JORDAN: IMF MISSION REVIEWS OUTLOOK

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007296

SIPDIS

TREASURY FOR OASIA - A. DEMOPULOS

E.O. 12958: DECL: 11/5/08
TAGS: EFIN EAID PREL JO
SUBJECT: JORDAN: IMF MISSION REVIEWS OUTLOOK

REF: A. AMMAN 6962


B. AMMAN 6313

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


1. (C) Summary. An IMF team visiting Amman sees no
economic need for additional cash assistance to Jordan before
December 31, given that the country's finances are currently
in good shape -- although there is potential crunch next year
as the level of foreign grants falls and oil import costs
rise. Sharing concerns about the new government's ability to
enforce fiscal restraint, the Fund staff recommended that the
U.S. continue to put effective policy conditions on its cash
assistance. For the longer term, the staff is worried about
the potential treatment of Jordan's large central bank claims
on Iraq (which they distinguish from other countries' credits
to Iraq),as well as by what they see as elevated military
spending. End Summary.


2. (C) IMF Mission Leader for Jordan Ihsan Mansur and
mission members briefed the DCM, the USAID Mission Director
and other embassy staff on November 4 on their findings
toward the mid-point of an on-going visit to Amman. The
mission estimated that Jordan would meet or exceed growth and
deficit reduction objectives for 2003. Growth would range
between 3 and 4% and the deficit would reach 2.5% of GDP or
below -- thanks to the cash assistance already provided by
the United States, which had offset war-related budget
shortfalls.

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Budget Crunch in 2004
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3. (C) The IMF team felt that Jordan had "no economic need"
for additional cash assistance during 2003. Cash assistance
-- including the recently appropriately $100 million in
supplemental aid and the "regular" FY04 cash transfer --
would be more useful in 2004, when Jordan could face a budget
and balance of payments "crunch" from lower grant aid and
higher oil import costs. (The mission said it was estimating
that Jordan would pay market prices for oil imports from the
second half of 2004.)

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New Government's Fiscal Commitment "Untested"
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4. (C) Expressing a concern about the new government's
commitment to fiscal discipline nearly identical to that in
ref A, the IMF mission suggested that it would be useful for
the U.S. to find ways to reinforce the new finance minister's
efforts to keep deficit reduction on track, including by
conditioning delivery of U.S. cash transfers on maintenance
of sound budget policies. In particular, the team mentioned
that it could be useful to use new cash transfers to
reinforce commitments made to the U.S. and IMF over the past
year to increase the base and rate of the value-added tax and
to reduce subsidies on oil products. They also asked that
the U.S. convey the message that it was in the Jordanians
best interest to continue to work closely with the Fund, even
after the July expiration of the current program. (They
noted that non-binding "enhanced staff monitoring" would
continue through 2005.)

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SETP Funds Should be "Well-Spent"
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5. (C) The Fund staff said that it did not have a
preference on whether U.S. aid was used to fund Social and
Economic Transformation Plan (SETP) projects or regular
budget needs. In their view, the bottom line was the same.
Their main concern about the SETP was the "quality of
spending." Although the IMF did not look at the detailed
breakdown of SETP spending, it was concerned that appropriate
financial controls should be in place , which they do not
appear to be. (See ref B for former Finance Minister Marto's
similar concerns about the SETP.)

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Iraqi "Debt" Something Else
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6. (C) Asked about the Central Bank of Jordan's $1.5
billion in claims on the Central Bank of Iraq, the staff
members said that in their opinion this did not constitute
"debt" in the way the Paris Club looks at debt. Rather, they
said it should be viewed as "cash payments" that were due and
not paid. Furthermore, while not considered free reserves,
these claims are treated as assets in the Bank's balance
sheet. Should inclusion of these claims in a multilateral
restructuring of Iraq's debt require the Central Bank to
write-off such a large amount, the Bank could become
insolvent. This would mean that the Government of Jordan
would be legally required to recapitalize the Bank --
creating an equivalent demand on the central government's
budget. "Don't destroy one country to save another," they
advised.

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Military Spending Needs to be "Rationalized"
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7. (C) As for longer-term issues, team members said they
would be turning their attention to Jordan's level of
military spending which they said was among the highest in
the world per capita or as a share of GDP. Ironically, they
noted, U.S. military aid in the form of equipment only
aggravated the demands on the budget for personnel and
recurring costs. Obviously, this was a very difficult
problem, but the team felt there was no alternative to taking
a close look at rationalizing the level of military
expenditure.

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Comment
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8. (C) As the IMF staff points out, Jordan continues to
face financial challenges. We think the advice to transfer
U.S. cash aid in Jordan's 2004 budget year (beginning January
1) and to condition it on budgetary and policy performance is
well-placed. Dr. Abu Hammour, the new and politically
untested finance minister, and other ministers of like mind
will no doubt welcome the additional leverage this will given
him in keeping the 2004 deficit under control.
GNEHM