US embassy cable - 05AMMAN7951

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 007951 
 
SIPDIS 
 
E.O. 12958: DECL: 10/05/2020 
TAGS: EFIN, ECON, JO, KU 
SUBJECT: JORDAN'S ECONOMY: TOP OFFICIALS CONCERNED ABOUT 
INFLATION, DEBT, AND OIL PRICES 
 
 
Classified By: CDA DAVID HALE, REASON: 1.4 (B, D & E) 
 
1.  (C) SUMMARY:  Jordan's Finance Ministry and the Central 
Bank of Jordan (CBJ) are increasingly concerned that high 
levels of liquidity and increasing prices will fuel inflation 
over the coming year.  The CBJ recently raised interest rates 
by half a percentage point, double the size of increases made 
over the past year.  Should inflation continue to threaten, 
further interest rate hikes would slow economic growth and 
could provoke a recession.  High fuel prices are still 
hurting the government's budget, despite a recent reduction 
in fuel subsidies.  Hopes are fading that the government will 
meet its legally-mandated 2007 debt reduction targets.  On 
the bright side, Kuwait recently rescheduled $220 million in 
Jordanian debt.  END SUMMARY. 
 
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INFLATION FEARS 
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2.  (C) In recent meetings with Ecouns, CBJ Deputy Governor 
Faris Sharaf signaled that the Central Bank would change its 
interest rate policy.  Previously, the CBJ had followed the 
lead of the U.S. Federal Reserve Bank, raising interest rates 
by a series of quarter-point hikes.  Beginning September 21, 
the CBJ would raise rates by a half-point, regardless of the 
Fed's move (which was another quarter-point rise).  Sharaf 
said the CBJ is increasingly concerned about the excess 
liquidity in Jordan, consisting 
of both domestic funds but also of large capital flows from 
the Gulf and other neighboring countries.  In addition, the 
GoJ's need to reduce fuel subsidies would also feed increases 
in prices throughout the economy.  Sharaf said he was 
frustrated that, despite Jordan's booming economy over the 
past two years (averaging over 7% real growth), the 
government itself remained "broke."  He predicted that, at 
best, rising interest rates would bring down the real growth 
rate by several points; at worst, they could 
provoke a recession.  In a separate meeting with Ecouns, 
Finance Ministry Secretary General Khasasbeh echoed Sharaf's 
views on inflation, adding that the GoJ expects an inflation 
rate of 5-6% in 2006, up substantially from this year's 3.4%. 
 
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THE DEFICIT, AND PLANNING NEXT YEAR'S BUDGET 
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3.  (C) According to CBJ Deputy Governor Sharaf, the recent 
reduction in the oil subsidy - the third cut in the past year 
and a half (see Amman 7561) - will bring in an additional JD 
40 million (USD 56 million) in revenue.  Due to the shift of 
some of those funds to the social safety net, however, the 
budget will net only an additional JD 28 million (USD 39 
million).  Sharaf noted that the IMF had recently agreed with 
the GoJ's plan to cut the subsidies, and that it shared 
concerns about increasing inflation in Jordan in 2006. 
Barring another sharp rise in oil prices, Khasasbeh did not 
expect another subsidy reduction would be needed before 2006. 
 
4.  (C) Khasasbeh expected the deficit for the year to reach 
5.2% of GDP, up from the 3.3% projected at the beginning of 
the year.  This would yield a deficit figure of USD 570-600 
million, based on a projected GDP of USD 11 to 11.5 billion. 
This would be an improvement on the JD 304 million deficit 
(USD 426 million) estimated by the Finance Ministry for the 
first half 2005 alone.  (NOTE: septel will report the Central 
Bank Governor's statement that the current deficit stands at 
JD 500 million (USD 700 million) and may be substantially 
lower by year-end, thanks to higher tax revenues.  END NOTE.) 
 Some Jordanian officials are still hoping aid from the Gulf 
will come to the government's rescue, but these hopes are 
flagging. 
 
5.  (C) According to Khasasbeh, the GoJ is hard at work on 
the 2006 budget.  In making its calculations, the government 
will only "book" foreign grants that are "guaranteed," i.e., 
those from the U.S. and other countries with a regular 
assistance program to Jordan.  This amount will total only JD 
220 million (USD 308 million), mostly from the U.S.  The 
projected oil price in the 2006 budget will also be raised to 
$60/barrel, up from $42/barrel at the beginning of this year 
for the 2005 budget.  When asked whether Jordan would meet 
its debt targets under the Debt Management Law, Khasasbeh 
said he doubted it was possible "without (new) grants." 
 
6.  (C) Khasasbeh expects real growth to slow to 5.5-6.0% in 
2006.  The current draft budget proposes no cuts in capital 
expenditures, and JD 150 million (USD 210 million) will be 
set aside for implementation of the National Agenda which 
should be released in mid- to late-October.  The budget will 
also include an increase on the value added tax on certain 
commodities from 4% to 16%, the current level for most 
products and services.  Khasasbeh explained that the IMF had 
requested this be done on all commodities whose prices are 
controlled by the government, but the GoJ is proposing to do 
this for only a third of those commodities.  In addition, the 
government plans to draw down slowly its over USD 5 billion 
in foreign reserves to finance imports. 
 
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DEBT RELIEF FROM KUWAIT 
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7.  (C) On the positive side, Khasasbeh confirmed a press 
report that Kuwait's Fund for Arab Economic Development would 
reschedule Jordan's USD 220 million debt over a 30-year 
period and would reduce the interest on the loan to 1%. 
HALE