MEPI-FUNDED TREASURY ADVISOR HELPING JORDAN WITH

UNCLAS SECTION 01 OF 02 AMMAN 009795

SIPDIS

E.O. 12958: N/A
TAGS: EFIN EAID JO
SUBJECT: MEPI-FUNDED TREASURY ADVISOR HELPING JORDAN WITH
CRITICAL DEBT ISSUES



1. SUMMARY: Since May 2004, the Treasury Department's
Office of Technical Assistance has provided a debt advisor
to Jordan's Ministry of Finance. Funded by MEPI, the
advisor has helped the Ministry rationalize its debt
issuance and improve its coordination with the Central Bank
of Jordan (CBJ). The goals of the advisory program include
creating reliable cash forecasting for the Ministry,
providing training, and establishing a framework for the
management of domestic and external debt on a long-term
basis. In addition, the program is aimed at helping Jordan
develop secondary markets for debt issuances. Although
hampered by three different Finance Ministers since his
arrival, the Advisor has made substantial progress, and has
already had important interactions with the new Finance
Minister, who also holds the portfolio of Deputy Prime
Minister. End Summary.

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THE OTA PROGRAM IN JORDAN
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2. The Treasury Department's Office of Technical Assistance
(OTA) first provided technical assistance to Jordan's
Ministry of Finance (MoF) in 2000-2002, when an advisor was
seconded to the Ministry to assist in establishing the basis
for MoF financing and creating methodology for operations
within the MoF's Debt Department. The principal objective
of the current OTA Government Debt Issuance and Management
(GDIM)-Jordan project is to develop primary and secondary
markets for issuance of securities by MoF. Included in this
objective are such issues as reliable cash forecasting,
effective interaction between MoF, CBJ, and investors,
training personnel to build the necessary capacity, and
establishing a framework for the management of domestic and
external debt on a long term basis. The Advisor is housed
in the MoF and works closely on a day-to-day basis with his
counterparts in the Ministry. He also liaises with the CBJ
and the banking community, to date the only significant
investors buying the debt issued by the GoJ.

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BETTER FINANCE MINISTRY-CENTRAL BANK COORDINATION
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3. Advisor Gregory Ambrosio arrived in Jordan in late May.
Since that time, he has made progress in a number of key
areas related to the Terms of Reference signed between OTA
and the MoF. Inter-institutional coordination between MoF
and CBJ has increased markedly. The CBJ now ensures that
necessary liquidity remains in the market so that when the
MoF issues bonds or t-bills, prices are good. This was a
serious problem because the earlier high price for an MoF
bond issuance in September was attributed to a lack of
liquidity in the market after the CBJ had just previously
issued certificates of deposit to mop up liquidity. The
lack of coordination between the two agencies forced the MoF
to pay a very high interest rate of 9% to clear the market.


4. Under the Advisor's initiative, for the first time, an
annual (2006) debt issuance calendar has been prepared by
the MoF and is awaiting final approval by DPM and Minister
of Finance Ziad Fariz. Henceforth, the Ministry will publish
its issuance plans on a quarterly basis. Additionally,
issuance will be coordinated with the CBJ so that there is
no overlapping of activities. Communication between the
domestic banking community and the MoF is also improving. A
regular meeting among the MoF's Debt Department, CBJ and the
banking community to discuss issuance and other topics will
be instituted in early 2006.
Once these changes are approved, Ministry and CBJ operations
will be synchronized, thereby ensuring the government is no
longer forced to pay higher-than-expected interest rates in
future bond/t-bill issuances.

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HELP WITH OTHER ISSUES AND ON-GOING TRAINING
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5. Discussions are also under way to deal with long-standing
issues between MoF and CBJ, including the clearing up of a
Ministry overdraft at the CBJ, an overdraft that has been
outstanding for at least five years.


6. Personnel at the MoF and the CBJ are currently receiving
training in capital markets issues and issuance procedures.
In response to their request, the Advisor has instituted a
weekly training session to deal with all aspects of debt
management.


7. As follow-up to the on-going work, an OTA Cash
Management Training Team will arrive in Amman in January to
introduce an Access-based cash management model. The
training will include all line ministries, the CBJ, and all
other government entities enjoying money-flows.


8. The Advisor, working with a Washington-based Treasury
legal advisor, also analyzed the Public Debt Law of 2001 and
provided significant recommendations for its amendment,
including adopting international standards and improving the
legal foundations of the MoF's issuance activities.


9. The Advisor proposed the MoF issue a Request for
Proposals for international investment banks to help the
government hedge the currency risks in its external debt
portfolio. COMMENT: Earlier this year, the weakness of the
dollar against the euro and yen added $1 billion to Jordan's
debt stock. Although subsequent strengthening of the dollar
has reduced this burden, hedging currency risk remains
essential for the government. END COMMENT.

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NEXT STEPS IN THE PROJECT
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10. There have been three changes in the Government over
the seven months since the advisor arrived in Jordan. This
lack of continuity has delayed some aspects of the agreed
work plan. The High Ministerial Committee (composed of the
Ministers of Finance and Planning and the Governor of the
Central Bank) is tasked with setting strategy and making
recommendations on medium to long-term strategy. Although
mandated by the 2001 Debt Law, the Committee has not yet
met. However, the new Minister has now agreed to convene
the Committee for its first meeting in January.


11. The recommendations on hedging currency and interest
rate risk in the external debt portfolio have not yet been
adopted by the new Finance Minister but remain a priority
for the Advisor and the Embassy. In addition, the Advisor
will be participating in drafting a Fiscal Agency Agreement
between MoF and CBJ that will detail the relative roles and
responsibilities of each vis--vis the issuance and payments
of GoJ debt. He will also work on finalizing the repayment
by MoF to CBJ of the overdraft mentioned previously; on
improving the domestic market infrastructure to promote
investment in GoJ debt instruments; and on continuing to
build capacity at the MoF, the CBJ and within the investment
community.


12. COMMENT: One of the most serious and pressing economic
challenges Jordan faces today is the country's debt. High
oil prices, and the early end of hoped-for financial aid
from the Gulf, have hit the government's finances hard.
2006 will prove even more of a challenge to the government
than 2005, as the government moves ahead to reduce fuel
subsidies two more times, and to follow the strictures of
its tough 2006 budget. OTA's debt advisor will play a key
part in helping the GoJ meet those challenges.