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DE RUEHKG #0759/01 3481938
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O 141938Z DEC 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0390
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHDG/AMEMBASSY SANTO DOMINGO IMMEDIATE
RUEHLO/AMEMBASSY LONDON IMMEDIATE 0118
RUEHOT/AMEMBASSY OTTAWA IMMEDIATE
RUEHCV/AMEMBASSY CARACAS
RUEHKG/AMEMBASSY KINGSTON

C O N F I D E N T I A L KINGSTON 000759 
 
SIPDIS 
STATE FOR WHA/CAR (VDEPIRRO) (WSMITH) (JMACK-WILSON) 
WHA/EPSC (MROONEY) (FCORNEILLE) 
EEB/TRA (VLIMAYE-DAVIS) 
EEB/ESC/IEC (GGRIFFIN) 
EEB/IFD/ODF (MSIEMER) 
EEB/ESC/IEC/EPC (MMCMANUS) 
INR/RES (RWARNER) 
INR/I (SMCCORMICK) 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR ERIN NEPHEW 
EXPORT IMPORT BANK FOR ANNETTE MARESH 
USTDA FOR NATHAN YOUNG AND PATRICIA ARRIAGADA 
OPIC FOR ALISON GERMAK 
 
E.O. 12958: DECL: 2034/12/14 
TAGS: ECON EFIN EAIR EINV SOCI PREL PINR TRSY IDB IMF JM
XL 
SUBJECT: JAMAICA: ON THE BRINK OF AN IMF DEAL 
 
REF: KINGSTON 956; KINGSTON 737; KINGSTON 743; KINGSTON 622 
KINGSTON 800; KINGSTON 315 
 
CLASSIFIED BY: Isiah Parnell, CDA; REASON: 1.4(B), (D) 
 
Summary 
 
----------- 
 
¶1. (C)  The Government of Jamaica (GOJ) appears on the verge of 
pursuing a selective default with local debt holders in order to 
secure a much needed Standby Agreement with the International 
Monetary Fund (IMF).  Prime Minister Bruce Golding has been adamant 
in wanting to avoid any blemish on the country's flawless credit 
history, but necessity has forced him to accept harsh realities. 
PM Golding is keen to demonstrate to taxpayers, who for years have 
had a majority of their tax payments used for debt servicing, that 
local bondholders will now be required to shoulder at least some of 
the burden in reducing Jamaica's indebtedness.  For years, local 
bondholders have derived substantial returns from low-risk, 
high-yield debt instruments.  However, taxpayers will not be spared 
as PM Golding, for the third time in nine months, announced plans 
for a new tax package effective January 1.  End Summary 
 
 
 
IMF Team Arrives For Final Trip? 
 
---------------------------------------- 
 
¶2. (C) The IMF team arrived on December 12, once again led by IMF 
Caribbean Division Chief, Trevor Alleyne (Reftels A and B).  Local 
press mistakenly reported that the team had arrived December 9 as 
originally scheduled; however, the team was delayed because of a 
disagreement among its team members regarding the execution of the 
debt operation.  According to Ministry of Finance contacts close to 
the deal, some of the financial experts from the IMF team fear that 
the debt operation could have adverse affects on weaker entities in 
the financial services sector.  Other members of the team accept 
this risk, but believe that a watered down solution would only 
provide momentary relief, and might require even more serious 
measures in the future.  As it stands, the GOJ appears set to 
pursue a "voluntary "debt exchange with lower coupons and extended 
maturities, and this could affect the balance sheet of some of the 
more vulnerable financial institutions, potentially leading to a 
contagion effect that could cause a run on the financial sector as 
investors lose confidence in the system, increasing the risk of 
capital flight. 
 
 
 
¶3. (C) GOJ and the IMF recognize that the national airline Air 
Jamaica needs to be privatized; however, timing is an issue, given 
the costs associated with divestment.  Most of the costs will be 
short term in nature and cannot be absorbed in the current fiscal 
year.  This will require some creative solutions if Air Jamaica is 
to be sold this year as expected, and may require pushing some 
debts into the next fiscal year (Reftel C).  Also, the proposed USD 
1 billion PetroJam refinery expansion could be postponed, as the 
IMF is unwilling to have the GOJ provide a sovereign guarantee for 
the project.  This is not likely to be well received by the 
Government of Venezuela, which recently purchased a 49 percent 
stake in the refinery, and could have implications for Jamaica's 
benefits under the PetroCaribe agreement (Reftel D). 
 
 
 
New Taxes On The Way 
 
 
 
 
 
---------------------------- 
 
¶4.  (C) In an attempt to close the current budget gap of JMD 10 
billion (USD 110 million) the GOJ is set to announce another major 
tax package to come into effect January 1.  This is the third tax 
increase for the fiscal year and follows closely on the heels of an 
October increase, but given that revenue collections are 
anticipated to remain below expectations it is likely that even 
with the tax increase there will still be a sizable budget 
shortfall by the end of the fiscal year on March 31, 2010 (Reftel 
E).  The tax package is expected to be comprised largely of an 
increase in the general consumption tax (GCT) and the special 
consumption tax (SCT) on fuel.  The GCT rate, currently at 16.5 
percent, may rise closer to 18 percent, while the SCT on fuel will 
be increased by JMD 8.75 (USD 0.10 ) the same amount by which it 
was increased in April (Reftel F).  At that time, there was 
widespread concern the SCT increase could lead to social unrest, 
but fortunately there were only a few isolated incidents.  However, 
with economic conditions worsening since April, the GOJ is likely 
to be even more concerned about an explosive public reaction to the 
tax hike. 
 
 
 
Public Sector Cuts 
 
--------------------- 
 
¶5.  (C)  The income tax threshold may also be increased which would 
provide relief to many low income taxpayers and mitigate some of 
the impact of the GCT and SCT increases. (NOTE The GOJ still only 
collects about 50 percent of the tax revenue that is owed.  End 
Note).  There are also expected to be public sector layoffs and a 
three-year wage freeze.  Public sector wages are second only to 
debt servicing in terms of total budget expenditures.  During the 
two years of PM Golding's term, public sector wages have increased 
by almost fifty percent, although PM Golding has frequently 
highlighted the fact that these wage increases were contractual 
obligations he inherited from the previous Peoples' National 
Party-led administration. 
 
 
 
Comment 
 
---------- 
 
¶6. (C) After several months of vacillating and numerous speeches in 
which he hinted at major reforms on the horizon, PM Golding finally 
appears ready to act decisively.  He is set to make another 
defining speech in Parliament on December 15, which is the last 
sitting of Parliament for the 2009 session; hopefully, it will 
include the specifics that both the private sector and the public 
have been anticipating.  However, the Jamaican economy is still in 
severe recession; the imposition of these new tax increases could 
send the economy deeper into the abyss if the private sector is 
unable to cope with additional burdens.  End Comment. 
Parnell