JAMAICA RE-EMBRACES THE WORLD BANK

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 KINGSTON 00000457 002 OF 003 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