KINGSTON POL/ECON ROUNDUP: JANUARY 20, 2006 -

UNCLAS SECTION 01 OF 02 KINGSTON 000240

SIPDIS

STATE FOR WHA/CAR (BENT) AND WHA/PDA
STATE ALSO FOR INL/LP (BOZZOLO),EB/TPP, AND EB/IFD
STATE ALSO DOE CA/OCS/ACS/WHA (RUTH BRANSON)
STATE PASS OPIC FOR TABERNAKI
CUSTOMS MIAMI FOR LOWEN AND MAHABIR
SANTO DOMINGO FOR FCS, FAS, AND LEGATT
STATE PASS USTR FOR A. GASH-DURKIN
DOJ FOR OPDAT/R LIPMAN
TREASURY FOR LAMONICA

SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL EFIN ECON EINV PHUM ELAB KHIV JM
SUBJECT: KINGSTON POL/ECON ROUNDUP: JANUARY 20, 2006 -
FEBRUARY 3, 2006

Ref: Kingston 00198

KINGSTON 00000240 001.2 OF 002



1. This week's topics:

-- Formal Inauguration of CARICOM Single Market
-- Fiscal Deficit Worsens
-- Fiscal Situation Worries International Investors
-- GOJ Exploring Fuel Tax Increase
-- Bauxite/Alumina Expansion Project On Track
-- Crime Rates Down

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Formal Inauguration of CARICOM Single Market
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2. At the University of the West Indies on January 30, the
leaders of 12 CARICOM countries participated in a ceremony
to mark the formal inauguration of the CARICOM Single Market
(CSM). The CSM entered into force on January 1, 2006, for
six countries that have advanced levels of legislation in
place (Barbados, Belize, Guyana, Jamaica, Trinidad and
Tobago, and Suriname),and creates a block that
theoretically allows for the free movement of goods,
services and labor (in certain limited categories) across
the region. Six other heads of government signed a
"Declaration of Intent" to become full members of the CSM by
June 30. Further details reported Reftel.

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Fiscal Deficit Worsens
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3. Data released by the Ministry of Finance on January 31,
showed that GOJ operations generated a fiscal deficit of JMD
29.1 billion (USD 448 million) for the nine months of the
fiscal year to December 2006 (Note: The Jamaican fiscal year
runs from April 1-March 31. End note). This result
represented a deviation of almost 100 percent from target,
reflecting the continued under-performance in revenues.
Revenues are running at just 5.3 percent above the
comparative period last year, representing a real decline of
6.2 percent. The deficit would have been worse had the GOJ
not slashed spending in general and capital spending in
particular. The continued deterioration in the deficit has
forced the GOJ to abandon its balanced budget target for a
deficit of between two and three percent of GDP.

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Fiscal Situation Worries International Investors
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4. The GOJ'S announcement that it will miss its balanced
budget target has drawn the ire of some international
investors. The Heritage Foundation, a Washington-based free
market think-tank, responded by increasing the country's
score regarding the fiscal burden taxpayers have to carry.
The foundation increased Jamaica's score to 4.1 (with 1
being a very low fiscal burden, 5 being a severe burden).
It also pointed out that the GOJ's recurrent expenditures
(wages, utilities, etc) amounted to more than 15 percent of
the country's GDP, reducing the amount available for capital
expenditure. Just one week after the Heritage Foundation
made its pronouncement, the Ministry of Finance reported
that the Jamaican tax compliance rate had fallen to 58
percent based on tax receipts for November 2005. The
Ministry argued that the decreasing tax compliance rate was
one of the major factors negatively impacting the GOJ'S
ability to achieve its balanced budget objective.

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GOJ Exploring Fuel Tax Increase
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5. The GOJ is again exploring options for a new petroleum
tax structure. Prime Minister P.J. Patterson has tasked the

KINGSTON 00000240 002.2 OF 002


Ministry of Finance and the Ministry of Commerce, Science,
Technology and Energy to present options for the new tax
regime. He said the tax structure does not reflect the
current realities, particularly within CARICOM. Patterson
said, "the tax level, fixed according to product type, is on
the decline when compared to the increasing price of
petroleum products." The last time the government tried to
implement an ad valorem tax on fuel, in 1999, it led to days
of nationwide rioting. With this still fresh in mind, the
Prime Minister has presented an olive branch by suggesting
that part of the proceeds from the tax will be used to
establish a road maintenance fund. However, any change to
the current tax regime is expected to be politically
explosive, with the opposition Jamaica Labor Party already
warning the GOJ to prepare for consistent and vigorous
resistance to any proposal to further increase the tax on
fuel.

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Bauxite/Alumina Expansion Project On Track
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6. ALCOA has announced that it remains committed to the
US$1.2 billion expansion project at its Jamalco alumina
refinery in Clarendon. In recent weeks, there had been
speculation that things were not going smoothly - especially
with regard to negotiations for the supply of Liquefied
Natural Gas (LNG) required by the project. However,
government sources have announced that progress is being
made with those negotiations.


7. The major new investment was first announced by Alcoa in
March 2004. The expansion, scheduled to take place over a 3-
year period is expected to move the capacity of the refinery
from 1.25 million metric tons a year to 2.65 million tons
and would simultaneously greatly improve processing
efficiency. It is also expected that the shareholding of the
Jamaican government would reduce from about 50% to about 25%
while that of Alcoa would increase from 50% to about 75%.

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Crime Rates Down
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8. As of February 2, there were 118 homicides committed
compared to 157 for the same time period in 2005. The JCF
reported a decline of 15% for overall crime.