Jordan's net foreign reserves rose 40 percent to a record $10.87 billion at the end of December compared with the end of 2008 as assets in dinar-denominated savings grew, central bank data showed.

The kingdom's reserves stood at $7.74 billion at the end of 2008 and had been on an upward trend since a $2 billion debt buyback in March 2007 brought reserves down to $5.2 billion.

The current foreign reserve levels were equivalent to almost eight months of imports, a Central Bank source told Reuters, adding preliminary figures show reserves stood at $10.89 billion as of Jan 6, 2010.

Reserves stood at $10.533 at end of November 2009, official data showed.   

Bankers attribute the rise in foreign reserves mainly to the the Central Bank of Jordan's (CBJ) policy of allowing a wider interest rate differential against the dollar in favour of the dinar that had encouraged banks and depositors to keep funds in dinars. 

Even Jordanian expatriates whose earnings were in foreign currencies were switching part of their savings into the dinar, attracted by interest rates as high as 4 percent compared with less than 1 percent on dollars, bankers say.

A main plank of monetary policy is the defence of the dinar, which is pegged to the dollar, a policy the International Monetary Fund (IMF) says has served the national economy well.   

They say maintaining the country's reserves in a comfortable position is crucial to allow the kingdom to pay for its imports and service its foreign debts.

The steady build-up in reserves in 2009 has also helped the CBJ to cut interest rates over the last year, inject more liquidity into the economy and prod private banks into cutting lending rates to spur growth.

The CBJ has slashed its benchmark lending rate by 200 basis points since November 2008 as the economy shrunk and inflation turned negative in most months of 2009 from record highs.

The latest cut in interest rates by 50 basis points on Dec 20, the first move since last April, was to prod banks to extend cheaper credit to spur growth, central bank officials say.

Despite the global downturn's impact on the economy which has slowed growth and domestic consumption, the kingdom has not seen any steep falls in capital inflows or capital flight, officials say.

fficials say the economy was forecast to continue to shrink this year even below a forecast 3 percent in 2009, almost half the levels that averaged 6 percent annually in recent years.-Reuters