A bit of inflation is needed

So much depends on the rate of economic growth as reflected by the gross domestic product (GDP) tables.

The most important economic and fiscal indicators depend directly on the volume of GDP accounted for in current prices.

What is meant by growth in this respect is not the so-called real growth in constant prices, which actually no one cares about. It is the growth in current prices, which means the actual figures arrived at.

Indicators used to measure success or failure in achieving the set objectives are: the budget deficit expressed as a percentage of GDP in current prices, and the increase in public debt also calculated as a percentage of GDP in current prices.

The International Monetary Fund (IMF) and the government are trying to achieve a reduction of budget deficit mainly by increasing revenue and controlling expenditure. 

This policy did not produce the desired results because the deficit is nothing but a ratio of GDP.

In other words, the budget deficit may widen or narrow not only due to changes in revenues and expenditures. It is also influenced by a change in the value of GDP. Growth in GDP means an improvement in the deficit and debt indicators.

Growth in current prices means the so-called real growth plus inflation.

What is meant by inflation in this juncture is not the rise in consumer prices, important as it may be, but the deflator that covers all the elements of GDP in current prices.

Beside the setting of a target for the budget deficit in millions of Jordanian dinars, and the movement taking place in debt by repayments of old loans and withdrawals from new loans, the question will range around the expected GDP growth rate and whether there is positive growth, stagnation or retreat.

Economic indicators in the first quarter of this year were generally on the negative side. There was a major reduction in national exports, tourism receipts, expatriate remittances, quantity of industrial output, industrialists’ prices, the flow of foreign investment and receipts of external grants in favour of the Treasury.

Things being so, and if the situation is allowed to continue during the remainder of this year, one wonders from where economic growth would come about at any rate.

At this point in the line of thinking comes inflation as a factor to improve the picture.

That is why economists, unlike consumers, do not like very low or negative inflation. In fact, a general reduction in prices is sometimes considered dangerous.

Let us hope that inflation (deflator) will rise in 2016 to over 3 to 4 per cent, which will help in achieving the set objectives and conditions set by the economic reform programme to be agreed upon with the IMF next month.