GOJ OFFICIAL UPBEAT ON PRIVATIZATION, PESSIMISTIC

UNCLAS SECTION 01 OF 02 AMMAN 000483

SIPDIS

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ECON EFIN KPRV JO
SUBJECT: GOJ OFFICIAL UPBEAT ON PRIVATIZATION, PESSIMISTIC
ON COUNTRY'S FINANCES

REF: 06 AMMAN 8241


1. (SBU) SUMMARY: The Chairman of Jordan's Executive
Privatization Commission (EPC),former Finance Minister
Mohammed Abu Hammour, painted an optimistic view of the
progress of privatization in Jordan. After a record year for
privatization in 2006, 2007 should also register major
progress, including sale of Royal Jordanian Airlines. Abu
Hammour was very concerned about the growing current account
and budget deficits, and the country's debt picture. END
SUMMARY.

ANOTHER BANNER YEAR FOR PRIVATIZATION AHEAD
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2. (SBU) In a January 28 meeting with the Ambassador, EPC
Chairman Abu Hammour agreed that 2006 had been a great year
for privatizations in Jordan (reftel). However, he expects
2007 to be great too. Partial privatization of the national
airline, Royal Jordanian, will be accompanied by private
sector opportunities in a BOT to expand Queen Alia
International Airport. There will be further government
tenders for an Amman-Zarqa light railway, a replacement for
Jordan's sole oil refinery and for a Saudi-Jordan water
pipeline. The winners for Queen Alia and Zarqa should be
announced in April.


3. (SBU) Abu Hammour noted that he had had to defend a
proposed internal rate of return (IRR) of 15-18% by the
bidders on some of these projects to conservatives in the
cabinet fearful of "losing" Jordan's patrimony. He argued
that this IRR was necessary to reward investors for the risks
taken and is typical for such projects worldwide. He added
that if the government had to pay for all of the upcoming
projects, it would raise the country's debt and affect the
Moody's and S&P ratings of the country's financial health.


4. (SBU) Abu Hammour expects a total of $6 billion in
privatizations and private sector partnerships over the
coming years, including those mentioned above. Some of the
other projects include state-owned power companies and
independent power projects. He expects these projects to
generate many new jobs, noting that the liberalization of the
telecoms sector had created at least 7,000 new jobs in Jordan.

WORRIED ABOUT FINANCIAL TRENDS
--------------


5. (SBU) Abu Hammour, a former Finance Minister known as a
fiscal conservative, expressed concerns about the current
state of Jordan's economy. He was particularly worried by
the rising budget and current account deficits and the
prospects for the country's debt burden. "Things are not
moving in the right direction," he lamented. He said the
budget deficit projected for the 2007 budget is the highest
in that last four or five years (septel will review the
budget in detail). The Saudi grants to Jordan ($300 million
last year) will help but those grants should not be relied
upon long-term.


6. (SBU) Abu Hammour was particularly concerned about the
25% increase in expenditures in this year's budget. Capital
expenditures are welcome, he said, but can also add
longer-term to an increase in current expenditures. The
salary increases granted to civil servants pushed by
Parliament and agreed to by the government will also cause a
permanent increase in current expenditures.


7. (SBU) Abu Hammour fears that continued government
over-spending could lead to a repeat of the dire economic
conditions the country faced in the late 1980's, which
culminated in Jordan being forced to devalue the dinar in

1989. Abu Hammour believes government over-spending over
several years precipitated that crisis. Currently,
government revenues are not keeping up with the rapid
increase in expenditures. Abu Hammour believes not
redressing this in the near future in risky.


8. (SBU) Abu Hammour noted that inflation last year was
6.25% and it is likely to moderate to 5% this year. However,
this level is still higher than the base in previous years,
which was in the 3% range. With inflation at these levels,
economic orthodoxy would call for fiscal conservatism not the
current expansionary fiscal policy.


9. (SBU) Finally, Abu Hammour is worried by the current

AMMAN 00000483 002 OF 002


account deficit, at 20% of GDP. For the first time in years,
he said, the current account is registering a deficit in both
goods and services. To finance it, the government must
either borrow more, thereby adding to the country's debt, or
start to draw down on the over $5 billion in foreign reserves
in government coffers. Neither approach would be sustainable
for more than two or three years, he said.

COMMENT
--------------


10. (SBU) Abu Hammour was known as a technocratic Finance
Minister and a fiscal conservative. He is certainly correct
that continuation of the government's current fiscal policies
is not sustainable over two or three more years. The twin
deficits he identifies and government debt are indeed major
challenges for the government. Nevertheless, Abu Hammour's
pessimism is over-stated. The uptick in inflation last year
was driven largely by the unprecedented surge in world oil
prices. With the current moderation in those prices,
inflation is moderating as well. Also, foreign reserves have
continued to rise over the past several years.


11. (SBU) Jordan's middle and lower classes are still
struggling with the continuing effects of the higher oil
prices, the removal of government subsidies of fuel products,
and a real estate boom, driven by foreign investment by
Iraqis and the Gulf. This is driving up prices and making it
harder for average Jordanians to buy homes. It is in this
political context that the government agreed with Parliament
to raise government salaries. Although this move has a clear
fiscal impact, it was politically necessary, particularly in
a year in which the country will be holding both
Parliamentary and municipal elections. In addition, the
privatization proceeds will be put to work offsetting some of
Abu Hammour's concerns. Foreign direct investment continues
to be positive and changes in tax policies should help
moderate the revenue shortfall.
HALE