VZCZCXRO9080
RR RUEHROV
DE RUEHAM #4338/01 2981159
ZNR UUUUU ZZH
R 251159Z OCT 07
FM AMEMBASSY AMMAN
TO RUEHC/SECSTATE WASHDC 0705
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHKO/AMEMBASSY TOKYO 0257
RUEHRL/AMEMBASSY BERLIN 0328

UNCLAS SECTION 01 OF 03 AMMAN 004338 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA AND EEB 
TREASURY FOR SETH BLEIWEIS 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECON ENRG PGOV JO
SUBJECT: DESPITE INCREASED REVENUES, SECOND BUDGET SUPPLEMENT NEEDED 
TO COUNTER FUEL SUBSIDY-DRIVEN DEFICIT 
 
REFS:  A) AMMAN 3813 
 
       B) AMMAN 3661 
       C) AMMAN 3557 
       D) AMMAN 1479 
       E) AMMAN 1452 
       F) AMMAN 483 
 
¶1.  (U) Summary: Jordan's 2007 budget and initial supplementary 
annex estimated USD 5.6 billion in total revenues, including foreign 
grants, and USD 6.1 billion in expenditures.  While the GOJ's 
revenue projections are on-track, skyrocketing fuel subsidy costs 
have necessitated an additional USD 700 million budget supplement 
approved earlier this fall.  New Minister of Finance Hamad Kasasbeh 
has publicly stated that fuel subsidies will not be included in the 
2008 budget as part of the petroleum price liberalization process 
(refs C, D).  Jordan currently has USD 10.1 billion in (total debt, 
a level that has changed little in the value of its base currencies 
in recent years, but has fallen as a percent of GDP as the economy 
has grown.  The Paris Club has agreed to a Jordanian proposal to buy 
back $2.5 billion, which the GOJ believes will provide fiscal space 
to improve living standards and implement development strategies. 
End Summary. 
 
Taxes Key to Increase in Government Revenues 
-------------------------------------------- 
 
¶2.  (U) According to the Ministry of Finance, gross public revenues 
for 2007 were budgeted at USD 5.6 billion, a 14 percent increase 
from the 2006 estimate.  NOTE: These budget figures include a 
supplementary budget annex that was announced immediately after the 
budget was approved.  END NOTE.  In the first eight months of 2007, 
total revenues and grants increased 7.6 percent to reach USD 3.59 
billion.  This increase came despite a 32.5 percent decline in 
foreign grants. 
 
¶3.  (U) An estimated 70 percent of domestic revenues are from taxes, 
29 percent are from non-tax revenue sources, and 1 percent is from 
collected loan repayments.  Non-tax revenues include fees, interest, 
licenses and mining revenues.  Domestic revenues in 2007 may 
slightly exceed projections of USD 4.8 billion, based on domestic 
revenues reaching USD 3.4 billion during the first eight months of 
2007 - a 10.2 percent increase over the same period in 2006.  This 
increase is due to the expanding economy and improvement in revenue 
collection by tax departments.  In particular, General Sales Tax 
revenues increased 19.1 percent, contributing 63.2 percent of the 
total increase in tax revenues.  Customs duties also increased 
during the period by 1.4 percent, or USD 4.1 million.  Jordan also 
recently increased its "sin taxes" on alcohol and tobacco.  A local 
economist writing in a recent newspaper editorial, predicted, 
however, that this tax increase might, in fact, reduce "sin tax" 
revenue, because it will encourage increased smuggling. 
 
¶4.  (SBU) Foreign grants were estimated at USD 134.9 million for the 
first eight months of 2007.  The main sources of foreign revenue are 
historically grants from the United States and Saudi Arabia. 
Director General of Budget Dr. Ismail Zaghloul noted concern in June 
2007 that Saudi Arabia had not transferred the monthly grant of USD 
21.9 million since November 2006; he did not give a reason for the 
delay.  NOTE: Zaghloul may not be aware of other aspects of Saudi 
financial support for Jordan.  END NOTE. 
 
Fuel Subsidies Increase Government Expenditures 
--------------------------------------------- -- 
 
¶5.  (U) The Ministry of Finance reported that total GOJ expenditures 
amounted to USD 3.53 billion during the first eight months of 2007, 
representing a 9.7 percent increase over the same period in 2006. 
This rise in total expenditures was mainly attributed to an 11.2 
percent increase in current expenditures, originally budgeted at USD 
6.1 billion for the calendar year, and estimated at USD 2.93 billion 
for the first eight months of 2007.  An increase in current 
expenditures has been attributed in part to the rise in "defense and 
security" expenses, wages, and pensions, as well as a 16.2 percent 
increase in interest payments.  According to the Ministry of 
Finance, the latter reflects the fiscal policy position to focus 
more on internal borrowing in financing Jordan's budget deficit. 
 
¶6.  (U) Although 30 percent of current expenditures in 2006 was 
spent on "social protection" which included fuel subsidies, the 2007 
budget did not include a specific line-item for fuel subsidies.  The 
GOJ had expected to cover subsidies for diesel, kerosene, heavy fuel 
oil, and liquid propane gas (LPG) through revenues generated by the 
sale, at market price, of all grades of gasoline.  When the budget 
decision was made, the cost of crude oil was USD 60 per barrel or 
 
AMMAN 00004338  002 OF 003 
 
 
below (ref D).  Profits were anticipated even if crude sold at USD 
70/barrel.  At current costs in excess of USD 80/barrel, no revenue 
is generated, making the diesel subsidies the costliest to the 
government.  LPG remains the most subsidized petroleum product by 
percentage. 
 
¶7.  (U) Jordan's capital expenditures were projected to be USD 1.3 
billion for 2007.  During the first eight months of 2007, capital 
expenditures reportedly reached USD 597.2 million.  In 2006, capital 
expenditures of USD 1.1 billion were spent on economic affairs (34 
percent); health (14 percent); education (13 percent); general 
services (13 percent); social protection (11 percent); public safety 
(6 percent); and other categories (10 percent). 
 
Rising Fuel Costs Result in Supplemental Budget 
--------------------------------------------- -- 
 
¶8.  (U) Parliament had approved a first annex to the budget in April 
2007 to allocate funds for salary increases of the civil service. 
At that time, the deficit was forecast at USD 548 million, a decline 
from 2006 and 3.4 percent of GDP.  There was also a promise that 
there would not be any annexes without parliamentary approval.  As 
the prices of oil and feed grains continued to skyrocket over the 
course of the year, however, Jordan's fuel and fodder subsidies 
began to place an extraordinary burden on its budget.  Although the 
GOJ modified its livestock feed subsidy program, it decided to 
maintain fuel subsidies, which led to the resignation of former 
Deputy Prime Minister and Minister of Finance Ziad Fariz (refs B, 
C).  The GOJ approved a second supplemental budget of USD 700 
million on September 11, issued as a provisional law since 
parliament was in recess.  USD 280 million of the second supplement 
was appropriated for fuel subsidies. 
 
Despite Budget Woes, GOJ Meeting Public Debt Targets 
--------------------------------------------- ------- 
 
¶9.  (U) The total debt balance at the end of June 2007 was USD 10.3 
billion, which is approximately USD 84 million or almost 1 percent 
less than its level at the end of 2005.  Due to continued GDP growth 
exceeding 6 percent a year in real terms, the nominal debt-to-GDP 
ratio has fallen significantly from 83.1 percent of GDP in 2005 to 
65.3 percent in June 2007.  This reduction also means that GOJ has 
fulfilled the terms of the 2001 Public Debt Management Law which 
stipulates that total public debt should not exceed 80 percent of 
GDP.  The GOJ is also striving to reduce its public debt to 60 
percent of GDP by 2011. 
 
¶10.  (U) Domestic debt reached USD 3.2 billion through June 2007, a 
reduction from its 2005 level of USD 186 million or 5 percent.  This 
brings the ratio of domestic public debt to GDP to 20.3 percent, 
compared to 27 percent at the end of 2005.  The majority of domestic 
debt is in the form of treasury bills maturing in one to five 
years. 
 
¶11.  (U) External debt was reported in October as USD 7.051 billion, 
a one percent increase from 2005.  35 percent of Jordan's external 
debt is bilateral; 35 percent is export credit; 28 percent is 
multilateral and 2 percent is other.  30 percent of Jordan's 
external debt is in U.S. dollars; 22 percent in Euros; 17 percent in 
Yen; 13 percent in Kuwaiti dinars; 10 percent in British pounds and 
7 percent in other currencies.  The top five creditors are Japan, 
the World Bank, France, the United Kingdom (UK), and the Arab Fund 
for Economic and Social Development (AFESD).  The United States is 
its sixth largest creditor with 7.3 percent of its debt.  NOTE: 
Jordan's currency is pegged to the U.S. Dollar, and the fall in the 
dollar increases Jordan's non-dollar denominated debt. END NOTE. 
 
¶12.  (U) Of Jordan's total debt, more than half (USD 4.385 billion) 
is owed to Paris Club creditor countries.  On October 18, Jordan 
successfully concluded an agreement with Paris Club members to 
buyback USD 2.5 billion of its debt at an average discount rate to 
face value of 11 percent.  Repayment is scheduled to occur between 
January 1 and March 31, 2008.  Finance Minister Kasasbeh told the 
Jordan Times that the debt buyback will be financed in part by funds 
generated from privatization efforts. 
 
Changes in the 2008 Budget 
-------------------------- 
 
¶13.  (U) An October report by Jordan Ahli Bank reports that the 
budget for 2008 is estimated to be around USD 6.16 billion, with a 
projected deficit of USD 560 million.  The government is also 
reported to be working on a 2008-2010 budget which will increase the 
role of the regional governors in the process.  In previous years, 
 
AMMAN 00004338  003 OF 003 
 
 
the budget was prepared mainly through the ministries. 
 
¶14.  (U) Minister Kasasbeh announced on September 21 that no oil 
subsidy will be included in the 2008 budget.  He said full 
liberalization of prices would take affect as the 50-year monopoly 
of the Jordan Petroleum Refinery Company ends in March 2008 (ref E). 
 In lieu of the broad subsidy, the GOJ will implement a social 
safety net program, providing direct cash payments to low-income 
citizens.  A November 2006 IMF report on fuel subsidies estimated 
that just 21.2 percent of the subsidy was benefiting the country's 
poorest 40 percent of citizens. 
 
Comment 
------- 
 
¶15.  (SBU) Assuming international oil prices continue to remain 
exorbitant, Jordan's budget will remain under financial pressure. 
High fuel costs, like food prices, continue to keep the King's and 
GOJ's attention as concerns of Jordan's poorest citizens (ref A). 
As Jordanian cities begin to be covered in election posters for the 
November 20 parliamentary elections, this and other economic issues 
that affect Jordanians' daily lives and pocketbooks are expected to 
be key campaign topics. 
 
Visit Amman's Classified Website at 
http://www.state.sgov.gov/p/nea/amman 
 
HALE