US embassy cable - 04AMMAN2520

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 002520 
 
SIPDIS 
 
E.O. 12958: DECL: 04/01/2014 
TAGS: PGOV, ECON, EFIN, JO 
SUBJECT: DEPUTIES EASILY APPROVE SALES TAX INCREASE OVER 
VOCAL OPPOSITION 
 
REF: A. AMMAN 01452 
 
     B. AMMAN 00652 
 
Classified By: Ambassador Edward W. Gnehm for Reasons 1.5 (b), (d) 
 
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SUMMARY 
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1.  (C) MPs on March 28 endorsed a three percent increase in 
the general sales tax as part of the GOJ's budgetary price 
and tax hike package.  Apart from a few independent MPs and 
the members of the Islamic Action Front, a large majority of 
the 95 deputies present voted in favor of the legislation. 
Prime Minister al-Fayez had decreased the initial proposed 
sales tax hike from four to three percent to placate 
opposition, and agreed to salary increases for public sector 
workers.  Opponents of the sales tax hike argued that the 
government needed to tackle corruption and unnecessary 
spending before asking Jordanians to pay more out of their 
pockets.  The measure demonstrates the GOJ's commitment to 
fiscal restraint as the country's debt position worsens due 
to the recent depreciation of the (dollar linked) Jordanian 
dinar.  End Summary. 
 
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SALES TAX INCREASE GETS A GREEN LIGHT 
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2.  (U) The Lower House of Parliament approved March 28 an 
increase in the general sales tax from 13 to 16 percent.  The 
tax hike was an integral part of the GOJ's 2004 budget, which 
the Parliament passed -- after considerable controversy -- in 
February (ref a).  Ninety-four MPs (out of 110) were present 
for the tax increase vote and all voiced their approval 
except for MPs from the Islamic Action Front (IAF) and a few 
independent deputies.  The GOJ estimates that the sales tax 
measure will pump an additional 70 million Jordanian dinars 
(around $98 million USD) into state coffers. 
 
3.  (U) A combined tax and price hike package originally 
proposed by the government (see refs a and b) included a four 
to six percent increase in the general sales tax on a list of 
91 goods, in addition to special levies on tobacco, alcohol 
and mobile telephone bills.  After a stronger than expected 
outcry against the proposals, Prime Minister Faisal al-Fayez 
lowered the sales tax hike from four to three percent and 
also scrapped plans to impose extra taxes on basic 
commodities including medicine, food and educational 
materials. 
 
4.  (U) To help ameliorate the impact of the tax hike, as 
well as fuel price increases (see ref b), the GOJ also 
approved monthly salary increases for public sector 
employees, as well as members of the Jordanian military.  A 
raise of 10 Jordanian dinars (roughly $14 USD) will be given 
to employees with monthly incomes below 200 Jordanian dinars, 
and 5 Jordanian dinars (approximately $7 USD) to those with 
monthly salaries between 200 and 300 Jordanian dinars. 
 
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OPPONENTS & SUPPORTERS SPEAK OUT 
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5.  (SBU) IAF members in the Lower House spoke out strongly 
against the tax hike.  IAF MP Zuhair Abul Ragheb (East 
Banker, Amman-3rd District) deemed the public salary 
increases insufficient, saying, "Increasing the sales tax 
will put an extra burden on some 47 percent of citizens who 
will not benefit from the salary increases proposed by the 
government to offset these hikes."  Reflecting the views of 
other opponents, Islamist independent MP Abdullah al-Akayleh 
(East Banker, Tafilah) told PolOff that lower income 
Jordanians were already being squeezed dry and that he would 
not consider tax increases until the GOJ first took action 
against corruption and unnecessary spending (including on 
large infrastructure projects) that were allegedly "draining 
public funds."  MP Abul Rahim Malhas (East Banker, Amman-3rd 
District) similarly related to PolOff his view that the GOJ 
should not ask Jordanians to pay more taxes when it has yet 
to seriously tackle wasteful public spending. 
 
6.  (U) Responding to IAF criticism, Lower House Speaker 
Abdul Hadi Majali (East Banker, Karak-2nd District) stressed 
the right of the IAF and others to express their opinions. 
However, he adamantly rejected "the implied suggestion that a 
majority of deputies who voted for the law were working 
against the interests of the country."  Perhaps to counter 
allegations that it was insensitive to the plight of the 
poor, Finance Minister Mohammad Abu Hammour publicly pointed 
out that the additional tax revenue will help finance a 
directive by King Abdullah to include children below the age 
of six in an expanded free health insurance program.  PM 
al-Fayez told MPs that the government would also increase 
funds for the National Aid Fund (NAF) so that it could 
provide financial assistance to 80,000 needy Jordanian 
families. 
 
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COMMENT 
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7.  (C) Lower House approval of the tax hike law was already 
a done deal after strong government lobbying efforts resulted 
in a large margin of parliamentary support for its 2004 
budget (see ref a).  The budget the government fought for 
meets IMF deficit targets for the year, key to private-sector 
led growth.  Small public salary increases, as well as 
proposed increases in social assistance spending, may help 
soften the public reaction to implementation of higher taxes 
and fuel prices, but without significantly compromising the 
GOJ's commitment to fiscal discipline. 
 
8.  (C) The policy of belt tightening and fiscal restraint is 
especially important given Jordan's worsening debt position. 
The GOJ has managed its debt well, paying off its 
higher-interest Brady bond debt at the end of 2003.  However, 
Jordan's dinar is linked to the dollar, while most of its 
debt is denominated in euros or yen.  The dollar's weakness 
has resulted in an increased Jordanian debt stock to GDP 
ratio.  The proposed fuel oil price increases, which are 
expected to be implemented soon, will help wean the Jordanian 
economy off its reliance on external oil support. 
 
Please visit Embassy Amman's classified web site at 
http://www.state.sgov.gov/p/nea/amman/ or through the 
Department of State's SIPRNET site. 
GNEHM