JORDANIAN REQUEST FOR IRAQ-RELATED AID

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 008107

SIPDIS

USDOC FOR 4520/ITA/MAC/ONE/PTHANOS
TREASURY FOR OASIA - LARRY MCDONALD

E.O. 12958: DECL: 09/29/2014
TAGS: PREL ECON EFIN EAID IZ JO
SUBJECT: JORDANIAN REQUEST FOR IRAQ-RELATED AID

REF: AMMAN 07841

Classified By: CHARGE D'AFFAIRES, A.I. DAVID HALE, REASONS 1.4 (B,D).


1. (C) SUMMARY: The GOJ has launched a two-track push for
increased aid for Jordan, which would also benefit Iraq. One
track proposes debt forgiveness for Jordan. Jordan would
then apply some of the savings from the debt forgiveness
against the debt it is owed by Iraq, thereby reducing Iraq's
debt burden as well. The second track requests approximately
$1 billion in assistance to Jordan for Iraq-related
infrastructure improvements. As a first step on the second
track, Jordan seeks Iraqi government approval; the Iraqi
Ambassador agrees that Jordanian officials received promising
signals from Iraqi counterparts, but the financing piece
remains a major hurdle. It will be a challenge, to say the
least, for the GOJ to win the donor, creditor, and IIG
support it needs; but Either approach, if successful, would
have direct and indirect benefits for Iraqi reconstruction.
Post believes donors should seriously consider this creative
approach. END SUMMARY.

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THE VISION
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2. (C) As reftel reported, Jordan is launching a two-prong
effort to increase assistance which has direct or indirect
links to support for Iraq. Jordan's Planning Minister Bassem
Awadallah began the campaign by calling in Paris Club
Ambassadors. Foreign Minister Muashar and King Abdullah
himself will also raise the strategy with their counterparts
among Paris Club and donor countries over the coming months.
In this context, Jordan has also offered to host the second
International Reconstruction Fund Facility for Iraq (IRFFI)
meeting early next year. The King and all key ministers have
advocated these plans with a range of foreign visitors in the
past month. The proposal comes in the context of Jordan,s
unstinting strategic and practical support for U.S. policy
aims in Jordan, an eagerness to reweave Jordan,s own
historic ties with Iraq, including in the commercial field,
and the economic self-interest of a still aid-dependent
country that has exposed itself politically time and again in
the pursuit of our common regional goals and seeks to improve
the state,s economic foundation as a defense against
extremists.


3. (C) In detail, the two proposals are as follows: Jordan
seeks some level of debt forgiveness by the Paris Club. In
turn, Jordan would then forgive a part of the $1.3 billion
owed Jordan by Iraq under the previous trade protocol between
the two countries. By way of background, Nearly 42% of
Jordan's external debt is denominated in euros or yen, and
the strengthening of both currencies has hurt Jordan.


4. (C) Under the second proposal, Jordan has identified
approximately $1 billion in "Iraq-related" Jordanian
infrastructure assistance needs, including $150 million to
upgrade the Aqaba container port, $705 million to upgrade the
road system connecting Aqaba to Iraq, and $140 million for
border-crossing infrastructure. The Iraqi Ambassador in
Amman told us that -- true to Jordanian claims -- Iraqi
officials are reviewing the proposal favorably, but aspects
of the proposed financing are clearly problematic. The GOJ
proposes using swap-outs of some of its bilateral debts, for
example with the Japanese, new donor funds, and DFI money to
finance these projects. The Japanese government is said here
to be looking favorably at a debt swap.

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THE REALITY
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5. (C) Despite the obvious self-serving aspects of these
proposals, there is no doubt that assistance in these areas
would help our effort in Iraq. Jordan is currently under
some pressure from its external auditor to write off the $1.3
billion debt Iraq owes the Central Bank under the now-defunct
trade protocol with Iraq which ran for nearly 20 years.
Jordanian officials make the point that they can hardly take
foreign assistance with one hand while writing off debt with
the other without consulting donors. Should the Central Bank
be forced to write off that debt, the Finance Ministry would
need to recapitalize the bank and Jordan's debt picture,
which is already serious, would become critical. (Note:
Jordan's total external debt is $7.5 billion in a total
economy of just under $10 billion. End Note.) Under the new
proposal, Jordan would receive debt forgiveness for an
unspecified portion of its external debt, with the
understanding that it would apply some of that gain to
forgive Iraqi debt owed Jordan.


6. (C) Looking at the infrastructure aid request, Aqaba
continues to serve as the largest port of entry for Iraq,
both for commercial goods and for fuel and materiel for U.S.
troops operating in Iraq. Aqaba's port facilities are
over-taxed, and the new commercial operator of the port
expects that it will take up to two years to convert Aqaba
into a modern container port. With the space constraints on
Iraq,s Umm Qasr port, and the inability to re-open Basra for
some years hence, Aqaba will continue to be vital for Iraq's
economy and reconstruction efforts. Similarly, the road
network connecting Aqaba and Iraq is severely stressed and in
need of refurbishment and/or expansion, tasks which Jordan
would find very difficult to finance on its own. Finally, an
improved border crossing facility at Karama/Trebil, on
Jordan's border with Iraq's Al-Anbar province, would both
speed the clearance of the goods in transit, make the trade
more secure, and eliminate the humanitarian problem caused by
immense delays in moving people through a remote, inadequate
desert post.


7. (C) Without question, the proposals will also directly
benefit Jordan. Reducing Jordan's debt overhang is the chief
worry of Jordan's Finance Minister, a concern driven by a
Jordanian law which requires substantial further reductions
in debt levels by the end of 2006. The problem is
exacerbated by doubt over how to handle the $1.3 billion debt
owed by Iraq. Jordan has launched talks with Iraq to
develop an oil-for-debt write-off over a period of years, but
there has been little progress to date.


8. (C) On the infrastructure side, the improvements
envisioned would also greatly benefit economic development in
Jordan, particularly in the area of rural development. Rural
development remains a particular concern for the government
due to high levels of poverty in those areas, fears that they
may serve as breeding grounds for extremism, or, at a
minimum, as sources of resentment on the part of Jordanians
who feel left out of the prosperity evident in large swathes
of the capital. The projects proposed, particularly the
roadworks, would provide employment for low-skilled workers
during the construction phase and longer-term benefits for
the country as a whole in terms of newer, more modern
infrastructure.

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COMMENT
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9. The self-serving nature of this Jordanian initiative is
obvious. Jordanian access to DFI funds -- even for projects
which indirectly support Iraqi reconstruction -- is unlikely
to win much favor, starting with the IIG. However, the
Jordanians have begun in the right way, by consulting Iraqi
partners. Should these ideas be identified by the IIG as
priority needs, they would be worth our serious study. Even
DFI funding for a joint border post -- critical for enhanced
security and faster processing of goods and people -- may not
be too far fetched. The fact that the projects would also
help Jordan and further enhance its reputation as a model of
economic reform in the region would be significant added
benefits. Strengthening economic ties between Iraq and
Jordan through infrastructure links and financial agreements
may serve to reduce the economic leverage other neighbors
such as Iran and Syria might develop over Iraq, and help
anchor the budding, moderate alliance between Amman and
Baghdad. The King, Foreign Minister, Finance Minister,
Planning Minister and others have made a point of raising
these proposals with nearly every U.S. visitor, and they will
feature in the upcoming visits by the Planning and Finance
Ministers. For now, post recommends that we listen to the
proposal, encourage an understanding with the Iraqis, and
express readiness to explore any reasonable joint plans which
enhance Jordan,s role in facilitating Iraqi redevelopment.


10. (U) Baghdad minimize considered.
HALE