JORDAN IMF TEAM REVIEWS IRAQ SCENARIOS

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 006515

SIPDIS

TREASURY MILLS/PIPATANAGUL

E.O. 12958: DECL: 11/04/2007
TAGS: EFIN EAID PREL IZ JO
SUBJECT: JORDAN IMF TEAM REVIEWS IRAQ SCENARIOS

Classified By: ECON COUNSELOR TOM GOLDBERGER REASONS 1.5 (B) AND (D)

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SUMMARY
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1. (C) According to an IMF team visiting Amman this week to
discuss the Fund's program for 2003, economic disruptions
from military operations against Iraq could increase Jordan's
external financing need by $1.2 billion in 2003. Substantial
external assistance could over time, however, help smooth the
economy's adjustment to higher oil prices. The Fund is
generally pleased with Jordan's economic growth and progress
on economic reform and privatization, but needs to see
speedier movement on pension reform before it can commit to
post-2003 funding. END SUMMARY.

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PROGRAM AND CONTINGENCIES
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2. (C) At their request, IMF team members Joannes
Mongardini, Economist--Middle East Department, Ashok Bhatia,
Economist-Treasurer's Department, and Todd Schneider,
Policies Department, briefed the Economic Section and USAID
at the Embassy November 4. The mission is in Amman for two
weeks to review Jordan's performance under stand-by
arrangements and to discuss the Fund's program in Jordan for

2003. In so doing, they are looking closely at the impact on
the balance of payments and the budget of possible military
operations against Iraq. The mission's findings will be
discussed by the IMF Board in March.

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IRAQ
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3. (C) Mongardini said the potential consequences of
military action in Iraq could be severe. He said the loss of
the oil grant/subsidy from Iraq, the disruption of trade,
temporary capital flight due to political uncertainty, and a
reduction in GDP growth might mean a $1.2 billion increase in
the Jordanian economy's external financing need for next year
over and above the baseline. Mongardini allowed that the
Central Bank of Jordan (CBJ) could use reserves to partially
cover this, but that would only plug half the gap. To avoid
a brutal economic shock, the rest, he said, would have to be
made up in additional support by donors and international
financial institutions.


4. (C) The team said that the key issue was smoothing the
adjustment of petroleum product prices to market levels.
Along those lines, Mongardini said, the team had just met
with Jordanian Minister of Finance Michel Marto, who was
"very happy" over recent discussions in Washington regarding
USG intentions to assist Jordan, but did not provide any
details. But regardless of the source of external financing,
the economy would need time to adjust to petroleum prices
that would be 50-60% higher than current prices, as well as
the loss of budget revenue due to the loss of the "oil
surplus". Mongardini estimated that a smooth adjustment
would entail increasing prices to market levels over a two to
three year period.


5. (SBU) Mongardini also said the Fund was going to advise
the Ministry of Finance to increase general sales and excise
taxes on petroleum products to end the budget's dependence on
the oil surplus. This would give the government flexibility
to subsidize, for example, lower kerosene prices for the poor
by raising taxes on other petroleum products.

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OTHERWISE, THE NEWS IS GOOD
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6. (SBU) Mongardini said that, Iraq aside, "things looked
good". The government was well on track to attain its target
of 5% GDP growth for the year, with preliminary Ministry of
Finance figures showing 5.3% growth for the third quarter
thanks to an impressive 11% increase in tourism receipts and
strong exports, up 77% over last year to the U.S. alone.
Mongardini said that although domestic demand seemed to be
weak and domestic revenues a bit below target, the government
was on track for deficit reduction, as it is holding back on
capital expenditures and other spending.


7. (SBU) In a related issue, the team said the Fund was
hopeful that the government would merge the Program for
Social and Economic Transformation (PSET),an off-budget plan
to fund various economic development projects via grants and
privatization proceeds, into the regular budget next year.
Mongardini said the danger is that the PSET would take on a
"life of its own". He said the Fund is encouraging the
government to base project spending on secured finance, but
that Marto does not quite understand how integrating the PSET
into the budget would work at this point. Mongardini said
the IMF proposed that "the funding the government could count
on" should be in the budget, and that the government could
still have a "wish list" of proposed projects should
additional funds become available. He emphasized that the
Fund needed assurances from Jordan that this integration
would happen.

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PENSION REFORM
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8. (C) Mongardini told us that some progress had been made
in pension reform. He said that King Abdullah signed a
decree October 10 increasing the retirement age by six months
per year for the next ten years. The enrollment of new
military recruits in the government's military pension plan
has not yet been frozen, but a plan to enroll recruits in the
Social Security Corporation is currently under active
discussion and could be implemented by year's end, according
to Mongardini.


9. (C) The team said the more difficult issue is the
disability pension for retirees in the military system.
Currently, 85% of military retirees get both a regular
pension and disability. Mongardini said a Fund-endorsed plan
was on the table that would move disability certification
from the military to an independent board of doctors under
the direction of the ministry of Health. The plan is closely
held, however, as the military is concerned that personnel
might retire now to take advantage of current regulations.
Action in Iraq, he added, would "stop everything". But he
said the IMF "will use all the leverage it has" regarding the
pension issues, and will not go ahead with post-2003 funding
unless both plans are met.

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PRIVATIZATION
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10. (SBU) Bhatia said that privatization plans for next year
appear to be headed in the right direction. He said the
unbundling of the electricity sector had been finished. The
government planned to sell the generation and distribution
companies next year, and expected "a substantial amount" of
privatization proceeds as a result. As the government wants
to retain the power grid in state hands, the transmission
company will not be offered. Bhatia said the government has
shortlisted six potential bidders for the Arab Potash
Company, with bids due at the end of January 2003 and the
final sale to take place in March 2003. Talks regarding the
sale of Jordanian Phosphate Mines Company to the Potash
Company of Saskatchewan were in "the third round", according
to Bhatia. But, he added, the government was also
considering restructuring the company over the next 12-14
months should negotiations stall. Bhatia claimed there was
also some hope the sale of Royal Jordanian Airlines could
move forward next year. All told, Bhatia said privatization
receipts next year could go as high as $560 million.

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JORDAN TELECOM IPO
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11. (SBU) The Team said the Fund was "quite pleased" that so
many investors bought shares in Jordan Telecom (JTC),as it
opens doors for IPOs in the future. Marto told the team he
was also pleased with the offering, and predicted a closing
price of JD 2.5 ($3.50) per share after yesterday's first day
of public trading on the Amman Stock Exchange. (Note: JTC
closed at JD2.45.) Bhatia called the decision by the Social
Security Corporation (SSC) to purchase 5% "very gutsy", but
said with its currently high level of liquidity, the SSC
could well afford the move. Bhatia said the government was
likely to offer another 10-15% of JTC for sale next year.


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TECHNICAL ASSISTANCE
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12. (SBU) Regarding technical assistance, the Fund is
sending a tax advisor to the Ministry of Finance (MOF),
arriving the weekend of November 7, to advise the Jordanian
government on setting up a new income tax system, one that
would represent what Mongardini called a "clean slate". The
advisor will be resident at the Ministry for at least one
year. In addition, the Fund will provide assistance to the
Ministry on a treasury accounting system.


13. (SBU) Most importantly, the MOF has agreed to accept a
Financial Sector Assessment Program Mission in March and May
of 2003. Jointly run by the IMF and the World Bank, the
assessment will comprehensively examine the sector for
soundness and vulnerabilities. The total report will remain
strictly confidential, but the substance will make up part of
the Fund's Article IV consultations regarding Jordan in
November, 2003.

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COMMENT
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14. (SBU) The Fund is generally pleased with Jordan's
economic performance. That said, it is also clear that
momentum in pension reform and privatizations is imperative
for the government to retain the IMF's continued support. We
expect that forward progress will continue, but action in
Iraq could well at least temporarily derail Jordan's economic
growth and progress on reform.
GNEHM