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