DISCOVERY OF FINANCE MINISTRY'S ISSUES ILLEGAL

UNCLAS SECTION 01 OF 02 KINGSTON 000893

SIPDIS

SENSITIVE

STATE FOR WHA/CAR/ (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: DISCOVERY OF FINANCE MINISTRY'S ISSUES ILLEGAL
LOAN GUARANTEES EMBARRASSES PM-HOPEFUL

REF: 03 KINGSTON 3056


1. (U) Summary: The Jamaican Ministry of Finance (MOF)
used deferred financing to support development projects
without going to Parliament for approval. Following an
amendment to the Financial Administration Act (FAA) in
2002, the MOF modified their "comfort letters" to
financial institutions, turning them into loan guarantees
on behalf of government agencies and not subject to
Parliamentary review. Parliament recently discovered the
illegal practice, which has increased GOJ debt obligations
by more than JD 19 billion (USD 300 million). In hearings
before Parliament, MOF officials admitted that they
knowingly broke the law, though other representatives of
the MOF told emboff that the situation was not as serious
as Parliament believes. Some in the MOF believe that the
timing of these revelations is politically motivated. End
Summary.


2. (U) On March 22, representatives of the Ministry of
Finance (MOF) faced a special sitting of the Public
Accounts Committee (PAC) of Parliament and admitted that
the MOF has been acting in violation of the Financial
Administration and Audit since 1992. The testimony
centered on the MOF's issuance of so-called "comfort
letters", which assured creditors that the GOJ would repay
loans should the borrower default. These letters served
as de-facto loan guarantees, and have increased the GOJ's
debt obligations by at least JD 19 billion (USD 300
million).


3. (U) The MOF has traditionally used deferred financing
(reftel) to support a variety of build-now, pay-later
development projects. However, growing concern about the
debt crisis and the burden such practices were placing on
the budget led Parliament, in 2002, to amend the FAA,
requiring that future deferred financing projects be
brought to Parliament for approval.


4. (U) According to March 22 testimony, the MOF responded
to the amended legislation by largely abandoning the
practice of deferred financing, shifting its focus instead
to letters of undertaking (LOU). A common practice since
1992, these documents initially served as "comfort
letters", reassuring lenders that the GOJ had confidence
in a borrower's ability to pay. Over time, however, the
wording changed to the point where the MOF was, in
practice, promising to pay the full value of the loan in
the event that the borrower defaulted. The issuance of
such letters is not subject to legislative review, and
Auditor General Adrian Strachan reports that MOF issuance
of such documents significantly increased following the
amendment of the FAA.


5. (U) Robert Martin, MOF Senior Deputy Financial
Secretary (DFS),admitted to Parliament's PAC on March 22
that the MOF had known that the process of providing de-
facto guarantees to financial institutions was illegal.
Their stated rationale was to reduce the MOF's financial
constraints and expand its capacity to fund development
projects.


6. (U) The PAC is concerned that the obligations made
through the outstanding LOUs may significantly worsen the
GOJ's debt position, and has demanded that the MOF provide
a full accounting of all comfort letters, promissory notes
and similar instruments. Early indications are that at
least JD 19.6 billion (USD 320 million) was offered by 13
government entities to commercial banks via LOUs. The
largest single recipient of the illegally guaranteed funds
was the Development Bank of Jamaica, which secured JD 4.2
billion in loans.


7. (SBU) Senior XXXXXXXXXXXX of the Ministry of
Finance XXXXXXXXXXXX told emboff on March 24 that it
was unfortunate that DFS Martin and Rowe had to explain
something they had nothing to do with. He said the
grilling from the PAC had put so much pressure on Martin
in particular that he had become obviously stressed out.
This has been complicated by the scramble to get
additional information for the next sitting of the PAC.
XXXXXXXXXXXX said that the outstanding LOUs were not much more
than JD 19.6 billion and it would not affect the budget
unless the entities did not make good on their
obligations. XXXXXXXXXXXX also reiterated the difficulty
these "off the book" expenditures had on planning. He
said the current development brings Finance Minister Omar
Davies' management and leadership into question, a clear
swipe at the latter's ambition to become the next Prime
Minister.

TIGHE