UNSCHEDULED FUEL PRICE HIKE IMMINENT

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007283

SIPDIS

STATE FOR NEA/ELA
STATE ALSO FOR EB/ESC/IEC

E.O. 12958: DECL: 09/11/2015
TAGS: EPET ENRG PGOV EAID PREL JO
SUBJECT: UNSCHEDULED FUEL PRICE HIKE IMMINENT

REF: A. AMMAN 5849


B. AMMAN 5725

C. AMMAN 5451

D. AMMAN 5311

E. AMMAN 5228

Classified By: CDA David Hale for reasons 1.4 B, D.


1. (C) SUMMARY: Minister of Finance Adel Al-Kodah told
Charge September 11 that the Government of Jordan (GOJ) would
institute a second, unscheduled fuel price hike September 20,
after consulting with the King on the subject the same day.
The King had earlier explained to Charge that he was
determined to accelerate the planned cuts, in light of higher
world oil prices and the failure to gain additional
assistance from Gulf states. (After agreeing to the new
schedule, PM Badran got cold feet over the weekend and had to
be persuaded by the King's advisors late on September 10 to
go forward with the new plan.)


2. (C) The price increase -- likely to be about 12 percent
for diesel -- would partially offset the continued rise of
crude oil costs since the government last presented an oil
subsidy-elimination plan to the IMF in June (Ref D). This
would be an additional increase since prices first rose July
9; two other planned increases would continue on schedule in
2006 and 2007. The Minister did not state that the plan
would achieve parity with world market prices. Noting riots
in Yemen earlier this year after the announcement of price
hikes, Al-Kodah expressed the hope that advance planning
would prevent such a reaction in Jordan, but complained that
Gulf neighbors who could afford to give Jordan more oil were
acting as if they were not fully cognizant of what the
implications were for the region if fuel price hikes sparked
riots here. Al-Kodah plans to be in Washington September 21
for World Bank/IMF Meetings and returns to Jordan on
September 27. END SUMMARY.

Budget Revenue and Expenditure Picture Good
--------------


3. (C) In a brief pull-aside from a signing ceremony,
Minister of Finance Al-Kodah explained to Charge that the
GOJ's FY 2005 budget planning was coming along, with revenues
now projected to come in at not less than 355 million
Jordanian Dinars (USD $500 million) above the original
budget. He also explained that the GOJ had succeeded in
reducing capital expenditures by JD 200 million (by not
starting new projects) and cutting general expenditures by JD
220 million. (NOTE: This tracks the austerity measures
outlined in Refs A, B. END NOTE.)

Need to Keep Fuel Subsidies in Check
--------------


4. (C) Turning to fuel subsidies, Al-Kodah noted that the
GOJ had already saved JD 115 million with the July 9 fuel
price hikes (Ref C). But in a special consultation with the
King earlier in the day to review fuel subsidies, a decision
had been finalized to announce a cabinet-approved fuel
increase on September 20. Al-Kodah said this fuel price rise
would save the GOJ about JD 40 million (USD $56.4 million).
If the GOJ uses the same formula it did in the last price
hike (Refs C, E),this would mean an additional increase in
diesel and heating fuel of about 12 percent. Al-Kodah
explained the increase became necessary as the GOJ's revised
budget projection of crude oil prices at USD $50/barrel (from
an original of USD $42/barrel) was overshadowed by what
appeared to be a projected average market price of about USD
$64-65/barrel for the remainder of the budget year.

Jordan's Gulf Oil Grants: "Hardly Any Effect"
-------------- -


5. (C) Regarding cash grants from Saudi Arabia, Al-Kodah
said these had already been offset by oil price rises and
consequently had "hardly any (net positive) effect" on
Jordan's fiscal picture. The Saudis were donating USD $22
million a month since May 2005, he noted, but the donation
was fixed in cash at a time when world oil prices were much
lower, and when translated into actual oil, was far lower
than the 50,000 barrels of oil per day the Saudis had been
donating. Charge referred briefly to high-level USG efforts
to convince counterparts in Saudi Arabia, Kuwait and the UAE
to donate more oil to Jordan. The GOJ's further elimination
of fuel subsidies might help convince potential donors that
Jordan was sincere in its plans to end its dependency, he
noted.


6. (C) Referring to fuel price riots in Yemen and
subsequent clashes that left a number of people dead,
Al-Kodah said that the Gulf state leaders should look closely
at what happened in Yemen when price hikes were announced.
These issues have consequences that can seriously affect the
region, he said. He averred that Jordan would try to plan
carefully to minimize any negative reactions to the price
hikes, but could not say whether Jordan's streets would
accept the price hikes or, conversely, stage demonstrations.


7. (C) COMMENT: Timed to follow widespread reports of fuel
price increases worldwide in the wake of Hurricane Katrina,
frequent references in the press to oil at $100/barrel, and a
number of fuel hike increases in major world economies that
heavily subsidize fuel prices, this fuel price increase has
the appearance of being almost inevitable. The big question
for a government looking at a yawning deficit -- which
Al-Kodah conservatively estimated might be 7.5 percent of GDP
-- is whether the price hike will be enough.
HALE