JORDAN'S ECONOMY: TOP OFFICIALS CONCERNED ABOUT

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007951

SIPDIS

E.O. 12958: DECL: 10/05/2020
TAGS: EFIN ECON JO KU
SUBJECT: JORDAN'S ECONOMY: TOP OFFICIALS CONCERNED ABOUT
INFLATION, DEBT, AND OIL PRICES


Classified By: CDA DAVID HALE, REASON: 1.4 (B, D & E)


1. (C) SUMMARY: Jordan's Finance Ministry and the Central
Bank of Jordan (CBJ) are increasingly concerned that high
levels of liquidity and increasing prices will fuel inflation
over the coming year. The CBJ recently raised interest rates
by half a percentage point, double the size of increases made
over the past year. Should inflation continue to threaten,
further interest rate hikes would slow economic growth and
could provoke a recession. High fuel prices are still
hurting the government's budget, despite a recent reduction
in fuel subsidies. Hopes are fading that the government will
meet its legally-mandated 2007 debt reduction targets. On
the bright side, Kuwait recently rescheduled $220 million in
Jordanian debt. END SUMMARY.

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INFLATION FEARS
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2. (C) In recent meetings with Ecouns, CBJ Deputy Governor
Faris Sharaf signaled that the Central Bank would change its
interest rate policy. Previously, the CBJ had followed the
lead of the U.S. Federal Reserve Bank, raising interest rates
by a series of quarter-point hikes. Beginning September 21,
the CBJ would raise rates by a half-point, regardless of the
Fed's move (which was another quarter-point rise). Sharaf
said the CBJ is increasingly concerned about the excess
liquidity in Jordan, consisting
of both domestic funds but also of large capital flows from
the Gulf and other neighboring countries. In addition, the
GoJ's need to reduce fuel subsidies would also feed increases
in prices throughout the economy. Sharaf said he was
frustrated that, despite Jordan's booming economy over the
past two years (averaging over 7% real growth),the
government itself remained "broke." He predicted that, at
best, rising interest rates would bring down the real growth
rate by several points; at worst, they could
provoke a recession. In a separate meeting with Ecouns,
Finance Ministry Secretary General Khasasbeh echoed Sharaf's
views on inflation, adding that the GoJ expects an inflation
rate of 5-6% in 2006, up substantially from this year's 3.4%.

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THE DEFICIT, AND PLANNING NEXT YEAR'S BUDGET
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3. (C) According to CBJ Deputy Governor Sharaf, the recent
reduction in the oil subsidy - the third cut in the past year
and a half (see Amman 7561) - will bring in an additional JD
40 million (USD 56 million) in revenue. Due to the shift of
some of those funds to the social safety net, however, the
budget will net only an additional JD 28 million (USD 39
million). Sharaf noted that the IMF had recently agreed with
the GoJ's plan to cut the subsidies, and that it shared
concerns about increasing inflation in Jordan in 2006.
Barring another sharp rise in oil prices, Khasasbeh did not
expect another subsidy reduction would be needed before 2006.


4. (C) Khasasbeh expected the deficit for the year to reach
5.2% of GDP, up from the 3.3% projected at the beginning of
the year. This would yield a deficit figure of USD 570-600
million, based on a projected GDP of USD 11 to 11.5 billion.
This would be an improvement on the JD 304 million deficit
(USD 426 million) estimated by the Finance Ministry for the
first half 2005 alone. (NOTE: septel will report the Central
Bank Governor's statement that the current deficit stands at
JD 500 million (USD 700 million) and may be substantially
lower by year-end, thanks to higher tax revenues. END NOTE.)
Some Jordanian officials are still hoping aid from the Gulf
will come to the government's rescue, but these hopes are
flagging.


5. (C) According to Khasasbeh, the GoJ is hard at work on
the 2006 budget. In making its calculations, the government
will only "book" foreign grants that are "guaranteed," i.e.,
those from the U.S. and other countries with a regular
assistance program to Jordan. This amount will total only JD
220 million (USD 308 million),mostly from the U.S. The
projected oil price in the 2006 budget will also be raised to
$60/barrel, up from $42/barrel at the beginning of this year
for the 2005 budget. When asked whether Jordan would meet
its debt targets under the Debt Management Law, Khasasbeh
said he doubted it was possible "without (new) grants."


6. (C) Khasasbeh expects real growth to slow to 5.5-6.0% in

2006. The current draft budget proposes no cuts in capital
expenditures, and JD 150 million (USD 210 million) will be
set aside for implementation of the National Agenda which
should be released in mid- to late-October. The budget will
also include an increase on the value added tax on certain
commodities from 4% to 16%, the current level for most
products and services. Khasasbeh explained that the IMF had
requested this be done on all commodities whose prices are
controlled by the government, but the GoJ is proposing to do
this for only a third of those commodities. In addition, the
government plans to draw down slowly its over USD 5 billion
in foreign reserves to finance imports.

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DEBT RELIEF FROM KUWAIT
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7. (C) On the positive side, Khasasbeh confirmed a press
report that Kuwait's Fund for Arab Economic Development would
reschedule Jordan's USD 220 million debt over a 30-year
period and would reduce the interest on the loan to 1%.
HALE