SUPPLEMENTAL ESF FOR JORDAN

C O N F I D E N T I A L AMMAN 002752

SIPDIS

TREASURY FOR A/S QUARLES
NSC FOR EDSON/HADLEY
STATE FOR A/S BURNS

E.O. 12958: DECL: 05/08/2008
TAGS: EFIN EAID JO
SUBJECT: SUPPLEMENTAL ESF FOR JORDAN

REF: A. AMMAN 2717

B. AMMAN 2569

C. AMMAN 2363 AND PREVIOUS

Classified By: AMBASSADOR EDWARD W. GNEHM. REASONS 1.4 (B) AND (D)


1. (c) On May 6, Embassy shared with Ministers Marto and
Awadallah drafts sent from Washington of the bilateral
transfer agreement that would govern the $700 million FY03
emergency supplmental ESF transfer. The most recent draft
includes among the policy measures that the GOJ must execute
prior to disbursing the final $200 million the stipulation
that the "IMF Executive Board must approve completion of the
Third Review under Jordan's IMF stand-by agreement and
endorse a (Jordanian) fiscal and monetary program for 2004."
Given that the IMF and Jordan are still in the process of
negotiating a 2003 program and that discussions of a 2004
program would not even begin until late 2003 (with Board
approval sometime in 2004) and that the first review has not
yet been completed, this would have the effect of delaying
Jordan's use of the $200 million until well into calendar
year 2004. The Ministers reiterated to Emboffs that they
need and are counting on receiving the total $700 million
before the end of 2003 to meet war related budgetary
shortfalls that will occur during calendar year 2003.


2. (c) As reported in ref c, the government believes it
will need to cover a war-related shortfall of at least $740
million in order to meet its 2003 fiscal target agreed with
the IMF. Therefore, in order to meet the 2003 target without
the full amount of U.S. assistance, they would have to cut
into spending on healthcare, education, and water development
contained in the 2003 budget. This is exactly the outcome
that we were seeking to avoid by making extraordinary
war-related assistance available to Jordan. Cutting social
spending programs would have a severe social impact that
would affect the broader economic and political stability of
the country. This would undermine the positive economic,
political and social reforms that King Abdullah has been
personally associated with since he took the throne in 1999.


3. (c) At the same time, the government remains solidly
committed to the plan described to the United States last
November to raise consumer petroleum prices to world levels
(ref b and c) and meet other conditions, including to
continue economic reforms under IMF auspices. Indeed, they
have already started the process of raising oil prices. They
are also committed to not drawing on the final $200 million
until the IMF Board has renewed its endorsement of Jordan's
economic program and the cabinet has approved a three-year
plan to eliminate oil subsidies. Furthermore, they are
committed to expending all sums through the national
budgetary process.


4. (c) Before the IMF staff is even in a position to
recommend to its Board that it approve a 2003 fiscal and
monetary program, the IMF will want reassurances from the GOJ
that unanticipated shortfalls are covered so that the
originally budgeted deficit target of 4.3% of GDP is
attainable. Without this, the IMF will not be in a position
to begin discussion of a 2004 program or approve completion
of IMF reviews under the stand-by arrangement, the first of
which has not yet taken place. In essence, Jordan might
never be able to meet the conditions for using the final $200
million suggested in the recent draft transfer agreement text.


5. (c) Comment: This issue must be satisfactorily solved
prior the Secretary of State's visit on May 12. If not, the
King will most certainly raise it, introducing a negative
issue to the agenda and dampening the atmosphere of the
visit, as a whole. We recommend that, as the Jordanians
suggest, the provision in the draft agreement apply to the
fiscal and monetary program for 2003 that the GOJ is
currently in the process of discussing with the IMF. This
should be finalized and approved by the Executive Board by
mid-2003, allowing the GOJ access to the full amount it needs
to cover shortfalls and meet its targets this year and in the
future, as long as it completes the other three measures
listed in the transfer agreement.
GNEHM