VZCZCXRO0031
RR RUEHGR
DE RUEHKG #1587 2261833
ZNR UUUUU ZZH
R 141833Z AUG 06
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 3369
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1835
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS KINGSTON 001587 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR (RBUDDEN), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL JM
SUBJECT: FALSE OPTIMISM?  GOJ FINANCES IMPROVE IN FIRST FISCAL 
QUARTER 
 
Ref: Kingston 1559 
 
¶1. Summary:  Government finances for April-June 2006 (the first 
quarter of the Jamaican fiscal year) improved due to strong revenues 
and lower-than-projected capital spending.  For the review period, 
GOJ operations generated a fiscal deficit of USD 115 million, lower 
than the targeted deficit of USD 154 million.  However, the fiscal 
deficit could rise in upcoming quarters as revenues normalize and 
spending increases.  Head of the Fiscal Policy Management Unit at 
the Ministry of Finance, Courtney Williams, told emboff that the 
first quarter result was misleading and that the fiscal position 
could start unraveling by the end of the second quarter.  End 
summary. 
 
----------------------------- 
First Quarter Results Improve 
----------------------------- 
 
¶2. Central government operations for April to June 2006 generated a 
fiscal deficit of USD 115 million, lower than the predicted deficit 
of USD 154 million.  The strong showing reflects a USD 38 million 
increase in tax on interest and a USD 27 million decline in capital 
expenditure relative to budget.  The spike in tax on interest 
stemmed from the collection of taxes from pension funds, which are 
tax exempt.  Once refunded, the flow from this source should 
normalize in upcoming periods.  In fact, tax revenues underperformed 
relative to projections, reflecting the continued sluggishness of 
the Jamaican economy. 
 
¶3. On the expenditure side, the contraction was due to the 
postponement of GOJ projects during the quarter.  For example, the 
Ministry of Education did not begin to spend a USD 76 million 
transfer from the National Housing Trust to modernize the education 
system.  Similarly, funds budgeted for World Cup Cricket were 
underutilized during the quarter, but must be exhausted by the end 
of the fiscal year. 
 
-------------------- 
Challenges Lie Ahead 
-------------------- 
 
¶4. The improvement in GOJ finances could be short-lived given the 
anticipated normalization in revenues and expenditures.  A number of 
challenges are expected to emerge in upcoming quarters.  First, the 
GOJ will not realize a projected USD 45.5 million from its proposed 
divestment of its 20 percent stake in the Mirant-owned Jamaica 
Public Service Company (an electric utility), since the company has 
announced that it is selling its Caribbean operations.  Given the 
uncertainty regarding who might purchase Mirant's stake, the GOJ has 
decided to hold onto its shares.  At the same time, negotiations are 
stalled over the GOJ's sale of a new cellular license, which was 
projected to raise USD 5.5 million. 
 
¶5. Equally challenging are wage disputes with teachers, nurses, 
doctors, the police, and workers at the central bank.  These workers 
remain opposed to the wage increases agreed to under a Memorandum of 
Understanding between trade unions and the GOJ.  Head of the Fiscal 
Policy Unit at the Ministry of Finance, Courtney Williams, opined 
that a government shutdown was possible given the militant mood of 
these workers and their importance to the normal functioning of the 
country.  However, if concessions are made to these groups it could 
lead to an unraveling of an agreement already signed with other 
public sector unions. 
 
¶6. Comment: Fiscal performance is expected to wane for the remainder 
of fiscal year 2006 unless the GOJ is able to find creative ways to 
draw more Jamaicans into the tax net.  There is little room for 
expenditure cuts - particularly with pending elections - and most 
revenue categories underperformed relative to budget during the 
review quarter.  At the same time, relatively high prices and 
increased taxes continue to dampen consumer demand, which not only 
hurt consumption taxes, but also revenues from taxes on company 
profits.  In fact, a recent business confidence survey pointed out 
that the private sector expects profits to fall in upcoming periods 
(reftel).  Reducing expenditures to address this expected revenue 
shortfall is not a viable option as most spending is obligatory in 
nature.  In fact, there could be a loosening in fiscal policy moving 
forward, as the current administration increases spending in 
preparation for the next general election.  Against this background, 
the deficit could actually start to widen by the end of the July to 
September quarter of 2006.  End comment. 
 
JOHNSON