JAMAICA IN ECONOMIC SURVIVAL MODE

UNCLAS SECTION 01 OF 03 KINGSTON 000405

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/ESC/IFD/EPC (McMANUS)
INR/RES (RWARNER)
INR/I (SMCCORMICK)
WHA/PPC (JUAN GONZALEZ)
EEB/IFD/OMA (RMERRIN)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW
EXIM BANK FOR ANNETTE MARESH
USTDA FOR NATHAN YOUNG AND PATRICIA ARRIAGADA
OPIC FOR ALISON GERMAK

E.O. 12958: N/A
TAGS: ECON TRYS ENRG EFIN EINV ETRD ECIN EAIR IADB IBRD
UNDP, IMF, KCOR, KIPR, XL, JM
SUBJECT: JAMAICA IN ECONOMIC SURVIVAL MODE

REF: A) KINGSTON 361
B) KINGSTON 325
C) KINGSTON 315
D) KINGSTON 306
E) KINGSTON 245

SUMMARY
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1. (SBU) Jamaica's gargantuan debt, falling external earnings, and
fiscal imbalance have placed it in a precarious position. Harsh
global conditions have rendered the Government of Jamaica's (GOJ)
medium-term macroeconomic framework useless, and have forced an
increase in the stock of debt to augment slowing revenues. In
addition to pushing up interest rates, the higher borrowing has
burdened the fiscal position. This, combined with falling revenues
from external sources, have led to worsening fiscal dynamics. As
options have narrowed, Prime Minister (PM) Bruce Golding has been
forced to enact a number of stern measures. Public sector workers
have been given the choice of a wage freeze or job cuts. Add in
talks about debt restructuring, albeit speculative, and the severity
of the situation intensifies. The measures being taken may not be
sufficient to slow the tide, and it might be only a matter of time
before the GOJ re-engages the IMF. A previously scheduled IMF
delegation will arrive at the end of May for a two week visit. End
Summary.

Missed Targets, New Forecast
--------------


2. (SBU) Confronted with the challenges emanating from the global
crisis, the Jamaican economy contracted by 0.6 percent in 2008, down
from the 1.2 percent in 2007. The outturn was also well below the
medium term target of 3-4 percent. Inflation of 12.4 percent for
the fiscal year was well below the 19.9 percent registered for the
last fiscal year, but it outpaced the original projected target of
5-6 percent. The GOJ's operations also generated a fiscal deficit
of 5.6 percent of GDP, above the 3 percent target. As the global
economy is expected to remain depressed, the GOJ is forecasting
further economic contraction of 2.5 to 3.5 percent during 2009-10.
Inflation is expected to be in the range of 11-14 percent, while the
fiscal deficit is budgeted at 5.5 percent of GDP. This represents a
total revamp of the medium term macroeconomic framework, which had
programmed a balanced budget by 2009-10, and points to the
challenges facing the country.

Economic Fallout Intensifies
--------------


3. (SBU) The economic fallout has continued into 2009 as real GDP
declined by 2.8 percent during January to March, with only
agriculture (up 13.3 percent) and financial services (up marginally)
registering growth. Inflation moderated to 1.3 percent, but policy
based inflation is expected to increase significantly in the next
quarter on the back of the tax package implemented in April (reftel
C). The fiscal deficit was USD 210 million, which is unusual, since
most revenues are collected in the period. During the quarter there
was also a 15 percent depreciation in the local currency, while
remittances declined by 15 percent to USD 414.6 million. The GOJ
announced the introduction of a new 5,000 Jamaican dollar note on
May 18, worth about USD 56.5; the highest prior note was 1,000 (USD
11.3),released in 2001.

Bauxite Taken Down, Taps Out
--------------


4. (SBU) The impact of the crisis has been felt most in the mining
sector, which declined by 28.2 percent during the quarter,
reflecting declining global demand for the country's major
merchandise export. This has resulted in a near collapse of the
once lucrative bauxite/alumina sector, as three plants (owned by UC
Rusal of Russia and Norsk Hydro of Norway) have ceased operations
(reftel B). The implications are far reaching, as almost 2,000 of
the country's most skilled and well paid workers have found
themselves unemployed. The once thriving towns around the bauxite
belt are also expected to stagnate as demand for goods and services
wanes. GOJ revenues have also taken a hit, forcing the

KINGSTON 00000405 002 OF 003


implementation of a USD 285 million tax package. So dramatic is the
fallout in the sector that Minister Without Portfolio in the
Ministry of Finance, Don Wehby, has suggested that if tourism and
remittances fall off and oil prices increase, the country's stock of
Net International Reserves (NIR) could halve (USD 800 million) by
March 2010. (NOTE: This would be a worst case scenario; before it
occurred a return to the IMF would have been triggered. END NOTE).
Although tourism earnings have remained flat, remittances have been
declining for the first time, by fully 15 percent in the first
quarter of 2009.

Debt Climbs...
--------------


5. (SBU) In order to augment slowing revenues, the GOJ also has also
been forced to resort to the unpopular solution of increased public
borrowing. For the 2008/09 fiscal year, public borrowing exceeded
the initially budgeted amount by USD 326 million. This had the
effect of adding to the already gargantuan debt stock, which
increased by 13 percent to USD 12.7 billion. (NOTE: A majority of
the debt is locally held; Jamaican financial institutions hold 53.85
percent of the GOJ debt. END NOTE). However, the debt-to-GDP ratio
moderated to 107 percent from 140 percent three years ago,
highlighting the significant positive impact inflation has had on
the ratio over the period. GOJ borrowing continues to push up
interest rates (up to 24 percent) and by extension crowd out private
sector borrowers, thus starving potential future business growth.
(NOTE: Several medium sized business owners have complained to
Emboffs about the high cost of credit and its stymieing effect on
business deals. END NOTE).

... And Exceeds Revenue
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6. (SBU) Debt servicing costs, which had been trending down to fifty
percent of the budget, have now given up those gains and have jumped
back to 56 percent. At this level, debt serving costs (interest and
principal payments) exceed the total revenue intake, forcing the GOJ
to borrow to finance all other expenditure items. The fact that the
GOJ has still not privatized major loss making parastatals like Air
Jamaica and the Sugar Company of Jamaica makes the balance sheet
looks even worse. If one adds in the significant amount of
contingent liabilities (loan guarantees) associated with these same
companies, the effective debt-to-GDP ratio could well near 150
percent.

Golding: Raises Taxes, Talks Tough
--------------


7. (SBU) As debt costs again absorb a greater portion of the budget,
the GOJ has embarked on another round of fiscal juggling. Although
capital expenditures are being cut, the Golding administration also
has announced a public sector wage freeze (reftel A). Public sector
wages of USD 1.3 billion doubled over the last six years to become
the second largest call on the budget, and a wage adjustment for the
current period would have added a further USD 43 million to the
bill. In light of this, Golding was left with little choice but to
stand up to the country's powerful trade union grouping in the face
of mounting pressure. He went as far as telling some protesting
workers and their unions that his administration would not be
bullied. He said in a press conference, "This Government is not
going to be cowered, is not going to be yielding, and is not going
to be genuflecting, simply because people believe they have a kind
of power that can hold the country to ransom."


8. (SBU) He also signaled his intention to contain spending by
having Permanent Secretaries monitor and report on expenditures
quarterly. In a token attempt to control the wage bill, he also
announced a policy to contain employment growth by leaving
non-critical vacancies unfilled and, where possible, retiring some
posts (reftel A). He also took a decision to reduce the USD 2.5
million in annual rent being incurred by GOJ entities by mandating
that some offices move to the 269,000 square feet of empty
government-owned space.

Debt Restructuring Debated
--------------

KINGSTON 00000405 003 OF 003




9. (SBU) The narrowing menu of options also led UNDP resident
representative Minh Pham to publically initiate a discussion on
April 5 on the benefits of debt restructuring. This idea has found
resonance among trade unionists and some analysts, who have been
arguing for the holders of capital to absorb some of the burden of
fiscal adjustment. Pham said his agency was willing to provide a
forum for dialogue between the GOJ and its domestic creditors to
work out a plan for proposed debt rescheduling. But even this
approach could be challenging, given that successive governments
have guarded, and even boasted about, their creditworthiness.


10. (SBU) Pham has argued that with each Jamaican owing about USD
5,000 of the debt, there is a need to look at how the country
balances the interests of the few creditors with that of the needs
of the population in order to find a win-win solution. However,
most of the domestic institutional creditors appear unwilling to
accept this option, positing that it could curtail access to credit
for a long time and/or lead to further downgrades by rating
agencies. The GOJ has a long history of paying its debt and does
not want to have the blemish of asking for debt write offs or
forgiveness on its record. Against this background, it is unlikely
that the debt hungry GOJ will pursue this approach. (NOTE: If the
situation continues to worsen, there is a chance that some debt
holder may voluntarily take a slight reduction in interest owed to
ease pressure on the GOJ's debt payment, in keeping with the idea
that a healthier Jamaica with requisite public funds for schools,
crime prevention, and health care will be more likely to grow the
economy and tax revenue and thus successfully repay the loans. END
NOTE).

IMF Dialogue
--------------


11. (SBU) Therefore, despite the reluctance, the GOJ appears to be
left with little option but to return to the IMF. However, the
timing of this decision might have to be dictated by the economic
imperatives, as Golding has suggested that he is reluctant to
negotiate an IMF program. This is understandable, since Jamaicans
remain wary of the IMF because of the conditions once associated
with the Fund's lending programs. Wehby, who along with Central
Bank Governor Derrick Lattibeaudiere held a dialogue with the IMF in
early May, explained that the meeting with the IMF had been merely
exploratory, geared towards sourcing alternative funding should the
need arise. "What it (was) is planning if there is a worse case
scenario in Jamaica how are we going to satisfy our external needs,"
he revealed. "A direct benefit of the exploratory meeting with the
IMF, is that the NIR could be boosted by up to USD 300 million",
Wehby continued. But a Senior Director at the BOJ told Emboffs that
the GOJ should immediately engage the IMF before the funds
contributed by the G20 deplete. She said Lattibeaudiere, although
reluctant in principle, is interested in an IMF program given the
perilous state of the external accounts. In this regard, months ago
he gave instructions to his technocrats to put numbers together in
preparation for a program.

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


12. (SBU) With Jamaica yet to face the full extent of the global
recession, there is every likelihood that the economic dynamics
could deteriorate further, leading to another bout of instability.
External accounts face the greatest danger, given the decline in
export earnings even as imports remain high. In essence, the
country could face a balance of payments (BOP) crisis, leading to
further depreciation in the local currency. In addition to
depleting the stock of NIR, further depreciation will only serve to
drive up inflation and keep interest rates high. But this
eventuality could well accelerate a return to the IMF, which, while
feared by most Jamaicans, could provide the impetus for some of the
structural changes required to revive the moribund economy. END
COMMENT.
HEG