So after discussing some background about inflation
, and heaps of people complaining about it (of course not on here!) and the people discussing whether it's ethical or not, or whether it's an international phenomena that our revered government can do nothing about or not. There have even been voices about holding a strike on May 4th
, and discussion ensued on whether it's even a good idea!
With all that talk about inflation I have not once read, from a Jordanian perspective, what are the actual options available for us to fight inflation, or some forecast to where we are heading. The most common thing that gets repeated is "the government is doing the best they can and the population should bear with the situation right now since it will pass"
Inflation is a perpetual problem that faces every economy and it's addressed by the fiscal policy of a country in order to expect it and put measures to control it and meet those expectations.
To fight a sharp rise in inflation both short term and long term plans must be adopted after identifying the main cause for the inflation, which i'll attempt to zero in on later on in this post.
In what follows I'll try to the best of my ability to answer most of those question, atleast from my perspective.
Is sharp increases in inflation an international problem ? if so how are other countries dealing with it ?
simply YES ! inflation rates in many countries have rose to critical level during the past year. Taking a look at inflation rates of countries around us and those who we do considerable importing from:
So we note that Gulf countries have experienced a huge inflation (with Qatar having the lead with its 13.8%) that is expected due to their economical boom and increases in oil prices. The main cause of inflation in those countries are their currency pegs against the dollar, with booming economies and the continued lowering of interest rates on the dollar it is forcing those central banks in the gulf to lower their interest rates instead of increasing it which is causing more inflation. The current method adopted to fight inflation in those countries is to raise wages and cap commodities prices, and they are intervening directly in real estate loans since real estate is the other major contributing factor of inflation. Kuwait broke its dollar peg in may of last year for basket of currencies, although it remained heavily weighed. there is growing pressure on other gulf countries to drop their pegs too in order to be able to maintain the economic growth rather than adopting band aid solutions that will contribute to future inflation. While the other option is to allow their currencies to appreciate against the dollar.
Given that 23% of Jordan imports are from Saudi Arabia, a 16 year high inflation rate is sure to translate into our markets. On the other hand China (inflation of 8% by the 1st quarter of this year) with a share of 8% of Jordanian imports (a figure that sure sounds too low in my opinion) is sure to translate in even higher rates. The inflation in China is a combination of four major factors, the fixed exchange rate with the dollar, the increases in oil prices, the super booming economy, and the developing middle class with the ability for spending.
Currently China is fighting inflation with little success, they are using commodity price controls and fixing the price of gas, they are raising their interest rates and bank reserve requirement and hoping to hold out from attacking the main culprit for inflation which is their undervalued currency against the dollar. if they decide to reevaluate their yuan (Chinese currency) by selling off their dollar reserves (in the form of T-Bills) they are bound to bring down the house of cards.
Focus! so what about Jordan ?
Well For Jordan, as discussed in the previous article, the causes of inflation in order of importance are as follow:
- Increased taxation and lifting of subsidies on commodities which contributed to market uncertainty and sharp increases in the prices of commodities.
- A Bubble real estate market that is fueled by speculation due to the low interest rate and enticing loan arrangements which is not reflected with an equal rise in demand.
- Increase in commodity prices globally regardless of the first point, coupled with a depreciating currency
Taxation is becoming the sole contributor to the Jordanian fiscal budget, after the privatization of many governmental income streams based on the requirements of free market adoption recommended by the world bank and IMF. The country found no option to reduce the deficit without increasing the taxation and lifting the subsidies, the problem with both is twofolds; one is the timing which came at a turbulent time where there is no stability in global market prices, two in the mismanaged transparency in lifting up the subsidies based on schedule rather than surprise which was the case.
Now that the subsidies have been lifted totally, it will most likely be followed by an increase in taxation, most likely an increase on an already high sales tax.
Since real estate speculation has been a major contributor for Jordanian economy and we are already reached the peak in that market, it will most likely put even more pressure on the speculators translated by higher level of defaults at banks and a slow down in the real estate market akin to the one experience in the early 90's after the second gulf war estate boom.
Short Term solutions
Currently those are some of the short term solutions that might be able to curb the inflation rate and help elevate the consequences on the citizens.
- Lifting of subsidies and revaluation of commodity prices that are set by the government should be fixed to a schedule that is transparent to the citizens while taking into account the shortages that might occur before each increase. That will help price stability in the market. stabilizing the prices of certain staple commodities as was done with natural gas is also encouraged but not to overburden the budget. (prices of natural gas, bread, livestock's grain and hay prices have been fixed)
- The increase in productivity and private sector profits haven't been translated in higher wages coupled with low interest rates encouraged debt while discouraging savings. The salaries for the private and public sector should be increase accordingly and the minimum wage to be reevaluated based on current prices. (lip services increases in salary that doesn't meet the cost of living increases)
- To maintain the investment in real estate which is a main driver of the economy in jordan it is encouraged to fix the price of iron. ( the government reduced the sales tax on iron from 16% to 8%)
- Limiting the amount of loans given out by public banks in order to limit the supplies by a requirement to increase the reserves.
- Encouragement of farming and agriculture projects that are provided with governmental protection in form of loans and tax exemptions to satisfy the country's local needs for staple commodities especially grain. To ward off the inflation and speculation of the global market and to make it viable to be competitive locally with the governmental backing.
Long Term solutions
On the long term the major problems that are facing Jordan are ever increasing petrol consumption without any semblance of independence or capitalization on years of dirt cheap oil. The shortage of water supplies and the dependence on seasonal rain reservoirs, and wide economic restructuring.
- Re-investment of the privatization capitol in forms of alternative energy, in terms of nuclear, solar or wind energy sources in order to provide part of the countries energy needs and to drive up a new sector into economic growth. The solution and pipe dreams of oil shale and petrol wells being found in Jordan do little since they will come at a time period that will demand more cost effective solutions for Jordan and Shale oil as it stands currently will provide little of our energy needs at too exuberant of a cost, and talk about petrol beds being found conveniently at this time is a bit too frowzy for my taste.
- A solution to the ever dwindling value of the dollar, which with the current adopted policy of the fed will continue on deteriorating. So a solution to this problem will be necessary to remove some of the downward pressure on the Jordanian economy.
- A tightening of the budget is required, and by that I mean to act like the economy we are and not put up appearances for appearances sake. Till now, year over year our fiscal budget has been mushrooming endlessly.
- Economical transparency of the government budget and investments, plus the democratization of the process as has been worked on since the year 2000 is required to be followed upon, and careful attention needs to be given to the water shortage issues and methods of circumventing the problem with diplomatic ties with neighboring countries is needed.
Well I tried to be optimistic as much as possible. but i Got bored towards the end and had to wrap up, My only hope in the short term lies in the workers and people of jordan. It would be of extreme importance to start a co-operative consumer watch to help market forces and bring down commodity prices. That would be done by sharing consumer price information and boycotting the higher priced retailers. All that it requires of the consumer is to share their grocery bill with an aggregator and follow up on market prices and shop at the cheapest available option based on the data. that will surely control the supply cartel from increasing the prices too rashly.
On the other hand wages needs to pushed up from within the institutions, and the lowest paid workers need to organize in order to realize their fair share of the profit to translate into higher wages. Anyways am writing in English so all this falls to deaf ears in my opinion.
What is interesting is the latest brain storming session came to the conclusion that everything is dandy and the denizens have been through worse so there is no need to do anything to rectify the situation and we need to stay the course.
So dear denizens, please drop your pants and bend over cause you might as well start enjoying !
Labels: a post by BamBam, fashakeh, jordan