VZCZCXRO6654
RR RUEHROV
DE RUEHAM #4575/01 3190556
ZNR UUUUU ZZH
R 150556Z NOV 07
FM AMEMBASSY AMMAN
TO RUEHC/SECSTATE WASHDC 0897
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 02 AMMAN 004575 
 
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: DRAFT 2008 BUDGET EXPECTS HIGH INFLATION AND SLOWING GDP 
GROWTH 
 
REFS: 
A) AMMAN 4338 
B) AMMAN 4207 
C) AMMAN 3661 
D) AMMAN 3557 
 
¶1. (SBU) Summary: Jordan's 2008 budget now being prepared is 
expected to include raises for public sector employees and 
pensioners, and to exclude fuel subsidies, which have necessitated 
budget annexes in 2007.  The draft budget assumes a slow-down in GDP 
growth to four percent in 2008 after three years of approximate six 
percent growth, and 10 percent inflation in 2008 because of high oil 
prices, elimination of the fuel subsidy, and the weak dollar, which 
will have a large negative impact on Jordanian families.  Jordan has 
been working with a USAID-funded project to improve its budgeting 
processes. End Summary. 
 
2008 Draft Budget Nearly Complete 
--------------------------------- 
 
¶2. (SBU) During a November 12 meeting, Dr. Ismail Zaghloul, Director 
General of the Finance Ministry's Budget Department, told EconOff 
that his department is finalizing the 2008 budget, which is due to 
the Cabinet by December 1.  Once accepted, the Minister of Finance 
will submit the budget to the Parliament for approval.  Zaghloul 
noted that Jordan's parliamentary elections on November 20 may 
result in a Cabinet reshuffling that could slightly affect the 
timing of the budget approval process. 
 
2008 Budget Accounting for High Inflation 
----------------------------------------- 
 
¶3.  (SBU) Zaghloul said the 2008 budget has been difficult to 
prepare, in part because of high projected inflation around 10 
percent in 2008.  He said half of this inflation would come from 
rising oil prices, and the other half from Jordan's peg to the 
dollar at an official exchange rate of one Jordanian Dinar (JD) to 
USD 1.40.  While Jordan's currency is tied to the dollar, the 
majority of its imports come from the Middle East and Europe.  The 
falling dollar, and hence the falling dinar, is increasing the price 
of imports to Jordan.  NOTE: Jordan has a preference for 
American-made products, but high transportation costs negate any 
benefits from purchasing goods in dollars.  END NOTE.  On November 
8, the Department of Statistics (DOS) reported a 5.4 percent 
inflation rate for the first ten months of 2007, a rate slightly 
lower than the 2006 inflation rate. 
 
¶4.  (SBU) Due to the expected rise in inflation, Jordan is preparing 
for salary or payment increases for 550,000 public sector employees 
and pensioners.  Zaghloul said that this would be the largest 
expenditure change in the 2008 budget.  He said most ministries 
would see their budgets grow with inflation, and he did not expect 
inordinately large increases in any ministry.  He added that capital 
projects are expected to remain concentrated in three ministries: 
Public Works, Education, and Health. 
 
No Fuel Subsidies; Inclusion of Social Safety Net 
--------------------------------------------- ---- 
 
¶5.  (SBU) Zaghloul confirmed that the draft 2008 budget would not 
provide for fuel subsidies, which if continued, would cost Jordan 
USD 1.4 billion in 2008 (Refs A and D).  He emphasized that ending 
fuel subsidies is a smart and difficult decision for Jordan, 
expected to be made no later than March.  He said barley subsidies 
should also be lifted (Ref C), and expected this also to be decided 
in March.  In separate conversations with EconOffs, Ministry of 
Industry and Trade Secretary General Montasser Oklah was skeptical, 
explaining that while subsidy programs should have ended years ago, 
Jordan was financially incapable of ending two popular programs at 
the same time and that doing so would result in "chaos."  To 
minimize the impact of lifting the subsidies, however, the 2008 
budget is planning increased safety net funding through the National 
Aid Fund, and for financial support to unemployed or underemployed 
citizens.  NOTE: The National Aid Fund is an independent 
organization established to support needy families through aid and 
work opportunities. END NOTE. 
 
Slowing GDP Growth and Exports 
------------------------------ 
 
¶6. (SBU) Zaghloul predicted that GDP would grow four percent in 
¶2008.  He said Jordan's GDP grew 5.8 percent in the first six months 
of 2007, and is projected to grow six percent in 2007.  He 
attributed the slowing in 2008 to inflation-driven higher production 
costs, and said the industrial and agricultural sectors will be 
 
AMMAN 00004575  002 OF 002 
 
 
particularly hard hit.  He said the industrial sector would be 
doubly hit by rising oil prices - since oil is a large component of 
their production cost structure - and by the weak dollar since a 
majority of raw materials are imported into Jordan. 
 
¶7. (SBU) Zaghloul also feared that Jordan's industrial sector, which 
exports primarily to the Middle East, would further slip in its 
competitiveness because rival firms in nearby oil-producing 
countries often receive subsidized fuel.  He said this could result 
in a sharp rise in Jordan's current account deficit in 2008.  The 
Department of Statistics reported on November 12 that Jordan's trade 
deficit widened by 12.3 percent during the first nine months of 
¶2007.  The widening trade deficit has been a major factor in the 
deterioration of the current account, which moved from a surplus of 
USD 1.2 billion in 2003 to a deficit of USD 2.3 billion in 2005 and 
USD 2 billion in 2006. 
 
Paris Club Debt Restructuring Short 900 Million Dollars 
--------------------------------------------- ---------- 
 
¶8. (SBU) Commenting on the debt restructuring program approved by 
Paris Club members in October, Zaghloul said that if Jordan pays USD 
1.9 billion for the buyback, it will save USD 1.26 billion in the 
coming 14 years in interest and principal.  He estimated that Jordan 
had one billion USD in privatization proceeds available for debt 
buyback, but that all future privatizations would be small and would 
not cover the outstanding USD 900 million.  He said Jordan hopes to 
fund the USD 900 million with international assistance, and said 
this aid would lift "a heavy burden on Jordan's budget."  Finance 
Ministry Acting Assistant Secretary General Ezz Eldeen Kanakria said 
the deficit was a direct result of rising oil prices and Jordan's 
fuel subsidy program. 
 
Impact on Jordanian Families 
---------------------------- 
 
¶9. (SBU) Zaghloul was optimistic that some features of the budget, 
particularly the increase in public sector salaries and pensions and 
the increased safety net estimated at USD 420 million, would have a 
positive impact on about 65 percent of the population.  He 
cautioned, however, that these increases will only partially offset 
the predicted rise in inflation, and he expected a public outcry, 
particularly since oil prices are expected to have increased 400 
percent in Jordan between June 2005 and February 2008.  He added 
that lifting the barley and wheat subsidies would increase meat 
prices and the price of other foodstuffs.  He said this inflation 
would hurt a population that already has a negative savings rate and 
relies heavily on real estate sales and remittances (Ref B). 
 
Budget Process Reforms 
---------------------- 
 
¶10. (SBU) Jordan has been working closely with USAID to reform its 
budgeting process, and as a result, will begin working in 2008 with 
a three-year budget covering 2008-2010.  Zaghloul praised USAID's 
help, and said that the three-year budget will allow for medium term 
expenditure planning, better prioritization of capital projects, and 
the ability to build a long-term plan to reduce the deficit.  He 
added that Jordan has remained on a path of fiscal and monetary 
reform since the early 1990s, citing Jordan's graduation from its 
IMF programs, the removal of restrictions on foreign investment, and 
that Jordan will be the first Middle Eastern country to use 
results-oriented accounting. 
 
¶11. (SBU) A USAID Fiscal Reform project representative said that the 
project was on-schedule and had benefited from strong Jordanian 
leadership including Zaghloul's.  The representative said the 
project will provide Jordan with a new chart of account and an 
information system which links the charts of account between all of 
the ministries and the Ministry of Finance.  NOTE: A chart of 
account is the tool used to classify, record, budget and report 
financial transactions. END NOTE.  The representative said one 
reason for this extensive budget project is that Jordan is limited 
in its ability to grow revenues further because its taxes are as 
high as they can be, and thus this project focuses on government 
expenditures.  He said that by changing to a results-oriented budget 
and by training the government on program evaluation, Jordan will be 
able to direct its expenditures to the most effective projects and 
ideally cut costs and limit corruption. 
 
Visit Amman's Classified Website at 
http://www.state.sgov.gov/p/nea/amman 
 
HALE