To borrow in dollars or not?

During this year, the Jordanian government is planning to borrow relatively big amounts in foreign currencies, mainly dollars. 

The International Monetary Fund agreed to release the last tranche of its stand-by loan, to the amount of $400 million. There will be other loans from France, Japan and Britain, but more important, is the expected issuance of Eurodollar bonds, to the extent of $1.5 billion, under the guarantee of the American treasury.

An accurate figure of the amount of foreign loans that Jordan will sign during this year is not available at this time. However, for the sake of analysis, I shall assume that new foreign borrowings during 2015 would be not less than $2 billion.

This does by no means indicate that the overall indebtedness of the Treasury will rise during this year beyond the planned level; $750 million of the proceeds of foreign loans will be paid and maturing remaining proceeds will enable the Treasury to repay more domestic loans denominated in dinars on their relative maturity dates without having to roll them out, as used to be the case.

This approach will produce two results. First, the structure of Jordan’s public debt will change in the wrong direction. It will raise it not only in absolute figures but also as a percentage of total debt from 38 per cent at the end of last year to 45 per cent at the end of this year.

Second, liquidity in the local banking system will substantially rise because a major part of this liquidity is invested in Treasury bonds and will be converted into liquidity cash to be added to the already high amount of surplus liquidity kept at the central bank at symbolic rates of interest.

The two results are bad. First because Jordan’s real debt is denominated in foreign currencies, in favour of foreign governments and international institutions, and more foreign debt is seen as a weak point as far as the financial positions of the country in concerned.

Second, the behaviour of the banks will change in the wrong direction: The interest rate on the dinar will further decline, to an extent that may erode the preferential advantage of saving in dinars.

In other words, it may encourage dollarisation without attracting new qualified borrowers, as credit facilities in favour of such borrowers are already available in abundance.

The Social Security Corporation will also be hurt because it invests the bulk of its liquidity in treasury bonds. From now on, SSC will have to live with a lower return on its deposits in the banking system.

One should not overlook the fact that interest paid by the Treasury on local loans is recycled within the national economy, while interest paid on foreign loans is a burden on the national economy and puts pressure on the balance of payments.

Why should the government go in this direction as a matter of choice, not necessity? 

The government definitely knows that external loans in foreign currencies are more risky than local loans in dinars. It also knows that banks seek qualified borrowers from the private sector and do not find enough of them, so crowding out the private sector is not an issue.

And finally, the government sure knows that the foreign exchange reserve at the central bank is high enough and does not need to be supported by borrowed funds.