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