TFIZ01: DISBURSAL OF SUPPLEMENTAL AID TO JORDAN

S E C R E T SECTION 01 OF 03 AMMAN 002363

SIPDIS

E.O. 12958: DECL: 04/19/2013
TAGS: EFIN EAID JO
SUBJECT: TFIZ01: DISBURSAL OF SUPPLEMENTAL AID TO JORDAN

Classified By: AMBASSADOR EDWARD W. GHEHM. REASONS 1.5 (B) AND (D)


1. (s) Summary. With preliminary assessment of the
political and economic impact of the war in Iraq revealing
substantially greater costs than foreseen last year, senior
leadership of the Jordanian government, including King
Abdullah himself, have urged prompt disbursal of the recently
appropriated $700 million in supplementary economic
assistance. In recent conversations with the Ambassador, the
King and senior officials have reasserted the Jordanian
government,s commitment to the economic objectives agreed
last fall. These officials have proposed a process for
disbursing U.S. aid that would help defuse short-term
political pressures while ensuring that it is disbursed
through the budget to meet fiscal needs as they occur over
time and with conditions that wean Jordan off its dependency
on cheap Iraqi oil. Given the importance of Jordan's
economic and political stability to our fundamental
objectives in this region, the Embassy strongly supports this
request for quick action, with follow-up that reinforces our
seriousness about the need to follow through on policies that
bolster Jordan's economic viability and independence. End
Summary.

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Reaffirmed Commitment to Economic Basis for Aid
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2. (s) The government of Jordan has affirmed to the
Ambassador at several levels -- including the King, Prime
Minister, and ministers of finance, planning and foreign
affairs -- that it remains committed to the arrangements
worked out in late 2002 for providing emergency U.S.
assistance linked to a conflict in Iraq. In particular,
Jordan is committed to the overarching objective of using
U.S. aid within the budget to meet fiscal deficit targets
agreed with the IMF without having to make socially and
politically disruptive cuts in budgetary social spending. In
addition, Jordan remains committed to using the "breathing
space" afforded by emergency U.S. assistance to smooth the
process of transition from its economic dependence on
concessional Iraqi oil to a market-based system for procuring
and marketing oil.

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Domestic Political Cost of Conflict More than Foreseen
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3. (s) At the same time, the King faces a domestic
political cost from the war that is likely to be much longer
lasting than he and we foresaw last year. He and the
government currently find themselves under intense pressure
from a public that is angry about the Western military
toppling of the regime of a neighboring Arab country,
dismayed by the suffering of the Iraqi people, and
disillusioned by growing evidence of Jordanian cooperation
with the Coalition effort. The King has resisted
extraordinary pressure for a public denunciation of the
United States and the coalition called for in an
unprecedented petition signed by 99 prominent Jordanians,
including former prime ministers. Coming along with the
economic shocks Jordan faces as a result of the war, the
tensions and pressures on King Abdullah have been greater
than they ever have been since he took the throne. Thus, the
King has an intense need to demonstrate to the Jordanian
people quickly that the policies he followed were in their
best interest.

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King's Desire to Meet Political and Economic Objectives
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4. (S) It is therefore the King's need and desire that we
find a mechanism for disbursing U.S. assistance that will
simultaneously safeguard its economic objectives and give the
King greater political latitude to persevere in policies --
including parliamentary elections in June -- that support
fundamental U.S. interests in the region. Finance Minister
Marto, in close consultation with the King and Prime
Minister, has therefore proposed that we transfer as soon as
possible the entire $700 million amount appropriated in the
FY03 Supplemental. Rather than spending it all at once,
however, the government of Jordan is prepared to place the
funds in a special account at the Federal Reserve Bank of New
York or other appropriate institution. Balances in the
account would be drawn on as necessary to cover budgetary
needs caused by revenue reductions or additional spending
needs linked to the conflict in Iraq.


5. (s) The government says it will need to draw on $500
million of the assistance quickly (see paras 7-10 below). To
preserve the commitment to sequence reforms so as to move to
economic independence while blunting the social costs, the
government is ready to commit not to draw down the final $200
million in the account until a) the IMF has renewed its
endorsement of Jordan's economic program, and b) the cabinet
has approved a three-year strategy to eliminate all petroleum
product subsidies and has made a policy "down payment" of an
initial increase in domestic petroleum product prices. If it
makes us more comfortable, the GOJ is also ready to signal
its commitment to ongoing fiscal soundness by agreeing that
it will not use the U.S. aid to avoid implementation of
budgetary revenue measures it has told the IMF it will take
this year, including increasing General Sales Tax (GST) rates
and closing loopholes.

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Economic Impact Sharper and Deeper than Foreseen
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6. (s) Like the stronger than expected political impact of
the war, the economic costs appear to have come sooner, and
cut deeper than foreseen last fall. According to Minister
Marto, the war will add $950 million to the fiscal deficit in
2003 alone. This includes a $360 million additional cost of
procuring oil outside the Jordan-Iraq barter arrangement for
the year as a whole. Of this, $210 million should be offset
by an expected oil grant of 100,000 bpd from Gulf states for
three months, so that the net negative deficit impact related
to oil procurement alone would be $150 million. This means
that the government will need to cover a $740 million
shortfall in order to meet its 2003 deficit target.


7. (S) In addition to the $150 million in extra oil costs,
the shortfall includes $400 million in lower than expected
budgetary revenue due to reductions in expected collections
of sales tax, income tax, customs, other taxes and fees, and
in the "oil surplus" the government earns by selling refined
Iraqi crude to the public for more than its actual cost.
Additional expenditures of $190 million will be required to
mitigate the economic impact of the war on various sectors.
Marto foresees a need for $60 million for emergency spending
on industry and labor support (including worker retraining
programs),$40 million for the transportation sector, and $30
million for the tourism industry, with additional amounts
required to pay for measures necessary in the lead-up to the
war to prepare for refugee flows (about $10 million) and to
enhance domestic security.


8. (S) Marto stresses that these are conservative estimates
based on the best information available to him at this time.
If the immediate need is mitigated in any way, he would
stretch the spending into 2004. If more resources become
available from other sources, he would like to use them for
additional support that would help minimize layoffs in
sectors (industry, tourism, transportation) that he expects
to take the hardest hits over the year and to begin
implementation of projects, through the national budget
process, contained in the Social and Economic Transformation
Program (SETP). Such projects are designed to address basic
needs in rural and disadvantaged areas, increase long-term
economic potential and productivity, and bolster popular
support for the economic reform process.

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Comment
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9. (s) The mechanism the Jordanians propose seems eminently
reasonable. It directly addresses fundamental U.S. policy
goals with regard to Jordan: it contributes to the political
stability of a key Arab ally committed to expansion of the
democratic process, and it preserves a commitment to economic
reform that is unique in this region. By channeling the
money from a special account into the budget to meet
budgetary needs as they arise, it ensures that overspending
above Jordan's "absorptive capacity" is avoided. Should the
budgetary needs not materialize to the extent foreseen by
Marto this year, it would provide for a flexible sequencing
of spending the aid through the budget over a two or more
year period. The King, Prime Minister, and finance, foreign,
and planning ministers have told us that they are committed
to such a framework. The government is also ready to report
to us regularly and in greater detail on the extraordinary
fiscal impact of the war, as its impact continues to become
clear.


10. (s) We also share the analysis that the impact of the
war on the Jordanian economy and budget will be sharp and
deep, creating potential for more politically disruptive
dislocations at a critical time for Jordan and the region.
The World Bank says that Jordan will bear the brunt of the
regional impact of the conflict and estimates that without
extraordinary assistance, real GDP growth initially projected
at over 5% for this year could be in large part wiped out,
leading to a return to negative per capita income growth.
According to Jordanian officials, budget revenues in the
first quarter were already at least $250 million below
target, due mainly to a reduction in consumption and economic
activity during the period of uncertainty that preceded the
conflict. At the same time, it now seems that recovery could
be more rapid than foreseen last fall. Along with continued
strong growth of exports to the U.S., Jordan's business
sector is moving aggressively to capitalize on new regional
opportunities in a free Iraq and from hoped-for easing in
Israeli-Palestinian tension.


11. (s) From both a political and economic aspect, the
embassy urges that we move quickly along the lines proposed
by the Jordanians. From a political perspective, we cannot
afford to take unnecessary risks in Jordan at this juncture
in the region. On the economic side, short-term support will
be crucial, while the longer-term reform objectives are fully
accepted and reaffirmed. We have a small window of
opportunity. The longer the process in Washington takes, the
greater the political pressures on the King will be to
backtrack on both the political and economic sides.


12. (s) Finally, we recommend that the USG take advantage
of upcoming meetings with Jordanian leaders, including a
possible visit by Foreign Minister Muasher to Washington, to
reiterate at the highest levels our seriousness about
Jordan's need to follow through with reforms that increase
its economic independence and sustainability, including the
elimination of oil price subsidies. Communications between
Treasury and Finance Minister Marto at the appropriate time
could also reinforce that sense of purpose.
GNEHM