Monetary policy is controlled by the Central Bank of Jordan, which played a key role in promoting balanced and sustainable economic growth in the Kingdom. In 1996, monetary policy facilitated fiscal stability, with a greater focus on increasing the foreign currency reserves of the Central Bank to enhance the stability of the exchange of the Dinar, one of the main requirements of balanced and sustainable economic growth.
To achieve monetary stability, the Central Bank continued its intervention in the money market through use of the indirect monetary control approach as a seller or buyer of three of and six-month certificates of deposit (CDs) denominated in the Jordanian Dinar. Consequently, the outstanding balance of CDs in 1996 increased by JD 297.5 million, increasing the total balance of CDs by 93% to JD 617.5 million. Interest on these CDs increased slightly in 1996: the highest rate on three-month CDs was 9.25% and the highest rate on six-month CDs was 9.5%, compared to 8.75% and 9%, respectively, in the previous year.
Accordingly, monetary expansion slowed in 1996 to 0.3% compared to 6.6% last year. Credit extended to the private sector grew by JD 162.8 million over its 1995 level. This was due to a decline of JD 184.5 million in net credit extended to the government by the banking sector. The decline in net credit extended to the government would have fallen to JD 115.6 million if net government borrowing from the International Monetary Fund (IMF) had been taken into consideration. As a result, the increase in the net foreign assets of the banking system contributed 1.7% to the growth of domestic liquidity in 1996, while net domestic assets had a contractionary effect of 1.4%.
Monetary policy was successful in achieving its goals because of aggregate monetary measures taken during 1996. Inflationary pressures were contained, particularly those which arose from the aggregate demand side of the national economy. The stability of the Dinar's exchange rate relative to most major foreign currencies was maintained, to a great extent because of the exchange rate policy adopted by the Central Bank toward the end of October 1995, which gave priority to stabilizing the exchange rate of the Dinar relative to the US Dollar, while allowing the former to fluctuate slightly relative to other currencies.
The Central Bank's policy played a major role in preserving confidence in the Dinar as a saving instrument because of its stable exchange rate, and as a result of the increase in returns on Dinar deposit relative to the return on US dollar deposits. Consequently, the attractiveness of Dinar-denominated assets increased relative to foreign currency-denominated assets. This led to an increase in the foreign currency reserves of the Central Bank by JD 191.5 million over its level in 1995 to reach JD 494.2 million or US$ 697.1 million in 1996.