Central bank budget developments during 2020

The central bank's budget witnessed remarkable developments in both the asset and liability sides during the year 2020 compared with the year 2019, which reflected the central bank's policy and its interventions to face the repercussions of the corona pandemic on the economy.

The first of these developments was the growth of foreign assets by about 9.5 per cent in 2020 compared to 2019, as a result of the growth of the central bank’s gold assets by 74.2 per cent. This is due to the purchase of new quantities of gold to strengthen and diversify the reserve portfolio of the central bank on the one hand. On the other hand, as a result of a shift in the central bank’s investments preferences between the US treasury bonds and bills item and the cash, balances and dollar deposits item; the latter grew by 11.9 per cent and the former decreased by 20.5 per cent.

Domestic assets grew by 59.9 per cent in 2020 compared to 2019, as a result of the following: First, the central bank’s portfolio of Jordanian government treasury bonds and bills grew by 25.3 per cent, mainly through open market operations that the central bank undertakes with banks to control the levels of liquidity in the economy. It should be noted that the Central Bank Law prevents it from providing direct credit facilities to the government. And secondly, the growth of the repo operations; selling part of the banks’ holdings of government securities to the central bank for a specified period of time for the purposes of meeting their liquidity needs, and then repurchasing them.

On the assets side, it is striking that there are two fixed items in the central bank’s budget for the past three decades worth nearly 1 billion dinars; the first with a value of 766.9 million dinars, which reflects loans arising from payment agreements, and the other with a value of 217 million dinars, which reflects bail-out operations, i.e. facilities provided by the central bank to troubled banks. The question that arises here is: When will these two items disappear.

As for the liabilities, which show the size of the central bank's obligations towards the general public, banks, financial institutions and the government, it also showed some of the interventions that the central bank had taken to confront the repercussions of the Corona pandemic on the Jordanian economy. The growth of the issued cash item by 25.8 per cent reveals the fact that new money was printed or cash went out of the central bank to add new liquidity in the market.

Moreover, the growth of bank deposits in dinars with the central bank by 9.8 per cent in 2020 compared to the year 2019 was the result of the following: First, the amortisation of certificates of deposit CDs of JD500 million in March 2020. CDs are one of the monetary policy tools that the central bank had to control liquidity in the market. CDs balance is now zero. Will the central bank finally stop issuing CDs permanently as one of its independent monetary tools for controlling liquidity?

Second, the volume of required reserve funds decreased by 26.1 per cent due to the central bank's reduction of the required reserve ratio RRR from 7 per cent to 5 per cent. This operation provided banks with additional liquidity of 550 million dinars, which led to a reduction in the costs on banks, and thus lower the interest rate for individuals. This is the first time that the central bank has reduced the RRR since 2009. Banks have used a large part of it during the year 2020 to provide financing to economic sectors. And third, the growth of excess liquidity by 12.8 per cent and remunerated deposits by 74.2 per cent.

What is striking about the liabilities side is the high levels of excess liquidity and interest-bearing deposits, which are money that banks were unable to lend and deposited with the central bank. Is this an indication of the lack of real demand due to the absence of new projects or the lack of expansion in existing projects, or is it a result of the closures caused by the corona pandemic.