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. -------------- THE OTA PROGRAM IN JORDAN -------------- ¶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. -------------- -------------- BETTER FINANCE MINISTRY-CENTRAL BANK COORDINATION -------------- -------------- ¶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. -------------- HELP WITH OTHER ISSUES AND ON-GOING TRAINING -------------- ¶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. -------------- NEXT STEPS IN THE PROJECT -------------- ¶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.