FALSE OPTIMISM? GOJ FINANCES IMPROVE IN FIRST FISCAL

UNCLAS KINGSTON 001587

SIPDIS

SIPDIS

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

SANTO DOMINGO FOR FCS AND FAS

E.O. 12958: N/A
TAGS: ECON EFIN PREL JM
SUBJECT: FALSE OPTIMISM? GOJ FINANCES IMPROVE IN FIRST FISCAL
QUARTER

Ref: Kingston 1559


1. Summary: Government finances for April-June 2006 (the first
quarter of the Jamaican fiscal year) improved due to strong revenues
and lower-than-projected capital spending. For the review period,
GOJ operations generated a fiscal deficit of USD 115 million, lower
than the targeted deficit of USD 154 million. However, the fiscal
deficit could rise in upcoming quarters as revenues normalize and
spending increases. Head of the Fiscal Policy Management Unit at
the Ministry of Finance, Courtney Williams, told emboff that the
first quarter result was misleading and that the fiscal position
could start unraveling by the end of the second quarter. End
summary.

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First Quarter Results Improve
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2. Central government operations for April to June 2006 generated a
fiscal deficit of USD 115 million, lower than the predicted deficit
of USD 154 million. The strong showing reflects a USD 38 million
increase in tax on interest and a USD 27 million decline in capital
expenditure relative to budget. The spike in tax on interest
stemmed from the collection of taxes from pension funds, which are
tax exempt. Once refunded, the flow from this source should
normalize in upcoming periods. In fact, tax revenues underperformed
relative to projections, reflecting the continued sluggishness of
the Jamaican economy.


3. On the expenditure side, the contraction was due to the
postponement of GOJ projects during the quarter. For example, the
Ministry of Education did not begin to spend a USD 76 million
transfer from the National Housing Trust to modernize the education
system. Similarly, funds budgeted for World Cup Cricket were
underutilized during the quarter, but must be exhausted by the end
of the fiscal year.

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Challenges Lie Ahead
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4. The improvement in GOJ finances could be short-lived given the
anticipated normalization in revenues and expenditures. A number of
challenges are expected to emerge in upcoming quarters. First, the
GOJ will not realize a projected USD 45.5 million from its proposed
divestment of its 20 percent stake in the Mirant-owned Jamaica
Public Service Company (an electric utility),since the company has
announced that it is selling its Caribbean operations. Given the
uncertainty regarding who might purchase Mirant's stake, the GOJ has
decided to hold onto its shares. At the same time, negotiations are
stalled over the GOJ's sale of a new cellular license, which was
projected to raise USD 5.5 million.


5. Equally challenging are wage disputes with teachers, nurses,
doctors, the police, and workers at the central bank. These workers
remain opposed to the wage increases agreed to under a Memorandum of
Understanding between trade unions and the GOJ. Head of the Fiscal
Policy Unit at the Ministry of Finance, Courtney Williams, opined
that a government shutdown was possible given the militant mood of
these workers and their importance to the normal functioning of the
country. However, if concessions are made to these groups it could
lead to an unraveling of an agreement already signed with other
public sector unions.


6. Comment: Fiscal performance is expected to wane for the remainder
of fiscal year 2006 unless the GOJ is able to find creative ways to
draw more Jamaicans into the tax net. There is little room for
expenditure cuts - particularly with pending elections - and most
revenue categories underperformed relative to budget during the
review quarter. At the same time, relatively high prices and
increased taxes continue to dampen consumer demand, which not only
hurt consumption taxes, but also revenues from taxes on company
profits. In fact, a recent business confidence survey pointed out
that the private sector expects profits to fall in upcoming periods
(reftel). Reducing expenditures to address this expected revenue
shortfall is not a viable option as most spending is obligatory in
nature. In fact, there could be a loosening in fiscal policy moving
forward, as the current administration increases spending in
preparation for the next general election. Against this background,
the deficit could actually start to widen by the end of the July to
September quarter of 2006. End comment.

JOHNSON