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Viewing cable 09KINGSTON800, JAMAICA: JAMAICA'S FISCAL MALAISE

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Reference ID Created Released Classification Origin
09KINGSTON800 2009-10-08 20:26 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kingston
VZCZCXRO0886
OO RUEHGR
DE RUEHKG #0800/01 2812027
ZNR UUUUU ZZH
O 082026Z OCT 09
FM AMEMBASSY KINGSTON
TO RUEHKG/AMEMBASSY KINGSTON IMMEDIATE
INFO EC CARICOM COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHLO/AMEMBASSY LONDON IMMEDIATE 0037
RUEHOT/AMEMBASSY OTTAWA IMMEDIATE 0035
UNCLAS SECTION 01 OF 03 KINGSTON 000800 
 
SENSITIVE 
SIPDIS 
STATE FOR WHA/CAR (JMACK-WILSON)(RALVARADO)(VDEPIRRO)(WSMITH) 
WHA/EPSC (MROONEY) (FCORNEILLE) 
EEB/IFD/OMA 
WHA/PPC (JGONZALEZ) 
INR/RES (RWARNER) 
INR/I (SMCCORMICK) 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR ERIN NEPHEW 
EXPORT IMPORT BANK FOR ANNETTE MARESH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINT EINV ELAB ETRD PGOV PREL SOCI IMF IBRD
JM, XL 
SUBJECT: JAMAICA: JAMAICA'S FISCAL MALAISE 
 
REF: KINGSTON 361; KINGSTON 788 
 
KINGSTON 00000800  001.2 OF 003 
 
 
Summary 
 
------------ 
 
1. (SBU) Only five months after outlining its spending plans, the 
Government of Jamaica (GOJ) has announced a USD 67 million increase 
in expenditures for the current fiscal year.  The hike comes after 
repeated pronouncements from Prime Minister (PM) Bruce Golding 
about deep cuts in the expenditure budget to compensate for the 
dramatic fall off in revenues.  The first Supplementary Budget 
tabled in Parliament on August 24 will therefore increase the 
original budget to USD 6.3 billion.  This hike was due to higher 
than anticipated interest costs, as other areas of proposed 
spending were slashed.  With the GOJ only able to implement a 
limited tax package, the fiscal deficit will jump to 8.7 percent of 
GDP from 5.5 percent.  This deficit will be financed by further 
borrowing from the capital market, adding to the GOJ's gargantuan 
stock of public debt.  But even with the proposed rationalization 
of the public sector, Jamaica's perennial fiscal malaise might not 
improve until the debt overhang is addressed.  End summary. 
 
Budget Shocker 
 
-------------------- 
 
2. (SBU) The GOJ has been forced to revise its fiscal targets to 
present a more credible budget to the IMF in order to access a USD 
1.2 billion loan.  In its pursuit of this goal, the cash-strapped 
GOJ has had to perform a major juggling act, chopping USD 143 
million from program spending and USD 67 million from capital 
spending to offset part of the additional USD 280 million in 
interest costs.  The net effect is that the original budget will be 
increased by USD 67 million to USD 6.3 billion.  However, this 
result runs counter to the position articulated by Golding in the 
months leading up to the tabling of the estimates.  The PM had 
given the impression that 20 percent of the USD 10 billion budgeted 
for programs and 15 percent of the capital budget would be slashed 
to reduce the original budget. 
 
 
3. (SBU) The original budget presented in April 2009 targeted a 
fiscal deficit of 5.5 percent of GDP (Reftel A).  However, by the 
end of August 2009 these targets were derailed due to the falloff 
in revenues.  Revenues for the five month period were 10 percent or 
USD 130 million less than expected, while expenditures were almost 
in line with projections.  For the entire 2009/10 fiscal year, the 
government is now expecting: (1) revenues to decline by USD 150 
million or the equivalent of 1.1 percent of GDP; (2) the divestment 
program to be postponed to the next fiscal year (1.2 percent of 
GDP) (Reftel B); and, (3) interest cost to increase by a further 
1.5 percent of GDP.  These changes are expected to result in an 
increase of the fiscal deficit to 8.7 percent of GDP or about USD 1 
billion.  To finance the budget, the GOJ has imposed a further tax 
package of USD 19 million, with the remaining amount to be sourced 
from the capital market.  This increased borrowing is expected to 
keep real interest rates high, providing further conflict between 
the Ministry of Finance and the Bank of Jamaica. 
 
Interest Rate Dissonance Hurts Fiscal Performance 
 
--------------------------------------------- --------------------- 
 
4. (SBU) In a bid to arrest the runaway depreciation of the 
Jamaican dollar, the central bank raised interest rates to as high 
as 24 percent at the end of 2008.  This had a deleterious effect on 
the fiscal accounts as, strapped for cash, the GOJ was forced to 
borrow at onerous rates of interest.  Since August 2009, the 
central bank has begun to reduce rates once again, but not before 
the GOJ's entire debt portfolio had been realigned toward higher 
yielding instruments with longer maturity.  At the current rate of 
17 percent, real interest rates are about seven percent, while 
inflation has moderated to 10 percent.  The central bank has 
 
KINGSTON 00000800  002.2 OF 003 
 
 
expressed a desire to reduce rates more aggressively, but appears 
to be hindered by the need to maintain monetary stability and, by 
extension, exchange rate and price stability.  And despite the 
reduction in inflation, domestic investors remain unwilling to 
accept lower rates, suggesting declining levels of confidence in 
the government's ability to pay. 
 
Heroes Circle and Nethersole Place Clash 
 
--------------------------------------------- --------- 
 
5. (SBU) The apparent dissonance between the Heroes Circle-based 
Ministry of Finance and the Bank of Jamaica situated at Nethersole 
Place is nothing new.  Ministry of Finance officials have long told 
Emboffs that the central bank operates like an independent 
institution, concerned only with maintaining exchange rate and 
price stability.  Minister of Finance Audley Shaw has also used a 
number of his public speaking engagements to address the need for 
low interest rates, which he calls the lifeblood of the economy. 
At least two ministry sources have told Emboffs that the Minister 
is dissatisfied with central bank governor Derrick Latibeaudiere, 
but is unable to find a suitable replacement.  The problem appears 
to be unresolved, as only weeks before the BOJ started reducing 
signal rates the MOF issued a number of long term high interest 
rate instruments.  Golding subsequently told a group of business 
leaders that this long standing problem should be resolved 
following the appointment of Dr. Wesley Hughes as Financial 
Secretary.  Hughes, a former Deputy to Latibeaudiere and Director 
General of the Planning Institute of Jamaica, is expected to bridge 
the divide between Heroes Circle and Nethersole Place. 
 
 
Opposition Critical of Revised Budget 
 
--------------------------------------------- ---- 
 
6. (SBU) The revised budget has come under attack from the 
opposition Peoples National Party (PNP), with its Spokesman on 
Finance, Omar Davies, describing the new estimates as still lacking 
in credibility.  He bemoaned the fact that the original budget was 
predicated on the premise that everything that could go right 
would, but the deteriorating economic conditions had blown the 
estimates off track.  Davies, who has been proposing a special 
temporary cessation on high yielding debt, is of the opinion that 
the revenue projections remain ambitious and warned Shaw to take a 
second look at the figures before presenting them to the 
International Monetary Fund (IMF).  He also reiterated the need to 
take a surgical look at expenditures, arguing that cutting the 
public sector was not the solution to the fiscal crisis. 
 
7. (SBU) However, Hughes has defended the new estimates, suggesting 
that they are credible, technically sound, and able to stand up to 
the scrutiny of the IMF.  Hughes noted that the cuts, while 
painful, were necessary if Jamaica was to present a credible budget 
to garner support from the Fund.  According to Hughes, the bottom 
line is that revenues are lagging projections and expenditures have 
been higher than anticipated, and that to deal with the imbalance 
there has to be a cut in spending, increased taxes, or a 
combination of both. "It is as simple as that", Hughes opined.  He 
further stated that the revised budget provides a basis for a 
sustainable medium term economic program. 
 
Comment 
 
------------- 
 
8. (SBU) The early presentation of the supplementary budget is an 
indication that the original forecasts were overly ambitious, 
suggesting the GOJ continues to underestimate the impact of global 
economic crisis on Jamaica.  The early revision would have also 
formed part of the IMF's condition for providing balance of 
payments support to Jamaica.  However, the most important 
revelation from the revised estimate is that the country is sinking 
deeper into a fiscal quagmire due largely to its unsustainable 
levels of borrowing and, by extension, stock of debt.  It would 
 
KINGSTON 00000800  003.2 OF 003 
 
 
therefore appear that until the debt overhang is addressed, the GOJ 
will only be treating the symptoms of fiscal problems.  However, 
unless the IMF forces a decision, the problem might extend into the 
next fiscal year, as the Jamaican government remains reticent to 
take a serious look at a voluntary debt operation, fearing the 
repercussions in the international capital market.  The GOJ has 
instead signaled its intention to restructure the less burdensome 
public sector which, while necessary, will not be sufficient to 
stem the fiscal malaise.  End comment. 
Parnell