Identifier
Created
Classification
Origin
08KINGSTON277
2008-04-02 12:05:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kingston
Cable title:  

JAMAICAN BUDGET TECHNOCRATS OPTIMISTIC

Tags:  ECON ECPS ETRD PREL PGOV EINV EAIR JM CH VZ XL 
pdf how-to read a cable
VZCZCXRO2183
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DE RUEHKG #0277/01 0931205
ZNR UUUUU ZZH
R 021205Z APR 08
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 6142
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0205
RUEHCV/AMEMBASSY CARACAS 0521
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 KINGSTON 000277 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (JTILGHMAN)
WHA/EPSC (VDEPIRRO)
TREASURY FOR SARA GRAY

E.O. 12958: N/A
TAGS: ECON ECPS ETRD PREL PGOV EINV EAIR JM CH VZ XL
SUBJECT: JAMAICAN BUDGET TECHNOCRATS OPTIMISTIC

REF: A. 07 KINGSTON 1806,

B. 07 KINGSTON 1793,

C. KINGSTON 263,

D. KINGSTON 111,

E. KINGSTON 021

F. KINGSTON 051


SUMMARY
-------

UNCLAS SECTION 01 OF 03 KINGSTON 000277

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (JTILGHMAN)
WHA/EPSC (VDEPIRRO)
TREASURY FOR SARA GRAY

E.O. 12958: N/A
TAGS: ECON ECPS ETRD PREL PGOV EINV EAIR JM CH VZ XL
SUBJECT: JAMAICAN BUDGET TECHNOCRATS OPTIMISTIC

REF: A. 07 KINGSTON 1806,

B. 07 KINGSTON 1793,

C. KINGSTON 263,

D. KINGSTON 111,

E. KINGSTON 021

F. KINGSTON 051


SUMMARY
--------------


1. (SBU) The Government of Jamaica (GOJ) released a USD 7 billion
estimated expenditure budget on March 27. The fiscal deficit is 5.5
percent of GDP, but should return to the 4.5 percent of GDP target
for next year. The GOJ is focusing on increased tax compliance and
taking tougher measures against tax dodgers. The GOJ received USD
70 million from Venezuela from the sale of part of its refinery.
Air Jamaica remains a major drag on the budget, while Air China has
emerged as a potential buyer of the airline and possible future
investor in infrastructure projects. The GOJ also considers other
divestment options, as the fiscal future looks slightly brighter,
with a goal of 3 percent GDP growth.

--------------
Fiscal Position Improves
--------------


2. (SBU) Over a private breakfast on March 31, Ministry of Finance
(MOF) Senior Director of the Fiscal Policy Management Unit, Courtney
Williams, told emboffs that the fiscal deficit for 2007/08 was
expected to be about 5.5 percent of GDP. Although above the
original target of 4.5 percent, the figure should be well received,
given that the budget has had to absorb unanticipated external and
weather related shocks (reftel A). Had the GOJ not sold 49 percent
of a local oil refinery, Petrojam, to Venezuela for USD 70 million
the figures would have been far worse. The GOJ received full
payment from Venezuela after some previous delays (reftel B). On
March 27, the GOJ tabled a USD 7 billion expenditure budget and is
projecting a reduced deficit of 4.5 percent of GDP for the 2008/09
fiscal year. Williams was quick to point out that, unlike previous

years, the target was non-negotiable in order to rebuild
credibility. Responding to the 20 percent increase in the budget,
the MOF officials stated that although the increase appears large,
it had to be taken in context. Over USD 560 million is being
allocated to principal repayment. This, they said, is expected to
start having positive results for debt service in the short term

--------------
How Will the Budget Be Financed?
--------------


3. (SBU) With Minister of Finance Audley Shaw already announcing
that there will be no major tax hike, the new budget is expected to
be financed by a combination of increased tax compliance and to a
lesser extent tax reforms (reftel C). Williams said there might be
the usual increases on the consumption of products like cigarettes
and alcohol, commonly referred to as sin taxes. He said Shaw was
steering clear of any major tax hike, as it would only add to
inflation already in double digits (reftel D) and more importantly
land a serious blow to the successful completion of a new Memorandum
of Understanding (MOU) with the unions.

--------------
Increased Tax Collection
--------------


4. (SBU) With higher tax rates out as an option, significant
emphasis is expected to be placed on increased tax compliance, which
now stands at around 45-50 percent. Unlike previous years,
compliance efforts will be accompanied by action, according to the
Ministry officials. Already two high profile individuals have been
arrested and brought before the revenue courts (reftel C). Tax
officials are preparing estimated tax bills, including interest and
penalties, to be sent to individuals and companies that did not file
tax returns by the March 17 deadline.


5. (SBU) Former army officer and Commissioner of Police, Colonel
Trevor McMillian, has been recruited to head up a Revenue Protection
Division to pay special emphasis on customs, which is notorious for
its corruption and by extension revenue leakages. The MOF officials
said corruption, fear of enforcing the rules, and a lack of
political will were the three biggest problems affecting
collections. As part of the tax reform process, government is
looking at simplifying the tax code.

KINGSTON 00000277 002 OF 003



--------------
Still Courting Multilateral Lenders
--------------


6. The GOJ continues its recent efforts to increase borrowing from
multilateral financial institutions. Senior Director of the Debt
Management Unit, Pamela McLaren, told Econoffs that there was a
solid commitment from the multilaterals to increase lending to
Jamaica, with only the fine details to be finalized. Shaw recently
announced he had received USD 10 million from the Inter-American
Development Bank (IADB) and that another USD 20 million could be
forthcoming (reftel C). Borrowing will remain high on the agenda of
the JLP-led government; but there is no immediate rush to tap the
external capital markets. This provides Jamaica with some breathing
space to see if international markets settle before any efforts are
made to source funds.

--------------
Air Jamaica a Drag on Budget
--------------


7. (SBU) Any improvement in the country's fiscal deficit is highly
dependent on offloading loss making public sector entities and in
particular Air Jamaica (reftel E). In an earlier discussion,
Minister of Finance advisor Dennis Chung, who has been appointed
project manager for the divestment of Air Jamaica, told emboffs that
the airline has accumulated debt of over USD 500 million. Chung
said the airline remains in need of a healthy cash injection to stay
afloat. The hemorrhaging could last a while longer, as McLaren
stated that although the GOJ was committed to the divestment of the
airline, it did not expect it until the end of the next fiscal year,
or March 2009. Williams confirmed that the airline desperately
needs cash. Williams added that although the GOJ provided cash in
the past along with guaranteeing Air Jamaica's debt, the GOJ is now
only committed to cash support in the amount of USD 30 million a
year to pay statutory (taxes) contributions.

--------------
Air China Interest in Air Jamaica
--------------


8. (SBU) The MOF officials confirmed reports that a number of
parties were interested in the airline, with Air China showing real
interest due to the strategic importance of having a foot print this
side of the hemisphere. Any prospective purchaser must be cash rich;
bring new tourist streams to the island; and, maintain the Air
Jamaica brand. They also disclosed that the International Finance
Corporation has agreed to assist with the divestment process. The
MOF officials said Chinese investors expressed serious interest in
investing in a large hotel on the North Coast specifically designed
to cater to Chinese tourists. The aim is to build a tourism link
between Chinese visitors and Chinese-Jamaicans. If Air China does
buy Air Jamaica, it could also give them a path into the air cargo
business for the region; this in turn could lead to Chinese
investment in other infrastructure projects, e.g. improvements to
the vital Palisadoes Road to the Kingston Airport or refurbishment
of Vernham airfield in Clarendon parish (reftel F).

--------------
Divestiture of Sugar Estates
--------------


9. (SBU) McLaren told emboffs that the sugar industry is also
expected to be divested between June and December 2008, although
emboffs have learned that a Brazilian company, Infinity, has been
selected as the preferred bidder, and a deal could be sealed at an
earlier date. Interestingly, the public transport system, while
incurring losses of up to USD 14 million a year, has addressed its
hemorrhaging by actively cutting cost. Chung, a board member of the
entity, said that subsidies for public transport have to continue
unless the GOJ was willing to raise fares, which is not feasible in
the current highly inflationary environment. Chung said losses
should decline as bus service becomes the transportation of choice
and by extension a possible way to cut the oil bill and ease traffic
congestion.

--------------
Economic Growth and Budget
--------------


10. (SBU) When asked about criticisms from some analysts that the
budget was over inflated, Chung stated that there was no problem
with the size of budget, and criticisms along this line only

KINGSTON 00000277 003 OF 003


demonstrated that past budgets had been merely accounting exercises
as opposed to instruments of growth. When asked for their view on
the growth prospects, Williams stated that the current budget was
predicated on a growth target of three percent. He pointed out that
this could be considered the most pro-growth budget in recent years,
with capital expenditure increasing by over 50 percent. "The
problem is whether Jamaica has the capacity to absorb so much
capital expenditure at this time", Williams continued.
JOHNSON