JORDAN'S FINANCE MINISTER ON DEBT POLICY, IRAQI

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 007153

SIPDIS

E.O. 12958: DECL: 08/19/2014
TAGS: EFIN JO IZ
SUBJECT: JORDAN'S FINANCE MINISTER ON DEBT POLICY, IRAQI
ASSETS

REF: AMMAN 04410

Classified By: CDA: David HALE, Reasons 1.5 (b) and (d).


1. (C) SUMMARY: Jordan's Finance Minister reviewed how he
hopes to reduce Jordan's debt burden, complying with a
Jordanian debt management law setting a debt/GDP ratio of 60%
by end-2006. He explored with a visiting Treasury delegation
the measures he has taken and the steps he hopes to take to
ease the debt burden. He also previewed a 100 million JD
bond issuance that was held the next day, with bonds with a
seven-year maturity, a first for Jordan. When asked about the
final settlement of Jordanian commercial claims against
frozen Iraqi assets, he expressed frustration that the
settlement process was taking so long but hoped that it would
be completed by mid-September. END SUMMARY.

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Background on Jordan's Debt
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2. (C) On August 16, Finance Minister Mohammad Abu Hammour
met with a Treasury delegation to discuss a MEPI-funded
proposal to house a Treasury debt specialist at the Finance
Ministry to advise the GOJ on improving its debt management.
In the course of the meeting, Abu Hammour provided an
overview of his assessment of Jordan's debt situation. He
said that during the previous two weeks, both the upper and
lower houses of Parliament had met to discuss the debt
situation in the country. The key topics of both sessions
were how to cut both the level of the debt itself and the
debt service.


3. (C) Providing some history, Abu Hammour explained that
Jordan had arranged a number of concessional loans in the
1970's which were to come due in the late 1980's.
Unfortunately for Jordan, the debt crises of the mid 1980's
in other countries caused some of Jordan's lenders to change
their terms. As a result, Jordan was forced to re-pay the
debt it accrued in the first half of the 1980's in the last
half of the decade, precipitating the 1989 financial crisis.
Under a series of agreements with the Paris Club, Jordan
received $5 billion in new loans as well as a $700 million
write-off of debt owed to the U.S. and another $72 million
owed the U.K. Jordan then pursued debt buy-backs and debt
swaps to bring down the debt level further.

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Public Debt Law
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4. (C) Abu Hammour explained his desire to meet the targets
set by Jordan's debt management law. The law, which does not
set a target date, stipulates that Jordan's domestic debt
must not exceed 60% of GDP nor should its foreign debt exceed
60% of GDP. In addition, Jordan's overall debt/GDP ratio
should not exceed 80%. According to Abu Hammour, the
government has set end-2006 as a deadline for these targets.
In achieving the targets, Abu Hammour plans to cut both
Jordan's debt stock and budget deficits as well as use the
proceeds from government privatizations to buy back debt. He
also hopes that Jordan's current strong growth rates will
help improve the ratio.


5. (C) Abu Hammour repeated what post has earlier reported,
that in his recent meetings with the Paris Club, he had
requested that Jordan be allowed to increase its debt swap
allowance from 30% to 50% of debt. He said he had also
raised the idea with both the U.S. and Britain. Abu Hammour
prefers to shift Jordan's borrowing more to domestic sources;
noting that Jordan's debt burden had increased by $1 billion
solely due to the appreciation of the euro. Although
exporters benefit from a stronger euro, euro debtors do not.
Abu Hammour added that Jordan's foreign official reserves
stood at $4.7 billion. The Ministry could consider buying $1
billion in euros to hedge against a further deterioration in
the dollar and the dollar/JD peg.

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Hope for a Bond Market
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6. (C) In that connection, Abu Hammour previewed a next-day
announcement of a JD 100 million bond issuance for seven
years, a longer term than earlier issuances. The auction was
to be held August 18. Abu Hammour said he had spoken to all
three of the banks involved in the auction and to the
government's Social Security Corporation to ensure the
issuance would be completely subscribed. The rate for the
issuance would be 7-7.25%. According to Abu Hammour,
previous government debt issuances had been for much shorter
periods. In addition, Jordanians tend to hold the bonds to
maturity, preventing development of a secondary bond market.
(NOTE: A Finance Ministry official later reported that the
auction was a great success. Instead of the JD 100 million
sought, demand was so high that the government sold JD 177
million in bonds, at a rate of "around 7%." END NOTE.)

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The Shape of the Debt
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7. (U) Abu Hammour provided a copy of the Ministry's new
quarterly bulletin on public debt and reviewed the structure
of Jordan's debt. He noted that 44% of Jordan's debt was at
a floating rate with 56% at a fixed rate. 29.4% of the debt
was denominated in US dollars, 21.6% in Japanese yen, 20.3%
in euros, 10.5% in Kuwaiti dinars, 8.4% in British pounds,
6.0% in SDRs and 3.8% in other currencies. In terms of
maturities, 46.5% has maturities of more than 20 years; 43.3%
maturities of 15 to 20 years; 9.9% five to fifteen years; and
only 0.3% has maturities of one to five years. Finally, the
debt with fixed interest rates includes 10.2% at more than
6%; 22.8% at 4-6%; 29.6% at 2-4%; and 37.5% at 0-2%.

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Lowering the Debt
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8. (C) Abu Hammour reviewed the four steps Jordan has taken
in recent years to reduce its debt burden. These are (1) a
buy-back of Brady bonds last year; (2) the debt swap with
the British for 74 million pounds; (3) a 35 million euro debt
swap with Germany; and (4) a $12 million debt swap with
Spain. These moves helped cut Jordan's debt stock by $620
million, yielding a savings of $25 million per year over the
next 20 years in reduced debt service payments.


9. (C) Abu Hammour said he has had discussions with the
World Bank on partial risk guarantees. Jordan wants to
attract strategic partners for state-owned companies the
government is privatizing wholly or in part. In these cases,
companies often want government guarantees but Jordanian law
allows no such guarantees which would also count as
additional debt. Abu Hammour hopes partial risk guarantees
may be an alternative.


10. (C) Abu Hammour has also invited Moody's and Standard
and Poor's to upgrade Jordan's credit rating and reviewed how
he made his case to the two credit rating agencies. He told
them that, for the first time, Jordan's domestic revenue
covers the government's current expenditures as well as 20%
of capital expenditures. Jordan continues to cut spending
and the government currently enjoys higher revenues and lower
spending than were originally budgeted.


11. (C) In other steps, government ministries have cut
their telephone, water and electricity bills by an average of
20%, with the Finance Ministry itself leading the way by
cutting those costs by 30%. Thanks to these and other
measures, the budget deficit, excluding grants, for the first
seven months of 2004 was half what it was during the same
period in 2003. When grants are included, the budget shifted
to a JD 50 million surplus compared with the same period last
year, even though grants were lower by JD 250 million.


12. (C) Thanks in part to these steps, both of the credit
rating agencies told Abu Hammour they will upgrade Jordan's
rating. Abu Hammour welcomed the news even though he said
Jordan currently has no intention to borrow overseas, due in
part to excess liquidity in Jordan. Nevertheless, upgrades
should help Jordan attract foreign investment.

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Better Cash Management Needed
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13. (C) In response to a question from Treasury about the
need for better cash management, Abu Hammour said that the
Ministry has begun focusing on financial management reforms.
There is an on-going joint IMF/WB expenditure review of
Jordan, and cash management is a part of that program.
Jordan also enjoys French and Italian technical assistance in
these areas. The Finance Ministry compiles a daily financial
position report of government finances. During the fourth
week of each month, the minister reviews the positions to
decide whether to cut spending or take some other action to
better meet IMF targets. Finally, Jordan is working with
Germany on developing a result-oriented budgeting system.


14. (C) As Abu Hammour explained, the Finance Minister
previously met with each minister to direct and design the
budget cuts for each ministry. Under the new system, the
government agrees on an expenditure ceiling instead and lets
each ministry set its own priorities.


15. (C) Abu Hammour has also prepared a plan for reform of
financial management which has been approved by the cabinet.
The plan targets each ministry's financial directorate to
improve budgeting and to apply results-oriented budgeting
precepts. In this connection, Abu Hammour said he would like
technical assistance under this financial management reform
plan for the period 2004-2006.

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Projections
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16. (C) Abu Hammour projects 8-9% nominal growth for Jordan
in 2004 and the same rate of growth for 2005. He expects a
deficit in 2005 of 3% of GDP and hopes the current debt/GDP
ratio of 89.5% will fall another 6% in both 2004 and 2005.
If debt needs to be financed, he want to do so from domestic
sources.

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Iraqi Assets
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18. (C) ECOUNS asked whether the review of commercial claims
against the frozen Iraqi assets was nearly complete. Abu
Hammour said he had told Deputy Prime Minister Mohammad
Halaiqa that the committee reviewing the assets needed to
speed up the process. Abu Hammour says he still spends an
hour and a half each day talking to members of Parliament
about specific claims and that more than 1500 claims have
been settled. He hopes the process can be completed by
mid-September.

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COMMENT
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19. (C) Abu Hammour is clearly eager to get the frozen
Iraqi assets issue behind him. It is apparently taking a
significant part of his time. Nevertheless, Jordan has
already made a significant contribution to re-building Iraq
with its earlier transfers of $250 million to the DFI to
date. Furthermore, Abu Hammour has assured us that if any
paid claims are found to be fraudulent by the Iraqis, the
funds will be reimbursed.


20. (C) In contrast to dealing with frozen Iraqi assets,
Abu Hammour clearly relishes macroeconomic discussions. He
is taking to heart the plan to reduce significantly Jordan's
debt burden by the 2006 deadline set under the Public Debt
Law. If he continues as minister for some time longer, he
may view gaining control of Jordan's fiscal house his key
legacy.
HALE