JORDAN: COMMITMENT TO PETROLEUM PRICE HIKES

C O N F I D E N T I A L SECTION 01 OF 04 AMMAN 000072 SIPDIS TREASURY FOR ABIGAIL DEMOPULOS E.O. 12958: DECL: 01/04/2009 TAGS: EFIN ECON PREL JO SUBJECT: JORDAN: COMMITMENT TO PETROLEUM PRICE HIKES Classified By: Ambassador Edward W. Gnehm. Reasons 1.5 (b) and (d). ¶1. (C) Summary. Jordan's Finance Minister believes he has met the 2003 budget deficit target in substance, although a delay in receiving expected oil aid from Gulf countries will likely require a waiver of the budget deficit target when the IMF Board reviews the stand-by agreement in mid-late February following implementation of military pension reforms and another IMF visit. After some difficult legwork, the Minister is also confident that the King and Government have blessed new 2004 spending and revenue measures needed to reach the budget deficit agreed with the IMF while planning for crude oil purchases at market prices. These measures -- including petroleum product price hikes as agreed with the United States -- will be domestic hot potatoes for the next few months, but given the King's blessing and the Finance Minister's tenaciousness, we believe fiscal discipline remains on track. End Summary. -------------- 2003: IMF Waiver Needed on Budget Deficit -------------- ¶2. (SBU) Finance Minister Abu Hammour told the Ambassador December 30 that the 2003 budget deficit had already reached its target for the entire year at the end of October. Since November and December spending typically exceeds revenues, he and the IMF were pessimistic that the annual target could be met. But thanks to extraordinary year-end efforts to curb spending and raise revenue, the Minister believes that the target has been met in substance, i.e. excluding foreign grants from the calculation. End-year measures included successful implementation of JD70 million in across the board spending cuts already foreseen by the budget as well as JD90 million in revenues squeezed out of state enterprises and the tax departments, plus JD25 million in profits turned over by the Central Bank. ¶3. (SBU) Including grants, however, the deficit would still fall short of the 2.5% of GDP goal. Abu Hammour attributed this to delayed transfers of oil aid from the UAE and Kuwait, with the Treasury having received only $110 million (equivalent to 1.3% of GDP) out of $200 million Jordan was expecting from the Gulf states. Since this was outside of Jordan's control, the Minister expected the IMF to be sympathetic and to recommend to the board that it waive the 2.5% target when it conducts the second stand-by review. ¶4. (C) Abu Hammour said that he was hopeful that the King's and Prime Minister Fayez' good relationships in the Gulf would pay off in the form of delivery of this promised assistance, as well as in obtaining an extension of oil aid into 2004. However, he noted that King Abdullah had unfortunately postponed a visit to Riyadh planned for mid-December for "security reasons." As a result, follow-on stops in Kuwait and other Gulf countries also had to be postponed, as it was thought essential, tactically, first to secure an understanding with Saudi Arabia. Abu Hammour did not know when the trips would take place. -------------- Military Pension Reform Battle Continues -------------- ¶5. (SBU) The IMF Board review would likely not be held until mid to late February. The Minister still needed time to complete the "prior action" of changing the military pension system to eliminate the "four year rule" (officers who have served four years at grade retire at the next higher grade) and modify the system for evaluating disabilities. Abu Hammour thought he had made progress despite opposition from the military and its supporters in Parliament. But the battle was not over: he had spent the day working to convince the Speaker of the lower house and the Chair of its Finance Committee to postpone a surprise committee hearing planned for the next day. He said he had only learned of the hearing that day and needed more time to work with the military, with which he had not yet agreed on the composition of a new committee to review disabilities. Abu Hammour said he had asked the IMF to send a mission in early February to review implementation of these changes prior to a Board meeting. -------------- 2004 Budget: Tough Spending Measures Included -------------- ¶6. (SBU) Abu Hammour outlined the key assumptions underlying the 2004 budget, which was presented to Parliament in mid-December and targets a deficit of 3.9% of GDP (including grants),as agreed with the IMF. The parliamentary debate would continue, he thought, at least through the end of January, during which time ministries can spend 1/12 of their previous years' budgets per month. In addition to the military pension reforms described above, the budget assumes that Jordan would pay an average price per barrel of oil of $26 over the year. Abu Hammour hoped that Jordan would be able to convince the Gulf countries to continue grant aid at least through the first quarter, but since this decision was political, he needed to plan realistically. The Minister added that recently completed prepayments of Brady Bonds and debt swaps with the UK and Germany would save $30 million in interest payments per year. ¶7. (SBU) On the revenue side, Abu Hammour said that he had budgeted for an increase in the basic General Sales Tax rate to 15% from 13% and in the special GST rate that covers about 90 items to 6% from 4%. The 6% GST would also be applied for the first time to cigarettes and alcohol. In addition, domestic petroleum prices would be increased by an average of 10%, sufficient to generate JD50 million in additional annual revenue, as agreed with the United States in the 2003 supplementary ESF disbursal. He noted that these measures are not explicit in the formal presentations and tables that have been made public or given to Parliament. The Minister said, however, that he planned to describe them in detail to Parliament (comment: although perhaps not in public) during the budget debate. -------------- Leadership on Board -------------- ¶8. (C) Abu Hammour said he had a hard time convincing his political leaders to approve what would be highly unpopular measures -- ones that were especially tough for a new government. In many sessions with the PM, he said, he had argued for the importance of fiscal reform to Jordan's continued economic health, as well as for sticking to commitments made to the IMF, Paris Club, and donors. (He called the confidence of the international financial community a precious asset.) Having agreed on a calendar to phase in the revenue measures, the leadership was now completely behind him, Abu Hammour said. The 4-6% GST increase and the tax on cigarettes and alcohol would be applied immediately. The increase in the basic GST rate to 15% is targeted for late March. Petroleum product prices will go up in late April/early May following the end of the winter season (a 17% planned increase in natural gas widely used for heating is particularly sensitive). -------------- Comment -------------- ¶9. (C) Jordan seems on track with continued fiscal rigor in 2004, despite the uncertainties caused by the change in government and the expiration of the stand-by arrangement in June. We do not believe that greater than initially expected assistance, such as the $100 million FY04 ESF supplemental or an extension of Gulf oil aid, would lead to a relaxation of this rigor. Most importantly, Abu Hammour said he had obtained the King's blessing for the tax and price hikes. (Although he had not been able to personally review the measures with the King, he showed us a copy of a one page summary of the measures that he said the King had seen and approved.) It is also politically useful for the new government to be able to "blame" unpopular but necessary measures on the commitments of the previous government. ¶10. (C) Finally, Abu Hammour is proving a battler who shows the commitment of his predecessor Michel Marto to living within Jordan's means and in following through on his word. It is also worth noting that Parliament's ability to modify the budget is limited by the Constitution so that Parliament may cut, but not increase, spending and raise, but not lower, taxes. The Minister was confident that once Parliament had approved the budget it would follow through with changing other laws, including the General Sales Tax law, as necessary to meet the budget's goals. -------------- Table I: Expenditure JD 1000's (embassy translation) -------------- 2004 budget 2003 est -------------- -------------- Current Expenditure 2,133,000 1,988,052 Civilian 632,798 578,754 Military 653,000 596,600 Armed Forces 405,000 378,700 Royal Medical Services 53,000 48,500 Public Security 173,000 150,800 Civil Defense 22,000 18,600 Other 847,202 812,698 General expenditure 37,539 23,350 Interest on domestic debt 60,600 60,000 Interest on external debt 200,000 209,000 Capital in state companies 2,000 2,000 Relief efforts 650 650 Other emergency spending 12,100 12,950 Pensions 370,113 345,546 Subsidies to Companies 98,300 97,302 Universities and municipalis 46,000 44,000 International missions 19,900 17,900 Capital Expenditure 537,000 458,204 Projects of ministries 433,770 369,472 Share in state company projec 83,230 69,732 Purchases of land 20,000 19,000 Unidentifed cuts (80,000) Total Expenditure 2,590,000 2,446,256 -------------- Table I: Revenue JD 1000's (embassy translation) -------------- 2004 budget 2003 est -------------- -------------- Domestic Revenue 1,825,000 1,630,341 Tax Revenue 1,186,000 1,073,350 Income tax 212,000 196,750 Customs 190,000 202,200 General Sales Tax 700,000 594,300 Other 84,000 80,100 Non-Tax Revenue 600,000 526,111 Licenses 34,500 32,000 Fees 241,500 229,000 Income from State companies 69,200 101,181 Income from Gov't services 22,100 16,230 Various 232,700 147,700 Loans 39,000 30,880 Grants 472,000 640,000 European Union 24,500 22,000 United States 177,000 385,000 Iraq (oil) 0 49,000 Other 270,500 184,000 Total Revenue 2,297,000 2,270,341 -------------- Table I: Financing JD 1000's (embassy translation) -------------- 2004 budget 2003 est -------------- -------------- Domestic Principal payments (382,722) (329,180) Foreign Principal payments (800) (47,800) Foreign Loans 122,525 85,669 Development project loans 104,525 81,788 International organizations 0 3,881 Other 18,000 0 Debt rescheduling 169,201 191,530 Domestic Loans 384,796 275,696 Total Deficit 293,000 175,915 GNEHM