JAMAICA: TWIN DEFICITS AND A USD 1 BILLION

C O N F I D E N T I A L KINGSTON 000245

SIPDIS

STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/ESC/IFD/EPC (MCMANUS)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW

E.O. 12958: DECL: 03/28/2024
TAGS: ECON ENRG SOCI EFIN EINV ETRD IADB IBRD TRYS
IMF, XL, JM
SUBJECT: JAMAICA: TWIN DEFICITS AND A USD 1 BILLION
SHORTFALL

REF: A. KINGSTON 223

B. KINGSTON 91

C. KINGSTON 45

Classified By: CDA James T.Heg for reasons 1.4 (b) and (d)

SUMMARY
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1. (C) Jamaica is facing a classic twin deficit problem, with
both fiscal and balance of payments deficits rising quickly.
The 2008-09 National budget will face a deficit of six
percent of GDP, according to Finance Minister Audley Shaw.
World Bank Country Representative Badrul Haque estimates that
this deficit could rise to over 12 percent of GDP by next
year unless serious mitigation measures are implemented. The
question remains as to whether the Government of Jamaica
(GOJ) has the political will to follow through on aggressive
reforms. The World Bank estimates that the GOJ will require
nearly USD 1 billion to fill the financing gap. About
one-third of these funds already have been secured from
multilaterals; the balance may need to come from the IMF.
Jamaica has faced significant financial challenges before,
but never in such an adverse global climate. END SUMMARY.

Usual "Muddle Through" Approach Could Be Disastrous
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2. (C) It is uncertain if the Jamaica Labour Party (JLP)-led
government is willing to make a range of difficult and
politically explosive choices including raising taxes,
cutting public spending and reducing social services. Some
measures being considered are a new gasoline tax. The last
time this was proposed in April, 1999, there were island-wide
riots over three-days, which affected commerce in general and
tourism specifically as visitors were stranded in their
hotels or at airports. The ensuing riots forced the
government to rescind the proposed gas tax). Successive
administrations of the GOJ have believed they can always
&muddle through8 economic problems no matter how severe.
However, this time around that approach could end in
disaster.

Other Measures On The Table
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3. (C) Another option being considered is to freeze and/or
cut public sector wages. Dwight Nelson, Minister without
Portfolio in the Ministry of Finance and Public Service, told
Emboffs on March 19 that a wage freeze was all but secured.
Public sector wages and salaries account for the second
largest part of GOJ expenditures, second only to service on
the public debt. Currently, public debt-to-GDP stands at 114
percent, one of the highest in the world. Public sector
workers have been allotted a seven percent salary increase
for the upcoming fiscal year.


4. (C) Another option being considered is to apply the 16.5
percent General Consumption Tax (value added tax) to items
that are currently zero rated. Other &sin8 taxes such as
alcohol and cigarettes are likely to rise as well. Property
taxes and various user fees may also increase. This new
package of taxes will fuel further policy induced inflation,
affecting price increases across the island.

Twin Deficits and Re-Visit to IMF?
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5. (C) Given the rising trade deficit and by extension
balance of payment deficit (the second of the twin deficits)
there has been significant instability in the foreign
exchange market (reftels). The currency has depreciated by
more than 10 percent since January 1. With this in mind,
Bank of Jamaica (Central Bank) Governor Derrick Latibeaudiere
may anticipate further foreign exchange market instability
and by extension an attack on his highly guarded Net
International Reserves (NIR).


6. (C) The NIR currently stand at USD 1.6 billion, down from
a high of USD 2.25 billion last year. According to Courtney
Williams, Acting Deputy Financial Secretary in the Ministry
of Finance and Public Service, Latibeaudiere,s fear has led
him to encourage Shaw to approach the IMF to seek balance of
payment support. It is worth noting that there are personal
tensions between Latibeaudiere--who acts as if he is


independent of his boss Shaw--and the technocrats at the
Ministry of Finance. (NOTE: Viralee Latibeaudiere, the
Commissioner Designate of Taxation, indicated to Emboffs on
March 25 that the GOJ is five or six percent away from
hitting its tax revenue collection targets for the year. END
NOTE).

Multilateral Solutions?
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7. (C) With the capital markets frozen because of the global
financial crisis, Jamaica has little chance of accessing
these and will be forced instead to rely on multilaterals.
Even if credit conditions were normal, the recent downgrade
of Jamaica,s credit rating by Moody,s and Standard and
Poor,s (reftels) would have diminished the GOJ,s ability to
tap credit. For the upcoming fiscal year, Jamaica has been
able to secure USD 170 million from the IDB in policy-based
loans, another 100 million in concessionary loans from the
World Bank, and USD 33 million from the Caribbean Development
Bank (CDB). However, it is estimated that most of these
loans will not become available until well into the fiscal
year. On March 23, Emboffs met with local representatives of
the Embassy of Japan on March 23 who said they are
considering a concessionary loan for project financing of
nearly USD 55 million. The Japanese Embassy also is
concerned about the GOJ,s ability to weather the current
crisis.

All Three Pillars of Economy Are Threatened
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8. (C) Remittances, Bauxite, and Tourism account for just
under half of GDP, and together form the three pillars of the
local economy. Jamaica,s USD 2 billion in remittances have
until recently been a model of resilience. (NOTE: Even after
the 9-11 attacks and the ensuing economic downturn in the US
economy, remittances continued to grow in Jamaica. END NOTE).
Over the past six months, remittances have been declining,
but the pace has increased in 2009. Remittances are down an
average of 12 percent per month, and slumped to an 18 percent
decline in February 2009.


9. (C) The temporary closure (possibly permanent) of two
Russian-owned bauxite facilities (reftels) will result in a
loss of USD 100 million in tax revenue (bauxite levy),as
well as income tax from lost jobs. Althougt tourism arrivals
have risen slightly over last year -- there were 464,589
visitors from December 15 to March 14 this year, up from
453,000 for the same period last year-- deep discounts by
hotels are reducing profit margins. Sandals, a major resort
chain, is advertising &once in a lifetime 55 percent off
offers8 in the U.S. market. If the GOJ begins reducing
public expenditures for police and security, the move could
lead to a further rise in crime. Any high-profile incidents
of crime against tourists could seriously depress the sector.


COMMENT
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10. (C) The GOJ held a Cabinet meeting on March 26 to discuss
the budget and the fiscal challenges. The Ministry of
Finance and Public Service is collecting a range of data that
should give the GOJ a better understanding of the current
economic situation by next week. There will likely be
negative political fallout if the JLP-led government returns
to the IMF for assistance, but no other options can be seen
on the horizon. With a slim 32 to 28 majority in Parliament
the opposition People's National Party (PNP) will likely try
to take advantage of the situation. The biggest risk is that
the GOJ is slow to act, thinking a "muddle through" approach
can succeed one more time. END COMMENT
HEG