US embassy cable - 03AMMAN2363

S E C R E T SECTION 01 OF 03 AMMAN 002363 
 
SIPDIS 
 
E.O. 12958: DECL: 04/19/2013 
TAGS: EFIN, EAID, JO 
SUBJECT: TFIZ01: DISBURSAL OF SUPPLEMENTAL AID TO JORDAN 
 
Classified By: AMBASSADOR EDWARD W. GHEHM.  REASONS 1.5 (B) AND (D) 
 
1.  (s)  Summary.  With preliminary assessment of the 
political and economic impact of the war in Iraq revealing 
substantially greater costs than foreseen last year, senior 
leadership of the Jordanian government, including King 
Abdullah himself, have urged prompt disbursal of the recently 
appropriated $700 million in supplementary economic 
assistance.  In recent conversations with the Ambassador, the 
King and senior officials have reasserted the Jordanian 
government,s commitment to the economic objectives agreed 
last fall. These officials have proposed a process for 
disbursing U.S. aid that would help defuse short-term 
political pressures while ensuring that it is disbursed 
through the budget to meet fiscal needs as they occur over 
time and with conditions that wean Jordan off its dependency 
on cheap Iraqi oil.  Given the importance of Jordan's 
economic and political stability to our fundamental 
objectives in this region, the Embassy strongly supports this 
request for quick action, with follow-up that reinforces our 
seriousness about the need to follow through on policies that 
bolster Jordan's economic viability and independence.  End 
Summary. 
 
--------------------------------------------- -- 
Reaffirmed Commitment to Economic Basis for Aid 
--------------------------------------------- -- 
 
2.  (s)  The government of Jordan has affirmed to the 
Ambassador at several levels -- including the King, Prime 
Minister, and ministers of finance, planning and foreign 
affairs -- that it remains committed to the arrangements 
worked out in late 2002 for providing emergency U.S. 
assistance linked to a conflict in Iraq.  In particular, 
Jordan is committed to the overarching objective of using 
U.S. aid within the budget to meet fiscal deficit targets 
agreed with the IMF without having to make socially and 
politically disruptive cuts in budgetary social spending.  In 
addition, Jordan remains committed to using the "breathing 
space" afforded by emergency U.S. assistance to smooth the 
process of transition from its economic dependence on 
concessional Iraqi oil to a market-based system for procuring 
and marketing oil. 
 
--------------------------------------------- --------- 
Domestic Political Cost of Conflict More than Foreseen 
--------------------------------------------- --------- 
 
3.  (s)  At the same time, the King faces a domestic 
political cost from the war that is likely to be much longer 
lasting than he and we foresaw last year.  He and the 
government currently find themselves under intense pressure 
from a public that is angry about the Western military 
toppling of the regime of a neighboring Arab country, 
dismayed by the suffering of the Iraqi people, and 
disillusioned by growing evidence of Jordanian cooperation 
with the Coalition effort.   The King has resisted 
extraordinary pressure for a public denunciation of the 
United States and the coalition called for in an 
unprecedented petition signed by 99 prominent Jordanians, 
including former prime ministers.  Coming along with the 
economic shocks Jordan faces as a result of the war, the 
tensions and pressures on King Abdullah have been greater 
than they ever have been since he took the throne.  Thus, the 
King has an intense need to demonstrate to the Jordanian 
people quickly that the policies he followed were in their 
best interest. 
 
--------------------------------------------- ---------- 
King's Desire to Meet Political and Economic Objectives 
--------------------------------------------- ---------- 
 
4.  (S)  It is therefore the King's need and desire that we 
find a mechanism for disbursing U.S. assistance that will 
simultaneously safeguard its economic objectives and give the 
King greater political latitude to persevere in policies -- 
including parliamentary elections in June -- that support 
fundamental U.S. interests in the region.  Finance Minister 
Marto, in close consultation with the King and Prime 
Minister, has therefore proposed that we transfer as soon as 
possible the entire $700 million amount appropriated in the 
FY03 Supplemental.  Rather than spending it all at once, 
however, the government of Jordan is prepared to place the 
funds in a special account at the Federal Reserve Bank of New 
York or other appropriate institution.  Balances in the 
account would be drawn on as necessary to cover budgetary 
needs caused by revenue reductions or additional spending 
needs linked to the conflict in Iraq. 
 
5.  (s)  The government says it will need to draw on $500 
million of the assistance quickly (see paras 7-10 below).  To 
preserve the commitment to sequence reforms so as to move to 
economic independence while blunting the social costs, the 
government is ready to commit not to draw down the final $200 
million in the account until a) the IMF has renewed its 
endorsement of Jordan's economic program, and b) the cabinet 
has approved a three-year strategy to eliminate all petroleum 
product subsidies and has made a policy "down payment" of an 
initial increase in domestic petroleum product prices.  If it 
makes us more comfortable, the GOJ is also ready to signal 
its commitment to ongoing fiscal soundness by agreeing that 
it will not use the U.S. aid to avoid implementation of 
budgetary revenue measures it has told the IMF it will take 
this year, including increasing General Sales Tax (GST) rates 
and closing loopholes. 
 
--------------------------------------------- --- 
Economic Impact Sharper and Deeper than Foreseen 
--------------------------------------------- --- 
 
6.  (s)  Like the stronger than expected political impact of 
the war, the economic costs appear to have come sooner, and 
cut deeper than foreseen last fall.  According to Minister 
Marto, the war will add $950 million to the fiscal deficit in 
2003 alone.  This includes a $360 million additional cost of 
procuring oil outside the Jordan-Iraq barter arrangement for 
the year as a whole.  Of this, $210 million should be offset 
by an expected oil grant of 100,000 bpd from Gulf states for 
three months, so that the net negative deficit impact related 
to oil procurement alone would be $150 million.  This means 
that the government will need to cover a $740 million 
shortfall in order to meet its 2003 deficit target. 
 
7.  (S)  In addition to the $150 million in extra oil costs, 
the shortfall includes $400 million in lower than expected 
budgetary revenue due to reductions in expected collections 
of sales tax, income tax, customs, other taxes and fees, and 
in the "oil surplus" the government earns by selling refined 
Iraqi crude to the public for more than its actual cost. 
Additional expenditures of $190 million will be required to 
mitigate the economic impact of the war on various sectors. 
Marto foresees a need for $60 million for emergency spending 
on industry and labor support (including worker retraining 
programs), $40 million for the transportation sector, and $30 
million for the tourism industry, with additional amounts 
required to pay for measures necessary in the lead-up to the 
war to prepare for refugee flows (about $10 million) and to 
enhance domestic security. 
 
8.  (S)  Marto stresses that these are conservative estimates 
based on the best information available to him at this time. 
If the immediate need is mitigated in any way, he would 
stretch the spending into 2004.  If more resources become 
available from other sources, he would like to use them for 
additional support that would help minimize layoffs in 
sectors (industry, tourism, transportation) that he expects 
to take the hardest hits over the year and to begin 
implementation of projects, through the national budget 
process, contained in the Social and Economic Transformation 
Program (SETP).  Such projects are designed to address basic 
needs in rural and disadvantaged areas, increase long-term 
economic potential and productivity, and bolster popular 
support for the economic reform process. 
 
------- 
Comment 
------- 
 
9.  (s)  The mechanism the Jordanians propose seems eminently 
reasonable.  It directly addresses fundamental U.S. policy 
goals with regard to Jordan:  it contributes to the political 
stability of a key Arab ally committed to expansion of the 
democratic process, and it preserves a commitment to economic 
reform that is unique in this region.  By channeling the 
money from a special account into the budget to meet 
budgetary needs as they arise, it ensures that overspending 
above Jordan's "absorptive capacity" is avoided.  Should the 
budgetary needs not materialize to the extent foreseen by 
Marto this year, it would provide for a flexible sequencing 
of spending the aid through the budget over a two or more 
year period.  The King, Prime Minister, and finance, foreign, 
and planning ministers have told us that they are committed 
to such a framework.  The government is also ready to report 
to us regularly and in greater detail on the extraordinary 
fiscal impact of the war, as its impact continues to become 
clear. 
 
10.  (s)  We also share the analysis that the impact of the 
war on the Jordanian economy and budget will be sharp and 
deep, creating potential for more politically disruptive 
dislocations at a critical time for Jordan and the region. 
The World Bank says that Jordan will bear the brunt of the 
regional impact of the conflict and estimates that without 
extraordinary assistance, real GDP growth initially projected 
at over 5% for this year could be in large part wiped out, 
leading to a return to negative per capita income growth. 
According to Jordanian officials, budget revenues in the 
first quarter were already at least $250 million below 
target, due mainly to a reduction in consumption and economic 
activity during the period of uncertainty that preceded the 
conflict.  At the same time, it now seems that recovery could 
be more rapid than foreseen last fall.  Along with continued 
strong growth of exports to the U.S., Jordan's business 
sector is moving aggressively to capitalize on new regional 
opportunities in a free Iraq and from hoped-for easing in 
Israeli-Palestinian tension. 
 
11.  (s)  From both a political and economic aspect, the 
embassy urges that we move quickly along the lines proposed 
by the Jordanians.  From a political perspective, we cannot 
afford to take unnecessary risks in Jordan at this juncture 
in the region.  On the economic side, short-term support will 
be crucial, while the longer-term reform objectives are fully 
accepted and reaffirmed.  We have a small window of 
opportunity.  The longer the process in Washington takes, the 
greater the political pressures on the King will be to 
backtrack on both the political and economic sides. 
 
12.  (s)  Finally, we recommend that the USG take advantage 
of upcoming meetings with Jordanian leaders, including a 
possible visit by Foreign Minister Muasher to Washington, to 
reiterate at the highest levels our seriousness about 
Jordan's need to follow through with reforms that increase 
its economic independence and sustainability, including the 
elimination of oil price subsidies.  Communications between 
Treasury and Finance Minister Marto at the appropriate time 
could also reinforce that sense of purpose. 
GNEHM