CBJ'S $1.3 BILLION TRADE LEDGER ACCOUNT

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 005912 SIPDIS STATE FOR EB/IFD/OMA STATE ALSO FOR NEA/ELA E.O. 12958: DECL: 07/25/2015 TAGS: EAID EFIN PREL IZ JO SUBJECT: CBJ'S $1.3 BILLION TRADE LEDGER ACCOUNT REF: A. AMMAN 5451 ¶B. AMMAN 5311 ¶C. 2004 AMMAN 8107 ¶D. 2004 AMMAN 6250 ¶E. 2004 AMMAN 4330 ¶F. 2004 AMMAN 3430 ¶G. 2003 AMMAN 8162 ¶H. 2003 AMMAN 7691 ¶I. 2003 AMMAN 7525 Classified By: CHARGE D'AFFAIRES DAVID HALE FOR REASON 1.4 (B) AND (D). ¶1. (C) SUMMARY: The $1.3 billion deficit in the Iraqi trade ledger account in the Central Bank of Jordan (CBJ) is a recurring issue among Jordan, the U.S., and Iraq. A legacy of the former Jordan-Iraq trade protocol, the account is not considered by the GOJ to fall under any Paris Club treatment (the IMF agrees). Its magnitude relative to the size of the CBJ's reserves and the GOJ budget give it the potential to wreak considerable havoc upon the Jordanian economy if it is not dealt with sensitively. Unless donor governments are prepared to offer aid sufficient to offset the cost of a full $1.3 billion recapitalization of the CBJ, the GOJ is unlikely to find the means to forgive the balance of the CBJ's trade ledger clearing account. END SUMMARY. -------------- A BRIEF HISTORY OF THE TRADE LEDGER ACCOUNT -------------- ¶2. (C) The Iraqi trade ledger clearing account at the CBJ was established under the Jordanian-Iraqi trade protocol, an arrangement created in the mid-1980s. Under the trade protocol, Jordan would procure a certain amount (changing every year) of Iraqi oil; the GOI in turn would procure a certain amount of Jordanian goods and services. The mechanism by which Jordanian exporters received their payment was a clearing account at the CBJ, from which the exporters' banks would draw payment for completed contracts directly. From the beginning of the trade protocol, the amounts of Jordanian goods and services bought by the GOI almost always outweighed the amount that Jordan had to pay for Iraqi oil. While in theory, the Central Bank of Iraq (CBI) was responsible to transfer enough cash to the account to cover the deficit, in practice it continually put off making such transfers as the deficit continued to build. The result was a $1.1 billion deficit in the clearing account (which, with accumulated interest, now amounts to $1.3 billion); in its accounting, the CBJ balanced its actual payments to these banks with the CBI's promise (certified each year by the CBI governor) to pay in to the account. ¶3. (C) At the conclusion of major combat operations and the passage of UNSCR 1483, the GOJ halted its trade protocol with Iraq and seized all assets of the listed Iraqi governmental and quasi-governmental institutions present in Jordan. The assets seized (approximately $500 million) were far from sufficient to pay off the CBJ clearing account; in any case, the GOJ opted to give priority to the claims of individual Jordanian exporters who could show proof that goods and services had been delivered to Iraq without payment. The USG took the position that all seized Iraqi assets should be immediately remitted to the Development Fund for Iraq (DFI), with commercial claims to be paid by the Iraqis. In a series of bilateral and trilateral meetings including GOJ, USG, and Iraqi officials (refs F, G, H, and I),the USG pressed for asset transfer to the DFI, while the GOJ pressed for Iraqi assurances that the CBJ account would be repaid by a new Iraqi government. Jordan transferred $250 million (in several tranches) into the DFI - becoming the first country in the Middle East to do so - and worked out with the GOI an arrangement for the settlement of further direct commercial claims (ref G),while punting the issue of the CBJ account. ¶4. (C) The issue continued to bedevil the CBJ's finances, however. The CBJ is audited annually, and while the CBJ was able to convince its independent auditor that the payment was being worked out, it realized that it would not be able to do so indefinitely without some kind of confirmation from the GOI. Accordingly, soon after hostilities in Iraq ceased, settlement of the issue became the top priority on the GOJ-GOI bilateral agenda. In a series of meetings in July 2004, then-Finance Minister Mohammed Abu Hammour proposed to Adel Abdel Mehdi, his then-Iraqi counterpart, that an arrangement be reached whereby Jordan would at some point begin importing $1 billion in Iraqi oil each year while paying Iraq $900 million (ref D). Soon after this, Jordanian newspapers reported that the Iraqis had agreed to such an arrangement, and Abu Hammour confirmed this to us later. This was another punt - it would settle the account within 13-14 years, but there was no start date. Nonetheless, the promise of Iraqi payment was good enough for the CBJ's auditor, who in the 2004 annual report noted again that a solution to the problem was being worked out. The agreement, however, was never formalized by the signature of the CBI governor. ¶5. (C) While the proposed oil deal averted the immediate crisis, it was not a solution; there was no schedule for Iraqi repayment, and the account remained an area of weakness in the CBJ balance sheet. In September 2004, then-Planning Minister Bassem Awadallah floated a trial balloon to obtain forgiveness of part of Jordan's Paris Club debt in return for the CBJ's forgiveness of the Iraqi trade ledger deficit in equal, or perhaps smaller, amounts (ref C). The thinking behind the proposal was that the Jordanian Paris Club debt that was forgiven would be immediately replaced by newly-issued domestic debt. The GOJ would then be able to arrange with the CBJ to recapitalize it with the proceeds of this new debt, while the CBJ forgave the same amount of the trade ledger account "debt." The proposal gained no traction among Paris Club members (the EU rejected it),and it was quietly dropped. More immediate fiscal problems (ref B) and three cabinet reshuffles diverted the attention of the GOJ after this date, and the $1.3 billion clearing account to our knowledge has not been raised in any serious way by the GOJ since the beginning of 2005. -------------- THE GOJ POSITION ON THE TRADE LEDGER ACCOUNT -------------- ¶6. (C) Ever since the fall of the old Iraqi regime, the GOJ has argued against the idea of the CBJ account being considered in the Paris Club discussions on forgiveness of Iraqi debt. One pillar of its argument is based upon the non-governmental nature of both the "creditor" and the "debtor." The CBJ is set up as an institution separate from - though attached to - the GOJ. The GOJ itself holds no debt from any Iraqi governmental agency or quasi-governmental institution; nor does any Jordanian institution hold appreciable amounts of Iraq sovereign debt. Sovereign debt is simply not a factor in their equation. ¶7. (C) Nor, argue the Jordanians, can the clearing account balance be strictly considered as debt at all. The GOJ position is that at no time did any Jordanian government or quasi-government entity ever extend a loan to any part of the GOI. Instead, private corporations delivered actual goods and services for which the GOI was dilatory (in some cases, extremely dilatory) in making payments. While one can take issue with this argument, the IMF agrees with the GOJ that the trade ledger clearing account balance should not be considered under the Paris Club (ref E). -------------- WHAT A CBJ FORGIVENESS WOULD MEAN -------------- ¶8. (C) A look at the balance sheets of the CBJ and the GOJ gives some explanation for the vehemence with which the GOJ has rejected linkage between the trade ledger account deficit and the Paris Club debt forgiveness. Under the line item "Facilities and Repayment Agreements," the CBJ counts an amount of JD 767 million ($1.1 billion) as a bank asset. The remaining $200 million is subsumed under the line item for accumulated interest. By way of comparison, the cumulative value of the CBJ's paid-up capital and reserves is only JD 161 million ($227 million). As the IMF notes, the size of the trade ledger account deficit would be sufficient to force a dissolution of the CBJ were there no hope of its eventual payment (ref E). ¶9. (C) To avoid such a meltdown, a recapitalization of the CBJ would be necessary. Given the level of CBJ reserves (high by historical standards but very low in comparison to the deficit),such a recapitalization would need to cover virtually the full amount of the $1.3 billion deficit. The potential source of such a large amount of funds, in an $11.1 billion economy, is unclear. The GOJ is currently facing a fiscal crisis brought on by an unanticipated rise in crude oil prices and an unanticipated fall in grants (ref B). Its deficit for 2005 (still a moving target) was projected by the IMF in mid-June to be approximately JD 515 million ($726 million),even after the government has pushed through a wave of large, politically unpopular fuel price increases (ref A). The GOJ has neither the funds nor the maneuvering space necessary to recapitalize the CBJ, even if such recapitalization were to take place over an extended period. The domestic debt market is neither sufficiently large nor well-developed to finance both the large projected deficits of the upcoming few years and a CBJ bailout at the same time; the GOJ would be forced again to issue high-interest debt in the international markets. If fiscal rectitude were not reason enough to avoid such a heavy expenditure, the GOJ would have to consider its own domestic laws: the Public Debt Law requires that Jordan's overall stock of debt be reduced to 80% of GDP by the end of 2006, a target that the GOJ has reason to fear that it would miss even without a buyout of the Iraq account deficit. -------------- COMMENT -------------- ¶10. (C) The GOJ does have at least one point that is hard to refute: the trade ledger clearing account deficit is qualitatively different than the debt held by most, if not all, Paris Club members. The sovereign debt that is the focus of the Paris Club process is money that has already been paid out - it remains on the balance sheets of the Paris Club creditor governments, but writing it off would require no further expenditure of money by the governments concerned. The trade ledger account, on the other hand, represents new money that the GOJ would suddenly find itself needing to pay to the CBJ - money that it does not have, in amounts that if paid would seriously exacerbate its ongoing fiscal crisis. For this reason, it is highly unlikely that the GOJ will find the means to forgive part of the CBJ's trade ledger account deficit. HALE