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

151451Z Feb 06

UNCLAS SECTION 01 OF 04 AMMAN 001118 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV JO
SUBJECT: LOWER HOUSE CONSIDERS BUDGET 
 
REF: 05 AMMAN 8823 
 
¶1.  SUMMARY: Jordan?s draft Budget Law for 2006 in front of 
Parliament?s Chamber of Deputies this week estimates a 
deficit of USD 635 million, with gross public expenditures 
at USD 4.9 billion, revenues at USD 4.2 billion, and 
foreign aid at USD 333 million.  In the budget submission, 
the Deputy Prime Minister and Minister of Finance projected 
nominal GDP growth at 11 percent and inflation at 4 - 5 
percent for 2006.  The budget includes a planned reduction 
of fuel subsidies in 2006, with future plans to eliminate 
all fuel subsidies by 2007 and other subsidies by 2010. 
The budget assumes an average crude oil price of USD 60 per 
barrel for the year.  The House Finance and Economics 
Committee nominally endorsed the draft Budget Law, and made 
several recommendations to reduce expenditures by up to USD 
127 million.  It is possible some proposed cuts will be 
adopted by the full parliament and accepted by the 
government, in a departure from past years when parliament 
gave its approval without any GoJ concessions.  In another 
departure, the government announced an end to its practice 
of approving subsequent ?annex? revisions to the budget 
without parliamentary approval.  The GoJ is currently 
operating under a continuing resolution.  It is anticipated 
that the budget will become law by mid-March.  END SUMMARY. 
 
¶2.  The Chamber of Deputies started debate of the budget on 
February 12.  The government submitted the draft budget in 
late December, and the House Finance and Economics 
Committee concluded its deliberations earlier this month. 
The committee?s report included 23 recommendations.  Seven 
of the 11 committee members publicly declared that these 
recommendations were a condition for their favorable vote 
in the final Chamber vote. 
 
---------------------- 
Budget Highlights 
---------------------- 
 
¶3.  Budget highlights (GoJ published numbers converted to 
USD million): 
 
The Draft Budget Law proposes: 
 
-- Gross public revenues at USD 4.231 billion, slightly 
lower that the 2005 re-estimated budget. 
 
-- Domestic revenue at USD 3.898 billion, USD 365 million 
higher than the 2005 re-estimated budget.  The bulk of the 
increase in domestic revenues, USD 358 million, represents 
an increase in tax revenues. 
 
-- Foreign grants at USD 333 million, approximately USD 400 
million lower than the 2005 re-estimated budget. 
 
-- Gross expenditure at USD 4.951 billion, USD 497 million 
higher than the 2005 re-estimated budget. 
 
-- Current expenditure at USD 3.663 billion, an increase of 
USD 102 over the published 2005 re-estimated budget. 
 
-- Fuel subsidies at USD 175 million are USD 262 million 
lower than the published 2005 re-estimated budget, and USD 
593 million lower than the reported (but not officially 
published) total cost of fuel subsidies in 2005. 
 
-- Interest due on domestic public debt to increase by USD 
150 million. 
 
-- Subsidies of commodities, including wheat for bread and 
fodder, at USD 63 million.  This is now a separate budget 
line item. 
 
-- Capital Expenditures at USD 1.189 billion, an increase 
of USD 297 million, of which USD 212 million is allocated 
for projects recommended by the National Agenda (REFTEL). 
 
 
 
                      2005       2006     Change 
                   Re-estimate   Budget   Percent 
                       (mn)        (mn) 
 
 
Total Revenues        4,266       4,231      (0.8) 
 
Domestic Revenues     3,533       3,898    + 10.3 
  of which 
     Taxes            2,434       2,793    + 14.7 
     Non-Tax Revenue  1,038       1,063    +  2.5 
    Payback of loans    61          42     (30.2) 
 
Foreign Grants          733         333     (54.6) 
 
============================================= ===== 
 
Total Expenditures    4,453      4,866     + 11.2 
 
Current Expenditures  3,561      3,677     +  2.9 
 of which 
   Civil Service Agencies 
                        925        986     +  6.6 
   Military Agencies    975      1,008     +  3.5 
   Others             1,661      1,683     +  1.3 
    of which 
     Fuel subsidies     437        175      (60.0) 
     Commodities 
             Subsidies              63   new item 
      Pensions           584        671     + 15.0 
     Interest on Debt 
      Domestic           97        247     +153.6 
      Foreign (commitment basis) 
                        261        247       (5.4) 
 
Capital Expenditures    892      1,189     + 33.3 
  Of which 
     National Agenda Projects 
                          0        212   new item 
     Socio-Economic Transformation Program 
                        130         86      (33.7) 
============================================= ===== 
 
Deficit 
  Factoring in Foreign Grants 
                        187        635 
  Excluding Foreign Grants 
                        920        968 
============================================= ===== 
 
** The 2005 re-estimated budget numbers do not reflect 
additional expenditures, including an additional USD 331 
million for fuel subsidies tallied by the Minister of 
Finance.  NOTE: GoJ officials have stated on numerous 
occasions that the fuel subsidy bill exceeded all 
expectations in 2005; they have yet to submit an annex to 
the 2005 Budget that would reflect actual increases in 
expenditure levels and the resulting deficit. END NOTE. 
 
¶4.  Deputy Prime Minister and Minister of Finance Ziad 
Fariz in his December presentation to the Chamber of 
Deputies projected 11 percent growth in GDP at current 
prices during 2006; he projected an inflation rate measured 
by the GDP deflator in the 4 ? 5 percent range. 
 
------- 
Deficit 
------- 
 
¶5.  The budget deficit, including grants, is estimated at 
USD 635 million, or 4.5 percent of GDP, an improvement over 
the 2005 re-estimated deficit of USD 677 million, or 5.4 
percent of GDP.  The budget deficit, before foreign grants, 
is estimated at USD 968 million, or 6.9 percent of GDP.  In 
the 2005 re-estimated budget, the amount was about USD 1.4 
billion, or 11.2 percent of GDP. 
 
------ 
Grants 
------ 
 
¶6.  The budget estimates foreign grants for 2006 at USD 333 
million, or 7.9 percent of public revenues.  This is a 
conservative estimate compared to 2005 when it was 
initially proposed to be USD 1.5 billion, or 34.6 percent 
of public revenues, and later re-estimated at USD 733 
million, or 17.2 percent of public revenues.  For 2006, 
external grants are projected to fund about 28 percent of 
capital expenditures. 
 
--------- 
Subsidies 
--------- 
 
¶7.  Fuel subsidies are projected at USD 175 million, 
compared to an estimated USD 768 million for 2005.  The 
budget reflects the GoJ commitment to gradually reduce fuel 
subsidies in 2006 and to their elimination by March 2007. 
NOTE: The budget is based on crude oil prices of USD 60 per 
barrel. Jordan imports mainly Arab heavy crude from Saudi 
Arabia.  The cost per barrel is usually $8-10 lower than 
?Brent Crude? and ?West Texas Intermediate? rates quoted in 
international media. END NOTE. 
 
¶8.  The Minister of Finance stated that the government will 
implement a program to gradually phase out all other forms 
of subsidies over the coming four years.  Examples include 
subsidies for commodities like grain, as well as for 
independent institutions, particularly those that generate 
their own revenues. 
 
-------- 
Revenues 
-------- 
 
¶9.  Gross public revenues are projected at USD 4.23 
billion, or 30.2 percent of GDP, a slight drop from the 
2005 re-estimate of USD 4.26 billion, or 33.8 percent of 
GDP.  The expected slight drop in public revenues is 
primarily the result of the decline in foreign grants. 
Although domestic revenue projections increased, the 
difference does not offset the decline in grants. 
 
¶10. Domestic revenues in 2006 will reach USD 3.9 billion, 
representing 27.8 percent of GDP.  Domestic revenues 
provide coverage for all current expenditures and 19 
percent of capital expenditures.  In 2005, domestic 
revenues covered only 87 percent of the current 
expenditures. 
 
----------------------------------- 
Expenditure and the National Agenda 
----------------------------------- 
 
¶11.  Public expenditure in 2006 is estimated at USD 4.87 
billion representing 34.7 percent of GDP, compared to USD 
4.45 billion in the re-estimated 2005 Budget. 
 
¶12.  Current expenditures for 2006 are estimated at USD 
3.66 billion, 3.25 percent above the current re-estimated 
budget for 2005.  Deputy Prime Minister (DPM) and Minister 
of Finance Fariz stated that current expenditures in 2006 
are 9.3 percent lower than its re-estimated level for 2005, 
and that this is the result of the anticipated drop in the 
fuel subsidy bill during 2006.  Compared to last year?s 
fuel subsidy expenditure (pending in the 2005 annex), the 
current expenditures as a percentage of GDP will decline 
from 32.1 percent in 2005 to 26.2 percent in 2006. 
 
¶13.  Capital expenditures are estimated at USD 1.2 billion 
representing 8.5 percent of GDP, compared to the USD 892 
million re-estimated level for 2005. 
 
¶14.  USD 212 million of the capital expenditures account is 
earmarked for projects recommended by the National Agenda. 
These projects are detailed in specific budget line items 
within their respective ministries. 
 
--------------------------------------------- ------ 
DPM holds hope that 2005 Budget Annexes are the last 
--------------------------------------------- ------ 
 
¶15.  The GoJ has frequently issued annexes to budgets and 
presented them to the parliament after the conclusion of 
fiscal years to be issued retroactively.  The increase in 
the 2005 current expenditures over what had been allocated 
in the General Budget Law followed the same path.  When 
presenting the annexes with the 2006 budget, the Minister 
of Finance told the House that "we hope that this is going 
to be the last annex to be presented to parliament without 
securing its prior approval." 
 
--------------------------------------------- --------- 
Recommendations of the House Finance & Economics Committee 
--------------------------------------------- --------- 
 
¶16.  The House Finance and Economics committee made 23 
recommendations to the GoJ on the budget and suggested 
reduction in expenditure allocation of over 30 budget line 
items totaling USD 127 million.  Some of these 
recommendations are not directly related to the budget; 
they mostly relate to government policy in the areas of 
investment promotion, privatization, water resources, 
poverty alleviation, and agriculture.  The committee also 
questioned expenditures for National Agenda projects. 
 
¶17.  Some of the recommendations call for stricter 
budgetary controls, prior approval by the parliament of any 
future budget annexes, and an assessment of the country?s 
current balance and the ways to improve it. 
COMMENT: While the recommendations are not binding on the 
government, it is likely that the GoJ will agree to reduce 
expenditure in some of the suggested areas.  This is a 
departure from the past, when parliament made a show of 
debating and criticizing the budget but then gave its 
approval without any GOJ concessions. END COMMENT. 
 
---------- 
Next Steps 
---------- 
 
¶18.  The Chamber of Deputies concluded its debate of the 
Budget on February 15.  After a vote by the Chamber, the 
budget is referred to the Senate.  Historically, draft 
budget laws have passed through the Senate swiftly.  The 
final step is endorsement by the King and publication in 
the Official Gazette.  Using 2005 as a benchmark, the 2006 
budget should be law by mid-March. 
 
¶19.  In line with the Constitution, the government is 
currently observing a continuing resolution status, and is 
allowed to spend up to one twelfth of the 2005 budget each 
month. 
 
----------- 
Public Debt 
----------- 
 
¶20.  The foreign debt balance at the end of October 2005 
declined to the equivalent of USD 7.2 billion which is 
lower than its level at the end of 2004 by approximately 
USD 331.5 million, a decline of about 4.4 percent.  This 
lower balance brings the ratio of foreign debt to GDP to 
58.3 percent compared to 65.5 percent at the end of 2004. 
 
¶21.  The decline in the foreign debt stock is due mainly to 
the drop in the U.S. Dollar exchange rate against major 
currencies.  NOTE: The Jordanian Dinar has been pegged to 
the U.S. Dollar since the end of 1995. END NOTE. 
 
¶22.  The net domestic public debt balance reached USD 3.1 
billion through October 2005, exceeding its 2004 level by 
USD 534.6 million.  This brings the ratio of domestic 
public debt to GDP up to 25.2 percent compared to 22.5 
percent at the end of 2004. 
 
HALE