JAMAICA: IMF NEGOTIATIONS IGNITE DEBATE,

UNCLAS SECTION 01 OF 03 KINGSTON 000551

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (RALVARADO)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/IFD/OMA
WHA/PPC (JGONZALEZ)
INR/RES (RWARNER)
INR/I (SMCCORMICK)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW
EXPORT IMPORT BANK FOR ANNETTE MARESH

E.O. 12958: N/A
TAGS: ECON ENRG EFIN EINV ETRD PGOV PREL IADB
IBRD, IMF, TRYS, JM, XL
SUBJECT: JAMAICA: IMF NEGOTIATIONS IGNITE DEBATE,
ECONOMIC FIRE STORM CONTINUES

REF: A. KINGSTON 521

B. KINGSTON 517

C. KINGSTON 422


1. (SBU) SUMMARY AND ANALYSIS. A Government of Jamaican
(GOJ) delegation led by Don Wehby, Minister Without
Portfolio in the Ministry of Finance, visited Washington
the week of July 6 to intensify negotiations with the
International Monetary Fund (IMF). The GOJ's failure to
reach most of its economic targets for the first three
months of the fiscal year is adding a sense of urgency to
the negotiations. The situation is becoming so dire that
in May, for the first time in over a decade, Jamaica did
not generate a primary surplus; the GOJ had to borrow
funds just to repay interest on its debt.


2. (SBU) The absence from the delegation of Minister of
Finance Audley Shaw and Central Bank Governor Derrick
Lattibeaudiere was criticized by the opposition Peoples'
National Party (PNP),which hoped to score political
points after being defeated in two major by-elections
this year.
After nearly a year of public discussions, most Jamaicans
are now resigned to the imminent return to the IMF
agreement, even though PM Golding continues to speak of
it in abstract terms. An IMF arrangement appears
imperative, not just for the financial support, but
particularly because it will force the GOJ to address
some of the structural changes required for the country
to get out of its economic quagmire. End Summary and
Analysis.

GOJ Team Visits IMF
--------------


3. (SBU) The week of July 6 Wehby led a team of senior
GOJ officials to accelerate negotiations with the IMF for
a new borrowing arrangement to shore up the country's
weakening external position (reftel A). The team
included members from the Ministry of Finance, the Bank
of Jamaica (Central Bank) and the Planning Institute of
Jamaica. The discussions, which are at an advanced
stage, were expected to reach consensus on a number of
issues, including the amount of funding required to
address the balance of payments (BOP) fallout, as well as
the measures Jamaica would adopt to address the country's
chronic economic woes.


4. (SBU) In particular, the IMF was interested in
Jamaica's solution to the country's gargantuan debt stock
(equal to nearly 110 percent of GDP),and by extension
persistent fiscal deficits and anemic economic growth.
Wehby told Econoff prior to his departure that the IMF
was specifically interested in the GOJ's plan for
improving tax collection.

Absence Ignites Political Storm
--------------


5. (SBU) The opposition PNP drew attention to the fact
that both Shaw and Lattibeaudiere did not attend,
igniting speculation and public debate on the reasons for
their absence. The move comes against the background of
Wehby's pending departure from the GOJ and his return to
the private sector at the end of July (reftel B). Former
Finance Minister Omar Davies maintained it was
unforgivable for Shaw and Lattibeaudiere to be absent
from such critical discussions. Davies said the move was
irresponsible, given that Wehby was on his way out of
government. (Note: It was suggested to Emboffs that
Shaw, the consummate politician, had stayed behind to
shore up support for a colleague contesting a municipal
by-election. End Note.)


6. (SBU) Opposition Spokesman on Industry and Commerce,
Mark Golding, speaking to a partisan crowd largely
opposed to a return to the IMF, said that Shaw's absence
from the IMF negotiations and his limited role in
preparing the April 2009 budget shows he lacks the
technical competence to manage his portfolio in a time of
crisis. (Note: The PNP administration of the 1990s broke
off its borrowing relationship with the IMF, citing the
harsh conditionalities. Reftel B. End Note).

Shaw and Latibeaudiere Hit Back
--------------


7. (SBU) In an official press release, Shaw chastised the
PNP for criticizing his handling of the IMF negotiations.
He said he did not need to be involved in the discussions
since they are not at a decision-making stage. Prime
Minister (PM) Bruce Golding noted that Shaw traveled to
Haiti on July 16 to meet with the Luis Alberto Moreno the
head of the IDB, to "discuss commitments that are
important to Jamaica." PM Golding said, "We have to keep
the dialogue going, because when we are passing through
this kind of fire storm, we need every friend that we can
find who is prepared to offer assistance." Latibeaudiere
also rejected as "laughable" any suggestion that his
absence from the meeting indicated a rift within the
government regarding IMF talks. He said he has been
involved in discussions with the IMF for the last several
months through videoconferencing and telephone calls.

Economic Woes Intensify
--------------


8. (SBU) Even as both parties engage in a war of words
over IMF meetings, economic conditions continue to
worsen, with the country generating a primary deficit
(revenues minus recurrent expenditure net of interest
payments) for the month of May. This is a sign that the
country's gargantuan stock of debt is becoming
unsustainable amid declining output and falling revenues.
For the first quarter of 2009, economic output declined
by 3.1 percent, due largely to a fall out in the goods
producing sectors (except agriculture),led by bauxite
and alumina. This is expected to precipitate an almost
USD 1 billion fallout in export earnings for 2009.


9. (SBU) To make matters worse, there has been a 17
percent decline in remittances for the first six months
of the year. Remittances are heavily relied upon by many
Jamaicans for the purchase of basic necessities such as
food, rent, and education fees. This decline is expected
to exacerbate worsening poverty levels. Data for the
first two months of the 2009/10 fiscal year also shows
that the fiscal deficit of USD 250 million is running
well ahead of target despite a USD 38 million cut in
expenditures. This is a troubling development, as it
means the increased deficit is solely attributable to the
underperformance in revenues, down USD 62 million. This
suggests that the extent of the economic fallout was
underestimated, and the entire economic framework, thus
might well be questionable.

IMF Program Vital
--------------


10. (SBU) XXXXXXXXXXXX, a senior technocrat at the
Ministry of Finance, told emboffs that the GOJ did not
make as much progress as it had intended in Washington,
but said an IMF program had to be in place within the
quarter to stem the fiscal slide. XXXXXXXXXXXX said that
after intense discussion of the difficult issue of public
sector downsizing, the IMF team moved closer to the GOJ
position that the wage-to-GDP ratio was not out of line
with Jamaica's comparators. He stated that if teachers,
who make up almost one fifth of the public sector, had
not been granted a 50 percent salary hike, the ratio
would have been even more acceptable. XXXXXXXXXXXX said that
the IMF team is expected in Jamaica in late July to
finalize discussions on the solution to the debt problem.


11. (SBU) PM Golding said in a press release on July 16
that whether Jamaica goes to the International Monetary
Fund (IMF) or not, it will not be business as usual,
because the country is facing serious financial problems
that will require an unaccustomed level of discipline.
(Comment: PM Golding continues to talk of serious
financial challenges facing the country, but seems
reluctant to speak frankly to the public about the
country's imminent return to the IMF) End Comment.

Interest Rates Must Fall!
--------------


12. (SBU) XXXXXXXXXXXX said the GOJ and the IMF have grave
concerns about the country's gargantuan debt stock and
the attendant high interest rates. He said based on the
discussions a solution must be found to this problem
before an agreement can be reached. with an estimated
annualized inflation rate of about 10 percent for 2009,
real interest rates are in the region of 11 percent. He
said the sticking point was whether an interest rate
reduction could be negotiated or one would have to be
imposed: an imposition had inherent risks, creating
unease among domestic creditors, on whom the GOJ will
still depend for new debt, and could initiate a run on
the local currency.


13. (SBU) Although PM Golding has been approached by
domestic creditors interested in negotiating a deal,
nothing concrete has materialized to date. Last week,
during a meeting the country's domestic creditors, he
stated his desire for the GOJ to reduce interest rates.
But despite the creditors public posturing, it appears
only U.S.-based Citibank is willing to make concessions.
XXXXXXXXXXXX is doubtful that other financial institutions
will be willing to voluntarily make the concessions
needed for an interest rate deal. When asked about the
magnitude of the concession being sought, XXXXXXXXXXXX
suggested that even a 5 percentage point reduction would
bring much needed fiscal space. The GOJ would like to
have a new ceiling on debt at or near a rate of 16
percent per year in the short term and then hopefully to
extract further concessions on some of the older debt
sourced at rates of 18 to 21 percent to bring them in
line with the new debt ceiling.

ANALYSIS
--------------


14. (SBU) After nearly a year of public discussions, most
Jamaicans are now resigned to the imminent return to the
IMF agreement, even though PM Golding continues to speak
of it in abstract terms. Shaw has signaled that an
agreement is inevitable and Wehby has said flat out, "The
country has no other choice, but to return to the IMF."
(Reftel B). As the country is finding it difficult to
fund some of its major obligations, some analysts are
criticizing the GOJ for waiting so long to approach the
IMF. An IMF arrangement appears imperative, not just for
the financial support, but particularly because it will
force the GOJ to address some of the structural changes
required for the country to get out of its economic
quagmire. End Analysis.
MOSS