US embassy cable - 05AMMAN5849

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 005849 
 
SIPDIS 
 
E.O. 12958: DECL: 07/18/2015 
TAGS: EFIN, PGOV, EAID, PREL, JO 
SUBJECT: JORDAN'S AUSTERITY PLANS KEEP GROWING DEFICIT IN 
CHECK 
 
REF: A. AMMAN 5725 
 
     B. AMMAN 5451 
     C. AMMAN 5311 
 
Classified By: CHARGE D'AFFAIRES DAVID HALE FOR REASONS 1.4 (B) AND (D) 
. 
 
1.  (C)  SUMMARY:  The GOJ strategy for getting through the 
present fiscal crisis (Refs A, B) consists of austerity 
measures (most importantly a 20 percent cut in Ministries' 
operational spending), revenue enhancement through 
accelerated privatization and tax reform, an end to costly 
fuel and other subsidies, steps to reinforce the social 
safety net (such as a minimum wage increase), and public 
gestures aimed at demonstrating that the governing class is 
sharing in society's pain (including the elimination of the 
German luxury sedans once favored by senior officials here). 
END SUMMARY. 
 
The Numbers as they Add Up 
-------------------------- 
 
2.  (C)  Ministry of Finance (MOF) Secretary General Hamed 
Kasasbeh recently reviewed with Emboffs a "very preliminary" 
draft of the revised budget that the Finance Ministry will 
present to the cabinet.  The figures show a fiscal picture 
that is bleak even under the most favorable assumptions;  the 
GOJ budget deficit will be in the range of USD 952 million, 
which is about 7 percent of the USD 11 billion GDP. 
 
First, The Good News - Revenues Up, Costs Trimmed 
--------------------------------------------- ---- 
 
3.  (C)  Building on the momentum of increased revenue 
collections that began in FY 2004, the MOF now  projects that 
the revenue side of the ledger in FY 2005 could be as high as 
JD 2.3 billion, representing a JD 300 million increase over 
the official budget that passed parliament last December. 
The Finance Ministry has also estimated the net effect of oil 
price increases as adding JD 114 million to the budget.  A 
final item on the plus side of the column is the JD 35 
million savings in government spending.  Total savings are 
thus JD 449 million. 
 
4.  (C)  While the government has been reluctant to release 
details of where this JD 35 million in budget cuts would come 
from, Kasasbeh shared an internal list with us.  Subsidies to 
independent agencies would be reduced by JD 11.5 million 
(many collect fees to sustain their operations or are part of 
larger operations, such as research institutes within 
universities, he said).  The government will seek 
across-the-board cuts in operational costs of JD 12.7 
million.  Kasasbeh saw JD 4.2 million coming from reduced use 
of vehicles.  For example, the Finance Minister gave up his 
BMW to the Prime Ministry for sale, he related, and took the 
SecGen's smaller car;  the SecGen, in turn, was using a small 
pool car. The Royal Palace is replacing its BMWs with Toyotas 
-- we witnessed the startling scene of a security chase car 
bristling with guns following a Toyota compact struggling up 
a hill, with the once-powerful Palace advisor Saad Khayr 
inside.  Other savings included JD 2.3 million from 
furniture, JD 1.6 million from phone use, JD 0.4 million from 
travel, and about JD 2 million in miscellaneous expenses. 
 
The Bad News -- The Deficit Hits 
-------------------------------- 
 
5.  (C)  The Finance Ministry is now revising the negative 
side of the ledger with the price of crude assumed to be $55 
per barrel (versus the original budget estimate of 
$42/barrel).  Calculated over the last six months of the 
year, this alone adds JD 300 million to the deficit. 
Together with the loss of JD 527 million in foreign grant 
assistance projected in the original budget, and JD 27 
million in salary increases for the lowest paid government 
workers, a total of JD 854 million is being newly tallied in 
the negative column. 
 
6.  (C)  With JD 854 million in additional costs (para 5), 
and JD 449 million in savings (para 3), the net effect on the 
GOJ budget is the sum of JD 405 million being added to the 
originally projected deficit of JD 270 million, leading to 
the overall deficit of JD 675 million ($952 million). 
 
Safety Net Extended 
------------------- 
 
7.  (C)  Salary increases for the lower grades of government 
employees are proposed to go into effect on August 1.  In 
addition, MOF analysts said that the semi-independent 
National Aid Fund (NAF) has been instructed to increase the 
pass-through of its JD 18 million annual budget by as much as 
50 percent in the second half of the year, so that more money 
reaches NAF beneficiaries.  (COMMENT: That this is considered 
possible is indicative of the deadwood present in some 
government bureaucracies.)  Finally, the proposal to raise 
the minimum monthly wage from 85 to 95 JD is working its way 
through the government.  Some investors are already 
complaining bitterly about the minimum wage hike, especially 
low-end garment manufacturers worried about the new Egyptian 
QIZs with their cheap labor and increased world competition 
in the post-quotas era.  However, manufacturers of high-end 
garments have indicated they understand that the new minimum 
wage is the price of doing business with a reliable 
workforce.  The most consistent concern raised by QIZ factory 
owners has been the immediate effect on their operating 
costs, due to higher priced transportation and what they say 
are unexplained inflationary trends. 
 
Comment - A Range for the Deficit 
--------------------------------- 
 
8.  (C)  Planning Minister Suhair al-Ali has been citing a 
figure of $950 million for the deficit, and other ministers 
have been pegging the deficit at about 7 percent of GDP. 
(Official estimates for the GDP were JD 8.24 billion ($11.6 
billion) when the budget passed, though this will now rise 
given that growth so far this year has exceeded seven 
percent.)  We reckon these stated deficit figures are about 
right and show just how much the government will have to do 
to continue to tighten its belt in the next few years, even 
as it pursues an aggressive reform agenda. 
 
9.  (C)  If oil prices were to stay at $60/barrel for the 
second half of 2005, an additional JD 65 million would be 
added to the deficit, the MOF analysts said.  Given this 
uncertainty and the fact that "actual" budgets at the end of 
the fiscal year do not match the amounts agreed to some 13 
months earlier, post estimates that a range of plus-or-minus 
JD 75 million for the oil deficit should cover all of the 
eventualities, all other considerations being equal.  Thus, a 
GOJ budget deficit for FY 2005 in the range of $800 million 
to $1 billion should be anticipated (not outside the range 
for developing countries in transition, but still an unwanted 
condition, as the IMF noted - Ref C).  The government's plan 
to eliminate oil subsidies over the following two fiscal 
years (Refs A, B) will substantially address a major portion 
of this deficit.  Combined with strong export-led growth and 
current levels of investment, Jordan's strategy to overcome 
its current fiscal woes puts it on track to return to a more 
evenly balanced budget. 
HALE