By : Ibrahim Rihani
Jordan Daily – The interaction between fiscal and monetary policy in Jordan is far more complex than most observers appreciate. In many emerging economies, this relationship is already difficult to manage; in Jordan’s case, a fixed exchange rate, limited monetary autonomy and chronic fiscal pressures turn it into a permanent balancing act.
Jordan has succeeded in avoiding the chaotic inflationary spirals seen elsewhere, but that stability comes at a cost: a structurally tight macroeconomic environment held together by the credibility of the dinar–dollar peg and the continued willingness of external partners to provide financing.
At first glance, the transmission mechanism between monetary and fiscal policy seems simple. When a central bank cuts interest rates, borrowing becomes cheaper and the government finds it easier to roll over debt. In a country like Jordan, however, this textbook explanation breaks down. Because the dinar is pegged to the US dollar, local interest rates must move in parity with the Federal Reserve. When the Fed tightens monetary policy, Jordan must follow, regardless of domestic economic conditions. Higher US rates translate directly into higher domestic borrowing costs, tightening financial conditions and raising the yield the Ministry of Finance must offer on dinar-denominated government debt.
This outward pressure is only half of the story. Fiscal behaviour feeds back into monetary conditions through a less visible but equally powerful channel: liquidity in the banking system. When financing needs rise, either because global rates climb, grants fall short, or expenditures rise, the government turns to domestic markets. Commercial banks purchase more Treasury bills and bonds, diverting liquidity away from the private sector. This process tightens interbank conditions, pushing up market interest rates even before the central bank acts. The Central Bank of Jordan (CBJ) then intervenes to manage liquidity, ensuring overnight rates remain near the policy rate and the peg remains credible.
In many emerging markets, persistent fiscal pressures eventually lead investors to question a government’s ability to stabilise its debt. This is the point where inflation expectations rise, capital flees domestic bonds, and the price level begins to climb, a phenomenon known in economics as the Fiscal Theory of the Price Level. Jordan stands out because this mechanism largely does not materialise. Three structural features explain why.
First, the dollar peg acts as a hard nominal anchor. By committing to match US policy, Jordan imports low-inflation credibility from the Federal Reserve. For decades, this peg has provided stability and anchored expectations in a way few emerging markets can replicate.
Second, domestic banks hold the majority of Jordan’s public debt. These institutions are regulated, well-capitalised and far less prone to the kind of panic selling that drives inflationary cycles elsewhere. They consistently roll over government debt, preventing sudden stops and bond-market stress.
Third, the CBJ has a long and credible record of defending the peg through foreign-exchange operations. Its willingness to deploy reserves reassures markets that the dinar will hold its value. Ultimately, the peg serves not only as a monetary framework but as a public commitment device: Jordan will defend price stability at almost any cost. Similarly, the artificially high JOD allows for cheap imports, and with Jordan being a highly open economy (meaning they import a lot of their needs), this allows for a consistently low inflation rate.
But this stability comes with a hidden price. Jordan cannot rely on the classic path other indebted countries use to reduce their debt burden, a jump in inflation that erodes the real value of outstanding liabilities. Monetising the deficit, even quietly, would undermine the peg. It would damage one of Jordan’s most valuable assets: the credibility of its monetary regime. Because the peg anchors inflation expectations, Jordan is effectively locked out of the “inflation tax” option that many large sovereigns have used historically to escape high debt.
With monetary financing off the table, the adjustment must come from elsewhere. Jordan has only three options: higher primary surpluses, continued concessional financing or stronger real economic growth. Each comes with significant challenges. Raising primary surpluses means spending cuts or tax increases in an economy already facing high unemployment and limited fiscal space. Relying on concessional finance leaves the country vulnerable to shifts in donor sentiment and geopolitical priorities. Expecting growth to carry the burden is unrealistic without tackling deep structural bottlenecks, among them high energy costs, rigid labour markets and shallow capital markets.
The structure of domestic financing complicates matters even further. Because banks hold such a large share of government debt, every additional dinar of government exposure reduces their capacity to lend to businesses and households. Over time, this crowds out private-sector credit and suppresses growth. Slower growth then makes stabilising the debt ratio even more difficult, creating a quiet, grinding equilibrium in which neither crisis nor true recovery materialises.
This is why Jordan often feels “stable but strained”. The country avoids dramatic instability, no hyperinflation, no sudden collapse of the exchange rate, no sovereign default, but also remains trapped in high unemployment, high debt and constrained fiscal space. The CBJ must constantly walk a narrow line: providing enough liquidity to prevent stress in the banking system while maintaining tight enough conditions to uphold the peg, which it has historically done an exceptional job at.
Jordan’s situation does not imply an inevitable slide toward default. But it does reveal the nature of the country’s macroeconomic equilibrium. Solvency is maintained less by domestic fiscal strength and more by the credibility of the peg and the geopolitical importance of Jordan to its partners. External actors, including the United States, Gulf Cooperation Council members, the IMF and the World Bank, consistently close Jordan’s financing gaps for strategic rather than purely economic reasons. This pattern has held for decades and is likely to continue.
Yet external solvency is not the same as internal sustainability. The danger Jordan faces is not an imminent crisis but a conditional one: a scenario in which a major external shock coincides with donor fatigue or tighter global financial conditions. In that environment, the peg could come under pressure, concessional financing could shrink and Jordan would face abrupt fiscal adjustment. Such a shock would not simply weaken growth; it would test the foundations of the entire fiscal–monetary framework.
Jordan has avoided the fate of many emerging economies because of disciplined monetary policy, credible institutions and strong international partnerships. But the long-term challenge remains: how to transition from externally guaranteed stability to internally generated resilience. Without structural reforms that boost growth, broaden the tax base and reduce the economy’s dependence on imported energy and foreign financing, Jordan will continue to operate in this narrow space, stable enough to avoid crisis, but too constrained to unlock its full economic potential.
Ibrahim Rihani studied economics with a focus on monetary and fiscal policy in Jordan and works at the IFC as a part of their investment analyst program. His interests lie in macro-financial policy trade-offs and their implications for growth, debt, and stability.