Identifier
Created
Classification
Origin
05AMMAN5311
2005-07-03 11:30:00
CONFIDENTIAL
Embassy Amman
Cable title:  

IMF ADVANCE REPORT PRESENTS STARK FISCAL PICTURE,

Tags:  EAID EFIN PREL KPRV JO 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 005311 

SIPDIS

LONDON PLEASE PASS TO D
NEA/ELA FOR WILLIAMS/BARON
EB FOR GRIFFIN
TREASURY FOR QUARLES/SHWARZMAN

E.O. 12958: DECL: 07/02/2015
TAGS: EAID EFIN PREL KPRV JO
SUBJECT: IMF ADVANCE REPORT PRESENTS STARK FISCAL PICTURE,
IN LINE WITH MOF PROJECTIONS

REF: AMMAN 5228

Classified By: Charge d'Affaires David Hale for reason 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 005311

SIPDIS

LONDON PLEASE PASS TO D
NEA/ELA FOR WILLIAMS/BARON
EB FOR GRIFFIN
TREASURY FOR QUARLES/SHWARZMAN

E.O. 12958: DECL: 07/02/2015
TAGS: EAID EFIN PREL KPRV JO
SUBJECT: IMF ADVANCE REPORT PRESENTS STARK FISCAL PICTURE,
IN LINE WITH MOF PROJECTIONS

REF: AMMAN 5228

Classified By: Charge d'Affaires David Hale for reason 1.4 (b) and (d)


1. (C) SUMMARY: According to advance reports, a quarterly IMF
review of Jordan,s economic situation shows a dramatic
deterioration in the fiscal position of the GOJ, broadly in
line with figures that we have seen from the Ministry of
Finance, that stems from the rise of world crude prices and
the GOJ,s failure to obtain the expected level of GCC grant
aid. Working with the Ministry of Finance, the IMF appears
to have convinced the Cabinet of the necessity of taking
drastic measures to partially rectify its fiscal position,
chief among them the acceleration of the elimination of fuel
subsidies from the original target date of February 2008 to
January 2007. Nonetheless, the upcoming several years will
see higher-than-recommended budget deficits, even if the GOJ
is able to muster the political will to follow up the painful
measures it is taking in 2005 with equally painful measures
planned for 2006 and 2007. END SUMMARY.


2. (C) Emboffs have recently seen a copy of the Concluding
Statement of the IMF Quarterly Post-Program Monitoring
Mission (which concluded on June 15),provided to them by a
GOJ official. The IMF appears from the report (and our
conversation with one team member confirms this to be the
case) to have been surprised by Jordan,s failure to secure
its expected level of grants from the GCC states and by the
continued rise in crude oil prices. The mission found the
resulting budget deficit - which it estimated at 12% of GDP -
to be alarming, noting in the report that without aggressive
action, "the serious macroeconomic imbalances would not only
reverse the progress made in the past few years in reducing
the debt/GDP ratio, but could also threaten stability of the
exchange rate."

--------------
ELIMINATING FUEL SUBSIDIES
--------------


3. (C) Given this substantial shortfall in Jordan,s budget,
the IMF considers that the only option for the GOJ is to move
aggressively to end fuel subsidies. The team member with

whom we spoke noted that progress had already been made on
this front with the GOJ. In alliance with then-Finance
Minister Bassem Awadallah, the IMF had gotten an agreement
from a previously reticent Cabinet to end fuel subsidies by
January 2007, rather than the February 2008 date that the GOJ
had previously noted as the deadline for fuel subsidy
elimination.


4. (C) The IMF report elaborates further on this agreement:
the first fuel price increases will come by early July,
followed by at least two further rises by March 2006 and
January 2007. (Judging from comments by PM Adnan Badran on
June 28, prices will increase by approximately 30%, providing
approximately $165 million in additional revenue to the GOJ
during the final six months of 2005.) The accelerated
schedule is intended to neutralize, at the earliest possible
time, the impact of further potential world crude oil price
increases. The GOJ, which already makes a surplus on every
gallon of gasoline sold, would see this informal revenue
source codified in the form of an excise tax on gasoline and
diesel.


5. (C) A gap still persists, however, between the IMF
recommendations on fuel subsidies and the steps that the GOJ
is willing to take at this point. One sticking point has
been the different estimates of the global crude oil price on
which to base fuel price increases - the GOJ is still making
its calculations at an estimated average price per barrel of
$45, while the IMF believes $53 per barrel is more realistic
given recent market pricings and projected movement of the
world market. (COMMENT: Given that the break-even point for
the GOJ at current Jordanian fuel prices would be at a global
crude oil price of approximately $27.15 per barrel, according
to MOF figures, the gap between the IMF and the GOJ on this
issue is relatively small. Nonetheless, if high prices
continue as the IMF projects, it may take some additional
time for Jordan to eliminate all fuel subsidies - and the
difference will be apparent in the budget deficits for 2006
and 2007. END COMMENT.) Even $53 per barrel, however, may
eventually prove to be too low an estimate. The IMF has
therefore recommended "the adoption of quarterly automatic
price adjustments in place of annual discretionary
increases," but the GOJ has not indicated any intention of
signing on to this idea.

--------------
FISCAL PREPARATION FOR THE END OF GCC GRANTS
--------------

6. (C) Of greater immediate effect to the GOJ balance sheet
than the unanticipated fuel price increases has been the loss
of anticipated GCC grants. The IMF currently assumes that no
further grants will come from GCC states in 2005, and that
even the reduced Saudi cash grant will not continue past
April 2006. Given that the grants from the GCC for 2005 were
expected to outweigh the fuel subsidies - even at increased
prices - by at least $300 million, the budget would have
needed to be cut substantially even had fuel prices remained
at 2004 levels.


7. (C) The GOJ has begun this process by making some hard
choices, though further hard choices remain to be made. A
substantial cutback in capital expenditures for 2005 (by 2.4%
of GDP according to the IMF report - equivalent to the $288
million in the most recent position paper that we have
received from the Ministry of Finance) still represents a
climbdown from former Finance Minister Abu Hammour,s
repeatedly stated vow that Jordan would do no spending that
was not covered by revenue or grants. (We do not have access
to information on exactly what capital spending has been
cut.) However, the capital spending cut being planned by the
GOJ meets the recommendations of the IMF, who have proposed
substantially smaller capital spending reductions for the
projected 2006 and 2007 budgets. In any case, the reduction
in capital spending will contribute more heavily to the
stabilization of Jordan,s fiscal position in 2005 than the
projected additional revenue from the increased fuel prices.


8. (C) The IMF language on the medium-term steps that the GOJ
has agreed to take to raise revenues and cut expenses is also
generally positive. The IMF has received a verbal agreement
from the GOJ to remove all food subsidies in 2006, though the
increased expenditure on a social safety net (providing the
neediest 20% of Jordanians with assistance in procuring food
and fuel) will counterbalance most of the savings from this
measure; they have also recommended that the GOJ freeze all
current expenditures except for pensions at 2005 levels - a
step that would cut GOJ projected expenditures by an average
of slightly less than $130 million per year during the
projected period. The IMF staff member with whom we met
viewed the King,s regional decentralization proposal as a
key threat to the freeze in current expenditures, as the
potential addition of elected officials and staff for this
purpose would not only add additional current expenditures
itself, but also make it harder for the GOJ to hold the line
against other requests. (NOTE: He also repeated the
often-heard rumor that the USG was behind this initiative.)


9. (C) The IMF has had less success in receiving GOJ
concurrence in the partial and total elimination of
exceptions to the GST for certain products taxed at a lower
rate than the 16% standard rate, only securing agreement from
the government for elimination of partial exemptions on hotel
rooms, alcohol, and cigarettes and a vague statement of
intent to double GST rates levied on some exempted goods and
services currently taxed at the lowest rate (from 4% to 8%)
in 2006. The potential revenue gain foregone by the GOJ by
its more selective (and delayed) policy on increases,
however, only totals around $85 million over the two-year
period of 2005-6.


10. (C) The IMF report also endorses GOJ,s restructuring of
Jordan,s income tax code to flatten the tax rate and improve
collection. It notes, however, that positive effects on
revenue are unlikely to appear before 2007, and the IMF makes
no attempt to quantify the potential returns of such a tax.


11. (C) Finally, the IMF report appears to regretfully accept
that rather than reducing the GOJ,s stock of debt, the
proceeds coming in from the GOJ,s accelerated privatization
program over the next three years will likely be used to
finance part of the GOJ deficit. These anticipated revenues,
though they are not cited in the IMF report, probably
underlie the GOJ,s optimistic prediction of a budget deficit
amounting to 5.1% of GDP (rather than the 12% deficit
projected based on commitments in the original GOJ budget) in

2005.

--------------
OTHER ECONOMIC CHALLENGES
--------------


12. (C) In addition to their effects on the fiscal deficit,
the IMF report notes that the loss of GCC grants and the rise
in oil prices would further widen Jordan,s current account
deficit. The IMF team views the recent large portfolio
capital inflows to Jordan as a potential additional element
of risk to currency stability and advocates a tighter
monetary policy on the part of the Central Bank of Jordan
(CBJ). Ultimately, the IMF does not foresee a serious
near-term risk to the exchange rate, though it noted that the
CBJ would likely have to draw down its reserves to some
degree over the upcoming year.


13. (C) The IMF notes a final risk to Jordan,s economy
stemming from the possibility of a dramatic reduction in the
value of the currently inflated Amman Stock Exchange, draws
attention to the exposure of Jordanian banks to the stock
market, and calls on the relevant authorities to be vigilant.
It also notes the necessity of swift passage of an
anti-money laundering law.

--------------
COMMENT
--------------


14. (C) That the IMF now considers the attainment of a 5.1%
(of GDP) deficit in the GOJ budget in 2005 and a 6.5% deficit
in 2006 to be best case scenarios in the absence of further,
unanticipated grant aid is a testimony to how drastically the
fiscal position of the GOJ has been transformed by the
continued rise in crude oil prices and the government,s
failure to obtain 2004 levels of grant aid from the GCC
states. The IMF, in its summary, notes that if all of their
recommendations are followed to the letter, Jordan might
barely meet the requirement specified in its Public Debt Law
that sovereign debt be reduced to 80% of GDP by the end of

2006. However, an economic downturn - or even a slowed rate
of growth - driven by the effect of the substantial fuel
price increases to the competitiveness of Jordanian
industries and to Jordanian consumer spending may mean that
the GOJ will be unable to meet this target. This likely will
mean an undiminished drive by the GOJ for further debt swaps
and debt forgiveness. If the latter is unsuccessful, there
will likely be increasing pressure for an amendment to the
Public Debt Law extending the deadline for achievement of the
target.


15. (C) The good news of this story, for the IMF, is the way
in which the GOJ has reacted to its sudden reversal of
fortune. By force of necessity - and, it appears, aided by
straight talk from the IMF on the severity of Jordan,s
fiscal position - the GOJ is now making concerted steps to
end its dependence on grants from its Arab neighbors that
have always been uncertain. Nonetheless, the painful
budgetary adjustments that now appear to be a fait accompli
for 2005 will have to be followed by equally painful
adjustments in 2006 and 2007 in order for the GOJ to safely
maneuver into its new budgetary equilibrium. To maintain the
requisite political will to endure this pain over an extended
period, the GOJ will require the strong support of its
friends and their constant reinforcement of the message that
the IMF has delivered.
HALE