GOJ WORKS TO LESSEN IMPACT OF CONTINUED INFLATION; CUTTING

UNCLAS SECTION 01 OF 02 AMMAN 001149 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/ELA, NEA/EX, EEB, M, HR/OE CAIRO FOR FAS AGMINCOUNS PKURZ E.O. 12958: N/A TAGS: ECON PGOV EAGR ENRG JO SUBJECT: GOJ WORKS TO LESSEN IMPACT OF CONTINUED INFLATION; CUTTING PRICES AND TAXES ON KEY COMMODITIES REFS: A: Amman 1034 ¶B. Amman 815 ¶C. Amman 26 ¶1. (U) Summary: Inflation in Jordan increased by 1.73% in March due to the continued rise in electricity and food prices. The government has responded by lowering customs and taxes on several food stuffs; by making its commissary stores not-for-profit; and by executing a deal with the Government of Egypt for rice. These steps are designed to ensure a continual, plentiful supply of commodities with a minimum of speculation in the marketplace. Representatives of private grocers and rice traders complain that these actions will severely impair their businesses, but government officials say these steps are modest, and serve primarily as a signal that the Jordanian government is addressing inflation. End Summary. Inflation Continues -------------- ¶2. (U) Inflation in Jordan continues at a steep rate. Jordan's Department of Statistics (DOS) reported a 1.73% increase in the monthly Consumer Price Average (CPA) between February 2008 and March 2008 after a 6.54% increase in February (ref B). The report attributed March's inflation to the rise in "fuel and lighting" costs led by increased electricity prices (10.3%),as well as increases in fruit (11.6%),meat (2.7%),and vegetables (6.5%). Prices for two categories -- dairy and clothes -- both declined 2%. The report also showed a 10.8% increase in prices for first quarter 2008 when compared to the same period last year. ¶3. (U) Ministry of Industry and Trade (MOIT) Director for Markets Monitoring Imad Al Tarrawneh estimated that the prices of basic foods have increased 52% since last year. In addition, gasoline prices, which are now set every 30 days, were raised 5% on April 10. Prices are set by a government committee on the basis of average international prices during the preceding 30 days. Government Intervenes to Control Some Prices -------------- ¶4. (SBU) The rising prices have provided fodder for the opposition, with the Islamic Action Front (IAF) maintaining a steady drumbeat of criticism, and IAF Secretary-General Zaki Bani Irsheid recently declaring that social unrest will lead to "a very big explosion." In response to public concern, King Abdullah instructed the cabinet on April 13 to take urgent measures to protect Jordanians against the impact. ¶5. (SBU) A senior government official confirmed to the Ambassador that while the Government of Jordan (GOJ) has no intention, nor means, to introduce price controls, it does plan to introduce several initiatives aimed at lessening the impact of continuing price increases (ref B). The official explained that GOJ intends to cut the value-added tax (VAT) and other import taxes on commodities; to develop a hedging strategy for wheat and other commodity import purchases; to increase the stock of basic commodities in government commissaries; and to use MOIT inspectors to ensure that retailers pass these cost savings along to consumers. The official explained that all of these steps will help ensure that there is a continual, plentiful supply of commodities with a minimum of speculation in the marketplace. ¶6. (U) The local press announced on April 16 the Cabinet's consumer price-cutting plan in response to King Abdullah's directive. The plan expands customs and tax exemptions on additional food items, including frozen meat, and increases taxes on luxury items such as alcohol, tobacco, and satellite receivers. The government previously eliminated customs duties and taxes on 13 items including sugar, rice, and cheese in January (ref C). ¶7. (SBU) The plan also changes the government commissaries to non-profit businesses, and recommends opening an additional 22 branches. Khalil Al Haj Tawfiq, Chairman of the General Association for Food Stuff Merchants, criticized government support of the commissaries, arguing it disadvantages Jordan's 11,000 small retailers and suppliers who may be forced to leave the industry. He said that the government-run commissaries have been able to keep AMMAN 00001149 002 OF 002 prices low because of long-term contracts with suppliers. He noted that suppliers are increasingly paying fines and not fulfilling their contracts, rather than meeting contract prices which are often far below market prices. He predicted that many of these contracts will not be renewed in the future. Al Tarrawneh and two major commodity suppliers told EmbOff that some suppliers are committed to providing the government commissaries with products at very low or no profit margins. One supplier commented "this is our market, our people, and our government. We need to share the burden." Al Tarrawneh added that the changes at the commissaries are a political move to calm consumers, and that the market share of commissaries has risen only slightly from its previous level of 5%. Is There an Economic Crisis? -------------- ¶8. (SBU) Prime Minister Nader al-Dahabi also told the local press that the government will reduce the sales tax on steel, which is widely used in construction; will impose a ban on the export of some Jordanian produce; and will maintain current subsidized bread prices throughout 2008 (ref A). Dr. Musa Shteiwi, Director of the Jordan Center for Social Research, said that Jordan is in an "economic crisis" and may not be capable of handling it. New Central Bank of Jordan Deputy Governor Kholoud Saqqaf acknowledged the current economic hardships, but added that it was somewhat reassuring that the problems were global and not unique to Jordan. ¶9. (SBU) The GOJ has also concluded a government-to-government rice deal with Egypt following Egypt's announcement last month banning rice exports. Rice traders expressed dismay saying that this will put them out of business and will further increase the national budget burden. Muhanned Gesh, MOIT Director of Tenders, explained that the deal represents only half of Jordan's monthly consumption of rice, but is primarily a signal to Jordanians that their government is alert and ready to intervene for their interests. NOTE: Most rice consumed in Jordan is purchased by traders, with 40% of Jordan's annual consumption coming from the U.S. END NOTE. MOIT is also expected to make a decision by April 17 about the timing of its next 100,000 ton wheat purchase, with some experts recommending purchasing now as a hedging mechanism before the early summer harvest, and other experts advising to wait for lower prices, pointing to declining barley prices as evidence of falling commodity prices. Visit Amman's Classified Website at http://www.state.sgov.gov/p/nea/amman HALE