US embassy cable - 03AMMAN6962

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 006962 
 
SIPDIS 
 
NSC FOR ABRAMS/EDSON 
TREASURY FOR OASIA - LOEVINGER/MILLS/DEMOPOULOS 
 
E.O. 12958: DECL: 10/29/2008 
TAGS: EFIN, ECON, PREL, JO 
SUBJECT: JORDAN: NEW GOVERNMENT'S COMMITMENT TO FISCAL 
DISCIPLINE 
 
 
1.  (C)  Summary.  While the new Jordanian government is led 
by economic and political reformers, changes in the cabinet 
and leadership give rise to questions about its commitment to 
fiscal discipline, particularly given the weariness of the 
political leadership following several years of tax hikes and 
spending cuts.  The new finance minister shares his 
predecessor's commitment to living within the country's 
means, but probably lacks his authority and access.  We can 
help by reminding Jordanian officials -- like Planning 
Minister Awadallah who visits Washington this week -- of the 
importance the United States places on continued sound 
macro-economic policies.  If it is to make an impact, 
Awadallah should get this message from interlocutors in all 
agencies.  End Summary. 
 
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Economic Reform Continues to be a Priority 
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2.  (C)  King Abdullah's letter of instruction to his new 
government highlights a new role for political reform, but at 
the same time renews the emphasis on economic reform with 
which the King has been personally associated since taking 
the throne in 1999.  The new Cabinet (septel) contains a 
highly qualified collection of young, dynamic technocrats and 
businesspeople who should be well qualified to implement a 
reformist economic agenda.  One leading member of this group 
told the Ambassador that in Abul Ragheb's cabinet the 
reformers had been in the minority, but that now they are in 
the majority. 
 
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But Commitment to Fiscal Discipline May Slip 
-------------------------------------------- 
 
3.  (C)  This gives confidence in the continuity of economic 
reform, but, at the same time, the government change raises a 
concern over the new government's commitment to the fiscal 
policy discipline -- the basis of Jordan's macroeconomic 
stability and growth since the late 1990's.  The weariness of 
senior politicians, at times including the King, with fiscal 
austerity, including tax and price hikes as well as spending 
cutbacks, has been increasingly evident especially this past 
politically stressful year.  This has been expressed in 
veiled and sometimes open criticism of former Finance 
Minister Marto, the architect and implementer of fiscal 
reforms, who is not a member of the new Fayez government. 
(Marto was initially rumored to replace Umayya Toukan as 
Central Bank chief, but even this is now in doubt given the 
widespread hostility he incurred as minister.) 
 
4.  (C)  This weariness is also reflected in the government's 
promotion of the Social and Economic Transformation Program 
(SETP), which has essentially sought to provide a short-term 
fiscal growth stimulus.  Thanks to Marto's efforts, and the 
support of the IMF, the SETP has so far been financed through 
new grant assistance and the limited use of privatization 
proceeds, so as to have a neutral impact on the bottom line 
budget deficit.  Planning Minister Bassem Awadallah, who 
designed the SETP and has been a consistent advocate of 
increased debt and deficit spending, remains in his position 
in the new government.  Awadallah continues to have the 
King's ear and feels he has the upper hand on economic policy 
following Marto's departure. 
 
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New Finance Minister Lacks Predecessor's Authority 
--------------------------------------------- ----- 
 
5.  (C)  Marto's successor, Finance Minister Muhammad Abu 
Hammour, was groomed by Marto and shares a similar philosophy 
and approach to the job.  Abu Hammour told the Ambassador he 
reminded the King and his new colleagues during the weekend 
"retreat" in Aqaba that the new government needed to follow 
through on previous commitments to raise oil prices, increase 
the basic VAT rate, and reform the bloated pension system. 
Yet, Abu Hammour lacks the gravitas and experience of Marto, 
which was sufficient to give the Prime Minister and even the 
King pause when others advocated un-funded spending 
initiatives.  Marto recently described the job of a finance 
minister as being able to say "No," when pushed by prime 
ministers or kings to authorize expenditures that exceeded 
the country's means.  It is unlikely that Abu Hammour will 
have the political confidence to take positions of similar 
strength. 
 
6.  (C)  Marto's job was also made easier with a Prime 
Minister who was an essentially conservative and risk-averse 
businessman, who knew what it meant to meet a bottom line and 
who kept a firm hand on his ministers, including Awadallah 
(who chafed under his leadership).  New Prime Minister Faisal 
al-Fayez is generally thought of as a pleasant, but not 
forceful individual whose main experience was in Royal 
Protocol.  In fact, Marto told the Ambassador that he refused 
to serve in Fayez' government because he did not believe it 
would stick to fiscally sound policies.  With typical 
hyperbole, Marto feared that with a few years of weak 
leadership the country could find itself back in the 
financial mess it faced in the 1980s. 
 
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Halaiqa Will be the Key 
----------------------- 
 
7.  (C)  Thus, the job of maintaining fiscal order in the 
Fayez government falls to Deputy Prime Minister Muhammad 
Halaiqa.  Halaiqa does not have a financial background, but 
seems to share Abul Ragheb's native caution and experience. 
In addition, Halaiqa will chair the critical cabinet 
subcommittee that reviews and takes initial action on 
economic issues.  Among the first major tests Halaiqa, Abu 
Hammour and the economic team will face will be moving the 
2004 budget through the cabinet and parliament.  A new 
government will have to deal with expected higher oil import 
costs, but will naturally be reluctant to increase taxes or 
subsidized prices (including on oil prices under the 
commitment made to us in return for FY03 supplemental ESF). 
We fear the natural temptation, particularly given the 
expiration of the IMF program in July, will be to allow the 
deficit to grow. 
 
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How We Can Help 
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8.  (C)  U.S. officials should take every opportunity to 
stress the importance the United States places on maintaining 
the sound fiscal and monetary policies that underlay Jordan's 
improved economic performance and future prospects.  The 
first opportunity for doing so will be during Planning 
Minister Awadallah's meetings in Washington this week. 
Awadallah, who may argue that Jordan should incur new 
external debt and allocate more privatization revenues to 
current SETP spending in lieu of debt reduction, should get 
this message from all his USG interlocutors.  Other early 
opportunities to make these points to new Jordanian officials 
could include visits to Amman by Treasury officials and/or a 
congratulatory letter to Minister Abu Hammour. 
 
9.  (C)  We should use such contacts to reiterate the need to 
follow through with the commitment to move to a market-based 
system for procuring and distributing petroleum products. 
These messages will be especially important in view of the 
expiration of the IMF program in July, which has in the past 
provided economic officials a useful stick to keep deficit 
reduction on track. 
GNEHM