JORDANIAN ASSESSMENT OF ECONOMIC IMPACT OF

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 005240

SIPDIS

TREASURY FOR OASIA -- MCDONALD
CENTCOM FOR POLAD

E.O. 12958: DECL: 09/12/2007
TAGS: EFIN PREL ETRD JO IZ
SUBJECT: JORDANIAN ASSESSMENT OF ECONOMIC IMPACT OF
POSSIBLE IRAQ HOSTILITIES

REF: AMMAN 4697

Classified By: CDA GREGORY L. BERRY. REASONS 1.5 (B) AND (D)


1. (c) Post has faxed to NEA/ARN a copy of a paper given to
DAS Satterfield by Prime Minister Abul Ragheb that describes
a preliminary Jordanian government interagency assessment of
the economic impact on Jordan of possible military
hostilities involving Iraq. The paper assumes and attempts
to quantify the value of the loss of grant and subsidized oil
shipments for Iraq, as well as knock-off effects on
government revenues and the transportation, tourism, and
export industries. It estimates the total cost to the
Jordanian economy at about $1.4 billion. Copies of the paper
are available from NEA/ARN.


2. (c) Foreign Minister Muasher told the Charge that he
would like to discuss the paper during meetings he has
requested in Washington with the Secretary and other senior
U.S. Government officials. Central Bank governor Umayya
Touqan has also raised a related issue related to impact on
Jordan's banking system of an abrupt halt in UN Oil for Food
Program trade with Iraq (reftel). We would also appreciate
Washington guidance on the issue Touqan raised.


3. (c) In post's view, given an overall absence of detail,
the numbers provided in the Jordanian paper are hard to
assess. Yet, it seems clear that loss of the oil subsidy
would be a major economic hit to Jordan. Although the
adjustment to market-based oil prices is probably a good
thing in the long-term, the transitional economic costs will
no doubt be significant and painful, particularly at a time
when the Jordanians would be facing major social dislocations
because of a conflict. On the other hand, Jordan has
resources of its own to deal, at least in part, with the
other identified costs, which are mostly temporary.
Following are some additional points that may prove useful in
Washington's analysis of the paper and the issues it raises.

-- The paper mentions in passing the possible need to
provide for refugee flows, but does not quantify the
potential need. The Jordanian government has been reluctant
for political reasons to discuss with the embassy or
humanitarian organizations its planning for this eventuality.
The Department may want to suggest to FM Muasher that
low-key contingency planning by the Jordanians with the
international community wuold be prudent.

-- The calculation of the value of the Iraqi oil grant and
subsidy is probably actually underestimated to the extent
that it sets a higher than market value on the low-quality
consumer goods exported to Iraq under the oil for goods
protocol. Viable alternative markets probably do not exist
for most (60-70%?) of such goods, so the loss of the Iraqi
market would mean a permanent loss of income and jobs for a
significant portion of Jordan's manufacturing sector.

-- The paper lumps together permanent and temporary shocks.
Permanent shocks would include the higher national oil bill
at market prices and the probable loss of Iraq as a captive
market for low-quality consumer exports. Temporary shocks
include the impact on port and land transport, loss of
tourism and remittance income.

-- Depending on the scenario, the temporary shocks could be
quickly reversed and even turn into "positive shocks." (Note
that real GDP grew by over 20% in 1992.) Similarly, the
opportunity for Jordan of the reopening of the Iraqi economy
to normal business is not addressed.

-- In addition to not addressing offsetting factors, the
paper does not discuss resources currently available to
Jordan. These include $5 billion in official reserves, $1.5
billion in claims on Iraq, and substantial foreign assets of
the banking system and private sector, as well as the
increased credibility of the central bank and government.

-- Furthermore, it does not seem to consider savings on debt
payments under the new Paris Club arrangement or the
substantial increase in non-Iraq exports expected this year.
Regarding the latter, it will be critical to keep QIZ exports
flowing, especially via Haifa; otherwise there could be a
permanent damage to the initiative.

-- Another critical factor will be how the international
banking community reacts during a crisis. Banks, especially
but not only European and Japanese ones, could preemptively
interrupt relationships with Jordanian banks ("redlining"),
making it impossible for Jordanian banks to access overseas
funds or clear international payments. This could lead to
trade disruptions and defaults by Jordanian banks with messy
and potentially long-lasting legal and financial consequences.

-- In addition to directly providing cash to the Jordanian
government, there could be other ways to address some of the
needs identified. For example, to minimize monetary
instability and reduce the probability of a speculative hard
currency outflow, the U.S. could announce a commitment to
make additional temporary reserves available to the Jordanian
Central Bank. This would also increase the ability of the
Jordanian government to guarantee domestic lending or finance
debt deferrals for hotels or other firms.

-- We could also consider U.S. government guarantees for
borrowing by the Jordanian government or banks, although the
U.S. budget cost of this would be equivalent to direct
lending. For this reason, it is likely preferable to provide
guarantees and lending through international institutions.

-- The IMF and World Bank would be probable sources of
emergency funding and guarantees, as could be the
international donor community. The Paris Club could also
provide additional extraordinary debt relief, but this would
be unlikely to provide much help in a crisis since the vast
majority of debt payments due over the next six years were
already deferred by the July Paris Club agreement.
BERRY