US embassy cable - 05AMMAN2295

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 002295 
 
SIPDIS 
 
E.O. 12958: DECL: 02/28/2015 
TAGS: ECON, EAID, EFIN, KPRV, EPET, PGOV, JO 
SUBJECT: ECONOMIC REFORM PROGRAM ON TRACK 
 
REF: A. 2004 AMMAN 9311 
     B. 2004 AMMAN 6441 
     C. 2004 AMMAN 4330 
 
Classified By: CDA Christopher Henzel for reason 1.4 (b) and (d) 
 
1. (C) SUMMARY: While Jordan remains dependent on foreign 
aid, its economic reform program is making substantial 
progress that has continued, undiminished in scope and 
urgency, since its "graduation" from an IMF program in summer 
2004.  The GOJ has succeeded in limiting the growth of 
current expenditures over the past year, has posted a 
significant increase in domestic government revenues through 
improvements in its collection of taxes, has reacted to 
sustained, higher-than-expected world crude prices by 
reaffirming its plan to implement a phased elimination of all 
fuel subsidies, and plans to conduct one of its most 
significant waves of privatization to date over the upcoming 
18 months. Despite increased political pressures to use 
Jordan's recent economic growth to increase GOJ transfer 
payments to the traditional pillars of support for the King 
and the GOJ, all signs are that the GOJ remains committed to 
reform.  END SUMMARY. 
 
2. (C) Jordan received over $1 billion in aid in 2004; the 
total size of its recorded economy was $10.9 billion.  Since 
the mid-1970s, foreign aid has been the second-largest source 
of foreign exchange, after remittances.  Before this, foreign 
aid was the number one source of foreign exchange. 
Notwithstanding this historical pattern of dependence upon 
foreign assistance and the large role aid still plays in the 
Jordanian economy, both King Abdullah and the GOJ understand 
the lessons of Jordan's economic collapse of 1989 and are 
exerting significant efforts to put GOJ finances - and 
Jordan's economy as a whole - on a sustainable basis that 
would assure its health even in the absence of foreign 
grants.  Jordan's Finance Minister Abu Hammour has repeatedly 
stressed to us the importance of building on IMF-spurred 
economic reforms, and the GOJ's actions have matched his 
words.  Since the beginning of 2004, the GOJ has taken action 
to improve GOJ finances through several measures, many of 
which have been put in place since the end of the IMF program 
in 2004. 
 
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CURRENT EXPENDITURES 
-------------------- 
 
3. (C) At the urging of the USG and IMF, Jordan in 2005 for 
the first time has implemented measures that improve the 
transparency of its budget, by including previously 
off-budget revenue and expenditures as line items on the 
budget.  In the long term, this change will make it more 
difficult for the GOJ to hide subsidies and will therefore 
create domestic pressure for their elimination; in the short 
run, it makes the GOJ's balance sheet look worse.  For 
example, Jordan's large fuel subsidies were included on the 
budget for the first time in 2005.  Their inclusion adds a 
substantial liability to the balance sheet and has provoked 
substantial Parliamentary debate. 
 
4. (C) In its 2005 budget, Jordan's largest sources of 
current expenditures are the fuel subsidies ($437.2 million), 
whose phased elimination is currently scheduled to conclude 
by the end of 2007 (see below), interest on Jordan's debt 
($486 million), salaries of government employees 
(approximately $686.3 million), and pensions ($584.2 
million).  Jordan has made significant progress in reducing 
its debt payments by paying off some of its high-interest 
debt early and replacing it with lower-interest 
domestically-held debt; it has also paid some debt outright 
and received debt forgiveness as a form of aid.  Pensions, by 
their nature, are more difficult to cut; nonetheless, Finance 
Minister Abu Hammour has been able to achieve successes in 
limiting the growth of this liability for the GOJ.  At the 
beginning of 2004, Abu Hammour was able to push through a 
reduction in the size of the pension of new military 
retirees, a significant government constituency (ref A). 
Also from the beginning of 2004, all incoming government 
employees have been transferred to the Social Security 
Corporation (SSC) for their pensions (ref B), a step which 
adds costs to the GOJ in the short term - as it has to pay in 
to the SSC immediately - but will deduct costs from the GOJ 
in the long run, as the SSC will be responsible for paying 
out the pensions instead of the GOJ.  Increases in government 
salaries in the 2005 budget are held to approximately the 
same levels the increases in 2004 and 2003. 
 
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TAXATION 
-------- 
 
5. (C) Jordan's General Sales Tax (GST) provides the majority 
of Jordan's domestic revenues.  In a region famous for its 
high rates of tax evasion, the GST is the most easily 
collected tax; it is also clearly the most regressive tax, 
making each rise fall disproportionately upon the poorest in 
Jordanian society.  The GST currently stands at 16% on 
virtually everything sold in Jordan (although the IMF had 
originally recommended an increase to 15%, the GOJ had 
managed to secure the higher figure) and it supplies 42% of 
revenue; income tax supplies another 11%, customs income 
contributes 10%, and the balance is supplied by other taxes, 
fees, institutional revenues, and other miscellaneous income 
sources.  Abu Hammour has committed to improving the 
collection of existing taxes rather than the imposition of 
new ones, and he is proud of the success that the tax 
department has had to date in increasing revenues through 
improved efficiency in the collection of taxes - he estimates 
an increase of almost $100 million over 2004 through these 
improvements alone.  To support the Minister's efforts, USAID 
is planning the launch of a subststantive fiscal reform 
program targeting the administration of tax revenues, with a 
planned start date late in 2005. 
 
6. (C) Abu Hammour plans to turn his attention to the Customs 
Directorate in 2005, with USAID support.  He envisions making 
substantial - if slightly smaller - returns.  There is 
substantial scope for improvement in customs receipts since, 
as Abu Hammour puts it, "70% of the Directorate staff is 
corrupt."  This move is likely to provoke substantial 
resistance, as opportunities for corruption have made the 
jobs highly sought after by people with influence. 
Nonetheless, Abu Hammour plans to press on with his reforms 
in this sector, and he appears to have royal support in this 
enterprise. 
 
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FUEL SUBSIDY 
------------ 
 
7. (C) Constantly rising crude prices - along with rising 
consumption - have given Jordan a moving target as it has 
tried to eliminate its fuel subsidies.  Jordan's initial 
target of a three-year phased rise in the prices it set for 
oil derivatives (including petroleum, diesel, fuel oil, 
kerosene, etc.) was based on the assumption - at the time 
considered conservative - that crude prices would hover at 
between $35-40 per barrel at the end of the three-year 
period.  As Jordan entered the latter half of 2004 (the 
second of the three years) with the global price of crude 
near $50, it became clear that in order to erase the 
differential between the price of Jordan's subsidized oil 
derivatives and their natural cost given the high world price 
of crude, Jordan would need to increase fuel prices in 2005 
by a greater amount than the increases of 2003 and 2004 
combined - and this from a base price already at a 
historically high level.  The GOJ therefore took the decision 
to extend its schedule of fuel price increases for an 
additional two years.  The IMF had suggested that this 
extension might be necessary when we had met with them in 
June (ref C); we heard no complaint about this policy when we 
met in October with Martin Petri, an IMF senior economist who 
collaborated with Jordan during its "workout" program and who 
has visited periodically at Minister Abu Hammour's request in 
order to check up on Jordan's progress since its "graduation." 
 
8. (C) The GOJ currently predicts that in absolute terms, its 
fuel product price increase will be slightly greater in 2005 
than in 2004 and 2003; it plans similarly-sized price hikes 
in 2006 and 2007.  The GOJ will, however, stop making large 
annual increases and shift to smaller quarterly increases, in 
hopes of limiting popular reaction. 
 
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PRIVATIZATION 
------------- 
 
9. (C) Due to foreign investors' lack of interest in 
Jordanian assets in the period leading up to and immediately 
following the March-April 2003 regime change in Iraq, most of 
Jordan's privatization program was put on ice.  Now, however, 
the ramping-up of several previously shelved privatizations 
that began in late 2003 has reached its culmination, and 
Jordan's Executive Privatization Commission - supported by 
the USAID privatization program - has a full plate for 
2005-6.  Jordan's Ministry of Energy has launched a strategic 
plan envisioning the privatization of almost the entirety of 
Jordan's power sector (septel).  The MOE has already issued a 
request for proposals (RFP) from interested parties for the 
sale of the GOJ's 100% stake in CEGCO, Jordan's 
power-generation company; in the future, either the 
privatized CEGCO will build power plants or other private 
corporations will do so under build-operate-transfer (BOT) 
contracts.  In addition, the government is moving to sell its 
stakes in two regional power-distribution companies by the 
end of the year.  Once these sales are completed, the GOJ 
will only retain the country's power-transmission backbone. 
Similarly, Jordan's Civil Aviation Authority has taken on a 
consultant to prepare it for the privatization of its 
remaining non-core functions.  The GOJ has also announced its 
intent to sell off its remaining shares of Jordan Telecom 
later this year; privatization of the postal service is to 
follow in 2006. 
 
10. (C) In its pursuit of full privatization of government 
assets, Jordan has shown a surprisingly strong willingness to 
challenge politically important constituencies.  Planned for 
September of 2005, for example, is an RFP for a strategic 
partner to take 40% of GOJ's stake (and a management 
contract) in the perennially money-losing Jordan Phosphate 
Mining Corporation (JPMC), the largest single employer by far 
in Ma'an Province, an area of southern Jordan known for its 
Islamist leanings.  The JPMC privatization plan is scheduled 
to go forward despite the repeatedly expressed objections of 
parliamentarians to the sale of any part of the company. 
Virtually the only major corporation in which the GOJ plans 
to retain ownership by mid-2006 will be Royal Jordanian 
Airlines (RJ), and the RJ CEO has noted to us his belief that 
RJ will hold an IPO in late 2006 - before the promulgation of 
an Open Skies policy throughout Jordan. 
 
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COMMENT 
------- 
 
11. (C) Nine months after the end of its IMF program, the 
GOJ's economic reform program remains on track.  Despite 
pressures from several directions to relax its fiscal 
discipline, the Ministry of Finance has kept a tight rein on 
the expansion of the government; royal backing and 
internally-imposed limits such as the Public Debt Law (which 
calls for debt to be reduced to 60% of GDP by the end of 
2006) have ensured that the Ministry has held the line, and 
the GOJ is putting in place measures that will help to 
further restrain spending growth.  Improvement in domestic 
revenue collection and phased elimination of fuel subsidies 
will continue at the same pace in 2005 as in previous years. 
At the same time, a massive sell-off of GOJ assets and of GOJ 
stakes in a variety of companies both underlines the 
commitment of the GOJ to the economic reform agenda proposed 
by the IMF and holds out the promise of further reductions in 
current expenditures - both through the debt that will be 
retired through sale of Jordanian assets and the divestiture 
of enterprises that run deficits which the GOJ has been 
forced in the past to cover. 
HENZEL