Daily Times

Upon trying to list the strong points of the Jordanian economy, the Central bank of Jordan’s (CBJ) foreign exchange reserve is the first to come to mind. By the end of last year, the CBJ owned a net reserve of gold and foreign exchange worth $15.4 billion, which is enough to cover the country’s imports for eight months, i.e., more than double the agreed safety level.

This point of strength, important as it may be, should not lead to overconfidence, on the assumption that the first line of defence is very strong. Actually many other factors must be taken into consideration, which make the reserve very flexible, if not volatile, in that it can move quickly up and down, following fact-changing circumstances that cannot be controlled and can hardly be anticipated. One should notice that the reserve has unexpectedly dropped by almost 10 per cent during the second half of this year. Jordan’s net borrowing in dollars during 2015 reached $1918 million, yet the reserve rose by only $411 million, an indication that, had it not been for foreign borrowing, the reserve of gold and foreign exchange would have dropped by $1.5 billion. One can easily calculate what could have happen to the reserve if Arab and foreign grants had ceased to flow.

The fact that the CBJ reserve depends heavily on foreign borrowing and external grants is not a cause of satisfaction. A real reserve should depend on sustainable sources of the country’s core economic activities, especially exports of goods and services, and, to a lesser extent, expatriates’ remittances and the flow of foreign investment that may move in either direction.

It is time to understand that the CBJ reserve should not be measured only by the number of months it can cover the cost of imports. This measure can be applied in countries which enjoy a sort of balance between exports and imports, i.e., when the cost of imports, or a major part of it, is being financed by the proceeds of exports.

In Jordan’s case, the value of imports is three times the value of exports. Therefore, the number of months of imports to be covered by the reserve should be raised to three times the world standard, i.e., at least nine months.

Jordan’s central bank reserve is not fed by the proceeds of exports of goods and services, as is the case with most countries in the world, it depends on other sources, some of which are extremely sensitive and undependable, such as Arab and foreign grants, foreign loans, expatriates’ remittances, foreign investments and tourism receipts. All these sources are prone to fluctuations based on external circumstances. The situation, therefore, calls for a reserve that is larger than normal to be able to absorb the shocks and face surprises.