This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 04 AMMAN 009311 
 
SIPDIS 
 
E.O. 12958: DECL: 11/21/2014 
TAGS: ECON EFIN EAID KPRV KMPI JO
SUBJECT: JORDAN'S ECONOMIC REFORMS AFTER FIVE YEARS: 
KEEPING THE FINANCIAL HOUSE IN ORDER (PART 1) 
 
Classified By: CHARGE D'AFFAIRES, A.I., DAVID HALE, REASON: 
1.4 (B & D) 
 
¶1.  (C)  SUMMARY:  Over the past five years, the government 
of Jordan has carried out a broad range of economic reforms. 
These have opened Jordan to foreign trade and investment and 
made the economy run more efficiently.  There is hardly an 
aspect of Jordan's economy that has not been changed, whether 
in government finances, privatization, trade liberalization, 
enterprise development, intellectual property protection, or 
entrepreneurship.  Jordan's current economic growth rate of 
7.2%, its recent graduation from a 15-year IMF program, and 
its booming exports to the United States all attest to the 
government's achievements.  The U.S., through its assistance 
program, played a key role in providing the government with 
the technical expertise to make many of these achievements a 
reality.  Still-high debt levels, oil prices, poverty levels 
and the weight of regional political troubles remain real 
threats to Jordan's long-term economic health.  Although 
transparency has improved, significant off-budget spending 
continues.  Nevertheless, barring a further severe 
deterioration in any of those factors, or the launch of a 
major terrorist attack in Jordan, the GOJ appears to have 
laid the groundwork for continued economic growth for the 
near future. 
 
¶2.  (U)  SUMMARY (cont.):  This is the first of a two-part 
series on Jordan's economic reforms.  This cable will focus 
on the financial picture, including fiscal policy and the 
health of the banking sector.  The second will examine 
privatization, trade liberalization, the investment climate, 
and the challenges Jordan will continue to face.  END SUMMARY. 
 
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MANAGING THE ECONOMY 
-------------------- 
 
¶3.  (C)  When King Abdullah acceded to the throne in 1999 
after the death of his father King Hussein, he inherited a 
stagnant economy, with per capita incomes actually falling. 
Investment was low, the total public debt to GDP ratio stood 
at 111%, and, aside from some success in the regional 
pharmaceutical trade, exports were largely dependent upon 
often shoddy goods sent to Iraq as part of the Jordan-Iraq 
trade protocol.  The state played a large role in the 
economy; in many ways, the benefits of globalization and 
economic integration with the rest of the world had passed 
Jordan by.  This situation began to change completely after 
King Abdullah,s reign began.  Jordan now has become a 
country with a strong and growing economy blessed with 
healthy and entrepreneurial sectors such as information 
technology, and a pharmaceuticals sector that now exports to 
non-traditional markets, including Europe.  The economy is 
currently growing at a 7.2% rate and the country's high debt 
levels are falling.  Although challenges remain, the 
government has succeeded in creating 
a more diverse and flexible economy. 
 
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FINANCE MINISTERS AS BAD COPS 
----------------------------- 
 
¶4.  (C)  Abdullah appointed competent technocrats to the 
ministries overseeing the economy.  Jordan has had in 
succession two excellent Finance Ministers: Michel Marto and 
his protege Mohammad Abu Hammour, who serves as the current 
Minister.  Although some doubted Abu Hammour's capabilities 
when he was appointed one year ago, he has succeeded in 
winning over the doubters and was just reappointed as Finance 
Minister in the recent Cabinet re-shuffle.  Planning Minister 
Awadallah has complained to Charge that Abu Hammour "thinks 
like an accountant"-- which is exactly what's needed to keep 
spending down. 
 
¶5.  (C)  Marto, who now heads a leading bank in Amman, 
described the role of the Finance Minister as the tough guy 
in a "good cop, bad cop" scenario.  The King plays the 
benevolent leader and uses the stubbornness of his Finance 
Ministers to fend off other ministers seeking extra spending. 
 Marto said the King had liked him because he was the only 
minister who ever said "no."  According to Abu Hammour, he 
himself played the same role in the recent government and he 
expects to continue saying "no" after his reappointment. 
 
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FISCAL DISCIPLINE 
----------------- 
 
¶6.  (C)  Abu Hammour has held the line on government 
spending, often in the face of intense lobbying by other 
ministers, parliament, and the military.  In 2004, Abu 
Hammour succeeded in increasing the minimum number of years 
needed to receive a pension by five years for civil servants 
and by four years for the military.  Equally sensitive in 
this country where the military is held in high regard, he 
ended the practice of promoting officers automatically upon 
retirement, thereby increasing their pensions.  The military 
is a pillar of the monarchy, and Abu Hammour could only have 
taken these steps with the blessing of the King. 
 
¶7.  (C)  After a long skirmish with Planning and 
International Cooperation Minister Bassem Awadallah, Abu 
Hammour succeeded in convincing the King to include the 
Planning Ministry's Social Economic and Transformation 
Program as part of the overall budget process.  It had 
previously been run off-budget, but will now fall under the 
capital expenditures control of the budget, as recommended by 
the IMF, and as required by a condition precedent for release 
of USAID budgetary support funds. 
 
¶8.  (C)  Using the recommendations of the IMF as political 
cover, Abu Hammour raised the General Services Tax from 13% 
to 16% in April 2004.  (The IMF had only called for a 2% 
increase).  At the same time, he won an average 9% increase 
in the price of fuel products.  Both moves affected every 
Jordanian and were politically difficult steps.  Yet, reforms 
will continue and USAID is currently designing a fiscal 
reform project to assist the government with more extensive 
reforms. 
 
¶9.  (C)  Thanks to these steps, total government expenditures 
have fallen by one percent, with a reduction in current 
expenditures more than offsetting a slight increase in 
capital spending.  Excluding foreign grants, the government's 
budget deficit fell by 59.6% ($393.4 million) in the first 
seven months of this year as compared with the same period 
last year.  When the declining level of foreign grants is 
factored in, the budget surplus of only $8.7 million in July 
2003 rises to $77.7 million in July 2004. 
 
---- 
DEBT 
---- 
 
¶10.  (C)  One of Abu Hammour's main worries is about the 
country's still-high debt levels.  As of September 30, 2004, 
Jordan's public debt outstanding reached $9.6 billion (89.5% 
of estimated GDP) of which $7.3 billion is external and $2.3 
billion is domestic.  Although these numbers remain very 
high, they are down from a recent peak of 111% of GDP in 
¶1999.  Unfortunately for Jordan, 19.9 % of its public debt is 
in euros and 22.6% in Japanese yen.  Abu Hammour recently 
said that the appreciation of the euro alone had added $1 
billion to Jordan's debt stock. 
 
¶11. (C)  Driven partially by a Debt Management Law which 
requires him to lower Jordan's overall debt/GDP ratio to 80% 
by a government-set deadline of 2006, Abu Hammour has been 
pushing a variety of debt reduction measures.  In December 
2003, Jordan bought back from the U.S. all of Jordan's stock 
of Brady bonds (Amman 1456).  In the past year, Jordan also 
concluded debt swap agreements with Britain, Germany, and 
Italy. 
 
¶12.  (C)  Now, Abu Hammour has turned his attention to 
Jordan's Paris Club debt.  According to the Paris Club Agreed 
Minute of July 2002, debtor countries have the option of 
carrying out debt swaps amounting to 30% of their total debt 
or up to 40 million euros, whichever is higher.  Jordan has 
already reached this maximum for some creditor countries and 
Abu Hammour and the government are lobbying hard to raise the 
30% limit to 50% in order to reduce both the debt/GDP ratio 
and the debt service. 
 
------------------------------- 
TRANSPARENCY IN GOVERNMENT DATA 
------------------------------- 
 
¶13. (C)  The government and the Finance Ministry in 
particular have been in the forefront of making Jordan's 
economic data available--arguably in advance of the region. 
In May, the Ministry began publication of a quarterly report 
on its internal and external public debt.  According to an 
IMF official, it is the only such report in the Middle East. 
The official also said that Jordan's government was one of 
the most open in the region in terms of the financial 
information it made public.  The information includes the 
national accounts statistics, price statistics, government 
finances and balance of payments statistics.  Illustrating 
that this openness is not limited to the Finance Ministry, 
the Director General of Jordan's Department of Statistics 
recently told emboffs that, in his view, the statistical data 
his agency produced should be seen "as a public good." 
 
¶14.  (C) However, Jordan still has a long way to go toward 
fully rational budgeting and total transparency.  Off-budget 
spending continues, for example the Planning Minister's 
benign if sometimes uncoordinated Social and Economic 
Transformation Program, which has spent about $300 million 
over the past three years outside Finance Ministry control, 
with another roughly $440 million remaining to be spent.  Of 
more concern are the unconfirmed, but credible, reports of 
palace and security service slush funds, and the cronies 
whose names regularly appear among the winning bidders for 
big government contracts.  The perception, as much as the 
reality, of corruption, infects public life in Jordan and 
probably diverts much potential foreign and domestic 
investment. 
 
---------------- 
HEALTHY RESERVES 
---------------- 
 
¶15.  (U)  The healthy state of Jordan's foreign exchange 
reserves is another indicator of the government's success in 
managing the economy.  When Abdullah became King in 1999, 
Jordan's reserves stood at $2 billion, or equal to 
approximately 4.8 months of imports.  Today those figures are 
$4.7 billion of reserves, covering 9.5 months of exports. 
 
--------------------------------------------- 
THE BANKING SECTOR ENJOYS THE BOOMING ECONOMY 
--------------------------------------------- 
 
¶16.  (C)  Competent financial leadership, combined with the 
influx of business related to Iraq, has helped Jordan's 
banking sector enjoy a mini-boom.  Net after-tax profits of 
the banking sector rose 27% in 2003 and are expected to break 
that record in 2004.  The balance sheets of banks are 
stronger and the level of non-performing loans fell from 
17.5% in 2002 to 15.8% in 2003.  One Jordanian bank, Housing 
Bank, is on the verge of breaking ground on its new 
headquarters, which would be the tallest building in Amman. 
Three of Jordan's banks are looking farther afield and have 
been granted licenses to open branches or buy into banks in 
Iraq, although launching services there remains a huge 
challenge. 
 
¶17.  (C)  Underlining the strength of the sector, the IMF's 
2004 financial stability assessment concluded in 2004 that 
the country had no substantial fiscal vulnerabilities, and 
that the banking system generally showed high capital ratios, 
liquidity and profitability.  However, Jordanian banks have 
been criticized for being too cautious and unwilling to lend; 
a complaint often heard from new entrants to the market and 
from small and medium enterprises.  In addition, the sector 
could benefit from consolidation; there are too many small 
banks unable to benefit from economies of scale. 
 
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COMMENT 
------- 
 
¶18.  (C)  Jordan's economy under King Hussein was 
characterized by a mix of tribal largesse and statist job 
protection.  One of King Abdullah's most important 
initiatives has been to begin to transform the economy into a 
competitive marketplace, and to rationalize management of the 
economy. 
 
¶19.  (U)  Baghdad minimize considered. 
HALE