Identifier
Created
Classification
Origin
09KINGSTON306
2009-04-22 20:22:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kingston
Cable title:  

FEW OPTIONS FOR CASH STRAPPED JAMAICA

Tags:  ECON TRYS ENRG EFIN EINV ETRD EAIR IADB IBRD IMF 
pdf how-to read a cable
VZCZCXRO6527
PP RUEHGR
DE RUEHKG #0306/01 1122022
ZNR UUUUU ZZH
P 222022Z APR 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 7532
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNCOM/EC CARICOM COLLECTIVE
UNCLAS SECTION 01 OF 03 KINGSTON 000306 

SENSITIVE
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: N/A
TAGS: ECON TRYS ENRG EFIN EINV ETRD EAIR IADB IBRD IMF
KCOR, KIPR, XL, JM
SUBJECT: FEW OPTIONS FOR CASH STRAPPED JAMAICA

REF: A) KINGSTON 303
B) KINGSTON 269
C) KINGSTON 245
D) KINGSTON 223

UNCLAS SECTION 01 OF 03 KINGSTON 000306

SENSITIVE
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: N/A
TAGS: ECON TRYS ENRG EFIN EINV ETRD EAIR IADB IBRD IMF
KCOR, KIPR, XL, JM
SUBJECT: FEW OPTIONS FOR CASH STRAPPED JAMAICA

REF: A) KINGSTON 303
B) KINGSTON 269
C) KINGSTON 245
D) KINGSTON 223


1. (SBU) SUMMARY. As the Bruce Golding-led administration reaches
the 18 month mark; the Government of Jamaica (GOJ) faces difficult
decisions on the eve of its second budget presentation. Still
suffering the effects of the global economic meltdown and frozen
credit markets, the GOJ has been forced to take a hard look at its
practice of generating persistent fiscal deficits and greater debt.
The severity of the situation is weighing on Golding, who has
signaled that changes are inevitable. Already, he has taken the
symbolic step of foregoing a wage increase and taking a 15 percent
wage cut and has encouraged his civil service colleagues to follow
suit. He has made it clear that public sector workers either have
to accept a wage freeze or face up to 22,000 job cuts. Given the
current economic malaise, more robust action will be needed,
including a possible return to the IMF and perhaps debt
restructuring. The GOJ may also be seeking a new central bank
governor. Some analysts are concerned that a mooted gas tax could
spark unrest and rioting, as occurred in 1997. End Summary.


BUDGET HIKE AMIDST ECONOMIC MALAISE
--------------


2. (SBU) The GOJ is set to spend USD 6.2 billion (up 8 percent in
nominal terms) during the 2009/10 fiscal year of which 56 percent or
USD 3.5 billion has been allocated to servicing the country's
gargantuan public debt. (Note: The budget has actually shrunk
nearly 8 percent in real terms compared to last year). The increased
spending is coming amidst a 0.6 percent decline in GDP following

growth of 2.7 and 1.4 percent in 2006 and 2007 respectively.
Although commodities prices, and by extension inflation, have
moderated to some degree, the current account deficit of USD 3.2
billion or 21.9 percent of GDP for 2008 is the largest on record for
Jamaica. The deterioration in the current account deficit was
influenced by a widening of the trade deficit to USD 5 billion
following a USD 1 billion spike in oil imports. At the same time,
slowing global growth reduced external demand for Jamaican goods,
particularly bauxite and alumina, leading to a far more modest rise
in exports at USD 399 million.


3. (SBU) The shortfall of payments relative to receipts, coupled
with the reduction in access to global credit and financial markets,
precipitated a demand supply imbalance, leading to a 23 percent
depreciation in the local currency since September 2008 (reftels).
To stem the tide the central bank hiked interest rates to 24
percent, while continuing its practice of augmenting supplies using
resources from its stock of Net International Reserves (NIR).
However, with demand pressures resilient, the stock of NIR has
declined to USD 1.6 billion or 12.8 weeks of goods imports. This is
just above the international benchmark of three months of goods
imports, suggesting that any further depletion could lead to renewed
speculation and further instability in the foreign exchange market.


REVENUES DIVE
--------------


4. (SBU) The proposed budget hike also comes against the background
of stagnant revenue growth, a direct result of the economic
slowdown. For the first 11 months of the 2008/09 fiscal year the
GOJ collected USD 2.7 billion, USD 240 million below projections.
As a result, the fiscal deficit for the same period is running at
USD 784 million, or USD 10.2 million more than targeted. The
revenue shortfall is largely due to the fall off in sales taxes as
demand for goods and services by Jamaicans declines. There was also
no levy on profits from Bauxite/Alumina companies following the
decision by companies to halt production in the face of falling
global demand for aluminum (reftels).

CAPITAL SPENDING SLASHED TO COMPENSATE
--------------


5. (SBU) As revenues fell and wages and interest payments rose, the
GOJ was forced to cut capital expenditure by USD 200 million.
Although this non-obligatory area of expenditure remains easy prey,
it starves the economy of the capital infrastructure required to
boost economic activity. A lack of capital spending also reduces
jobs in the construction sector for both skilled and unskilled
workers, a sector that was already hit by a slowdown as construction

KINGSTON 00000306 002 OF 003


of tourist hotels has stalled. To close the financing gap the GOJ
also sourced USD 257 million more than planned from the debt market.
The higher demand for credit by the GOJ is partially responsible
for the continued high domestic interest rates; in addition to
increasing debt servicing costs, GOJ credit demand will continue to
crowd out private sector investment.

WAGE FREEZE OR JOB CUTS?
--------------


6. (SBU) While little emphasis is placed on wages and salaries, this
area of expenditure is expected to account for 21 percent of the
budget this year. This means that 77 cents of every dollar of
revenue or new borrowing will be used to finance wages and salaries
and debt servicing for next fiscal year. The GOJ's determination to
make good on its debt obligations means it will need to focus on
ways of reducing its increasingly burdensome public sector wage
costs. Already, PM Golding has signaled his intention to arrest the
growth in this area by agreeing to forego his own wage increase in
addition to giving up 15 percent of his current salary. Golding has
encouraged his colleagues on both sides of the political divide to
follow suit.


7. (SBU) Although his party officials have agreed to the request,
members of the opposition party are resisting. In the face of
robust trade union opposition, Golding also has announced a wage
freeze in the public sector, noting that the only other option would
be a cut of up to 22,000 jobs. Even though Golding is taking a
tough stance, he faces significant opposition from three of the
strongest public sector groups: teachers, nurses, and doctors.
Already Labor Minister Pearnel Charles has had to apply for an
injunction to stop doctors from staging a work slowdown.


GAS TAX COULD FUEL RIOTS
--------------


8. (SBU) Golding is opting for a potentially politically volatile
route of increasing borrowing and introducing new tax measures to
finance the budget. The GOJ will likely introduce a new tax package
including a gas tax (Note: in 1997 a similar measure fuelled the
only island-wide riot in Jamaica's recent history, reftels. End
Note). The "gas riots" lasted for three days, crippling economic
activity and hurting tourism, and only abated after the GOJ
rescinded the decision. Jamaica Observer Columnist and Financial
Analyst Keith Collister told emboffs that the GOJ was debating a JMD
9-10 flat tax (about USD ll cents) on a liter of gas, which now
sells for as high as JMD 65 (USD 74 cents). Collister, a government
sympathizer, also alluded to a possible consumption tax on
electricity, and told emboffs that he had advised the GOJ to
implement the gas tax in smaller tranches over the year. He said if
both measures are implemented concurrently, there is likely to be
rioting of the proportions seen in 1997.


9. (SBU) Collister's advice appears to be finding support, as senior
technocrat at the Ministry of Finance and the Public Service
Courtney Williams told emboffs that the proposed fuel tax was
negotiated down to JMD 7.50 (USD 8.5 cents) per liter, and his
preferred position remained JMD 5.00 (USD 5.6 cents). He said the
electricity tax was still under consideration but, was even more
troublesome, given that a tax could lead to increased theft
especially among larger consumers of electricity. ((Note: Non
technical loss of electricity-theft-at the Jamaican Public Service
Company (JPSC),the monopoly power provider, already stands at 13.2
percent of total output)). Williams said with the JPSC already due
for a rate increase, a consumption tax would be a double whammy. He
also said that the gas tax, which is being sold as a revenue source
to be placed in a dedicated fund for infrastructure, was proposed
for implementation in 2008 when fuel prices were falling, but this
was rejected by the political directorate. In confirming this
position, Collister said that the proposal was actually accepted by
Minister Without Portfolio in the Finance Ministry, Don Webhy, but
apparently rejected by Audley Shaw, Minister of Finance and Public
Service.


10. (SBU) Williams, who also confirmed an increase in the income tax
threshold to reduce the burden on the formal economy, appears to be
less concerned about possible rioting. His view is grounded in the
fact that tax payers already are expecting the tax. (Note the idea
of a potential new gas tax has appeared in newspapers and on the
radio for several weeks). He said the probability of rioting will
be largely based on the size of the tax. He appeared even more
concerned about the policy-induced inflationary effects of the tax

KINGSTON 00000306 003 OF 003


measures and the resulting rising prices that would have a more
significant affect on poorer Jamaicans.


IMF PROGRAM IMMINENT
--------------


11. (SBU) Even if the GOJ is able to add a new tax package and
implement expenditure reductions, the country still faces
significant economic malaise. Remittances, the country's largest
and most resilient foreign exchange flow, have been declining by
double digits since the beginning of 2009 (reftels). Coupled with
the expected collapse in bauxite/alumina and scrap metals earnings,
as well as flat tourism receipts, the overall prospects look bleak.
Given this scenario, there is rising indication that the GOJ will
have to seek an arrangement with the IMF (reftels). Even PM Golding
has backed off his previous position of ruling out a return, by
announcing that a team will be undertaking exploratory talks with
the IMF. Although necessary, this is not an easy step for Golding
given the huge political cost associated with a return to the IMF
(Note: Jamaicans blame the IMF for some of the ills facing the
country because of the austerity measures previously associated with
its lending arrangements. End Note).


12. (SBU) Shaw's former personal assistant, Sidjae Robinson, told
emboffs that Jamaica already was in discussions with the Fund and an
early arrangement could well be a reality. She said the process
should be aided by the fact that Shaw and current IMF Head,
Dominique Strauss Kahn, have developed a good working relationship
-- Strauss Kahn visited Jamaica at the end of 2008. Courtney
Williams also told emboff that internal discussions were ongoing for
a possible return to the IMF, but the move was facing resistance
from central bank governor Derrick Lattibeaudiere, who ironically
stands to benefit (the move would help foreign exchange, interest
rate and inflation problems). (Note: Although the central bank
falls under the authority of Audley Shaw, Minister of Finance and
Public Service, the governor has traditionally operated
autonomously. However, this may change if Lattibeaudiere remains at
odds with Shaw on key issues like the IMF. Lattibeaudiere caused
outrage among the business community earlier in the year when he
took measures to raise interest rates. Robinson asked Emboffs for
resumes of possible candidates with central banking experience,
indicating Shaw may be looking to replace central bank governor.
End Note).

DEBT RESTRUCTURING DEBATE
--------------


13. (SBU) Talk about a possible restructuring of the domestic debt
has also emerged in the last two weeks. The issue was raised during
questioning on the proposed budget at the Standing Finance Committee
of Parliament. PM Golding, cognizant of the damage any official talk
of debt restructuring could have on the credit market, was at pains
to point out that the GOJ was committed to continue making good on
its debt obligations. He did disclose, though, that discussions
were taking place among a group of creditors, and he would be
willing to listen to any proposal they might present. In a thinly
veiled warning to creditors, he went on to suggest that it was in
everyone's interest to understand the current problems facing the
country and do what was in the best interest of everyone. Trade
unions also have been arguing that labor should not continue to bear
the brunt of the adjustments (wage freeze) and it was about time
capital (creditors),the major beneficiary of the high interest rate
policy, face some of the pain.

COMMENT
--------------


14. (SBU) The GOJ faces continued hurdles in the face of the global
economic crisis, frozen credit markets, and falling revenue from its
three key sectors: tourism, bauxite and remittances. If the
proposed tax package does lead to public disturbances or riots, it
could further hurt the tourism sector. The sector is still fearful
that the recent attempted hijacking incident of Canadian passengers
aboard a CanJet in Montego Bay could deal a blow to the sector and
hurt future earnings (reftel). Although well handled by Jamaican
security forces and the GOJ's tourism public relations team, it is
too early to tell what impact that event may have on tourist
arrivals. Emboffs are attending the budget debate in Parliament on
April 23, and will report suptel on specifics of the tax package and
expenditures. End Comment.
HEG