Journal Issue

Chapter IX. Country Case Studies

Simon Gray, and Philippe Karam
Published Date:
May 2013
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A. Central Bank of Egypt77

Steps towards Reforming Egypt’s Monetary Policy Framework

Over the past few years the Central Bank of Egypt (CBE) has taken many important steps to upgrade Egypt’s monetary policy with a view to adopting IT as a monetary policy framework once the prerequisites are fulfilled. The CBE has been granted more independence under the banking law number 88 which entrusts the CBE with the formulation and implementation of monetary policy, with price stability being the primary and overriding objective. Towards that end, the CBE has (i) strengthened its technical capacity in modeling and forecasting through setting up a Monetary Policy Department which provides monetary policy analysis, assessment and communication through its research, and other functions; (ii) moved from a quantitative operational target (excess reserves) to a price target (overnight inter-bank rate), and launched a Corridor system in June 2005; (iii) issued its own instruments for the first time in August 2005 as the primary instruments for liquidity management through open market operations to enhance the role of monetary policy operations; and (iv) continues to work closely with statistical government agencies to improve macroeconomic statistics. In the transition period towards IT, the CBE meets its inflation objectives by steering short-term interest rates, keeping in view the developments in credit and money supply, as well as a host of other factors which may influence the underlying rate of inflation. There are, however, a number of outstanding issues that need to be addressed before Egypt will be ready to adopt a fully fledged IT framework. In particular, efforts are needed to consolidate the fiscal position, deepen the FX market and continue to improve the macroeconomic databases.

Over the last few years the CBE has taken many important steps to upgrade Egypt’s monetary policy with a view to adopting IT as a monetary policy framework once the prerequisites are fulfilled. The CBE has been granted more independence under the banking law number 88 of 2003 and an explicit institutional framework was set up for interest rate determination. In addition, the CBE launched a comprehensive and far-reaching banking sector reform program in 2004, which contained important steps to help overcome the previous shortcomings in the banking sector and fulfill the prerequisites for IT. It included the (non-performing-loans-related) restructuring and privatization of banks with state participation, and other regulatory reforms, the liberalization of the FX and money markets, and ongoing efforts to strengthen the supervision of banks.

Restoring confidence in the FX market and replacing quantitative monetary instruments with price instruments were the cornerstones in the CBE’s monetary policy reform program. A FX inter-bank market was introduced at the end of 2003 and price stability has been declared the overriding policy objective. The CBE is committed to achieving, over the medium term, low rates of inflation, which it believes are essential for maintaining confidence and for sustaining high rates of investment and economic growth. Egypt made the transition to a unified, flexible exchange rate regime during 2004. The parallel market rate, which had a premium of over 15 percent in late 2003, converged with the banking rate in the second half of 2004 as confidence was restored.

A deep and well-developed banking sector is also important to allow for proper transmission of monetary policy actions. Monetary policy within an IT framework is highly market-oriented, and the banking sector is expected to function based on market principles. The dominance of the state-owned banks in the market had tended to create rigidities in the interest rate structure in Egypt. Under the banking system reform program, the banking sector has undergone substantial transformation that has entailed the exit of several weak banks, large-scale financial restructuring, and divestiture of state shares in private banks and privatization of a major state bank. These actions have reduced the share of banks with state participation significantly. The large stock of non-performing loans (NPLs) has been largely addressed through provisioning and cash settlements. The government and the CBE implemented programs designed to clean up banks’ balance sheets and settle NPLs of public and private enterprises.

Moreover, several institutional and operational changes were initiated under the program to help facilitate monetary policy formulation and assessment.


  • The CBE strengthened its technical capacity in modeling and forecasting through setting up a Monetary Policy Department which provides objective monetary policy analysis, assessment and communication through its research and other functions.
  • To carry out its better-defined mandate, the CBE established a Monetary Policy Committee (MPC), which convenes on Thursday every six weeks to decide on key policy rates. The MPC consists of seven members from the CBE’s Board of Directors. The full year MPC schedule is posted on the CBE web-page.
  • To enhance transparency, bolster the credibility of the CBE, and help anchor inflation expectations, MPC decisions are communicated to the market through a monetary policy statement, which is released on the CBE’s website after each meeting.


  • Price stability has been declared the overriding policy objective and the CB has worked on safeguarding an orderly functioning FX market.
  • Moved from a quantitative operational target (excess reserves) to a price target (overnight interbank rate). On June 2, 2005 the CBE introduced an interest rate corridor with two standing facilities, the overnight lending and deposit facilities. The interest rates on the two standing facilities define the ceiling and floor of the corridor, respectively. By setting the rates on the standing facilities, the MPC determines the corridor within which the overnight inter-bank rate can fluctuate. Effectively, steering the overnight interbank rate within this corridor is the operational target of the CBE.
  • In August 2005, the CBE began to issue its own securities for liquidity management through open market operations to differentiate between monetary and fiscal tools.
  • In October 2009, the CB introduced a core inflation index that strips out fruits and vegetables as well as administered prices. The index has helped the CB communicate better how it views underlying inflationary pressures. It has been well-received and will serve as an important tool in an effort to prevent spill-over from food and fuel price volatility.

Monetary policy during the revolution

Before discussing developments that occurred during the first quarter of 2011, it is important to characterize the initial conditions that existed during the fourth quarter of 2010. Egypt entered the revolution with a very comfortable cushion, a by-product of monetary and fiscal reforms implemented since 2004, which provided support to the CB and the government over the past fifteen months. This cushion was in the form of structural surplus liquidity in the banking sector on the back of the sizable capital inflows witnessed since 2006. This was also reflected in the all-time high levels of net international reserves which recorded US$36 billion. In what follows is a description of the challenges that faced the CB during the revolution and the measures undertaken to mitigate their effect.

1. Providing Domestic Currency Banknotes

Following January 25, 2011 banks were closed for a week in light of lack of security concerns. Against this background and in a preemptive action and to face above average demand for domestic currency banknotes outside the banking system, the CBE provided EGP 23 billion in February 2011 (Figure 24) and transported the cash to the various governorates via airplanes with the assistance of the armed forces to ensure the availability of cash in ATMs. The public sector banks played a very important role in supplying their branches, even for other banks that were closed during this period. Moreover, given the anticipation of sharp withdrawals after banks reopened, the CBE imposed restrictions on daily withdrawals of domestic currency for individuals, limiting it to EGP 50 thousand. This action was meant to mitigate panic withdrawals from banks and was lifted in April 2011. Moreover, to avoid transferring illegally obtained funds, the CBE imposed restriction on foreign currency transfers of the household sector, limiting it to USD 100 thousand while exceptions included: (i) trade related transactions; (ii) funds of foreign portfolio investors; and (iii) funds of foreign corporations operating in Egypt. These actions allowed the Egyptian households and investors as well as foreign investors to test the markets in an orderly manner and consequently created the confidence needed to protect the country from a possible bank run as we have observed from the historical experiences of other countries in similar circumstances.

Figure 24.Egypt: Currency outside CBE

(in EGP billions)

Source: Central Bank of Egypt.

2. Facing Capital Outflows and Domestic Liquidity declines

In the meantime, the balance of payments deteriorated markedly (Figures 25 and 29) on the back of significant outflows from the domestic treasury bills market. Capital outflows recorded US$5 billion in 2011 Q1 alone. This led banks to draw down their reserve balances to purchase foreign currency in the USD interbank market and to a drawdown in the CBE’s FX reserves. In February 2011, to avoid the transfer abroad of illegally obtained funds, the CBE imposed restrictions on foreign currency transfers of the household sector, limiting it to US$100 thousand. Exceptions were: (i) trade related transactions; (ii) funds of foreign portfolio investors; and (iii) funds of foreign corporations opera ting in Egypt.

Figure 25.Egypt: Balance of Payments

Source: Central Bank of Egypt.

Figure 26.Egypt: Net Portfolio Inflows

Source: Central Bank of Egypt.

Figure 27.Egypt: Market for CBE Reserves

Source: Central Bank of Egypt.

Figure 28.Egypt: CBE’s main Policy Rates and the Interbank Rate

Source: Central Bank of Egypt.

Figure 29.Egypt: Selected Balance of Payments Items

Source: Central Bank of Egypt.

Against this background, excess liquidity in the market declined by EGP 78 billion to average EGP 33 billion in the maintenance period ending March 7, 2011 (Figures 27 and 30). Deposit auctions were redeemed at maturity and saving certificates before maturity. These measures had been used to absorb the excess liquidity in the market prior to the January 25. The interbank activity rose markedly with daily interbank volumes averaging EGP 7.5 billion and EGP 4.9 billion in February and March 2011, respectively, after averaging EGP 1.2 billion in 2010. Moreover, the overnight interbank rate rose by 112 basis points above the CBE’s implied policy rate of 8.25 percent at the time and caused borrowing at the CBE’s overnight facility at 9.75 percent to reach EGP 10 billion (Figure 28).

Figure 30.Egypt: Excess Liquidity

Source: Central Bank of Egypt.

To reduce the volatility of the interbank rate and to steer it towards the target rate consistent with the CBE’s price stability mandate, in its first MPC meeting following the revolution, on March 10, 2011, the CBE announced the launch of regular one week repurchasing agreements on March 22, 2011 at a fixed rate of 9.25 percent. Consequently, after operating in a floor liquidity system, the CBE shifted towards a corridor system, where the operational target became around the middle of the corridor (Figure 28).

3. Interest Rate Decisions

In the meantime, total deposit growth in 2011 was very weak, increasing by only EGP 29 billion at a constant exchange rate. This compares to 2009 and 2010, where total deposit growth averaged EGP 85 billion. Moreover, the EGP 29 billion increases mainly reflected additional foreign currency deposits, which increased by EGP 17 billion on the back of dollarization of private sector deposits. Against this background, to secure the household domestic currency deposit base and attract new longer-term domestic currency deposits, in its MPC on November 24, 2011, the CBE raised the standing facilities and the Repo-Rate, while it narrowed the corridor width via raising the overnight deposit rate twice as much as the repo-rate and the overnight lending rate.

4. Adjusting the Reserve Requirement Ratio

Furthermore, as market liquidity continued to decline, on the back of a deteriorating balance of payments and given the uncertainty facing the balance of payments and fiscal outlooks, the CBE decided in March 2012 and in May to reduce the reserve requirement ratio, consecutively, by 4 percentage points to 10 percent. The objective was to provide permanent liquidity to the banking sector and help ease credit conditions in the market.

It is worth emphasizing that the past 18 months have been a period of crisis management which is far from tranquil times where fundamentals take center stage. Each and every day, the CB’s information set changes, which necessitates extreme pragmatism from its side to try to weigh all the tradeoffs and use best judgment to make a decision that would alleviate the downward pressures on market liquidity and consequently economic growth without jeopardizing the CBE’s overriding price stability mandate. The steps undertaken throughout the whole period have been timely and supportive of orderly and well functioning markets which will facilitate the expected economic rebound.

B. Central Bank of Tunisia78

1. The objectives of the Central Bank of Tunisia’s monetary policy

Pursuant to Article 33 of Law 2006–26, the principal objective of Tunisia’s monetary policy is the preservation of price stability.79 To this end, and taking into account macroeconomic projections (GDP, balance of payments and the public finances), the CB draws up a monetary program in which it sets an intermediate target for growth of the money supply (M3), with base money80 (the level of which is influenced through its interventions on the money market) being the operational target on which the Central Bank of Tunisia (BCT) acts.

The acceleration of the M3 aggregate over the course of recent years has sparked instability in the velocity of circulation of money. Thus, the link between the growth of monetary aggregates and inflation has weakened, calling into question the reliability of the monetary aggregates as intermediate targets for the conduct of monetary policy.

The poor performance of monetary targeting, on one hand, and the progressive liberalization of the capital account on the other hand, have led the CB to strengthen its analytical framework through indicators linked to inflation, taking as examples the output gap and underlying inflation while progressively developing a tool for analyzing and forecasting inflation and economic growth that will serve as the basis for closer analysis of the channels by which monetary policy is transmitted.

The monetary program remains an indispensable tool for the estimation of future inflation trends. Although it is used less than in the past, the monetary program is now prepared on a quarterly basis, and is used for information purposes to estimate future inflation trends by comparing forecasts of money supply and economic activity.

2. BCT’s monetary policy instruments

2.1. Instruments at the discretion of the Central Bank:

  • a) Auction (appel d’offres). This is the principal instrument for intervention on the money market, whereby the BCT injects or soaks up liquidity against the exchange of Treasury bills or performing loans as collateral.The amount allotted is determined on the basis of forecasts of changes in the autonomous factors influencing liquidity, the level of the banking sector’s current account, and the lag or anticipation detected in the establishment of required reserves. This amount is distributed among the banks according to the multiple rates method, starting with the highest rates in case of injection and the lowest rates in case of absorption. The auction is normally for seven days but, in light of the tightening of bank liquidity in 2011, the BCT began to hold auctions for one to three months with a view to meeting the money market’s structural liquidity needs and laying the groundwork for a yield curve.
  • b) Fine-tuning operations (opérations ponctuelles ou de réglage fin). These are overnight transactions whereby the BCT injects or mops up liquidity on the money market. The amount is determined by the liquidity situation at the end of the day on the money market and by the behavior of the daily money market rate. The CB has been making less use of this instrument since the introduction in February 2009 of standing overnight facilities.
  • c) Repo operations (pensions livrées). Introduced in 2006, repos allow the BCT to inject or absorb liquidity in the money market through the temporary purchase or disposal of treasury bills.
  • d) Outright purchase or sale of treasury bills. This allows the BCT to buy (or to sell) Treasury bills outright against the injection (or absorption) of liquidity on the money market. Unlike the others instruments, the exchange of liquidity between BCT and banks is made without any repayment.
  • e) Reserve requirements. This is a direct instrument which the BCT can use to deal with a surplus or shortfall in structural liquidity, considering its immediate impact on liquidity.

The rate of required reserves has been changed several times in light of the liquidity situation of the banking sector. The rate currently required for reserves is 2 percent of demand deposits.

2.2. Instruments at the discretion of the banks

Standing overnight loan or deposit facilities (facilités permanentes de prêt ou de dépôt à 24 heures). These facilities allow banks to cope with significant and unexpected fluctuations in banking liquidity and to contain the behavior of the overnight interest rate on the money market within a clearly defined corridor.

  • The lending facility allows the banks to meet their liquidity needs through overnight loans from the CB. The rate is equal to the BCT’s policy rate, plus a margin of 50 basis points.
  • The deposit facility allows the banks, in the absence of placement opportunities on the interbank market, to make overnight deposits with the BCT. Its rate is equal to the policy rate minus 50 basis points.

3. The money market rate

The introduction of standing overnight facilities in 2009 has allowed the BCT to establish a band within which the daily money market rate fluctuates.

The upper limit of the band is the standing overnight lending facility rate, and the lower limit is the standing overnight deposit facility rate, while the policy rate of the BCT constitutes the midpoint of the band.

4. Behavior of bank liquidity since 2007

4.1. The period from 2007 to mid-2010

This period was characterized by a situation of excess liquidity (Figure 31), due to the significant inflow of foreign direct investment and the privatization of several public enterprises, mainly in favor of nonresident investors.

Figure 31.Tunisia: Excess Liquidity in the Financial System (January 2007–June 2010)

Source: Central Bank of Tunisia.

This caused a substantial increase in net foreign currency holdings, which rose from TD 8.924 billion in 2007 to TD 12.963 billion in 2010.

This situation triggered an increase in bank liquidity and in fact consolidated that increase, particularly with the easing of the State’s cash situation, which allowed it to cover its expenses from its own resources, bolstered by the proceeds of privatization, and thereby to reduce its reliance on financing from the banking sector.

This surplus liquidity thus took on a structural nature, and the BCT instituted a series of measures to forestall inflationary pressures that could potentially have resulted from this situation. Those measures related primarily to:

  • Mopping up surplus liquidity, essentially through weekly reverse auctions.
  • On three successive occasions, increasing the required reserves rate81 applied to demand deposits, raising it from 7.5 percent at the beginning of 2009 to 12.5 percent at end-April 2010 (Table 33).
  • Sterilization of the proceeds from privatization of public enterprises in a special government account held in foreign currency with the BCT, in order to reduce their impact on liquidity in the banking sector.
Table 33.Trend in the Required Reserve Rate (In Percent)
Date of decisionDemand deposits

(less than 3 months)
Time deposits

(between 3 and 24 months)
December 31, 20087.51
February 25, 201010.51
April 30, 201012.51.5
March 2, 2011101
April 1, 201151
May 26, 201120
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.

Thanks to these measures, excess liquidity was reduced during the second half of 2010.

4.2. The period since the second half of 2010

Following the last increase in the required reserve rate to 12.5 percent, a liquidity need appeared, which was addressed through BCT refinancing.

However, the political instability that gripped the country in December 2010 after the beginning of 2011 had a major impact on the business climate, causing a sizable retreat in the volume of foreign investment, a decline in tourism receipts and a slowing of the pace of growth of exports. This situation sparked a significant drop in net foreign currency holdings, which lost an amount equal to 34 days of imports in 2011 compared to 2010.

These disruptions also caused a massive withdrawal of banknotes and coins from the financial system, due to hoarding.

In fact, the average volume of banknotes and coins in circulation increased by TD 1.231 billion in 2011, compared to TD 569 million in 2010.

In the face of unprecedented growth in the banking sector’s needs, the CB took a series of measures to provide more liquidity to the banks and to support production in units that were heavily affected by fallout from the downturn in economic activity (Figure 32). The main provisions were:

  • On three occasions within close succession, a cut in the required reserves rate applied to demand deposits, bringing it gradually from 12.5 percent to 2 percent at end-May 2011.
  • Pursuit of an accommodating monetary policy stance, meeting nearly all the liquidity needs of the banking sector, essentially through auctions (Figure 33).
  • An extension of maturities for auctions (one month and three months) in order to provide more liquidity and to meet the structural liquidity needs of certain banks over longer periods.
  • A downward adjustment of the BCT policy rate, lowering it from 4.5 percent to 4 percent at the end of June 2011 and then to 3.5 percent at the beginning of September,82 in order to alleviate the interest charges borne by economic enterprises (since bank loan rates are indexed to the money market rate), particularly those that had suffered damage or experienced economic difficulties. This in turn had an impact on the overnight lending and deposit facility rates, which dropped by 100 basis points to stand at 3 percent and 4 percent respectively as of September 5, 2011.

Figure 32.Tunisia: Banking Sector Liquidity Needs

Source: Central Bank of Tunisia.

Figure 33.Tunisia: Auction Volumes, by Maturity

Source: Central Bank of Tunisia.

Thus, the money market rate has followed a downward trend (Figure 34).

Figure 34.Tunisia: Money Market Rates

Source: Central Bank of Tunisia.

Relief from the tightening of bank liquidity and restoration of balance on the money market are still very much dependent on the economic, political and social situation in the country. However, if the banking sector’s liquidity needs persist, the BCT could consider intensifying longer-term refinancing, reactivating its outright purchase of treasury bills (which can reduce the return of liquidity to CB), and instituting non-standard monetary policy measures.

C. Central Bank of Jordan83

1. Introduction

Jordan is a small open economy with limited natural resources (oil, coal, water, and other commodities). It is highly dependent on foreign grants, foreign direct investment, travel receipts and workers’ remittances for foreign currency resources, while at the same time it is highly susceptible to commodity price shocks and to regional and global economic shocks.

During the oil boom of the late 1970s and early 1980s, Jordan benefited from increased Arab aid reaching on average a real GDP growth rate of more than 10 percent a year; however, reductions in both aid and worker remittances in the latter part of the 1980s, slowed real economic growth to an average rate of roughly 2 percent a year. In response, Jordan relied heavily on external borrowing to close an ensuing external financing gap and a shortage in fiscal revenues. It suffered a balance of payments crisis by the end of 1989, followed by 50 percent currency devaluation. In response, Jordan adopted significant structural, economic, legal, administrative and social reform programs; while many elements of these programs have been successfully implemented others are being gradually implemented in meeting their final objectives.

During the 2000s, growth expanded at an average rate of close to 6 percent, propelled by a strong global growth—real GDP grew twofold from 4 to 8 percent between 2000 and 2007. The global economic crisis that followed dampened growth, which along with the social and political unrest that has swept the region slowed real growth to mere 2.6 percent in 2011.

2. Monetary policy

The Central Bank of Jordan (CBJ) implemented a monetary policy prior to 1989 which was strongly shaped by the developmental role of the CBJ in the economy, focusing mainly on financing either the government’s budget deficit or supporting and subsidizing the banking credit extended to sectors which were deemed as “essential” to the performance of the economy. Monetary policy tools (interest rates and the exchange rate) were determined administratively with no role for market forces in the banking sector. In all, monetary policy was carried based on direct controls, with the CBJ frequently setting ceilings on credit extended by banks and limits on lending and borrowing rates.

Following the financial crisis in 1989 and in consultation with the IMF and World Bank, Jordan implemented several adjustment programs which aimed at reforming the main sectors of the economy, including monetary and external. Beginning in 1993, CBJ abandoned its old directive approach, and shifted to indirect controls of monetary policy, introducing CBJ CDs as its main instrument—CBJ’s monetary policy primary focus on meeting developmental objectives was relinquished, switching to maintaining stability in prices and the exchange rate (given its pegged regime), and a supportive level of interest rates taking into account domestic and international economic developments. The CBJ conceives monetary stability to be a catalyst for an attractive investment environment for foreign and domestic investors and strong economic growth as a byproduct.

3. Monetary policy instruments

With a structural reform strategy in place and a growing reliance on market forces (which is likely to reduce distortions in saving and investment and improve efficiency in resource allocation), the CBJ at the start of the 1990s moved to an indirect intervention policy relying on market interest rates and on OMO as main instruments in achieving monetary stability.

The efficiency of OMOs in achieving the objectives of monetary policy depends on the existence of well-developed and deep financial markets. Lack of such markets in Jordan as a result of insufficiently issued government debt instruments (treasury bills and bonds), at low frequency and at the short tenure of the yield curve) impeded carrying an effective monetary policy. Further, the secondary markets for these instruments were also considerably shallow. By the end of 1993, taking these deficiencies into consideration, the CBJ resorted to issuing own Jordanian Dinar (JD)—denominated CDs as a way to absorb excess liquidity in the banking system and to mitigate unintended negative effects on the price level and exchange rate. CDs were issued on a bi-weekly basis through a public auction system with banks being the main counterparty to the transactions.

By mid-1997, CBJ added more transparency in issuing CDs by disclosing openly the auction interest rates on CDs, the volume of issuance, and the balance of excess liquidity in the banking system. It also introduced repurchase agreements (which can be traded among banks) in assisting banks improve their excess liquidity management, and provide the necessary liquidity to the economy as needed.

In addition to the main use of OMOs, the CBJ also relies on the reserve requirement (RR) ratio for instrument. RR rates were unified across banks and deposits (JD- and foreign currency-denominated), gradually declining from 35 percent in 1989 to 7 percent in 2011. It also makes use of the rediscount rate instrument which serves as a signal to banks and financial markets and which can be used quite flexibly in response to changing economic conditions. Beginning in 1998, the CBJ also resorted to using the overnight deposit window (to influence bank reserves) and the overnight repo facilities. Beginning in 2000, the CBJ moved away from targeting CD auction rates to a corridor system with the overnight window set as the floor and the 7-day repo facility (introduced in 1994) set as the ceiling. In May 2007, the CBJ simplified its interest rate structure by reducing the corridor width by 125 basis points and replacing the 7-day repo facility with an overnight facility to ensure symmetry with the overnight deposit window.

4. Monetary policy operations in the wake of the global financial crisis

The CBJ pursued expansionary monetary policy gradually to mitigate the repercussions of the global financial and economic crisis on the national economy; at the same time, it reinforced its mandate in pursuing financial and monetary stability while strengthening the economy’s resilience to external shocks. In this context, the CBJ ceased issuance of CDs beginning in October 2008 as a way to preserve adequate levels of liquidity in the banking system (Figure 36) and to encourage banks to extend credit to firms and households in the economy. This was combined with cutting interest rates on monetary policy instruments gradually by a total of 250 basis points (Table 34 and Figure 35), in addition to reducing the required reserve ratio from 10 to 7 percent. Such measures helped stabilize the economy. FX reserves increased by US$4.5 billion in 2010 (from the end of 2008) and reached a record high of just over US$12 billion by the end of 2010 (the equivalent of close to eight months of Jordan’s imports of goods and services).

Table 34.Jordan: Monetary Policy Interest Rates during 2008–10(In Percent)
Date of DecisionDiscount RateOvernight Repo RateDeposit Window Rate
Feb. 3, 20086.756.54.5
Nov. 25, 20086.2564
Mar. 12, 20095.755.53.5
Apr. 12, 20095.2553
Dec. 12, 20094.754.52.5
Apr. 23, 20104.2542
Source: Central Bank of Jordan.
Source: Central Bank of Jordan.

Figure 35.Jordan: Interest Rate Structure Dec. 2006–Dec. 2010

Source: Central Bank of Jordan.

Figure 36.Jordan: Excess Liquidity in Banks during Jan. 2007–Dec. 2010 (JD Million)

Source: Central Bank of Jordan.

5. Monetary Policy Operations from 2011 to Present

The global financial and economic crisis, accompanied by regional social and political unrest, advanced economies’ sovereign debt debacle, and rising oil prices had important implications on the economy. Starting in 2011, Jordan’s external account has faced increasing pressures as a result of higher import prices, lower tourism and workers’ remittances receipts, as well as lower grants and FDI inflows; these combined with an increasing government’s budget deficit, affected the accumulation of the country’s buffer of foreign reserves declining to US$6.7billion by the end of June 2012.

In response, the CBJ started a tightening monetary policy cycle, increasing its policy rates (Table 35 and Figure 37). This action aimed at supporting monetary stability in curbing expected inflationary pressures and ensuring a competitive return on the JD-denominated assets would ultimately promote a favorable investment environment in support of sustainable growth. At the same time, with the aim of providing the necessary liquidity to the banking system and minimizing volatility in interest rates in the interbank market, the CBJ introduced the weekly repurchase agreements facility.

Table 35.Jordan: The Structure of Monetary Policy Interest Rates during 2011(In Percent)
Date of DecisionDiscount RateOvernight Repo RateDeposit Window Rate
Feb. 23, 20104.2542
Jun. 1, 20114.54.252.25
Feb. 5, 201254.752.75
May 31, 201254.753.25
Source: Central Bank of Jordan.
Source: Central Bank of Jordan.

Figure 37.Jordan: Main Money and Banking Indicators during 2010–12

Source: Central Bank of Jordan.

6. Monetary and Exchange Rate Policies

The exchange rate policies adopted in Jordan ranged from a peg to the British pound, the SDR, and the U.S. dollar to a managed float arrangement; the JD was pegged to the British Pound until 1975, followed by a peg to the SDR within a narrow band during 1976–1988. In 1988, the JD was allowed to float under pressure but was pegged again to the SDR in 1989. Since October 1995, the JD has been pegged to the U.S dollar. Shortly after, in mid 1996, all exchange rate controls were abolished and the capital account was fully liberalized.

The fixed exchange rate regime adopted in 1995 has served Jordan well, fostering confidence in the JD demonstrated through the strong economic performance, export growth, productivity improvements, reasonable inflation levels, unprecedented level of foreign reserves (exceeding JD 12 billion at the end of 2010), as well as the surge in foreign direct investment inflow.

Risks. The ongoing regional and global risks and uncertainties continue to exert pressure on the Jordanian economy, requiring vigilance on the part of the CBJ in monitoring and analyzing the main macroeconomic and financial indicators on a continual basis as well as meeting its mandate of maintaining monetary stability and preserving external competitiveness while taking more into consideration financial sector development and financial stability.


Prepared by Ms. Rania Al-Mashat. This section reflects the views of the author and not necessarily those of the CBE.


Prepared by Zouaghi Chedly Karim. This section reflects the views of the author and not necessarily those of the Central Bank of Tunisia (BCT).


This objective was explicitly mentioned in law 2006–26 of May 15, 2006, amending the law establishing the CB.


Base money = balance on the current account of the banking system at the BCT + banknotes and coins in circulation + standing overnight deposit facilities.


The constitution of the required reserves is based on the average credit balances in the banks’ current accounts for a calendar month. Since the beginning of October 2012, a new rate of reserves requirements (50 percent) is also applied to the increase in some consumer loans outstanding compared to September 2012 in order to reduce consumer loans by banks.


This is the minimum rate for banks’ weekly bids for all maturities (7 days, 1 month, and 3 months).


Prepared by Malik Bani Hani. This section reflects the views of the author and not necessarily those of the CBJ.

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