VZCZCXRO5609
PP RUEHGR
DE RUEHKG #0343/01 1141211
ZNR UUUUU ZZH
P 231211Z APR 08
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 6227
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1983
RUEHBR/AMEMBASSY BRASILIA 0101
RUEHCV/AMEMBASSY CARACAS 0526
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 KINGSTON 000343 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CAR (JTILGHMAN)(VDEPIRRO) 
WHA/EPSC (LKUBISKE) (PMAIER) 
 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR SARA GRAY 
 
E.O. 12958:  N/A 
TAGS: ENRG EINV SENV ECON ETRD IBRD IADB JM XL
SUBJECT: JAMAICA PURSUES "DEVELOPMENT WITH EQUITY" 
 
REF: A) KINGSTON 341 
 
SUMMARY 
------- 
 
¶1. (SBU) Jamaica's newly appointed Minister of Finance and Public 
Service Audley Shaw delivered his maiden budget presentation on 
April 10.  The key speech, entitled "Development with Equity, with 
the People at the Center of Our Concern," was the first government 
budget address by a Jamaica Labor Party (JLP) member in 20 years. 
The 2008/09 budget is forecast at USD 6.9 million, with a focus on: 
eliminating the fiscal deficit; increasing growth; and reducing the 
debt-to-GDP ratio.  Debt-servicing costs of USD 3.7 billion, again 
account for the largest share.  In addition to current revenue, 
expenditure will be financed by new tax measures and loan receipts. 
The JLP-led administration is making a deliberate attempt to widen 
the tax net, which eventually could reduce its appetite for debt, 
reduce interest rates, and increase investment and growth.  However, 
given the unfavorable international environment, the Government of 
Jamaica (GOJ) may be hard pressed to meet its short term targets. 
End Summary. 
 
Development with Equity 
----------------------- 
 
¶2. (SBU) Minister of Finance and Public Service, Audley Shaw, 
delivered his inaugural budget speech on April 10.  This was also 
the first Parliamentary presentation by a JLP government since 1987, 
when Prime Minister and Minister of Finance and Planning Edward 
Seaga had announced that the country would achieve its first surplus 
in 22 years.  Despite the ravages of Hurricane Gilbert, the economy 
still had registered growth of 2.2 percent a year later, a result 
Shaw attributed to the foundation laid after the turbulent 1970s. 
In noting the similarities between the current and post 1970s 
periods, Shaw suggested that the country is obliged to seek answers 
from an assessment of past policy errors, which should never be 
repeated if the country is to progress.  He said this progress must 
be inclusive, with everyone feeling that there is an opportunity for 
a better life.  In this regard, he said the JLP's first budget must 
lay the framework for "Development with Equity, with the People at 
the Centre of Our Concern". 
 
JLP'S Framework for Economic Development 
---------------------------------------- 
 
¶3. (SBU) In outlining the new government's framework for growth and 
development, Shaw alluded to the expectation of the populace for 
improvements in their living standards based on improved governance 
and new economic initiatives.  Against this background, Shaw 
outlined his five pillars to rebuild the economy.  These include the 
need to: (1) apply a strong disciplined approach to fiscal and debt 
management; (2) reform the tax system; (3) reduce bureaucracy, 
corruption and waste; (4) increase local and foreign investment; 
and, pursue energy conservation and the development of alternative 
energy.  As part of the fiscal and debt management program, the GOJ 
has initiated dialogue with multilateral institutions for better 
terms on loans for heavily-indebted middle income countries 
(reftel).  In the interim, the government has signed policy-based 
loan agreements for almost USD 120 million, while negotiating 
another USD 219 million, all priced at interest rates ranging from 
4.2 to 6.5 percent. 
 
Ambitious Medium Term Framework 
------------------------------- 
 
¶4. (SBU) With the JLP's promise to deliver robust growth and 
employment in mind, the 2008/09 macroeconomic program aims to create 
conditions that support medium term economic expansion.  In this 
regard, the administration is placing emphasis on agriculture and 
manufacturing, while pursuing fiscal and monetary consolidation to 
moderate inflation, build up reserves, and bolster investor 
confidence (Note: Septel will outline the vision for agriculture to 
address the looming food crisis. End note).  Shaw's budget was 
formulated within a four-year program aimed at eliminating the 
fiscal deficit and reducing the debt-to-GDP ratio to 100 percent. 
The medium-term program also is targeting an acceleration in 
economic growth to three percent, a moderation in prices to ten 
percent, and a decline in the current account deficit to 15 percent 
of GDP. 
 
The Raw Numbers 
 
KINGSTON 00000343  002 OF 003 
 
 
--------------- 
 
¶5. (SBU) The expenditure budget for 2008/09 amounts to USD 6.9 
billion, or 20 percent more than the revised budget for 2007/08. 
But with inflation running at nearly 20 percent, the new budget is 
flat in real terms.  Of the total expenditure, USD 4.3 billion or 62 
percent is set for recurrent or day-to-day spending (this includes 
interest payments), while the other 38 percent (USD 2.6 billion) is 
slated for capital spending (includes principal repayment).  Debt 
servicing (interest and principal payments) of about USD 3.7 billion 
(up 19.5 percent) will again absorb the lion's share of the budget. 
At this level, 54 cents out of every dollar of expenditure will be 
spent on repaying the debt in 2008/09.  The increased debt servicing 
costs are a direct result of the absorption of debt accrued by loss 
making public sector entities such as the airline Air Jamaica, the 
National Road Construction Company, and the Sugar Company of 
Jamaica.  When wages and salaries of nearly USD 1.5 billion are 
factored in, this leaves only USD 1.7 billion for social and capital 
infrastructure.  That said, the new government has made a deliberate 
effort to increase capital spending, which has almost doubled to USD 
630 million or 4.7 percent of GDP. 
 
                           2007/08 2008/09 2009/10 2010/11 
Inflation (percent)            19.2    10.0     8.0     7.0 
Real GDP Growth (percent        0.9     3.0     3.5     3.5 
NIR (USD Billion)               1.9     1.9     2.1     2.2 
Fiscal Bal/GDP (percent)       -4.7    -4.5    -2.5     0.0 
Source: Ministry of Finance and Planning 
 
In keeping with commitments to improve social services and food 
security, almost 56 percent (USD 1.8 billion) of the non-debt budget 
has also been allocated to national security, education, health, and 
agriculture. 
 
Financing the Budget 
-------------------- 
 
¶6. (SBU) In light of the progressively worsening international 
economic climate, Shaw pointed out that the financing of the 2008/09 
budget has been one of the most challenging in recent years.  He 
said to aggravate the problem, the external capital market and 
international financial institutions are paying increased attention 
to Jamaica's medium term fiscal profile, after years of missed 
targets.  With tax compliance running at around only 38 percent, and 
with outstanding taxes amounting to almost USD 1 billion (excludes 
interest and penalties), the GOJ plans to adopt an aggressive 
strategy to increase revenue collections through among other things 
audit and assessment, collections, and taxpayer education (reftel). 
At the centre of this strategy is a tax amnesty package, which will 
run from June to October 2008.  More specifically, the 2008/09 
budget will be financed by a combination of revenues, grants and 
loan receipts.  Revenues are projected to increase by 18.3 percent 
to USD 4.2 billion and grants by 21.9 percent to USD 77 million, 
while loan receipts are expected to provide another USD 2.6 billion. 
 This amount includes USD 126 million from multilateral and 
bilateral sources for capital projects. 
 
Tax Reform and Limited Tax Package 
---------------------------------- 
 
¶7. (SBU) In order to fill the gap and achieve the fiscal deficit 
target of 4.5 percent of GDP, the government proposed a limited tax 
package of USD 75.8 million, while giving back USD 33 million in 
concessions for a net amount of USD 42 million.  A significant 
amount of the increase is expected to come from higher cigarette 
taxes, also a strategy to reduce the incidence of smoking. 
Additional funds will be generated from higher motor vehicle taxes. 
The goal is also to reduce fuel consumption by charging higher taxes 
on less fuel efficient vehicles. 
 
¶8. (SBU) To stimulate investment and growth, the GOJ has removed the 
tax on private dividends and reduced the transfer and stamp duty on 
real estate transactions.  Shaw announced that a team led by 
Minister Without Portfolio Don Wehby are engaged in an extensive 
review of proposed tax reform measures.  Shaw reiterated his 
government's commitment to the process, which was last overhauled 21 
years ago.  To kick start the process, he proposes a consolidation 
of the more than five different statutory deductions into one social 
security payment this fiscal year.  He also outlined plans for 
administrative reforms to include the tax amnesty. 
 
 
KINGSTON 00000343  003 OF 003 
 
 
Comments 
------- 
 
¶9. (SBU) After almost 20 years out of power, the JLP has embarked on 
an ambitious program geared at fiscal consolidation, debt reduction, 
and accelerated growth.  This is particularly important as the JLP 
is cognizant of its promise to deliver jobs.  Shaw is hoping that 
his Party's pursuit of good governance will lead to reduced 
corruption, waste, bureaucracy, and red tape.  He also is banking on 
the removal of at least two loss making entities from the budget 
this fiscal year: Air Jamaica and the sugar estates.  But promises 
aside, after years of missed targets, the achievement of the fiscal 
target will be critical to regain the country's credibility among 
external creditors.  In this regard, the government may have erred 
in understating its inflation target, as prices are already running 
at 5.2 percent for the first three months of 2008-- more than half 
the 10 percent calendar year target.  Although the tax measures 
targeting energy conservation are commendable, they will only add to 
the price instability (policy induced); add the cost push effect of 
rising commodity prices, and the problem magnifies.  Runaway prices 
also could bring other challenges as they could impact interest cost 
and stymie private sector borrowing, thus derailing the growth 
agenda.  Worse yet, any up-tick in interest rates could increase the 
debt stock, which now stands at USD 14 billion.  The GOJ will have 
to wish for better than anticipated returns from its tax amnesty, as 
well as increased borrowing from multilaterals, to improve the 
fiscal dynamics.  (Note: Septel will provide external comments on 
the budget. End note).  End comment. 
JOHNSON