JORDAN CONSIDERS STIMULUS PACKAGE TO AID ITS

C O N F I D E N T I A L AMMAN 000611 SIPDIS STATE FOR NEA/ELA AND EEB E.O. 12958: DECL: 03/05/2019 TAGS: EAID ECON EFIN JO PGOV SUBJECT: JORDAN CONSIDERS STIMULUS PACKAGE TO AID ITS ECONOMY REF: A. AMMAN 516 ¶B. AMMAN 472 ¶C. 08 AMMAN 3121 ¶D. 08 AMMAN 2982 ¶E. 08 AMMAN 2366 ¶F. 08 AMMAN 1392 Classified By: Ambassador R. Stephen Beecroft for reasons 1.4 (b) and (d) ¶1. (SBU) Summary: Ministry of Finance (MoF) officials said the government is developing a $212 - $258 million stimulus package to help the private sector weather the global economic crisis (ref B). While the package must still be approved by the Cabinet and Parliament, potential projects include real estate sector support, small agricultural grants, poverty alleviation, and water projects. Financing for the package may come from current expenditure funds that were originally intended for fuel and food subsidies and the cancellation of some commodity tax exemptions. Officials explained that the difficult financial situation will limit the budget options available to the new Minister of Finance. Critics have questioned the relative effectiveness of agriculture and real estate projects to stimulate the economy. End Summary. What's in the Stimulus Package? -------------- ¶2. (SBU) Dr. Ismail Zaghloul, Director General of the Budget Department, informed EconOff on February 24 that a small committee consisting of himself, the Secretary General of the Ministry of Planning and International Cooperation Nasser Shraideh, and the Secretary General of the Ministry of Finance Izzeddin Kanakrieh, were working to develop a fiscal stimulus package as a budget supplement to address the weakening economic situation (refs B, D). The committee reviewed $847 million in program ideas submitted by individual ministries and identified $212 - $258 million in suitable projects focused primarily on real estate and agriculture. Zaghloul said they were looking for projects that could be implemented in 2009 with low import content, high amounts of Jordanian labor, and high added value. In a separate meeting with EconOffs, Kanakrieh noted that other selected projects will focus on poverty alleviation, water, road construction, and infrastructure development. Where Is the Money Coming From? -------------- ¶3. (SBU) Zaghloul explained that the stimulus package will be primarily funded with monies reallocated from current account expenditures, notably liquefied petroleum gas (LPG),wheat and barley subsidies (ref E). He said that current low world market prices of these commodities have eliminated the need for government support to offer the products at the stated "subsidized" price. When the stimulus package is presented to the Cabinet in mid-March, MoF will present a recommendation to simultaneously end these subsidies. While hopeful that such a recommendation would be accepted, Zaghloul acknowledged that the Cabinet and the Parliament could accept the stimulus package and reject the subsidy cessation plan. Kanakrieh said that some funds would also come from the end of a tax exemption on common foodstuffs that was put into place when food prices spiked during summer 2008 (ref F). Fiscal Policy Not Likely to Change with New Minister -------------- -------------- ¶4. (C) The next step is for newly appointed Finance Minister, Bassem Salem, to study the stimulus plan before it is submitted to the Cabinet and Parliament for approval (ref A). In a meeting with EmbOff on March 3, Salem, who served previously as Minister of Labor, said that he was eager to prop up employment, especially in the construction sector, and had some reservations about the current package. Kanakrieh, however, predicted few significant fiscal policy changes with the new minister this year. He said there is little flexibility in the current expenditures because government salaries, which account for the majority of the budget, are already committed. He added that any decrease in capital expenditures would hurt the economy and summarized that "there aren't many scenarios to consider." ¶5. (C) Zaghloul said the government is torn between a desire to grow the economy and to manage the budget deficit. Kanakrieh agreed that if the government cut costs it would push the country further into a recession. He said the budget deficit will grow and will require debt to pay for it but the country's debt ceiling of 60% of GDP will present a challenge. Kanakrieh reiterated the GOJ's need for U.S. assistance (ref B). ¶6. (C) Center for Strategic Studies' Director Dr. Ibrahim Saif said that the government needs to look at its tax structure and that the richest individuals and businesses should pay more to reduce the budget deficit. Saif argued that it will be impossible to have tax reform in Jordan without corresponding political reform. Although some have claimed that there is currently no political will to increase taxes, Salem indicated to EmbOff a greater willingness than the previous minister to push through a tax reform bill that will streamline tax administration and create mostly lower, flat corporate taxes to stimulate investment. The Minister agreed that coupling tax reform with this stimulus package seemed to make political sense. Criticism of the Stimulus Package -------------- ¶7. (SBU) Critics agreed that the government must play a role in stimulating the economy but were skeptical of the choice of real estate and agriculture as the primary recipients. Saif noted that agriculture is the least efficient sector in Jordan and only generates 2% of GDP. He also commented that these two sectors employ relatively few Jordanians and rely instead on Egyptian expatriate labor. When asked, Zaghloul agreed that the majority of workers in construction and agriculture were Egyptian but said that the committee was trying to add a requirement to the stimulus package to encourage Jordanian employment. ¶8. (SBU) Envision Consulting Group CEO and economist Dr. Yusuf Mansur also disagreed with the government's plan to use savings from current expenditures for real estate projects directly. He recommends instead that the government focus on solving the liquidity and credit crunch, which is impacting real estate, and reducing the high interest rates on all business loans (ref B). Pointing out the wide disparity between interest rates in the U.S. and Jordan, he questioned why the local rates had not yet come down significantly. He speculated that the growing amount of loans to the GOJ by commercial banks was crowding out all other borrowers and keeping rates high. Above all else, he highlighted the need for the government to instill confidence in the economy. Visit Amman's Classified Website at: http://www.state.sgov.gov/p/nea/amman Beecroft