JAMAICA PURSUES "DEVELOPMENT WITH EQUITY"

UNCLAS SECTION 01 OF 03 KINGSTON 000343

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (JTILGHMAN)(VDEPIRRO)
WHA/EPSC (LKUBISKE) (PMAIER)


SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR SARA GRAY

E.O. 12958: N/A
TAGS: ENRG EINV SENV ECON ETRD IBRD IADB JM XL
SUBJECT: JAMAICA PURSUES "DEVELOPMENT WITH EQUITY"

REF: A) KINGSTON 341

SUMMARY
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1. (SBU) Jamaica's newly appointed Minister of Finance and Public
Service Audley Shaw delivered his maiden budget presentation on
April 10. The key speech, entitled "Development with Equity, with
the People at the Center of Our Concern," was the first government
budget address by a Jamaica Labor Party (JLP) member in 20 years.
The 2008/09 budget is forecast at USD 6.9 million, with a focus on:
eliminating the fiscal deficit; increasing growth; and reducing the
debt-to-GDP ratio. Debt-servicing costs of USD 3.7 billion, again
account for the largest share. In addition to current revenue,
expenditure will be financed by new tax measures and loan receipts.
The JLP-led administration is making a deliberate attempt to widen
the tax net, which eventually could reduce its appetite for debt,
reduce interest rates, and increase investment and growth. However,
given the unfavorable international environment, the Government of
Jamaica (GOJ) may be hard pressed to meet its short term targets.
End Summary.

Development with Equity
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2. (SBU) Minister of Finance and Public Service, Audley Shaw,
delivered his inaugural budget speech on April 10. This was also
the first Parliamentary presentation by a JLP government since 1987,
when Prime Minister and Minister of Finance and Planning Edward
Seaga had announced that the country would achieve its first surplus
in 22 years. Despite the ravages of Hurricane Gilbert, the economy
still had registered growth of 2.2 percent a year later, a result
Shaw attributed to the foundation laid after the turbulent 1970s.
In noting the similarities between the current and post 1970s
periods, Shaw suggested that the country is obliged to seek answers
from an assessment of past policy errors, which should never be
repeated if the country is to progress. He said this progress must
be inclusive, with everyone feeling that there is an opportunity for
a better life. In this regard, he said the JLP's first budget must
lay the framework for "Development with Equity, with the People at
the Centre of Our Concern".

JLP'S Framework for Economic Development
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3. (SBU) In outlining the new government's framework for growth and
development, Shaw alluded to the expectation of the populace for
improvements in their living standards based on improved governance
and new economic initiatives. Against this background, Shaw
outlined his five pillars to rebuild the economy. These include the
need to: (1) apply a strong disciplined approach to fiscal and debt
management; (2) reform the tax system; (3) reduce bureaucracy,
corruption and waste; (4) increase local and foreign investment;
and, pursue energy conservation and the development of alternative
energy. As part of the fiscal and debt management program, the GOJ
has initiated dialogue with multilateral institutions for better
terms on loans for heavily-indebted middle income countries
(reftel). In the interim, the government has signed policy-based
loan agreements for almost USD 120 million, while negotiating
another USD 219 million, all priced at interest rates ranging from
4.2 to 6.5 percent.

Ambitious Medium Term Framework
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4. (SBU) With the JLP's promise to deliver robust growth and
employment in mind, the 2008/09 macroeconomic program aims to create
conditions that support medium term economic expansion. In this
regard, the administration is placing emphasis on agriculture and
manufacturing, while pursuing fiscal and monetary consolidation to
moderate inflation, build up reserves, and bolster investor
confidence (Note: Septel will outline the vision for agriculture to
address the looming food crisis. End note). Shaw's budget was
formulated within a four-year program aimed at eliminating the
fiscal deficit and reducing the debt-to-GDP ratio to 100 percent.
The medium-term program also is targeting an acceleration in
economic growth to three percent, a moderation in prices to ten
percent, and a decline in the current account deficit to 15 percent
of GDP.

The Raw Numbers

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5. (SBU) The expenditure budget for 2008/09 amounts to USD 6.9
billion, or 20 percent more than the revised budget for 2007/08.
But with inflation running at nearly 20 percent, the new budget is
flat in real terms. Of the total expenditure, USD 4.3 billion or 62
percent is set for recurrent or day-to-day spending (this includes
interest payments),while the other 38 percent (USD 2.6 billion) is
slated for capital spending (includes principal repayment). Debt
servicing (interest and principal payments) of about USD 3.7 billion
(up 19.5 percent) will again absorb the lion's share of the budget.
At this level, 54 cents out of every dollar of expenditure will be
spent on repaying the debt in 2008/09. The increased debt servicing
costs are a direct result of the absorption of debt accrued by loss
making public sector entities such as the airline Air Jamaica, the
National Road Construction Company, and the Sugar Company of
Jamaica. When wages and salaries of nearly USD 1.5 billion are
factored in, this leaves only USD 1.7 billion for social and capital
infrastructure. That said, the new government has made a deliberate
effort to increase capital spending, which has almost doubled to USD
630 million or 4.7 percent of GDP.

2007/08 2008/09 2009/10 2010/11
Inflation (percent) 19.2 10.0 8.0 7.0
Real GDP Growth (percent 0.9 3.0 3.5 3.5
NIR (USD Billion) 1.9 1.9 2.1 2.2
Fiscal Bal/GDP (percent) -4.7 -4.5 -2.5 0.0
Source: Ministry of Finance and Planning

In keeping with commitments to improve social services and food
security, almost 56 percent (USD 1.8 billion) of the non-debt budget
has also been allocated to national security, education, health, and
agriculture.

Financing the Budget
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6. (SBU) In light of the progressively worsening international
economic climate, Shaw pointed out that the financing of the 2008/09
budget has been one of the most challenging in recent years. He
said to aggravate the problem, the external capital market and
international financial institutions are paying increased attention
to Jamaica's medium term fiscal profile, after years of missed
targets. With tax compliance running at around only 38 percent, and
with outstanding taxes amounting to almost USD 1 billion (excludes
interest and penalties),the GOJ plans to adopt an aggressive
strategy to increase revenue collections through among other things
audit and assessment, collections, and taxpayer education (reftel).
At the centre of this strategy is a tax amnesty package, which will
run from June to October 2008. More specifically, the 2008/09
budget will be financed by a combination of revenues, grants and
loan receipts. Revenues are projected to increase by 18.3 percent
to USD 4.2 billion and grants by 21.9 percent to USD 77 million,
while loan receipts are expected to provide another USD 2.6 billion.
This amount includes USD 126 million from multilateral and
bilateral sources for capital projects.

Tax Reform and Limited Tax Package
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7. (SBU) In order to fill the gap and achieve the fiscal deficit
target of 4.5 percent of GDP, the government proposed a limited tax
package of USD 75.8 million, while giving back USD 33 million in
concessions for a net amount of USD 42 million. A significant
amount of the increase is expected to come from higher cigarette
taxes, also a strategy to reduce the incidence of smoking.
Additional funds will be generated from higher motor vehicle taxes.
The goal is also to reduce fuel consumption by charging higher taxes
on less fuel efficient vehicles.


8. (SBU) To stimulate investment and growth, the GOJ has removed the
tax on private dividends and reduced the transfer and stamp duty on
real estate transactions. Shaw announced that a team led by
Minister Without Portfolio Don Wehby are engaged in an extensive
review of proposed tax reform measures. Shaw reiterated his
government's commitment to the process, which was last overhauled 21
years ago. To kick start the process, he proposes a consolidation
of the more than five different statutory deductions into one social
security payment this fiscal year. He also outlined plans for
administrative reforms to include the tax amnesty.


KINGSTON 00000343 003 OF 003


Comments
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9. (SBU) After almost 20 years out of power, the JLP has embarked on
an ambitious program geared at fiscal consolidation, debt reduction,
and accelerated growth. This is particularly important as the JLP
is cognizant of its promise to deliver jobs. Shaw is hoping that
his Party's pursuit of good governance will lead to reduced
corruption, waste, bureaucracy, and red tape. He also is banking on
the removal of at least two loss making entities from the budget
this fiscal year: Air Jamaica and the sugar estates. But promises
aside, after years of missed targets, the achievement of the fiscal
target will be critical to regain the country's credibility among
external creditors. In this regard, the government may have erred
in understating its inflation target, as prices are already running
at 5.2 percent for the first three months of 2008-- more than half
the 10 percent calendar year target. Although the tax measures
targeting energy conservation are commendable, they will only add to
the price instability (policy induced); add the cost push effect of
rising commodity prices, and the problem magnifies. Runaway prices
also could bring other challenges as they could impact interest cost
and stymie private sector borrowing, thus derailing the growth
agenda. Worse yet, any up-tick in interest rates could increase the
debt stock, which now stands at USD 14 billion. The GOJ will have
to wish for better than anticipated returns from its tax amnesty, as
well as increased borrowing from multilaterals, to improve the
fiscal dynamics. (Note: Septel will provide external comments on
the budget. End note). End comment.
JOHNSON