US embassy cable - 04AMMAN4330

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 004330 
 
SIPDIS 
 
TREASURY FOR A. DEMOPULOS 
CPA FOR J. VARDAMAN 
 
E.O. 12958: DECL: 05/24/2014 
TAGS: EFIN, ETTC, EAID, IZ, JO 
SUBJECT: VISITING IMF TEAM IMPRESSED BY THE STATE OF 
JORDAN'S ECONOMY 
 
Classified By: AMB: EGNEHM,JR. for Reasons 1.5 (b) and (d). 
 
 1.  (C)  SUMMARY:  At the end of a two-week mission, a 
visiting IMF team tallied a long list of indicators 
reflecting the current strength of Jordan's economy. 
Economic growth continues to build momentum and the IMF has 
increased its estimate for real growth in Jordan's GDP this 
year to 5.5%.  Finance Minister Mohammad Abu Hammour 
continues to impress the IMF with his control over government 
spending and in his success in bringing all types of spending 
under the government budget for 2005.  In addition, tax 
administration continues to improve, with higher tax revenues 
targeted for deficit reduction and debt repayments.  The IMF 
team reported that Abu Hammour would be seeking to raise 
Jordan's debt swap limits with the Paris Club when he visits 
Paris in June.  The IMF team's only concern regarding 
Jordan's economic health was how long Minister Hammour would 
be able to fend off demands for increased spending, 
particularly from Planning Minister Bassem Awadallah. 
 
2.  (C)  Monetary policy, too, goes well, with a current 
account surplus equivalent to 5% of GDP.  Inflation 
registered 3.6% in April but, excluding the GST increase and 
the fuel price rises that affected the April figures, the 
underlying rate of inflation remains at 2%.  Regarding the 
$1.3 billion in Central Bank of Jordan claims on Iraq, the 
IMF team said such claims were not normally defined as 
government-to-government debt.  (NOTE:  The IMF team will be 
submitting the findings of this mission in its semi-annual 
report to the IMF on Jordan.  END NOTE.)  END SUMMARY. 
 
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FISCAL POLICY GOING WELL 
------------------------ 
 
3.  (C)  At the close of their two-week mission to Jordan, 
visiting IMF officials reported to E/COUNS their satisfaction 
with the state of Jordan's economy.  The 1st quarter of 2004 
registered real growth of 7-8%, driven largely by a surge in 
exports.  Credit growth was also up by 4.9%, helping fuel the 
economic expansion.  Although Jordan's economy is unlikely to 
continue the high growth rate of the 1st quarter, the IMF is 
already revising upwards its estimated growth for the year 
for Jordan from 5% to 5.5%. 
 
4.  (C)  The IMF team continues to be very impressed by 
Jordan's Finance Minister Mohammad Abu Hammour.  The IMF 
welcomed the GOJ's decision in March to raise the GST from 
13% to 16%, higher than the IMF's request for a rise to 15%. 
The GST increase and the average 9% increase in fuel prices, 
both of which took place in April, combined with improvements 
in tax administration to produce a healthy fiscal picture. 
The Finance Ministry has agreed to apply increased tax 
revenues to reducing the deficit and/or paying down debt. 
(NOTE:  One downside of the increase in fuel prices for the 
government is that the government now owes the Zarqa refinery 
JD 120 million (($ 168 million)) for additional subsidies it 
must pay the refinery.  END NOTE.) 
 
5.  (C)  The main concern of the team in the area of fiscal 
policy was whether Abu Hammour would be able to continue his 
tight control over government spending.  The team was 
particularly concerned about Abu Hammour's ability to hold 
off spending requests from Planning Minister Bassem 
Awadallah.  However, the team was reassured by the fact that 
Abu Hammour had been successful in consolidating the budget 
and bringing all government spending under next year's 
budget.  (COMMENT:  Previously, Planning Minister Awadallah 
had controlled an off-budget account which had included USAID 
cash transfer funds.  According to the IMF, under the new 
consolidated budget, additional cash transfers from the U.S. 
to Jordan would then generate the need for a supplemental 
allocation to spend those funds, as occurs in the U.S.  This 
would give the Finance Ministry tighter, more comprehensive 
control over government spending.  END COMMENT.) 
 
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THE MONETARY PICTURE 
-------------------- 
 
6.  (C)  The monetary picture is also good.  The current 
account registered a surplus equivalent to 5% of GDP.  The 
inflation rate was up 3.6% in April but this reflected the 
fuel price increases and the increase in the GST.  The IMF 
estimates the underlying rate of inflation at only 2%.  If 
the U.S. raises interest rates in the coming months, Jordan's 
interest rates will also rise.  However, provided the 
increases are gradual, the effect on Jordan's economy should 
be muted, particularly if inflation remains under control. 
 
7.  (C)  In terms of exchange rates, the Jordanian government 
told the IMF that it has no current plans to float the 
Jordanian dinar.  The government fears that the continued 
uncertainty in Iraq could cause too much volatility for a JD 
without its dollar peg. 
 
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DEBT SITUATION ALSO LOOKING UP 
------------------------------ 
 
8.  (C)  Abu Hammour told the IMF that he wanted to raise 
Jordan's debt swap limits with the Paris Club.  He will lodge 
the request with the Paris Club during a visit to Paris in 
June.  He will seek an increase in the limits from 30% to 
40%.  According to the IMF, this would be the first time any 
country has requested such an increase. 
 
9.  (C)  The IMF team estimated Jordan's debt/GDP ratio for 
2004 at 92.7%.  This presumes that Jordan continues to follow 
its privatization schedule and includes JD 12 million ($16.8 
million) in savings from paying off Jordan's Brady bonds 
early. 
 
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IRAQ ISSUES 
----------- 
 
10.  (C)  When asked about the impact of the Central Bank of 
Jordan's (CBJ) $1.3 billion claim on Iraq, the IMF team said 
that if the CBJ were forced to write it off, the CBJ would 
have to be re-capitalized immediately.  This would have a 
severe impact on Jordan's debt picture.  However, the IMF 
officials said that this type of account would not normally 
be defined as government-to-government debt.  As a result, it 
should not be part of any debt write-offs negotiated for the 
new Iraqi government. 
 
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SAUDI OIL 
--------- 
 
11.  (C)  The IMF team said that the GOJ had confirmed that 
the Saudi government had finalized its offer of a grant of 
50,000 barrels of oil per day to Jordan.  However, the 
assessment of the IMF was that the grant would barely offset 
the much higher oil costs for the Jordanian government due to 
the currently high level of oil prices. 
 
GNEHM