JAMAICA: JAMAICA'S FISCAL MALAISE

UNCLAS SECTION 01 OF 03 KINGSTON 000800

SENSITIVE
SIPDIS
STATE FOR WHA/CAR (JMACK-WILSON)(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 EFIN EINT EINV ELAB ETRD PGOV PREL SOCI IMF IBRD
JM, XL
SUBJECT: JAMAICA: JAMAICA'S FISCAL MALAISE

REF: KINGSTON 361; KINGSTON 788

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Summary

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1. (SBU) Only five months after outlining its spending plans, the
Government of Jamaica (GOJ) has announced a USD 67 million increase
in expenditures for the current fiscal year. The hike comes after
repeated pronouncements from Prime Minister (PM) Bruce Golding
about deep cuts in the expenditure budget to compensate for the
dramatic fall off in revenues. The first Supplementary Budget
tabled in Parliament on August 24 will therefore increase the
original budget to USD 6.3 billion. This hike was due to higher
than anticipated interest costs, as other areas of proposed
spending were slashed. With the GOJ only able to implement a
limited tax package, the fiscal deficit will jump to 8.7 percent of
GDP from 5.5 percent. This deficit will be financed by further
borrowing from the capital market, adding to the GOJ's gargantuan
stock of public debt. But even with the proposed rationalization
of the public sector, Jamaica's perennial fiscal malaise might not
improve until the debt overhang is addressed. End summary.

Budget Shocker

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2. (SBU) The GOJ has been forced to revise its fiscal targets to
present a more credible budget to the IMF in order to access a USD
1.2 billion loan. In its pursuit of this goal, the cash-strapped
GOJ has had to perform a major juggling act, chopping USD 143
million from program spending and USD 67 million from capital
spending to offset part of the additional USD 280 million in
interest costs. The net effect is that the original budget will be
increased by USD 67 million to USD 6.3 billion. However, this
result runs counter to the position articulated by Golding in the
months leading up to the tabling of the estimates. The PM had
given the impression that 20 percent of the USD 10 billion budgeted
for programs and 15 percent of the capital budget would be slashed
to reduce the original budget.



3. (SBU) The original budget presented in April 2009 targeted a
fiscal deficit of 5.5 percent of GDP (Reftel A). However, by the
end of August 2009 these targets were derailed due to the falloff
in revenues. Revenues for the five month period were 10 percent or
USD 130 million less than expected, while expenditures were almost
in line with projections. For the entire 2009/10 fiscal year, the
government is now expecting: (1) revenues to decline by USD 150
million or the equivalent of 1.1 percent of GDP; (2) the divestment
program to be postponed to the next fiscal year (1.2 percent of
GDP) (Reftel B); and, (3) interest cost to increase by a further
1.5 percent of GDP. These changes are expected to result in an
increase of the fiscal deficit to 8.7 percent of GDP or about USD 1
billion. To finance the budget, the GOJ has imposed a further tax
package of USD 19 million, with the remaining amount to be sourced
from the capital market. This increased borrowing is expected to
keep real interest rates high, providing further conflict between
the Ministry of Finance and the Bank of Jamaica.

Interest Rate Dissonance Hurts Fiscal Performance

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4. (SBU) In a bid to arrest the runaway depreciation of the
Jamaican dollar, the central bank raised interest rates to as high
as 24 percent at the end of 2008. This had a deleterious effect on
the fiscal accounts as, strapped for cash, the GOJ was forced to
borrow at onerous rates of interest. Since August 2009, the
central bank has begun to reduce rates once again, but not before
the GOJ's entire debt portfolio had been realigned toward higher
yielding instruments with longer maturity. At the current rate of
17 percent, real interest rates are about seven percent, while
inflation has moderated to 10 percent. The central bank has

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expressed a desire to reduce rates more aggressively, but appears
to be hindered by the need to maintain monetary stability and, by
extension, exchange rate and price stability. And despite the
reduction in inflation, domestic investors remain unwilling to
accept lower rates, suggesting declining levels of confidence in
the government's ability to pay.

Heroes Circle and Nethersole Place Clash

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5. (SBU) The apparent dissonance between the Heroes Circle-based
Ministry of Finance and the Bank of Jamaica situated at Nethersole
Place is nothing new. Ministry of Finance officials have long told
Emboffs that the central bank operates like an independent
institution, concerned only with maintaining exchange rate and
price stability. Minister of Finance Audley Shaw has also used a
number of his public speaking engagements to address the need for
low interest rates, which he calls the lifeblood of the economy.
At least two ministry sources have told Emboffs that the Minister
is dissatisfied with central bank governor Derrick Latibeaudiere,
but is unable to find a suitable replacement. The problem appears
to be unresolved, as only weeks before the BOJ started reducing
signal rates the MOF issued a number of long term high interest
rate instruments. Golding subsequently told a group of business
leaders that this long standing problem should be resolved
following the appointment of Dr. Wesley Hughes as Financial
Secretary. Hughes, a former Deputy to Latibeaudiere and Director
General of the Planning Institute of Jamaica, is expected to bridge
the divide between Heroes Circle and Nethersole Place.


Opposition Critical of Revised Budget

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6. (SBU) The revised budget has come under attack from the
opposition Peoples National Party (PNP),with its Spokesman on
Finance, Omar Davies, describing the new estimates as still lacking
in credibility. He bemoaned the fact that the original budget was
predicated on the premise that everything that could go right
would, but the deteriorating economic conditions had blown the
estimates off track. Davies, who has been proposing a special
temporary cessation on high yielding debt, is of the opinion that
the revenue projections remain ambitious and warned Shaw to take a
second look at the figures before presenting them to the
International Monetary Fund (IMF). He also reiterated the need to
take a surgical look at expenditures, arguing that cutting the
public sector was not the solution to the fiscal crisis.


7. (SBU) However, Hughes has defended the new estimates, suggesting
that they are credible, technically sound, and able to stand up to
the scrutiny of the IMF. Hughes noted that the cuts, while
painful, were necessary if Jamaica was to present a credible budget
to garner support from the Fund. According to Hughes, the bottom
line is that revenues are lagging projections and expenditures have
been higher than anticipated, and that to deal with the imbalance
there has to be a cut in spending, increased taxes, or a
combination of both. "It is as simple as that", Hughes opined. He
further stated that the revised budget provides a basis for a
sustainable medium term economic program.

Comment

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8. (SBU) The early presentation of the supplementary budget is an
indication that the original forecasts were overly ambitious,
suggesting the GOJ continues to underestimate the impact of global
economic crisis on Jamaica. The early revision would have also
formed part of the IMF's condition for providing balance of
payments support to Jamaica. However, the most important
revelation from the revised estimate is that the country is sinking
deeper into a fiscal quagmire due largely to its unsustainable
levels of borrowing and, by extension, stock of debt. It would

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therefore appear that until the debt overhang is addressed, the GOJ
will only be treating the symptoms of fiscal problems. However,
unless the IMF forces a decision, the problem might extend into the
next fiscal year, as the Jamaican government remains reticent to
take a serious look at a voluntary debt operation, fearing the
repercussions in the international capital market. The GOJ has
instead signaled its intention to restructure the less burdensome
public sector which, while necessary, will not be sufficient to
stem the fiscal malaise. End comment.
Parnell