US embassy cable - 02AMMAN6515

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 006515 
 
SIPDIS 
 
TREASURY MILLS/PIPATANAGUL 
 
E.O. 12958: DECL: 11/04/2007 
TAGS: EFIN, EAID, PREL, IZ, JO 
SUBJECT: JORDAN IMF TEAM REVIEWS IRAQ SCENARIOS 
 
Classified By: ECON COUNSELOR TOM GOLDBERGER REASONS 1.5 (B) AND (D) 
 
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SUMMARY 
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1.  (C) According to an IMF team visiting Amman this week to 
discuss the Fund's program for 2003, economic disruptions 
from military operations against Iraq could increase Jordan's 
external financing need by $1.2 billion in 2003.  Substantial 
external assistance could over time, however, help smooth the 
economy's adjustment to higher oil prices.  The Fund is 
generally pleased with Jordan's economic growth and progress 
on economic reform and privatization, but needs to see 
speedier movement on pension reform before it can commit to 
post-2003 funding.  END SUMMARY. 
 
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PROGRAM AND CONTINGENCIES 
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2.  (C) At their request, IMF team members Joannes 
Mongardini, Economist--Middle East Department, Ashok Bhatia, 
Economist-Treasurer's Department, and Todd Schneider, 
Policies Department, briefed the Economic Section and USAID 
at the Embassy November 4.  The mission is in Amman for two 
weeks to review Jordan's performance under stand-by 
arrangements and to discuss the Fund's program in Jordan for 
2003.  In so doing, they are looking closely at the impact on 
the balance of payments and the budget of possible military 
operations against Iraq.  The mission's findings will be 
discussed by the IMF Board in March. 
 
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IRAQ 
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3.  (C) Mongardini said the potential consequences of 
military action in Iraq could be severe.  He said the loss of 
the oil grant/subsidy from Iraq, the disruption of trade, 
temporary capital flight due to political uncertainty, and a 
reduction in GDP growth might mean a $1.2 billion increase in 
the Jordanian economy's external financing need for next year 
over and above the baseline.  Mongardini allowed that the 
Central Bank of Jordan (CBJ) could use reserves to partially 
cover this, but that would only plug half the gap.  To avoid 
a brutal economic shock, the rest, he said, would have to be 
made up in additional support by donors and international 
financial institutions. 
 
4.  (C) The team said that the key issue was smoothing the 
adjustment of petroleum product prices to market levels. 
Along those lines, Mongardini said, the team had just met 
with Jordanian Minister of Finance Michel Marto, who was 
"very happy" over recent discussions in Washington regarding 
USG intentions to assist Jordan, but did not provide any 
details.  But regardless of the source of external financing, 
the economy would need time to adjust to petroleum prices 
that would be 50-60% higher than current prices, as well as 
the loss of budget revenue due to the loss of the "oil 
surplus".  Mongardini estimated that a smooth adjustment 
would entail increasing prices to market levels over a two to 
three year period. 
 
5.  (SBU) Mongardini also said the Fund was going to advise 
the Ministry of Finance to increase general sales and excise 
taxes on petroleum products to end the budget's dependence on 
the oil surplus.  This would give the government flexibility 
to subsidize, for example, lower kerosene prices for the poor 
by raising taxes on other petroleum products. 
 
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OTHERWISE, THE NEWS IS GOOD 
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6.  (SBU) Mongardini said that, Iraq aside, "things looked 
good".  The government was well on track to attain its target 
of 5% GDP growth for the year, with preliminary Ministry of 
Finance figures showing 5.3% growth for the third quarter 
thanks to an impressive 11% increase in tourism receipts and 
strong exports, up 77% over last year to the U.S. alone. 
Mongardini said that although domestic demand seemed to be 
weak and domestic revenues a bit below target, the government 
was on track for deficit reduction, as it is holding back on 
capital expenditures and other spending. 
 
7.  (SBU) In a related issue, the team said the Fund was 
hopeful that the government would merge the Program for 
Social and Economic Transformation (PSET), an off-budget plan 
to fund various economic development projects via grants and 
privatization proceeds, into the regular budget next year. 
Mongardini said the danger is that the PSET would take on a 
"life of its own".  He said the Fund is encouraging the 
government to base project spending on secured finance, but 
that Marto does not quite understand how integrating the PSET 
into the budget would work at this point.  Mongardini said 
the IMF proposed that "the funding the government could count 
on" should be in the budget, and that the government could 
still have a "wish list" of proposed projects should 
additional funds become available.  He emphasized that the 
Fund needed assurances from Jordan that this integration 
would happen. 
 
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PENSION REFORM 
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8.  (C) Mongardini told us that some progress had been made 
in pension reform.  He said that King Abdullah signed a 
decree October 10 increasing the retirement age by six months 
per year for the next ten years.  The enrollment of new 
military recruits in the government's military pension plan 
has not yet been frozen, but a plan to enroll recruits in the 
Social Security Corporation is currently under active 
discussion and could be implemented by year's end, according 
to Mongardini. 
 
9.  (C) The team said the more difficult issue is the 
disability pension for retirees in the military system. 
Currently, 85% of military retirees get both a regular 
pension and disability.  Mongardini said a Fund-endorsed plan 
was on the table that would move disability certification 
from the military to an independent board of doctors under 
the direction of the ministry of Health.  The plan is closely 
held, however, as the military is concerned that personnel 
might retire now to take advantage of current regulations. 
Action in Iraq, he added, would "stop everything".  But he 
said the IMF "will use all the leverage it has" regarding the 
pension issues, and will not go ahead with post-2003 funding 
unless both plans are met. 
 
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PRIVATIZATION 
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10.  (SBU) Bhatia said that privatization plans for next year 
appear to be headed in the right direction.  He said the 
unbundling of the electricity sector had been finished.  The 
government planned to sell the generation and distribution 
companies next year, and expected "a substantial amount" of 
privatization proceeds as a result.  As the government wants 
to retain the power grid in state hands, the transmission 
company will not be offered.  Bhatia said the government has 
shortlisted six potential bidders for the Arab Potash 
Company, with bids due at the end of January 2003 and the 
final sale to take place in March 2003.  Talks regarding the 
sale of Jordanian Phosphate Mines Company to the Potash 
Company of Saskatchewan were in "the third round", according 
to Bhatia.  But, he added, the government was also 
considering restructuring the company over the next 12-14 
months should negotiations stall.  Bhatia claimed there was 
also some hope the sale of Royal Jordanian Airlines could 
move forward next year.  All told, Bhatia said privatization 
receipts next year could go as high as $560 million. 
 
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JORDAN TELECOM IPO 
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11.  (SBU) The Team said the Fund was "quite pleased" that so 
many investors bought shares in Jordan Telecom (JTC), as it 
opens doors for IPOs in the future.  Marto told the team he 
was also pleased with the offering, and predicted a closing 
price of JD 2.5 ($3.50) per share after yesterday's first day 
of public trading on the Amman Stock Exchange.  (Note: JTC 
closed at JD2.45.)  Bhatia called the decision by the Social 
Security Corporation (SSC) to purchase 5% "very gutsy", but 
said with its currently high level of liquidity, the SSC 
could well afford the move.  Bhatia said the government was 
likely to offer another 10-15% of JTC for sale next year. 
 
 
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TECHNICAL ASSISTANCE 
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12.  (SBU) Regarding technical assistance, the Fund is 
sending a tax advisor to the Ministry of Finance (MOF), 
arriving the weekend of November 7, to advise the Jordanian 
government on setting up a new income tax system, one that 
would represent what Mongardini called a "clean slate".  The 
advisor will be resident at the Ministry for at least one 
year.  In addition, the Fund will provide assistance to the 
Ministry on a treasury accounting system. 
 
13.  (SBU) Most importantly, the MOF has agreed to accept a 
Financial Sector Assessment Program Mission in March and May 
of 2003.  Jointly run by the IMF and the World Bank, the 
assessment will comprehensively examine the sector for 
soundness and vulnerabilities.  The total report will remain 
strictly confidential, but the substance will make up part of 
the Fund's Article IV consultations regarding Jordan in 
November, 2003. 
 
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COMMENT 
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14.  (SBU)  The Fund is generally pleased with Jordan's 
economic performance.  That said, it is also clear that 
momentum in pension reform and privatizations is imperative 
for the government to retain the IMF's continued support.  We 
expect that forward progress will continue, but action in 
Iraq could well at least temporarily derail Jordan's economic 
growth and progress on reform. 
GNEHM