Identifier
Created
Classification
Origin
02AMMAN4697
2002-08-20 11:15:00
SECRET
Embassy Amman
Cable title:  

JORDAN CENTRAL BANK GOVERNOR WORRIED ABOUT BANKS'

Tags:  EFIN ETRD JO 
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S E C R E T AMMAN 004697 

SIPDIS

TREASURY FOR OASIA

E.O. 12958: DECL: 08/20/2007
TAGS: EFIN ETRD JO
SUBJECT: JORDAN CENTRAL BANK GOVERNOR WORRIED ABOUT BANKS'
EXPOSURE TO OIL FOR FOOD TRADE


Classified By: Ambassador Edward W. Gnehm. Reasons 1.5 (b) and (d)

S E C R E T AMMAN 004697

SIPDIS

TREASURY FOR OASIA

E.O. 12958: DECL: 08/20/2007
TAGS: EFIN ETRD JO
SUBJECT: JORDAN CENTRAL BANK GOVERNOR WORRIED ABOUT BANKS'
EXPOSURE TO OIL FOR FOOD TRADE


Classified By: Ambassador Edward W. Gnehm. Reasons 1.5 (b) and (d)


1. (S) Summary. Jordan's central bank governor is worried
that a sudden interruption in Oil for Food exports via Jordan
to Iraq in the event of military action in Iraq could leave
the Jordanian banking system seriously exposed. He requested
U.S. views on possible mechanisms that would help banks cope
with this problem. Jordanian ministries are working on an
assessment of the likely economic fallout of a disruption in
trade with Iraq, which, the governor expects, would be
difficult, but manageable at a high cost. End Summary.


2. (S) Central Bank Governor Umayya Touqan told econ chief
August 19 that an inter-ministerial group led by the finance
ministry at the behest of the Prime Minister is working on
economic planning for managing the fallout on Jordan of a
possible military strike on Iraq. He said the group was
preparing a short paper, which should be forwarded to the
U.S. and other governments soon.


3. (c) One area of specific concern to the Central Bank
that Touqan said he had discussed with the Prime Minister
(who had also raised it with the Ambassador) is the exposure
of Jordanian commercial banks to UN Oil for Food program
exports to Iraq. At any one time, Touqan said, Jordanian
banks have USD 400-500 million in letters of credit
outstanding to finance this trade. Under current procedures,
UN officials in Baghdad confirm receipt of goods in Iraq
before BNP as the bank managing the oil for food account
releases payment for OFF contracts to Jordanian banks. If
this system were unable to function because of military
activity, Jordanian banks could be left holding the bag.


4. (c) Touqan said that the USD 400-500 million estimated
in outstanding Jordanian bank credit is concentrated in and
makes up a substantial part of the assets of 4-5 Jordanian
commercial banks. He did not think these banks, or by
extension the banking system as a whole could absorb the
shock of having so much liquidity tied up in the event of an
extended conflict.


5. (c) Two possible mechanisms for dealing with this had
occurred to Jordanian officials: 1) UN inspectors could be
stationed at the Jordan-Iraq border to take control of
incoming goods. In this case, banks could be paid and goods
could be held at the border until delivered to their ultimate
destination. 2) Alternatively, goods could be stored in
Jordan with the Jordanian banks keeping or acquiring title to
them. This would allow the banks to use the goods as
security in order to raise funds. Touqan said that there
were no doubt other ways to deal with this problem and would
appreciate the U.S. government's opinion.


6. (c) Overall, Touqan described the impact on Jordan of a
disruption in its trade with Iraq as difficult, but
ultimately manageable. He said the central bank would act
aggressively by raising interest rates to counter any
inflationary tendencies arising from a likely increase in the
government deficit. This would result from the expected loss
of the Iraq oil grant, a drop in tax revenue due to a
contraction in economic activity, and increased emergency
spending to help companies and individuals cope in such a
crisis. At the same time, remittances, export earnings, and
tourism receipts would drop sharply. Jordan would use its
resources, including its foreign reserves, but obviously,
Touqan said, the more quickly military action was over, the
easier it would be for Jordan to absorb such a massive shock.


7. (S) Comment: Touqan, an economist and former diplomat,
is not prone to dramatization; but the scenario he paints
sounds like a recipe for shutting down the financial system
for possibly an extended period. We would appreciate being
able to convey to him and to the Prime Minister Washington's
views on the issue Touqan raises.
GNEHM