US embassy cable - 03AMMAN1214

C O N F I D E N T I A L SECTION 01 OF 05 AMMAN 001214 
 
SIPDIS 
 
TREASURY FOR OASIA -- MARSHALL MILLS, WON CHANG 
USDOC 4520/ITA/MAC/ONE/COBERG 
 
E.O. 12958: DECL: 02/25/2008 
TAGS: EFIN, EAID, PGOV, JO 
SUBJECT: LOTS OF HOLES TO BE FILLED IN JORDAN'S 2003 BUDGET 
 
REF: AMMAN 485 
 
Classified By: Amb. Edward W. Gnehm.  Reasons 1.5 (b) and (d) 
 
1.  (c)  Summary.  Jordan's new 2003 budget signals a very 
difficult fiscal year ahead for Jordan:  Filling the holes 
needed to meet a 4.3% of GDP deficit target includes finding 
$100 million in additional spending cuts and $100 million in 
still unidentified foreign grants, as well as compensating 
for probable revenue shortfalls.  In the current political 
environment, this challenge is likely to test Jordan's 
commitment to fiscal discipline and sound economic policy as 
never before.  U.S. support for sound economic policies and 
reform of government finances, including through the 
provision of supplemental assistance connected to a military 
conflict, will be critical.  End Summary. 
 
2.  (sbu)  Finance Minister Michel Marto announced on 
February 5 a JD2.44 billion ($3.45 billion, JD1=$1.41) 
"emergency budget" for the year 2003.  The announcement was 
more than two months behind Jordan's normal budget calendar, 
delayed by the difficulty the GOJ faced in compressing 
expenditure growth and finding new sources of income given 
weakness in revenue growth.  The budget will likely meet the 
deficit targets agreed with the IMF in the May 2002 stand-by 
program (an IMF team is currently in town).  That Marto was 
able to announce a budget that meets the IMF targets despite 
the intense pressures currently on Jordan is a demonstration 
of the government's ongoing commitment to sound economic 
policy. 
 
3.  (sbu)  The main features of the budget, which are also 
summarized in the table at the end of this report, are as 
follows. 
 
----------------------------------------- 
Deficit Increase, but Consistent with IMF 
----------------------------------------- 
 
4.  (sbu)  An increase in the overall deficit to JD316 
million from JD259 million in 2002.  As a share of GDP, this 
represents an increase to 4.3% from 3.8%.  An increase is, 
however, consistent with the targets set in the IMF program 
(allowing for differences in Jordanian and IMF accounting). 
After taking into account rescheduling of JD100 million of 
debt service by Paris Club and other creditors, the 
government will need to borrow an additional net JD216 
million, compared to JD184 million last year.  The government 
expects to raise the bulk of this by issuing government 
securities in domestic markets.  The GOJ will also welcome 
new concessional foreign debt (e.g. PL 480 food loans) that 
helps finance budgetary expenditure. 
 
------------------------------- 
Expenditures Up, but Only a Bit 
------------------------------- 
 
5.  (sbu)  Total expenditure increases by JD157 million to 
JD2,441 million from JD2,289 million in 2002.  However, the 
total will fall as a share of GDP from 34 percent to 33 
percent according to Finance Ministry projections.  This 
means another year of increasingly painful austerity for GOJ 
ministries and agencies.  Of total spending, approximately 
JD2,009 million, or 82%, is current expenditure over which 
the government has little discretion (salaries, pensions, 
supplies, and interest).  As was the case last year, the 
military and security budgets receive the bulk of the 
increase in discretionary spending, including a JD54 million 
increase in military and security service salaries ordered by 
King Abdullah during 2002.  The education and health 
ministries also receive significant increases (see Table II 
below).  The remaining JD502 million is planned for capital 
spending on roads, water projects, schools, courthouses, and 
other government buildings.  As was also the case last year, 
the total includes JD70 million (1% of GDP) in 
still-to-be-identified cuts in ministries' budgets. 
 
----------------- 
Revenues Stagnate 
----------------- 
 
6.  (sbu)  Anticipated domestic revenue from tax and non-tax 
sources represents 25% of GDP in 2003, or JD1,803 million. 
This is up from JD1,752 million in 2002, but unchanged as a 
share of GDP.  Tax revenues are slated to rise by 7.2% after 
stagnating in 2002 due to a fall off in customs and General 
Sales Tax (GST)revenues.  In 2003, non-tax revenues increase 
by JD11 million to JD690 million.  Tax increases will also 
have to compensate for an expected decrease in the 
government's so-called "oil surplus" (the difference between 
what the GOJ pays Iraq and what it receives from selling the 
oil to the refinery company) due to higher global energy 
prices. 
 
7.  (c)  Marto's public presentation did not provide detail 
on how an increase in tax receipts would be accomplished.  In 
a private meeting, he told the Ambassador confidentially that 
the measures agreed within the government are 1) an increase 
in the basic GST rate from 13% to 15% and in the lower GST 
rate from 2% to 5% that would raise JD30 million in new 
revenue, 2) an increase in retail prices for petroleum 
products that would raise JD40-50 million (although prices 
for some products would remain below OECD averages), 3) 
imposing a 5% tax on interest income, and 4) initiating a 2% 
income withholding tax on imported goods that will improve 
efficiency of income tax collection.  Marto said the 
government had agreed, with the King's blessing, to phase in 
these measures between March and July 2003.  All of them 
generated hot debate within the government, but Marto said 
the principle of increasing taxation of upper and middle 
income groups and minimizing the impact of new measures on 
the poor had been accepted, despite, he said, the strong 
influence of the business community on the King's economic 
thinking. 
 
--------------------------------------------- -- 
Foreign Grants Budgeted for, but not Identified 
--------------------------------------------- -- 
 
8.  (sbu)  The final major budget element is foreign grants, 
for which the budget stipulates an increase to JD322 million 
from JD278 million received in 2002.  This amount includes 
approximately JD70 million ($100 million) in 
still-to-be-identified foreign grants.  Marto told the 
Ambassador that a portion of the identified grants -- 
approximately JD57 million -- will be used to finance Social 
and Economic Transformation Plan (SETP) spending also 
included on the expenditure side of the budget.  This will be 
supplemented by JD55 million in SETP grants received in 2002 
but not yet spent, bringing total basic 2003 SETP spending to 
JD112 million.  Any additional SETP spending would be 
financed by additional grants received above the JD322 
million. 
 
------------ 
OBSERVATIONS 
------------ 
 
9.  (C)  Following are embassy observations about the budget, 
informed by our conversations with Marto, his deputy Dr. 
Mohammed Abu Hammour, and members of the visiting IMF mission. 
 
--    Despite the "emergency" label, this is not a war 
budget.  It does not take into account expected revenue 
losses (including of the oil surplus) and expenditure 
increases consequent to a military conflict with Iraq. 
Rather, the moniker sends the signal that 2003 will be a very 
difficult year with or without a war.  If there is a war, 
Marto will count on extraordinary U.S. assistance to make up 
for budget shortfalls, as he discussed in late 2002 in 
Washington. 
 
--    The budget's achievability depends on the observer's 
confidence in the government's ability to impose additional 
spending cuts (at least the JD70 million figured into the 
deficit) and revenue measures over the course of the year, as 
well as to raise $100 million in so far unidentified foreign 
grants.  Past performance gives a measure of confidence (see 
reftel for the heroic measures taken to bring the 2002 
deficit within striking distance of the IMF target).  As in 
the past, capital spending on sorely needed improvements in 
infrastructure will likely bear the brunt of cuts. 
 
--    However, given the current political tension 
surrounding a conflict with Iraq and the slowness of progress 
on the Palestinian issue -- plus the years of fiscal 
restraint the country has already endured -- the political 
difficulty of tough decisions (which may be equivalent to at 
least 2-3% of GDP) is likely much more intense than in past 
years.  Parliamentary elections by summer will bring 
increased pressures from political leaders for fiscal 
generosity, and a new Parliament by mid-year will most likely 
make austerity even harder to bear. 
--    The budget does not make bold structural changes:  it's 
business as usual on both the revenue and expenditure sides. 
On revenues, the tax system is clearly not responsive to GDP 
growth.  In 2002, the GST, which accounts for 60 % of non-tax 
revenue, stagnated, as it failed to capture income growth 
that was not reflected in greater consumption (see Table IV). 
Greater utilization of direct income taxation to supplement 
the GST (which the minister prefers as being relatively easy 
and inexpensive to administer) could provide greater 
stability and diversification in the tax system, and also 
help make the tax structure more progressive.  On 
expenditures, some progress has been made in overhauling the 
over-generous military pension system (the length of service 
requirement has been extended), but more needs to be done to 
make this system less generous and thereby decrease its 
disincentives to employment and productive use of resources. 
 
--    Recurring expenditures under SETP projects are not yet 
a budgetary issue, but are likely to be in the future.  So 
far, only a relatively small amount has been spent on SETP 
projects (about JD40-50 million in 2002).  But an increase in 
recurring expenditures in future years underscores the need 
for a more fundamental approach to revenue and expenditure 
reform. 
 
--    The budget does not include spending on critical 
infrastructure projects, such as the Disi water project, the 
Samra power plant project, the Aqaba-Amman natural gas 
pipeline, and the Amman city center (Abdali) project.  The 
government hopes that these will be financed by the private 
sector through "build-own-operate" arrangements.  The 
government is likely however to be under considerable 
pressure to provide financial guarantees for these projects, 
which would increase its sovereign debt levels. 
 
--------------------------------------------- 
Comment:  A Chance to Encourage Fiscal Reform 
--------------------------------------------- 
 
10.  (c)  In the end, the budget is likely to prove a paper 
exercise given the overwhelming impact a military conflict 
would have on Jordan's finances.  It serves, however, to 
highlight the fiscal pressures on the government as well as 
the need for structural changes in revenues and expenditures 
in order to put the government's finances on a sustainable 
track.  Emergency assistance provided by the U.S. or other 
countries to help Jordan adjust to a conflict should provide 
opportunities to leverage such changes.  Our bottom line is 
that the King's and government's support for the sound 
economic policies supported by the IMF remains intact, but 
that this commitment is likely to be tested in 2003 as never 
before. 
 
11.  (c)  The budget also serves to highlight the political 
pressures on the finance minister.  Marto confidentially and 
frankly described the growing fatigue with fiscal discipline 
he perceives on the part of the King, prime minister and 
other ministers.  We believe the King continues to value his 
service, but that patience could wear thin since he hears 
only criticism of Marto from the vast majority of his other 
economic and political advisers.  The alternative to Marto is 
a less experienced minister who would be picked for his 
readiness to spend and take on new debts.  We can help to the 
extent that we find ways to counterbalance the pressures on 
Marto by expressing support for him and his policies. 
 
------ 
TABLES 
------ 
------------------------------------- 
TABLE I 
Jordan's 2003 Budget:  Basic Features 
------------------------------------- 
                               (JD millions) 
 
                          2003       2002      2001 
                        budget   estimate    actual 
                        ------   --------    ------ 
Revenues                  1803       1752      1719 
  Domestic Revenue        1764       1680      1638 
    Tax Revenues          1074       1000       996 
    Non-Tax Revenues       690        679       642 
  Other Revenues            39         73        81 
 
Foreign Grants             322        278       249 
Current Expenditures      1939       1852      1789 
  Current spending        1799       1660      1568 
       (non-interest) 
  Interest Payments        210        192       220 
  Unidentified cuts        -70          -         - 
 
Capital Spending           502        437       404 
 
                        ------    -------    ------ 
Balance                   -316       -259      -224 
                        ------    -------    ------ 
 
Rescheduled Interest       100         75        69 
 
Borrowing need            -216       -184      -156 
 
Note: GDP                 7350       6780      6260 
 
  --------------------------------------------- --- 
                       TABLE II 
  CURRENT EXPENDITURE BY MINISTRY/GOVT. DEPARTMENT 
  --------------------------------------------- --- 
                    (JD millions) 
 
                                     2003      2002 
                                    Budget     Est. 
                                    ------    ----- 
Royal Court                             23       21 
Parliament, Prime Ministry              10        8 
Administration, Civil Service            1        1 
Defense and Royal Med. Services        427      397 
Interior                               182      165 
Justice                                 20       16 
Foreign Affairs/Palestinian Affairs     21       20 
Finance *                              859      796 
Industry and Trade                       3        3 
Planning                                 2        2 
Tourism and Antiquities                  2        2 
Municipal, Rural Affairs                 3        2 
Energy and Natural Resources             3        3 
Public Works and Housing                 9        7 
Agriculture                             10       10 
Water/Jordan Valley Authority            6        6 
Environment                              1        0 
Education                              276      248 
Health                                 126      116 
Social development                       5        5 
Labor                                    2        1 
Information                              3        2 
Culture                                  3        2 
Transport/Civil Aviation/Meteorology    11       10 
Post and Telecommunications              1        9 
The Royal Geographic Center              1        1 
                                     ------   ----- 
TOTAL                                 2009     1852 
 
* Includes pensions, interest expense, subsidies, and 
transfer payments. 
 
  --------------------------------------------- ---- 
                       TABLE III 
  CAPITAL EXPENDITURES BY MINISTRY/GOVT. DEPARTMENT 
  --------------------------------------------- ---- 
                     (JD millions) 
 
                                               2003 
                                             budget 
                                             ------ 
Finance *                                       170 
Planning/National Planning Council              101 
Public Works & Housing                           47 
Water/Jordan Valley Authority                    46 
Interior Ministry/Public Security                23 
Health                                           23 
Education                                        12 
The Royal Medical services                       10 
Post and Telecommunications                      10 
Interior Ministry/Civil Defence                   9 
Agriculture                                       9 
Transport/Civil Aviation Authority                8 
Tourism & Antiquities                             7 
Social development                                5 
Energy/Natural resources Auth.                    3 
Min. of Tourism/ Antiquities Dept.                3 
Foreign Affairs                                   3 
Interior                                          2 
Water and Irrigation                              2 
Other                                            12 
                                               ---- 
TOTAL                                           502 
 
* Finance Ministry capital budget includes spending 
counterpart of foreign aid for equipment purchases (e.g. 
military), and loans, advances, and contributions. 
 
                  --------------------- 
                          TABLE IV 
                  STRUCTURE OF REVENUES 
                  --------------------- 
                       (JD millions) 
                            2003      2002     2001 
                          budget  estimate    final 
                          ------  --------    ----- 
Total Domestic Revenues    1,803     1,752    1,719 
 
Tax Revenues               1,074     1,000      996 
  Income Tax                 201       196      195 
  Customs duties             190       220      228 
  General Sales Tax          604       511      503 
  Other Local Taxes           79        74       70 
 
Non-Tax Revenues             690       679      642 
  Licenses                    33        32       32 
  Fees                       226       225      215 
  Receipts from Gov't 
   institutions              139       139      137 
  Revenues from Gov't 
   Services                   28        24       25 
  Miscellaneous              292       283      257 
GNEHM