ABSTRACT
Jordan is a small open economy with a limited industrial base and relies heavily on foreign aid and workers’ remittances for foreign currency resources. In the 1970s, Jordan witnessed high growth and large capital inflows due to the boom in oil prices, which contributed to increased foreign revenues through the large flow of aid and workers’ remittances from the Gulf States. With the drop in oil prices in the early 1980s, the main sources of foreign exchange flows, aid and remittances, dried up, resulting in economic recession and stagnation throughout the decade. Jordan resorted to heavy external borrowing to compensate for the fall in foreign currency and public revenues more generally. The accumulation of foreign debt, coupled with expansionary fiscal policy and accommodating monetary policy, culminated in an exchange rate crisis in 1989-90 and a sharp devaluation of the fixed exchange rate. Jordan pursued macroeconomic stabilisation successfully in the aftermath of the crisis, has maintained prudent policies since and has restored exchange rate stability, supported by a marked development in the monetary policy framework, including improved monetary policy instruments and enhanced central bank independence.
