROA) of Jordanian banks reached around 9.1% and 1.2%, respectively, as of end-2017.