US embassy cable - 02AMMAN5240

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 005240 
 
SIPDIS 
 
TREASURY FOR OASIA -- MCDONALD 
CENTCOM FOR POLAD 
 
E.O. 12958: DECL: 09/12/2007 
TAGS: EFIN, PREL, ETRD, JO, IZ 
SUBJECT: JORDANIAN ASSESSMENT OF ECONOMIC IMPACT OF 
POSSIBLE IRAQ HOSTILITIES 
 
REF: AMMAN 4697 
 
Classified By: CDA GREGORY L. BERRY.  REASONS 1.5 (B) AND (D) 
 
1.  (c)  Post has faxed to NEA/ARN a copy of a paper given to 
DAS Satterfield by Prime Minister Abul Ragheb that describes 
a preliminary Jordanian government interagency assessment of 
the economic impact on Jordan of possible military 
hostilities involving Iraq.  The paper assumes and attempts 
to quantify the value of the loss of grant and subsidized oil 
shipments for Iraq, as well as knock-off effects on 
government revenues and the transportation, tourism, and 
export industries.  It estimates the total cost to the 
Jordanian economy at about $1.4 billion.  Copies of the paper 
are available from NEA/ARN. 
 
2.  (c)  Foreign Minister Muasher told the Charge that he 
would like to discuss the paper during meetings he has 
requested in Washington with the Secretary and other senior 
U.S. Government officials.  Central Bank governor Umayya 
Touqan has also raised a related issue related to impact on 
Jordan's banking system of an abrupt halt in UN Oil for Food 
Program trade with Iraq (reftel).  We would also appreciate 
Washington guidance on the issue Touqan raised. 
 
3.  (c)  In post's view, given an overall absence of detail, 
the numbers provided in the Jordanian paper are hard to 
assess.  Yet, it seems clear that loss of the oil subsidy 
would be a major economic hit to Jordan.  Although the 
adjustment to market-based oil prices is probably a good 
thing in the long-term, the transitional economic costs will 
no doubt be significant and painful, particularly at a time 
when the Jordanians would be facing major social dislocations 
because of a conflict.  On the other hand, Jordan has 
resources of its own to deal, at least in part, with the 
other identified costs, which are mostly temporary. 
Following are some additional points that may prove useful in 
Washington's analysis of the paper and the issues it raises. 
 
--  The paper mentions in passing the possible need to 
provide for refugee flows, but does not quantify the 
potential need.  The Jordanian government has been reluctant 
for political reasons to discuss with the embassy or 
humanitarian organizations its planning for this eventuality. 
 The Department may want to suggest to FM Muasher that 
low-key contingency planning by the Jordanians with the 
international community wuold be prudent. 
 
--  The calculation of the value of the Iraqi oil grant and 
subsidy is probably actually underestimated to the extent 
that it sets a higher than market value on the low-quality 
consumer goods exported to Iraq under the oil for goods 
protocol.  Viable alternative markets probably do not exist 
for most (60-70%?) of such goods, so the loss of the Iraqi 
market would mean a permanent loss of income and jobs for a 
significant portion of Jordan's manufacturing sector. 
 
--  The paper lumps together permanent and temporary shocks. 
Permanent shocks would include the higher national oil bill 
at market prices and the probable loss of Iraq as a captive 
market for low-quality consumer exports.  Temporary shocks 
include the impact on port and land transport, loss of 
tourism and remittance income. 
 
--  Depending on the scenario, the temporary shocks could be 
quickly reversed and even turn into "positive shocks."  (Note 
that real GDP grew by over 20% in 1992.)  Similarly, the 
opportunity for Jordan of the reopening of the Iraqi economy 
to normal business is not addressed. 
 
--  In addition to not addressing offsetting factors, the 
paper does not discuss resources currently available to 
Jordan.  These include $5 billion in official reserves, $1.5 
billion in claims on Iraq, and substantial foreign assets of 
the banking system and private sector, as well as the 
increased credibility of the central bank and government. 
 
--  Furthermore, it does not seem to consider savings on debt 
payments under the new Paris Club arrangement or the 
substantial increase in non-Iraq exports expected this year. 
Regarding the latter, it will be critical to keep QIZ exports 
flowing, especially via Haifa; otherwise there could be a 
permanent damage to the initiative. 
 
--  Another critical factor will be how the international 
banking community reacts during a crisis.  Banks, especially 
but not only European and Japanese ones, could preemptively 
interrupt relationships with Jordanian banks ("redlining"), 
making it impossible for Jordanian banks to access overseas 
funds or clear international payments.  This could lead to 
trade disruptions and defaults by Jordanian banks with messy 
and potentially long-lasting legal and financial consequences. 
 
--  In addition to directly providing cash to the Jordanian 
government, there could be other ways to address some of the 
needs identified.  For example, to minimize monetary 
instability and reduce the probability of a speculative hard 
currency outflow, the U.S. could announce a commitment to 
make additional temporary reserves available to the Jordanian 
Central Bank.  This would also increase the ability of the 
Jordanian government to guarantee domestic lending or finance 
debt deferrals for hotels or other firms. 
 
--  We could also consider U.S. government guarantees for 
borrowing by the Jordanian government or banks, although the 
U.S. budget cost of this would be equivalent to direct 
lending.  For this reason, it is likely preferable to provide 
guarantees and lending through international institutions. 
 
--  The IMF and World Bank would be probable sources of 
emergency funding and guarantees, as could be the 
international donor community.  The Paris Club could also 
provide additional extraordinary debt relief, but this would 
be unlikely to provide much help in a crisis since the vast 
majority of debt payments due over the next six years were 
already deferred by the July Paris Club agreement. 
BERRY