Identifier
Created
Classification
Origin
03AMMAN1214
2003-03-02 08:35:00
CONFIDENTIAL
Embassy Amman
Cable title:  

LOTS OF HOLES TO BE FILLED IN JORDAN'S 2003 BUDGET

Tags:  EFIN EAID PGOV JO 
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C O N F I D E N T I A L SECTION 01 OF 05 AMMAN 001214 

SIPDIS

TREASURY FOR OASIA -- MARSHALL MILLS, WON CHANG
USDOC 4520/ITA/MAC/ONE/COBERG

E.O. 12958: DECL: 02/25/2008
TAGS: EFIN EAID PGOV JO
SUBJECT: LOTS OF HOLES TO BE FILLED IN JORDAN'S 2003 BUDGET

REF: AMMAN 485

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

C O N F I D E N T I A L SECTION 01 OF 05 AMMAN 001214

SIPDIS

TREASURY FOR OASIA -- MARSHALL MILLS, WON CHANG
USDOC 4520/ITA/MAC/ONE/COBERG

E.O. 12958: DECL: 02/25/2008
TAGS: EFIN EAID PGOV JO
SUBJECT: LOTS OF HOLES TO BE FILLED IN JORDAN'S 2003 BUDGET

REF: AMMAN 485

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


1. (c) Summary. Jordan's new 2003 budget signals a very
difficult fiscal year ahead for Jordan: Filling the holes
needed to meet a 4.3% of GDP deficit target includes finding
$100 million in additional spending cuts and $100 million in
still unidentified foreign grants, as well as compensating
for probable revenue shortfalls. In the current political
environment, this challenge is likely to test Jordan's
commitment to fiscal discipline and sound economic policy as
never before. U.S. support for sound economic policies and
reform of government finances, including through the
provision of supplemental assistance connected to a military
conflict, will be critical. End Summary.


2. (sbu) Finance Minister Michel Marto announced on
February 5 a JD2.44 billion ($3.45 billion, JD1=$1.41)
"emergency budget" for the year 2003. The announcement was
more than two months behind Jordan's normal budget calendar,
delayed by the difficulty the GOJ faced in compressing
expenditure growth and finding new sources of income given
weakness in revenue growth. The budget will likely meet the
deficit targets agreed with the IMF in the May 2002 stand-by
program (an IMF team is currently in town). That Marto was
able to announce a budget that meets the IMF targets despite
the intense pressures currently on Jordan is a demonstration
of the government's ongoing commitment to sound economic
policy.


3. (sbu) The main features of the budget, which are also
summarized in the table at the end of this report, are as
follows.

--------------
Deficit Increase, but Consistent with IMF
--------------


4. (sbu) An increase in the overall deficit to JD316
million from JD259 million in 2002. As a share of GDP, this
represents an increase to 4.3% from 3.8%. An increase is,
however, consistent with the targets set in the IMF program
(allowing for differences in Jordanian and IMF accounting).
After taking into account rescheduling of JD100 million of
debt service by Paris Club and other creditors, the

government will need to borrow an additional net JD216
million, compared to JD184 million last year. The government
expects to raise the bulk of this by issuing government
securities in domestic markets. The GOJ will also welcome
new concessional foreign debt (e.g. PL 480 food loans) that
helps finance budgetary expenditure.

--------------
Expenditures Up, but Only a Bit
--------------


5. (sbu) Total expenditure increases by JD157 million to
JD2,441 million from JD2,289 million in 2002. However, the
total will fall as a share of GDP from 34 percent to 33
percent according to Finance Ministry projections. This
means another year of increasingly painful austerity for GOJ
ministries and agencies. Of total spending, approximately
JD2,009 million, or 82%, is current expenditure over which
the government has little discretion (salaries, pensions,
supplies, and interest). As was the case last year, the
military and security budgets receive the bulk of the
increase in discretionary spending, including a JD54 million
increase in military and security service salaries ordered by
King Abdullah during 2002. The education and health
ministries also receive significant increases (see Table II
below). The remaining JD502 million is planned for capital
spending on roads, water projects, schools, courthouses, and
other government buildings. As was also the case last year,
the total includes JD70 million (1% of GDP) in
still-to-be-identified cuts in ministries' budgets.

--------------
Revenues Stagnate
--------------


6. (sbu) Anticipated domestic revenue from tax and non-tax
sources represents 25% of GDP in 2003, or JD1,803 million.
This is up from JD1,752 million in 2002, but unchanged as a
share of GDP. Tax revenues are slated to rise by 7.2% after
stagnating in 2002 due to a fall off in customs and General
Sales Tax (GST)revenues. In 2003, non-tax revenues increase
by JD11 million to JD690 million. Tax increases will also
have to compensate for an expected decrease in the
government's so-called "oil surplus" (the difference between
what the GOJ pays Iraq and what it receives from selling the
oil to the refinery company) due to higher global energy
prices.


7. (c) Marto's public presentation did not provide detail
on how an increase in tax receipts would be accomplished. In
a private meeting, he told the Ambassador confidentially that
the measures agreed within the government are 1) an increase
in the basic GST rate from 13% to 15% and in the lower GST
rate from 2% to 5% that would raise JD30 million in new
revenue, 2) an increase in retail prices for petroleum
products that would raise JD40-50 million (although prices
for some products would remain below OECD averages),3)
imposing a 5% tax on interest income, and 4) initiating a 2%
income withholding tax on imported goods that will improve
efficiency of income tax collection. Marto said the
government had agreed, with the King's blessing, to phase in
these measures between March and July 2003. All of them
generated hot debate within the government, but Marto said
the principle of increasing taxation of upper and middle
income groups and minimizing the impact of new measures on
the poor had been accepted, despite, he said, the strong
influence of the business community on the King's economic
thinking.

-------------- --
Foreign Grants Budgeted for, but not Identified
-------------- --


8. (sbu) The final major budget element is foreign grants,
for which the budget stipulates an increase to JD322 million
from JD278 million received in 2002. This amount includes
approximately JD70 million ($100 million) in
still-to-be-identified foreign grants. Marto told the
Ambassador that a portion of the identified grants --
approximately JD57 million -- will be used to finance Social
and Economic Transformation Plan (SETP) spending also
included on the expenditure side of the budget. This will be
supplemented by JD55 million in SETP grants received in 2002
but not yet spent, bringing total basic 2003 SETP spending to
JD112 million. Any additional SETP spending would be
financed by additional grants received above the JD322
million.

--------------
OBSERVATIONS
--------------


9. (C) Following are embassy observations about the budget,
informed by our conversations with Marto, his deputy Dr.
Mohammed Abu Hammour, and members of the visiting IMF mission.

-- Despite the "emergency" label, this is not a war
budget. It does not take into account expected revenue
losses (including of the oil surplus) and expenditure
increases consequent to a military conflict with Iraq.
Rather, the moniker sends the signal that 2003 will be a very
difficult year with or without a war. If there is a war,
Marto will count on extraordinary U.S. assistance to make up
for budget shortfalls, as he discussed in late 2002 in
Washington.

-- The budget's achievability depends on the observer's
confidence in the government's ability to impose additional
spending cuts (at least the JD70 million figured into the
deficit) and revenue measures over the course of the year, as
well as to raise $100 million in so far unidentified foreign
grants. Past performance gives a measure of confidence (see
reftel for the heroic measures taken to bring the 2002
deficit within striking distance of the IMF target). As in
the past, capital spending on sorely needed improvements in
infrastructure will likely bear the brunt of cuts.

-- However, given the current political tension
surrounding a conflict with Iraq and the slowness of progress
on the Palestinian issue -- plus the years of fiscal
restraint the country has already endured -- the political
difficulty of tough decisions (which may be equivalent to at
least 2-3% of GDP) is likely much more intense than in past
years. Parliamentary elections by summer will bring
increased pressures from political leaders for fiscal
generosity, and a new Parliament by mid-year will most likely
make austerity even harder to bear.
-- The budget does not make bold structural changes: it's
business as usual on both the revenue and expenditure sides.
On revenues, the tax system is clearly not responsive to GDP
growth. In 2002, the GST, which accounts for 60 % of non-tax
revenue, stagnated, as it failed to capture income growth
that was not reflected in greater consumption (see Table IV).
Greater utilization of direct income taxation to supplement
the GST (which the minister prefers as being relatively easy
and inexpensive to administer) could provide greater
stability and diversification in the tax system, and also
help make the tax structure more progressive. On
expenditures, some progress has been made in overhauling the
over-generous military pension system (the length of service
requirement has been extended),but more needs to be done to
make this system less generous and thereby decrease its
disincentives to employment and productive use of resources.

-- Recurring expenditures under SETP projects are not yet
a budgetary issue, but are likely to be in the future. So
far, only a relatively small amount has been spent on SETP
projects (about JD40-50 million in 2002). But an increase in
recurring expenditures in future years underscores the need
for a more fundamental approach to revenue and expenditure
reform.

-- The budget does not include spending on critical
infrastructure projects, such as the Disi water project, the
Samra power plant project, the Aqaba-Amman natural gas
pipeline, and the Amman city center (Abdali) project. The
government hopes that these will be financed by the private
sector through "build-own-operate" arrangements. The
government is likely however to be under considerable
pressure to provide financial guarantees for these projects,
which would increase its sovereign debt levels.

--------------
Comment: A Chance to Encourage Fiscal Reform
--------------


10. (c) In the end, the budget is likely to prove a paper
exercise given the overwhelming impact a military conflict
would have on Jordan's finances. It serves, however, to
highlight the fiscal pressures on the government as well as
the need for structural changes in revenues and expenditures
in order to put the government's finances on a sustainable
track. Emergency assistance provided by the U.S. or other
countries to help Jordan adjust to a conflict should provide
opportunities to leverage such changes. Our bottom line is
that the King's and government's support for the sound
economic policies supported by the IMF remains intact, but
that this commitment is likely to be tested in 2003 as never
before.


11. (c) The budget also serves to highlight the political
pressures on the finance minister. Marto confidentially and
frankly described the growing fatigue with fiscal discipline
he perceives on the part of the King, prime minister and
other ministers. We believe the King continues to value his
service, but that patience could wear thin since he hears
only criticism of Marto from the vast majority of his other
economic and political advisers. The alternative to Marto is
a less experienced minister who would be picked for his
readiness to spend and take on new debts. We can help to the
extent that we find ways to counterbalance the pressures on
Marto by expressing support for him and his policies.

--------------
TABLES
--------------
--------------
TABLE I
Jordan's 2003 Budget: Basic Features
--------------
(JD millions)

2003 2002 2001
budget estimate actual
-------------- -------------- --------------
Revenues 1803 1752 1719
Domestic Revenue 1764 1680 1638
Tax Revenues 1074 1000 996
Non-Tax Revenues 690 679 642
Other Revenues 39 73 81

Foreign Grants 322 278 249
Current Expenditures 1939 1852 1789
Current spending 1799 1660 1568
(non-interest)
Interest Payments 210 192 220
Unidentified cuts -70 - -

Capital Spending 502 437 404

-------------- -------------- --------------
Balance -316 -259 -224
-------------- -------------- --------------

Rescheduled Interest 100 75 69

Borrowing need -216 -184 -156

Note: GDP 7350 6780 6260

-------------- ---
TABLE II
CURRENT EXPENDITURE BY MINISTRY/GOVT. DEPARTMENT
-------------- ---
(JD millions)

2003 2002
Budget Est.
-------------- --------------
Royal Court 23 21
Parliament, Prime Ministry 10 8
Administration, Civil Service 1 1
Defense and Royal Med. Services 427 397
Interior 182 165
Justice 20 16
Foreign Affairs/Palestinian Affairs 21 20
Finance * 859 796
Industry and Trade 3 3
Planning 2 2
Tourism and Antiquities 2 2
Municipal, Rural Affairs 3 2
Energy and Natural Resources 3 3
Public Works and Housing 9 7
Agriculture 10 10
Water/Jordan Valley Authority 6 6
Environment 1 0
Education 276 248
Health 126 116
Social development 5 5
Labor 2 1
Information 3 2
Culture 3 2
Transport/Civil Aviation/Meteorology 11 10
Post and Telecommunications 1 9
The Royal Geographic Center 1 1
-------------- --------------
TOTAL 2009 1852

* Includes pensions, interest expense, subsidies, and
transfer payments.

-------------- --------------
TABLE III
CAPITAL EXPENDITURES BY MINISTRY/GOVT. DEPARTMENT
-------------- --------------
(JD millions)

2003
budget
--------------
Finance * 170
Planning/National Planning Council 101
Public Works & Housing 47
Water/Jordan Valley Authority 46
Interior Ministry/Public Security 23
Health 23
Education 12
The Royal Medical services 10
Post and Telecommunications 10
Interior Ministry/Civil Defence 9
Agriculture 9
Transport/Civil Aviation Authority 8
Tourism & Antiquities 7
Social development 5
Energy/Natural resources Auth. 3
Min. of Tourism/ Antiquities Dept. 3
Foreign Affairs 3
Interior 2
Water and Irrigation 2
Other 12
--------------
TOTAL 502

* Finance Ministry capital budget includes spending
counterpart of foreign aid for equipment purchases (e.g.
military),and loans, advances, and contributions.

--------------
TABLE IV
STRUCTURE OF REVENUES
--------------
(JD millions)
2003 2002 2001
budget estimate final
-------------- -------------- --------------
Total Domestic Revenues 1,803 1,752 1,719

Tax Revenues 1,074 1,000 996
Income Tax 201 196 195
Customs duties 190 220 228
General Sales Tax 604 511 503
Other Local Taxes 79 74 70

Non-Tax Revenues 690 679 642
Licenses 33 32 32
Fees 226 225 215
Receipts from Gov't
institutions 139 139 137
Revenues from Gov't
Services 28 24 25
Miscellaneous 292 283 257
GNEHM