US embassy cable - 04AMMAN3328

C O N F I D E N T I A L AMMAN 003328 
 
SIPDIS 
 
FOR TREASURY U/S TAYLOR FROM AMBASSADOR GNEHM 
 
E.O. 12958: DECL: 04/28/2014 
TAGS: EFIN, JO 
SUBJECT: FINANCE MINISTER'S RESPONSE ON PRICING OIL 
PRODUCTS IN RELATION TO JORDAN'S BUDGET 
 
Classified By: DCM DAVID HALE FOR REASONS 1.5 B AND D. 
 
1.  (C)  John, During an April 8 call on you in Washington by 
GOJ Finance Minister Mohammad Abu Hammour mentioned to you 
the serious impact of higher oil prices on Jordan's budget. 
You asked for details.  When I called on Abu Hammour April 27 
to discuss a range of issues, he noted that he had promised 
you a paper brief and asked me to transmit to you the 
following non-paper. 
 
 
 
Begin Text Letter: 
 
H.E. Mr. John Taylor 
Under Secretary for International Affairs 
Department of the Treasury 
Washington, D.C. 20228 
U.S.A. 
 
Your Excellency, 
 
I would like to refer to the meeting which was held at your 
office on April 8, 2004 and would like to thank you for your 
time and for your understanding of the challenges and 
difficulties that Jordan is currently facing.  As you recall, 
we have discussed a number of issues regarding the Jordanian 
economy.  The financial impact of the increase in world oil 
prices on our budget was one of these issues. 
 
Please find attached a paper concerning this issue. 
 
Yours truly, 
 
Moh'd Abu-Hammour 
Minister of Finance 
 
Begin Paper: 
 
Impact of Oil Prices on the Jordanian Treasury 
 
During the last few years and before the war in Iraq, Jordan 
used to get most of its needs of crude oil and oil products 
from Iraq with discounted prices in addition to an annual 
grant of about US$300 million. 
 
After the war, Iraq stopped its exports of oil to Jordan. 
Consequently, the 2004 budget was prepared and agreed upon 
with the IMF on the basis of a price of US$26 per barrel of 
oil.  The government's intention to increase the prices of 
petroleum products was also taken into consideration.  The 
increase in prices by an average of 8.6% went into effect on 
April 3, 2004 and will generate additional revenue by JD (60) 
million. 
 
In terms of rationing expenditures, the government has 
adopted a plan to control government expenditures by an 
annual amount of about US$150 million for this year. 
 
At present, the price of one barrel of oil is US$33. 
Accordingly, there is an increase of US$7 on the price of 
each barrel.  An increase of one dollar per barrel costs the 
Treasury US$30 million.  The additional cost of the increase 
in the price of oil on the Treasury is estimated at US$210 
million.  This additional cost will lead to increase the 
burden on the budget by US$210 million which requires 
external additional assistance in terms of grants to cover 
the increase in the budget deficit. 
 
End Text Paper and Letter. 
 
2.  (C)  EMBASSY COMMENT:  THE GOJ had boldly enacted the 
fiscal program it had committed to.  While the end of 
subsidized oil imports is very painful for the GOJ balance 
sheet, the government's fuel price increases do not represent 
its only countervailing increases in revenue in 2004.  A 
recent increase in the general sales tax (the principal 
revenue source for the GOJ) from 13% to 16% and the levy of 
special taxes on luxury items such as tobacco and alcohol 
products should, according to GOJ calculations, add another 
80-85 million JD ($113-120 million) to the government's 
coffers.  The Jordanian government also intends to reduce 
"expenditures by an annual amount of $150 million this year," 
as Abu Hammour mentions.  Nonetheless, the continued high 
world market price of crude oil does impact on Jordan's 
budget and could cause Jordan to miss its IMF-suggested 
target for deficit reduction if world crude prices do not 
drop and are not offset by other increased inflows by the 
GOJ.  In a meeting earlier this month, Abu Hammour said that, 
if oil prices continue at current levels over the summer, the 
GOJ may be forced to raise fuel prices once again. 
GNEHM