VZCZCXRO3311
RR RUEHGR
DE RUEHKG #0422/01 1341808
ZNR UUUUU ZZH
R 131808Z MAY 08
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 6332
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 KINGSTON 000422 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CAR (JTILGHMAN)(VDEPIRRO) 
WHA/EPSC (LKUBISKE) 
EEB/IFD/OMA (ALDO SIROTIC) 
 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR SARA GRAY 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ENRG PREL EAGR EINV ETRD JM XL
SUBJECT: JAMAICA'S CENTRAL BANK WARNS OF PRICE INSTABILITY 
 
REF: KINGSTON 111 
KINGSTON 343 
KINGSTON 366 
 
SUMMARY 
------- 
 
¶1. (SBU) Spiraling inflation is complicating planning for Jamaican 
policy makers.  Inflation for the first three months of 2008 is 
running at 5.2 percent and the central bank is warning that prices 
could jump by a further six percent in the next three months.  This 
would bring prices for the first half of 2008 to over 11 percent, 
surpassing the original 11 percent target for the entire year. 
Inflation continues to be driven by local and international 
commodities prices as well as policy-based decisions.  The foreign 
exchange market remains stable, with the local currency depreciating 
by only 0.7 percent.  Rising prices have forced the Central Bank to 
revise the inflation target to between 11.5 and 14.5 percent.  Even 
if international commodities prices were to decline significantly 
during the second half of the year (which is unlikely), it is 
improbable that inflation will fall within the new target range. 
End summary. 
 
INFLATION A MOVING TARGET 
------------------------- 
 
¶2. (SBU) Spiraling inflation, fuelled by rising food and oil prices, 
is complicating planning for Jamaican policy makers.  Only a month 
ago, Minister of Finance and the Public Service Audley Shaw 
projected inflation of between nine and ten percent in 2008, a 
marked slowdown from the 16.8 percent registered in 2007.  However, 
speaking at a Quarterly Monetary Policy Report (QMPR) Meeting on May 
7, one of Shaw's chief advisors and Governor of the Central Bank 
Derrick Latibeaudierre revised the annual inflation target to 
between 11.5 and 14.5 percent. He also projected inflation of six 
percent for April to June 2008.  Although this forecast is at best 
optimistic, it means inflation for the first half of 2008 could be 
11.2 percent, which is close to the 11.5 bottom range of his 
projection for the entire year.  When asked at the meeting why an 
upward revision was made in such a short period of time, 
Latibeaudierre blamed the change on unforeseen movement in 
international commodities prices.  He added, "The underlying 
assumptions have changed since April, with the prices of rice and 
corn rising well beyond our expectations." 
 
RECORD INFLATION 
---------------- 
 
¶3. (SBU) Despite a government subsidy on basic food items, inflation 
for the first three months of 2008 was 5.2 percent, bringing prices 
for the fiscal year ending March 2008 to 19.9 percent.  Inflation 
for January to March 2008 was also above the projected 3.5 percent 
as well as the average of 1.2 percent for the last five March 
quarters.  Cost-push inflation continues to provide the major 
impetus for price hikes.  Food, which accounted for over 50 percent 
of the increase, remained the single most dominant influence on 
inflation during the March quarter.  Food- related inflation 
continued to emanate from both domestic and international 
agricultural commodities, with the prices of rice and corn rising by 
35.9 and 28 percent, respectively.  Wheat prices, an input for 
flour, baked products and animal feeds, jumped by a further 18.3 
percent.  Upward pressure on prices has also been caused by rising 
energy costs for producers being passed through to consumers. 
 
RISK OF PRICE INCREASES PERSISTS 
-------------------------------- 
 
¶4. (SBU) As the country grapples with record inflation, there are 
factors that may cause price increases to persist.  Chief among 
these are the many policy-based decisions taken in the last two 
months.  The revised tax structure on motor vehicles and higher user 
fees announced during the recent budget debate are bound to feed 
inflation in upcoming months.  Factor in the 28 percent hike in 
water rates and the 25 percent price increase granted to taxi 
operators and the risk of higher prices escalates.  Worse yet is the 
continuing rise of international commodities prices, with oil prices 
surpassing USD 125 per barrel, well above the USD 95 on which the 
budget was predicated.  Other cost push influences are set to 
emanate from international grain prices, with rice, corn, and wheat 
flour registering record prices.  But demand-pull factors are also 
expected to come from relatively robust salary increases in the 
public sector as well as the massive USD 60.5 million payout to 
workers at the Jamaica Public Service.  These pay raises are 
expected to set the stage for higher wage increases in the private 
 
KINGSTON 00000422  002 OF 003 
 
 
sector, providing further impetus for inflation and inflationary 
expectations. 
 
FOREIGN EXCHANGE MARKET STABLE 
------------------------------ 
 
¶5. (SBU) Although prices have risen significantly, there was 
relative stability in the foreign exchange market as evidenced by 
the marginal (0.7 percent) depreciation in the local currency.  The 
depreciation of the Jamaican dollar occurred in the month of January 
2008 because of high levels of liquidity and heightened inflationary 
expectations, which caused some investors to increase their demand 
for US denominated assets.  To address the instability, the Central 
Bank issued open market instruments to investors while at the same 
time increasing the interest rates.  The result of these monetary 
policy actions was an appreciation in the exchange rate during 
February and March 2008.  The stability was further buffeted by the 
widening interest rate differential between Jamaican and U.S. dollar 
based assets, as well as uncertainty in the international financial 
markets, which increased the attractiveness of Jamaican dollar 
assets (Note: During the quarter the Fed Reserve continued its 
policy of reducing rates. End note.)  As a result, the country's Net 
International Reserves (NIR) rose to USD 2.1 billion, USD 205.7 
million more than at the end of December 2007. 
 
BUT BOP POSITION TENOUS 
----------------------- 
 
¶6. (SBU) Rising prices could also set the stage for Balance of 
Payments (BOP) instability.  Imports are already up by 22.4 percent 
during January 2008.  Oil imports of USD 206.4 million accounted for 
32 percent of the total import bill.    The country's oil bill could 
soar to over USD 3 billion if oil remains above USD 125 per barrel. 
The central bank projected oil prices of USD 95 for 2008, which 
would equate to an oil bill of about USD 2.5 billion.  Although 
tourism arrivals and remittances are up, Latibeaudiere was quick to 
point out that nothing in the BOP can offset a USD 500 million 
increase in the oil bill.  Jamaica does not have the capacity to 
immediately benefit from exchange rate competitiveness or rising 
agricultural prices in the short term, thus any further increase in 
oil prices could force the country to draw down on its stock of NIR. 
 Therefore, unless Jamaica's domestic demand for oil moderates, it 
may have to rely on its NIR, which could lead to renewed instability 
in the foreign exchange market.  Latibeaudiere addressed this 
eventuality saying, "macroeconomic stability is critical and with 
Jamaica being a price taker, no tool at the disposal of the Central 
Bank will be taken off the table," suggesting that further hikes in 
interest rates could not be ruled out to address instability in the 
foreign exchange market. 
 
TOURISM AND REMITTANCES RESILIENT 
--------------------------------- 
 
¶7. (SBU) Tourist arrivals to Jamaica increased by 7.7 percent during 
January to March 2008.  Since 70 percent of visitors to the island 
come from the U.S., it does not appear that the slowdown in the U.S. 
economy is hindering tourism.  Some speculate that tourism numbers 
will fall if the economic situation in the U.S. worsens, but 
historical evidence suggests no correlation between a slowing U.S. 
economy and visitor arrivals or remittances to Jamaica.  In fact, 
the island remains one of the most price competitive destinations in 
the region as the local currency has been sliding along with the 
weakening U.S. dollar.  There also has been a diversion of some U.S. 
visitors from more expensive destinations in Europe due to the 
stronger Euro.  Tourists from Europe and Canada also are finding 
Jamaica a bargain, given their stronger currencies and increased 
purchasing power.  Spanish investors have added over 10,000 rooms in 
the last four years and have been marketing these travel packages to 
European tourists. 
 
¶8. SBU) Remittances from Jamaicans living abroad, particularly those 
in the U.S., have remained buoyant in the first quarter, jumping by 
11 percent to USD 540 million. (Note: Most remittances to Jamaica 
are used for core necessities such as food, rent, and school fees. 
The continued resilience of this flow of funds in light of an 
economic downturn is not surprising, given its importance to family 
members residing on the island. End note.) 
 
COMMENT 
------- 
 
¶9. (SBU) Local inflation will continue its upward climb on the back 
of buoyant international and local commodities prices.  This, 
coupled with a series of recent administrative price increases 
 
KINGSTON 00000422  003 OF 003 
 
 
announced by the Jamaican government, could send inflation for the 
first half of the year to well above ten percent.  There is no 
indication that international commodity prices will fall 
significantly in the second half of the year, so the GOJ will likely 
be forced to further revise its inflation target at the next QMPR 
meeting in August.  It appears that the Central Bank is using the 
new optimistic target range for inflation as a way to manage 
inflationary expectations.  As more information becomes available, 
the targets will likely be revised again. 
 
¶10. (SBU) Increased international prices, particularly for oil, will 
lead to higher imports, and could by extension impair the country's 
ability to finance its import bill.  If oil remains above the USD 
125 per barrel level, the Central bank could well be forced to draw 
down on its stock of NIR to finance imports.  Any significant 
drawdown in the NIR could lead to increased speculation, resulting 
in increased demand for U.S. denominated assets and a concomitant 
weakening in the local currency.  In this event, the central bank 
would be left with no choice but to use the only tool at its 
disposal, interest rates, to temper demand pressures.  But any 
upswing in interest rates will affect the fiscal authorities' 
ability to service the nation's gargantuan debt.  Rising interest 
rates also would be a blow to the government's economic growth 
target of three percent for 2008.  End Comment. 
JOHNSON