VZCZCXRO3074
RR RUEHGR
DE RUEHKG #0704/01 2172015
ZNR UUUUU ZZH
R 042015Z AUG 08
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 6633
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 05 KINGSTON 000704 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO) 
WHA/EPSC (MROONEY) 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR ERIN NEPHEW 
 
E.O. 12958:  N/A 
TAGS: ENRG EAIR EINV ECON ETRD EIND SENV IADB IBRD IMF
TRSY, XL, JM 
SUBJECT: JAMAICAN ECONOMY STAGNATES AMID SHOCKS, A REVIEW OF THE 
FIRST HALF OF 2008 
 
REF: A. KINGSTON 648 
¶B. KINGSTON 422 
¶C. KINGSTON 366 
¶D. KINGSTON 111 
¶E. KINGSTON 542 
¶F. KINGSTON 703 
¶G. KINGSTON 651 
¶H. KINGSTON 571 
 
SUMMARY 
------- 
 
¶1. (SBU) Growth in the Jamaican economy, suffering from a number of 
shocks, has slowed to less than one percent during the first half of 
¶2008.  The downturn was most evident in the goods producing sectors, 
which declined by 3.5 percent. Services grew by a moderate 1.7 
percent fueled by robust tourism performance.  The sluggish economic 
conditions occurred against the background of increasing 
macroeconomic instability and in particular price and foreign 
exchange market volatility.  Inflation of 11.5 percent for the first 
half of 2008 already has exceeded the original target for the entire 
calendar year.  Although the exchange rate has remained relatively 
stable, declining less than a one percent, it has been largely due 
to increased intervention by the Central Bank to temper demand 
pressures.  Government of Jamaica (GOJ) operations also are 
outperforming targets due to a combination of reduced expenditure 
and higher revenue collections.  But even this unlikely success 
story is tenuous, given the impact rising energy and food prices and 
non-performing state assets like Air Jamaica could have on 
expenditure.  The Jamaican economy is expected to face even more 
serious challenges during the next six months, given the expected 
slowdown in investment and consumer spending following the meltdown 
of a number of alternative investment schemes (reftel A).  Add to 
this the country's susceptibility to shocks, and the near term 
outlook dims.  End summary. 
 
Output Stagnates 
---------------- 
 
¶2. (SBU) Economic output for the first half of 2008 declined to less 
than one percent as a result of a number of shocks.  Global 
challenges including increasing commodities prices and in particular 
crude oil, wheat, rice and fertilizer, as well as unusually heavy 
rains in February, provided the underlying impetus for the economic 
downturn (reftels C and D).  The impact was particularly evident in 
the goods producing sectors, which, with the exception of the 
construction sector, stagnated.  But it was the double digit 
downturn in agricultural output which underlined the negative 
performance.  Agriculture was severely hampered by the residual 
effects of Hurricane Dean, which hit the island in August 2007. 
This, coupled with the heavy rainfall and fires associated with the 
subsequent drought, combined to decimate export crop production. 
Mining output also declined due to decreasing bauxite production as 
a result of maintenance and equipment problems at a number of 
refineries--particularly disconcerting in an environment in which 
Jamaica could have capitalized on rising aluminum prices.  Despite 
the fall in output, Jamaica's gross export earnings from bauxite/ 
alumina grew by more than 14 percent in 2007 to USD 1.3 billion. 
Growth in the sector is expected to be 3 percent in 2008.  While the 
construction sector improved, the major stimulus was provided by 
public sector projects.  Increased tourist arrivals continued to 
provide the growth impetus in the services sector. 
 
 
Macroeconomic Instability Emerges 
--------------------------------- 
 
¶3. (SBU) Jamaica's vulnerability to external shocks, including 
rising international commodities prices, makes it susceptible to 
frequent bouts of instability.  In fact, current rising external 
prices and domestic policy-induced measures have combined to fuel 
prices for the first half of 2008.  Inflation of 11.5 percent for 
the six month period already has exceeded the original target of 
nine to ten percent.  The movement was also 6.4 percentage points 
above the 5.1 percent recorded in the similar period of 2007.  Most 
of the inflation was registered in urban areas, with soaring prices 
in energy (up 34.3 percent) and food (up 34.9 percent).  The impact 
of rising oil prices was particularly devastating, given that 
Jamaica depends on imported crude oil for over 90 percent of its 
energy needs.  Although the GOJ provided a three month subsidy on 
basic food items, the shock to domestic agriculture and the 
subsequent hike in domestic prices essentially nullified the 
benefits.  Further impetus was provided by a number of policy 
induced measures including increased tax, transportation, and 
 
KINGSTON 00000704  002 OF 005 
 
 
utility rates.  The policy decisions were largely responsible for 
the near five percent rate of inflation recorded in May and June. 
 
 
Monetary Policy Challenged 
-------------------------- 
 
¶4. (SBU) The increased prices have provided their own set of 
challenges to the Central Bank.  Although the local currency has 
remained relatively stable, with the exchange rate depreciating by 
just over one percent for the first half of the year, the foreign 
exchange market has been relatively volatile.  Attendant efforts to 
maintain exchange rate stability have come at a significant cost to 
fiscal and monetary policy.  The Central Bank therefore has had to 
utilize all the instruments at its disposal to defend the currency. 
In particular, the bank has been forced to engage in open market 
operations (OMO), increasing interest rates by three percentage 
points (to 15 percent) for the first half of the year.  In addition 
to crowding out private investment, the increased rates eventually 
will impact fiscal policy, as the higher cost of money will only 
magnify the debt burden.  The bank also has had to frequently 
intervene in the market by selling foreign currency from its stock 
of net international reserves (NIR) to temper rising demand 
pressures.  Despite the pressure on its foreign currency reserves, 
the NIR was supplemented with USD 250 million raised through the 
sale of government bonds on the capital markets and loans from 
multilateral lenders.  In total the stock of NIR jumped by USD 350 
million to USD 2.3 billion.  But again, this and the OMO have not 
come without cost, as at the end of June the Central Bank recorded a 
loss of USD 26 million to implement its monetary policy. 
 
¶5. (SBU) Soaring commodities prices also have fuelled a 
deterioration in the current account position, with the deficit 
climbing by USD 340 million to USD 538.6 million for the first three 
months of the year.  A deterioration in the merchandise (goods) 
trade deficit was the main source of the widening, stemming from 
significant increases of USD 237.4 million (58.3 percent) and USD 
38.9 million (22.6 percent) in the values of mineral fuels (crude 
oil and refined products) and manufactured goods imports, 
respectively.  The impact of soaring mineral fuels has been softened 
by increased earnings from alumina and non-traditional exports.  But 
even as other areas of the current account continue to decline, 
remittances from Jamaicans living abroad remained resilient. 
Central Bank economist Chandar Henry told emboff that remittances 
for the first half of the year jumped an impressive 11.5 percent. 
These figures are not surprising to Noel Greenland of Western Union, 
the country's largest remittance company.  Greenland told emboffs 
that in addition to the obligatory nature of the remittance flows, 
most overseas Jamaicans are employed in areas that have been 
relatively unscathed by the economic downturn in North America. 
Tourist arrivals also have remained buoyant as European and Canadian 
tourists are finding Jamaica a bargain.  Arrivals from the U.S. 
climbed 7.7 percent due to the diversion of visitors from more 
expensive destinations in Europe.  Stop over visitor arrivals 
climbed by 9.9 percent for the first five months of 2008. 
Antoinette Lyn, a statistician at the Jamaica Tourist Board, told 
emboff that barring any unforeseen challenges she expects both 
earnings and arrivals to continue on an upward trajectory. 
 
 
Reforms Help Government Accounts 
-------------------------------- 
 
¶6. (SBU) Even though the monetary side struggled, fiscal policy 
continued to outperform expectations, with government operations 
generating a deficit of USD 126 million for the first two months of 
the fiscal year; four percent better than projected.  A combination 
of moderate spending and, more importantly, increased revenue 
collections were responsible for the improvement.  The higher tax 
collection is attributable to Minister of Finance and the Public 
Service Audley Shaw's ambitious reform agenda.  Shaw claims there 
has been a 37 percent increase in taxes collected in June 2008 from 
the same month last year.  Ministry of Finance officials told Emboff 
that about USD 30 million of the USD 170 million in tax revenue 
collected is due to the tax amnesty. 
 
But Debt Overhang Persists 
-------------------------- 
 
¶7. (SBU) Despite efforts to reduce the country's gargantuan debt 
stock, Jamaica continues to be the fourth most indebted country in 
the world, with a debt to GDP ratio of close to 130 percent (USD 14 
billion) at the end of May.  The problem is that the associated 
interest payments can run up to fifty cents out of every dollar of 
 
KINGSTON 00000704  003 OF 005 
 
 
revenue, leaving government to borrow to finance principal payments 
and to a lesser extent some of its house keeping spending.  Although 
Jamaica has a long history of debt, most of the load was accumulated 
between 1996 and 2003, when the debt to GDP ratio jumped by over 70 
percentage points.  The doubling is largely attributable to 
recurrent fiscal deficits and the absorption of liabilities from 
loss making public sector entities like Air Jamaica (reftel E). 
(Note: The airline has lost USD 85 million for the first five months 
of the year, building on a loss of USD 171 million for 2007.  The 
GOJ hopes to privatize the airline by March 2009, End Note).  The 
GOJ's medium-term goal is to balance the budget by fiscal year 
2010/11 and bring the level of debt down to below 100 percent of 
GDP.  While the government has garnered low cost loans from 
multilaterals, there continues to be an up tick in the stock of 
debt, with almost USD 50 million added during the first four months 
of 2008.  And with GDP stagnating, the ratio could move in the wrong 
direction, eroding the medium-term goal. 
 
And Other Vulnerabilities Remain 
-------------------------------- 
 
¶8. (SBU) Several major alternative investment schemes including Cash 
Plus, CAREIF have collapsed since April. One of the largest, Olint, 
collapsed in July.  It is not certain how much money was invested in 
the various schemes, but some major investors were affected by 
Olint; the impact of the collapse is expected to deal a serious blow 
to the economy in general and the real estate market in particular 
(reftel A).  There also could be a downturn in domestic investment 
as affected investors recover from the fallout.  The stalling of 
some investment projects also could result in the addition of a 
number of Jamaicans to the ranks of the unemployed, putting a dent 
in the consumer spending and consumption tax revenue needed to keep 
the economy afloat.  But the worst impact yet could be felt in the 
real estate market, which was partially driven up by a false sense 
of new wealth by those involved in the schemes.  Add to this the 
over USD 200 million in debt accumulated by loss making entities 
like Air Jamaica, the National Road Operating and Construction 
Company, and the Jamaica Urban Transport Company (JUTC), and the 
burden on fiscal policy increases.  And while the privatization of 
the Sugar Company of Jamaica was completed in recent days, the GOJ 
will have to absorb the USD 40 million redundancy costs. 
 
 
Government's Reform Agenda 
-------------------------- 
 
¶9. (SBU) The GOJ's nine month economic performance has been largely 
set by Shaw's ambitious reform agenda, which includes: (1) fiscal 
discipline; (2) reduced bureaucracy; (3) investment promotion; (4) 
tax reform; (5) engagement of multilaterals; and (6) energy 
diversification.  Shaw has been particularly passionate about tax 
reform and in particular an assault on corruption.  As a precursor 
to the reform process, Shaw pledged to provide transparent 
governance so taxpayers receive value for their taxes.  However, he 
has pointed out that almost USD 1 billion in tax arrears remains 
outstanding, of which over USD 600 million is owed by the private 
sector.  To address the issue Shaw introduced a graduated tax 
amnesty program expected to end in October (reftel F).  Shaw also 
has started reducing transfer taxes and stamp duties and is pledging 
to bring corporate taxes in line with personal income tax (25 
percent) before further reducing both to 15 percent.  Plans are on 
track to consolidate statutory deductions by the end of 2008, and 
legislation is being drafted for tax agencies to share information 
under a Tax Collection Act.  Customs, which Shaw says is a hotbed 
for corruption, is under increased scrutiny, with the no-nonsense 
former Director of Elections Danville Walker recruited to overhaul 
operations.  A number of top level tax officials suspected of either 
corruption or incompetence already have been suspended, transferred, 
or retired.  There also has been a significant increase in the value 
of goods declared. 
 
Reforms Yielding Positive Results 
--------------------------------- 
 
¶10. (SBU) On May 19, 2008, Standard & Poor's Ratings Services 
affirmed its 'B' long-term and short-term sovereign credit ratings 
on Jamaica, while maintaining its stable outlook.  According to S&P, 
the ratings were supported by the GOJ's commitment to fiscal 
discipline, debt reduction, and economic reinvigoration.  The rating 
was also premised on continued political stability and capital 
market development.  The IMF, in its 2008 Article IV Consultation, 
also considered the broad nature of Jamaica's structural agenda as 
appropriate, and even encouraged an expeditious implementation of 
reforms.  IMF officials also welcomed the GOJ's pursuit of fiscal 
 
KINGSTON 00000704  004 OF 005 
 
 
adjustment aimed at balancing the budget by 2011 and at establishing 
a virtuous cycle of lower debt and higher growth.  However, they 
noted the adjustment effort must be underpinned by broad-ranging 
reforms of the tax system and the public service. 
 
¶11. (SBU) The GOJ also has made good on its plan to engage 
multilaterals and has received commitments for over USD 130 million 
for fiscal year 2008/09, including USD 30 million for the tax reform 
initiative.  The GOJ's reform agenda also has allowed it to benefit 
significantly from technical expertise, with the IMF providing a 
team of consultants to review the tax incentive system.  In addition 
to a USD 1.6 million grant to focus on enhancing the accountability 
framework, the IDB also has provided consultants to work on the tax 
system, while the World Bank has been providing ongoing technical 
assistance.  Positive results also have taken place on the 
divestment front, with the USTDA providing USD 820,000 in grant 
funds to assist in the privatization of Air Jamaica.  The GOJ also 
has entered into an agreement with Brazilian company Infinity 
Bio-energy to take over the assets of the Sugar Company of Jamaica 
(SCJ).  The government also has taken the decision to discontinue 
offering guarantees to public sector entities raising private 
financing, a practice which has contributed significantly to amount 
of the debt accrued. 
 
Energy a Binding Constraint, Jobs Elusive 
----------------------------------------- 
 
¶12. (SBU) Rising energy costs continue to reduce Jamaica's 
attractiveness to investors, especially in energy intensive sectors. 
 Jamaicans now pay about USD 0.31 per kilowatt hour for electricity 
compared to USD 0.13 for other Caribbean countries.  This is largely 
due to the fact that the country relies on imported oil for more 
than 90 percent (29 million barrels of crude) of its energy needs. 
In 2007 the country spent USD 2.2 billion (almost 25 percent of GDP) 
on oil imports, and this figure could climb to almost USD 3 billion 
or 30 percent of GDP by the end of 2008. Recognizing the magnitude 
of the problem, the GOJ has made a commitment to have 15 percent of 
its energy needs come from renewable sources by 2015.  Minister of 
Energy Clive Mullings also outlined a number of energy conservation 
measures during his budget debate in July 2008.  He also proposed 
the creation of legislation to allow for net metering.  And while 
Don Gittens of Jamaica's Trade and Invest told emboff that the new 
government has been able to attract a number of tourism, information 
technology, and mining projects, to date it has fallen short on its 
promise of massive job creation.  On the contrary, the GOJ has been 
forced to lay off almost 1,000 workers from some public sector 
entities, which were heavily overstaffed.  Add to this the almost 
2,000 expected to join the ranks of the unemployed due to the sale 
of the SCJ.  The U.S. garment manufacturer Jockey will close its 
last plant in Jamaica by December ending 575 jobs.  Jockey also 
closed a 600 worker plant in Clarendon Jamaica in 2007. 
 
Outlook for Next Six Months 
--------------------------- 
 
¶13. (SBU) Rising prices remain one of the biggest threats to the 
Jamaican economy over the next six months particularly in the 
context of the meltdown in alternative investment schemes.  The 
expected reduction in effective demand amidst rising prices could 
slow government and consumer spending as well as investment, which 
in turn will keep economic growth moribund.  The spike in the cost 
of imported commodities will also feed expectations for higher wages 
as well as a demand for increased returns on investments.  If these 
expectations are satisfied it could lead to further adjustments in 
domestic goods and services prices even when international prices 
recede.  Higher international commodities prices combined with the 
erosion of traditional trade preferences could lead to a widening of 
the country's current account to over 15 percent of GDP.  Respected 
financial analyst Keith Collister has told emboffs that this figure 
could escalate as high as 20 percent by the end of 2008.  The 
Balance of Payments (BOP) situation would have been worse, if it 
were not for the concessionary terms offered under the Petrocaribe 
Agreement.  The fact that Petrocaribe benefits have helped Jamaica 
avert economic disaster has not been lost on Prime Minister Bruce 
Golding.  In recent months he has been warming up to Cuba and 
Venezuela in contrast to his pre-election stance (reftel G). 
 
And Political Imperatives Emerge 
-------------------------------- 
 
¶14. (SBU) Record prices and the current crime wave making life 
difficult for average Jamaicans and are likely to thwart the Jamaica 
Labor Party's (JLP) reform agenda (reftel H).  Polls also show that 
Golding's favorability ratings have stagnated.  Although Opposition 
 
KINGSTON 00000704  005 OF 005 
 
 
Leader Portia Simpson-Miller is facing her own set of challenges, 
her ratings have rebounded.  With these issues in mind, the GOJ 
could well stall or backtrack on its reform agenda to win back 
support, a concern expressed by Acting Deputy Financial Secretary at 
the Ministry of Finance and the Public Service, Courtney Williams. 
 
 
Comment 
------- 
 
¶15. (SBU) The Jamaican economy is expected to face serious 
challenges during the next six months, particularly given the 
expected slowdown in investment and consumer spending following the 
meltdown of alternative investment schemes.  Add to this the 
country's susceptibility to natural disasters such as hurricanes, 
and the near-term outlook dims.  Even in the face of these 
challenges, the GOJ is better served if it continues to embark on 
the reforms required to spur growth and development.  Minister Shaw 
appears determined to remain on track for tax reform and bolstering 
anticorruption efforts regardless of the political costs.  His 
efforts already are paying significant dividends, especially in tax 
collections.  Shaw also has defied local critics and the opposition 
Finance Minster Omar Davies by garnering substantive loans and 
technical expertise from multilaterals.  But, Shaw could find the 
next couple months to be particularly challenging as the slowing 
world economy takes a further toll on Jamaica.  The single biggest 
threat to reform will come from emerging political dynamics with 
talks of a new election remaining topical.  If this materializes, it 
could thwart, if not reverse, some of the reforms, as the government 
tries to regain popularity among a disenchanted electorate.  End 
comment. 
JOHNSON