UNCLAS SECTION 01 OF 03 KINGSTON 000457

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (JTILGHMAN)(VDEPIRRO)
WHA/EPSC (LKUBISKE)
EEB/IFD/ODF (EDIBBLE, MSAKAVE)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR SARA GRAY

E.O. 12958: N/A
TAGS: ECON ENRG PREL EINV IADB IFC ETRD JM XL
SUBJECT: JAMAICA RE-EMBRACES THE WORLD BANK

REF: A. KINGSTON 450


B. KINGSTON 342

C. KINGSTON 277

D. KINGSTON 366

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


1. (SBU) After more than a decade of strained relations, the
Jamaican Labour Party (JLP) led-government has followed through on
its promise to renew the government's relationship with multilateral
lending agencies. The World Bank's Country Representative in
Jamaica, Badrul Haque, told emboffs, in a meeting on May 13, that
the Government of Jamaica (GOJ) has already requested three policy
based loans. He said the GOJ in general, and Minister of Finance
and the Public Service Audley Shaw in particular, are quite eager to
receive advice from the WB. However, Haque was concerned about the
negative perception of multilateral institutions among public sector
officials left over from 18 years of rule under the Peoples National
Party (PNP). Haque cautioned that opposition by holdover civil
servants to assistance from multilaterals could slow the adoption of
reforms needed to reduce the exorbitant public debt. Haque
suggested that Shaw must demonstrate strong and decisive leadership
if his reform agenda is to gain traction. Initial indications are
that Shaw is succeeding: his debt reduction policies are taking
root, and he has shown a willingness to reassign senior officials in
his ministry who are not in step with his vision of reform.

Historical Background
--------------


2. (SBU) During 1996, the PJ Patterson-led administration took the
controversial, albeit popular, decision of ending Jamaica's
borrowing relationship with the IMF. Patterson, a staunch supporter
of South-South cooperation, was of the opinion that the country's
economic woes were largely due to the "austerity measures' attached
to multilaterals loans. But while Patterson was busy finding a

scapegoat, his Finance Minister was courting the IMF for its stamp
of approval to tap the international capital market. With the IMF's
assistance, the GOJ was able to launch its first bond offering of
USD 100 million in 1997, which was highly oversubscribed, allowing
the GOJ to increase the amount to USD 200 million. The allure of
significant sums of private funds without the attendant
policy-related scrutiny suited the then PNP-led government, leading
private credit to balloon to USD 3.5 billion by the end of 2007.
There was also a concurrent jump in the country's debt servicing
burden, which catapulted from under fifty cents to over sixty cents
of every dollar of revenue collected. The changing debt dynamic
precipitated a physical and social infrastructural deficit with the
attendant social and economic fallout.

GOJ Re-Embraces Multilaterals
--------------


3. (SBU) Recognizing that this strategy was unsustainable, Shaw
campaigned on a platform of renewal of relations with and borrowing
from multilaterals in order to manage the country's gargantuan debt.
Shaw argued that the objective would be to replace high cost
private debt with low cost multilateral loans. This position was
ridiculed by then- Minister of Finance Omar Davies, who argued that
multilaterals would never lend to countries at Jamaica's level of
income. Shaw has proven Davies wrong, as the GOJ is well on his way
to ratcheting up the country's borrowing relationship with
multilaterals, including USD 90 million in loans from the
Inter-American Development Bank (IDB). Shaw also has concluded
negotiations for three policy-based loans amounting to USD 65
million from the WB.


4. (SBU) In a meeting on May 13, Haque told emboffs that Jamaica's
relationship with WB is quite different than in the past. Haque
said he has provided Shaw with a full spectrum of funding and
technical assistance options and has asked the GOJ to chart its own
course on how it wants to implement reform. Haque said the new
policies will be determined by the GOJ and not dictated by
multilaterals. The GOJs ability to secure loan funds relates
directly to the speed at which they are able to implement policy
reforms.

Education and Agriculture
--------------


5. (SBU) Haque said Shaw's eagerness to embrace the WB was
demonstrated by his desire to engage him on policy issues on a
weekly basis. "I meet with the Finance Minister up to four times a
week in some instances", he told emboffs. Haque also has been

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sought out by Minister of Education, Andrew Holness, who is eager to
float a "diaspora education bond" among Jamaicans living abroad.
Holness also is keen on taping the same group for donations to
upgrade school facilities. Haque said that while overseas Jamaicans
were willing to invest in the country's fledging education system,
they were demanding good governance as a prerequisite. Haque has
agreed to use the vast technical resources at the disposal of the
bank to help create the governance structure required to access this
creative form of funding. The Multilateral Investment Fund (MIF) is
also doing a feasibility study on the possibility of providing crop
insurance for the agriculture sector (reftel A). In addition, the
MIF is providing grant funding to strengthen the local insurance
infrastructure, including the development of the necessary
regulatory framework as well as the provision of analytical tools to
measure crop damage.

Energy Mission
--------------


6. (SBU) Energy-dependent Jamaica is reeling under the current oil
crisis, and Minister of Energy Clive Mullings also has been reaching
out to Haque for counsel. Mullings, who Haque said was not seeking
money, has been on the hunt for sound technical advice to analyze
the plethora of energy projects turning up on his desk. (COMMENT:
Mullings has had his portfolio changed in a recent restructuring,
the Telecommunications and Mining portfolios have been peeled off
and given to former Minister of National Security Derrick Smith END
COMMENT). In response, the WB agreed to arrange an energy mission,
which currently is on the island. Mission members include experts
on carbon credit, power generation and renewable energy. "When the
client is receptive, we are in prime position to provide the best
experts and expertise," said Haque. The country will be happy with
what they are getting in the areas of global best practices and
problem identification", he continued.

Donor Coordination Needed
--------------


7. (SBU) Haque said the International Financial Corporation (IFC),
another WB affiliate, also is working on expanding a GOJ wind farm
through public-private partnerships. While Haque is happy with the
renewed spirit of cooperation, he is concerned that GOJ officials
are making the same requests to all donor agencies. And with each
donor agency welcoming the opportunity to lift its profile, it has
led to a breakdown in donor coordination.

Civil Servants Unresponsive And Being Removed
--------------


8. (SBU) Although the political directorate has been very receptive,
the WB representative expressed concern about the skepticism being
displayed by senior members of the public service. Haque said most
civil servants still view multilaterals as structural adjustment and
free trade advocates. This skepticism has slowed progress. Shaw
wants to sprint with his reform agenda, but the most senior
bureaucrats remain, at best, reticent. This is not surprising,
given that the upper echelons of the public sector continue to be
dominated by political actors who cemented their positions under the
former administration and share a negative view of these
institutions. Haque thinks this opinion within the public service
has to change if the situation is to improve. He said if the trend
of high debt coupled with shocks continues there is a 75 percent
chance the country's debt to GDP ratio would remain between 110 and
135 percent. This, he said, prompted Shaw to conclude significant
reform is required immediately. Shaw's motivations also explain why
he has started to shake up the civil service. Shaw removed his
Financial Secretary (FS) Colin Bullock and returned the career
central banker, turned FS, to his substantive post at the central
bank. Prime Minister Bruce Golding also transferred the Permanent
Secretary in the Ministry of Education to the Ministry of Finance in
a new position that is a significant demotion. There is speculation
that other Permanent Secretaries with strong affiliations to the PNP
are likely to be moved or demoted.

Reform Agenda: Development Policy Lending
--------------


9. (SBU) Debt remains a constant drag on growth and will continue to
be the major focus of the JLP-led government. Access to the USD 65
million loan depends on the speed with which Jamaica reforms its
fiscal structures to address this debt. The faster the pace of
reform, the higher the loan amounts available and the more technical
assistance the WB will provide. That said, Jamaica will also be
free to proceed at a slower pace, but this would translate into
smaller loans. The comprehensive reform agenda hinges largely on

KINGSTON 00000457 003 OF 003


the promotion of debt and fiscal sustainability. The first
objective is for the GOJ to curb it persistent fiscal deficits to
reduce borrowing. More specifically, the GOJ will be required to
initiate steps toward the adoption of a fiscal transparency and
responsibility act. To access further loans, the GOJ will be
required to draft and submit the act to cabinet for approval. The
last block of funds will be dependent on the implementation of
policies geared at preventing new debt at other public owned
entities, like beleaguered national carrier Air Jamaica or sugar
estate parastatals, from being transferred to the central government
(reftels B and C).

Divestment Of Non-Core Assets
--------------


10. (SBU) The second major objective of the reform agenda involves a
comprehensive program of rationalization of public bodies. In
addition to reducing the risk of debt from these entities being
transferred to central government, the divestment of non-core assets
will provide funds for current expenditure or to pay down the debt.
To fulfill this objective, at least two public sector bodies must be
sold during the first phase of the program. This should be followed
by fifteen in phase two and a number to be decided in phase three.
Other objectives under the WB's Development Policy Lending (DPL)
include: (1) increasing the efficiency of central government's
financial management and budgeting; (2) increasing revenue
collections through a comprehensive tax reform program; and, (3)
maintaining macroeconomic stability.

Food Security on the Agenda
--------------


11. (SBU) With food security high on the GOJ's agenda, the WB also
has been asked to look at the supply side to identify constraints
and recommend solutions (reftel A and D). The GOJ has asked the WB
to look at areas where agricultural output can be expanded. Haque
said the United Nations Development Program (UNDP) is also
conducting a rapid assessment of the impact of rising food prices on
the poorest Jamaicans. The WB is also fielding a mission to look
for possible areas of intervention among the most vulnerable groups.
Rural development is also a key component of the mission and Haque
has expressed keen interest in funding greenhouses to up vegetable
production to supply the tourism sector. "This is one of the key
linkages which can spur rural development and provide a much needed
boost to growth", Haque told emboffs.

Comment
--------------


12. (SBU) Although Jamaica is caught up in one of the worst debt
crises in the world, Haque is confident that if the country embarks
on a comprehensive reform agenda, it could start reaping benefits in
the coming years. The WB official is hedging his bet on the giant
strides taken by Mexico, which encountered a similar problem in the
1990s. Add to this the propensity of members of the new political
directorate to seek, accept, and implement policies from the
multilaterals, and Haque's confidence appears well grounded.
Despite the reticence of some bureaucrats, Haque is convinced that
strong leadership could correct these issues in the near term.
Unlike his predecessor, Shaw has demonstrated that he is willing to
seek advice from both local and international experts. These
efforts appear to be paying dividends, as Shaw already has garnered
over USD 150 million in long-term concessionary financing, while at
the same time addressing tax reform and efforts to reduce corruption
and improve governance structures. However, Shaw's route to success
hinges on his bureaucrats falling in line, and could explain the
recent shake up in his ministry. End Comment.
JOHNSON