US embassy cable - 03AMMAN7296

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007296 
 
SIPDIS 
 
TREASURY FOR OASIA - A. DEMOPULOS 
 
E.O. 12958: DECL: 11/5/08 
TAGS: EFIN, EAID, PREL, JO 
SUBJECT: JORDAN: IMF MISSION REVIEWS OUTLOOK 
 
REF: A. AMMAN 6962 
 
     B. AMMAN 6313 
 
Classified By: Ambassador Edward W. Gnehm.  Reasons 1.5 (b) and (d). 
 
1.  (C)  Summary.  An IMF team visiting Amman sees no 
economic need for additional cash assistance to Jordan before 
December 31, given that the country's finances are currently 
in good shape -- although there is potential crunch next year 
as the level of foreign grants falls and oil import costs 
rise.  Sharing concerns about the new government's ability to 
enforce fiscal restraint, the Fund staff recommended that the 
U.S. continue to put effective policy conditions on its cash 
assistance.  For the longer term, the staff is worried about 
the potential treatment of Jordan's large central bank claims 
on Iraq (which they distinguish from other countries' credits 
to Iraq), as well as by what they see as elevated military 
spending.  End Summary. 
 
2.  (C)  IMF Mission Leader for Jordan Ihsan Mansur and 
mission members briefed the DCM, the USAID Mission Director 
and other embassy staff on November 4 on their findings 
toward the mid-point of an on-going visit to Amman.  The 
mission estimated that Jordan would meet or exceed growth and 
deficit reduction objectives for 2003.  Growth would range 
between 3 and 4% and the deficit would reach 2.5% of GDP or 
below -- thanks to the cash assistance already provided by 
the United States, which had offset war-related budget 
shortfalls. 
 
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Budget Crunch in 2004 
--------------------- 
 
3.  (C)  The IMF team felt that Jordan had "no economic need" 
for additional cash assistance during 2003.  Cash assistance 
-- including the recently appropriately $100 million in 
supplemental aid and the "regular" FY04 cash transfer -- 
would be more useful in 2004, when Jordan could face a budget 
and balance of payments "crunch" from lower grant aid and 
higher oil import costs.  (The mission said it was estimating 
that Jordan would pay market prices for oil imports from the 
second half of 2004.) 
 
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New Government's Fiscal Commitment "Untested" 
--------------------------------------------- 
 
4.  (C)  Expressing a concern about the new government's 
commitment to fiscal discipline nearly identical to that in 
ref A, the IMF mission suggested that it would be useful for 
the U.S. to find ways to reinforce the new finance minister's 
efforts to keep deficit reduction on track, including by 
conditioning delivery of U.S. cash transfers on maintenance 
of sound budget policies.  In particular, the team mentioned 
that it could be useful to use new cash transfers to 
reinforce commitments made to the U.S. and IMF over the past 
year to increase the base and rate of the value-added tax and 
to reduce subsidies on oil products.  They also asked that 
the U.S. convey the message that it was in the Jordanians 
best interest to continue to work closely with the Fund, even 
after the July expiration of the current program.  (They 
noted that non-binding "enhanced staff monitoring" would 
continue through 2005.) 
 
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SETP Funds Should be "Well-Spent" 
--------------------------------- 
 
5.  (C)  The Fund staff said that it did not have a 
preference on whether U.S. aid was used to fund Social and 
Economic Transformation Plan (SETP) projects or regular 
budget needs.  In their view, the bottom line was the same. 
Their main concern about the SETP was the "quality of 
spending."  Although the IMF did not look at the detailed 
breakdown of SETP spending, it was concerned that appropriate 
financial controls should be in place , which they do not 
appear to be.  (See ref B for former Finance Minister Marto's 
similar concerns about the SETP.) 
 
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Iraqi "Debt" Something Else 
--------------------------- 
 
6.  (C)  Asked about the Central Bank of Jordan's $1.5 
billion in claims on the Central Bank of Iraq, the staff 
members said that in their opinion this did not constitute 
"debt" in the way the Paris Club looks at debt.  Rather, they 
said it should be viewed as "cash payments" that were due and 
not paid.  Furthermore, while not considered free reserves, 
these claims are treated as assets in the Bank's balance 
sheet.  Should inclusion of these claims in a multilateral 
restructuring of Iraq's debt require the Central Bank to 
write-off such a large amount, the Bank could become 
insolvent.  This would mean that the Government of Jordan 
would be legally required to recapitalize the Bank -- 
creating an equivalent demand on the central government's 
budget.  "Don't destroy one country to save another," they 
advised. 
 
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Military Spending Needs to be "Rationalized" 
-------------------------------------------- 
 
7.  (C)  As for longer-term issues, team members said they 
would be turning their attention to Jordan's level of 
military spending which they said was among the highest in 
the world per capita or as a share of GDP.  Ironically, they 
noted, U.S. military aid in the form of equipment only 
aggravated the demands on the budget for personnel and 
recurring costs.  Obviously, this was a very difficult 
problem, but the team felt there was no alternative to taking 
a close look at rationalizing the level of military 
expenditure. 
 
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Comment 
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8.  (C)  As the IMF staff points out, Jordan continues to 
face financial challenges.  We think the advice to transfer 
U.S. cash aid in Jordan's 2004 budget year (beginning January 
1) and to condition it on budgetary and policy performance is 
well-placed.  Dr. Abu Hammour, the new and politically 
untested finance minister, and other ministers of like mind 
will no doubt welcome the additional leverage this will given 
him in keeping the 2004 deficit under control. 
GNEHM