VZCZCXYZ0029
OO RUEHWEB

DE RUEHKG #0048/01 0141417
ZNR UUUUU ZZH
O 141411Z JAN 10
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0538
INFO EC CARICOM COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHLO/AMEMBASSY LONDON IMMEDIATE 0139
RUEHOT/AMEMBASSY OTTAWA IMMEDIATE

UNCLAS KINGSTON 000048 
 
SENSITIVE 
SIPDIS 
STATE FOR WHA/CAR (VDEPIRRO) (WSMITH) (JMACK-WILSON) 
WHA/EPSC (MROONEY) (FCORNEILLE) 
EEB/IFD/ODF (MSIEMER) 
EEB/ESC/IEC (GGRIFFIN) 
EEB/ESC/IEC/EPC (MMCMANUS) 
EEB/TRA (VLIMAYE-DAVIS) 
INR/RES (RWARNER) 
INR/I (SMCCORMICK) 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR ERIN NEPHEW 
EXPORT IMPORT BANK FOR ANNETTE MARESH 
USTDA FOR NATHAN YOUNG AND PATRICIA ARRIAGADA 
OPIC FOR ALISON GERMAK 
 
E.O. 12958: N/A 
TAGS: ECON ETRD ENRG EFIN EINV PREL PINR SOCI TRSY OPIC
IBRD, IMF, XL, JM 
SUBJECT: JAMAICA: FISCAL CRISIS THREATENS MONETARY STABILITY 
 
REF: KINGSTON 735; KINGSTON 914; KINGSTON 956; KINGSTON 737 
 
Summary and Analysis 
 
----------------------------- 
 
¶1. (SBU) Jamaica's fiscal crisis is beginning to threaten monetary 
stability, with the Bank of Jamaica (BOJ) (central bank) forced to 
extend direct credit to the Government of Jamaica (GOJ) as well as 
purchase debt instruments shunned by the market. The BOJ 
accommodation has become necessary because of the significant 
decline in revenues as well as the uncertainty associated with the 
drawn out International Monetary Fund (IMF) negotiations for a 
Standby-by Agreement and the likely impact of a liability 
management program (Reftel A). Declining confidence combined with 
recent rate cuts also have prompted investors to hold funds at the 
BOJ on short-term deposits at low rates of interest. But the BOJ 
action has serious implications for price stability, as it could 
fuel inflation and inflationary expectations. With investors 
relatively liquid and losing confidence by the day, there also 
could be a run on the currency, which has its own monetary 
implications. Against this background, the urgency of an IMF 
Stand-by Agreement cannot be overstated. End Summary and Analysis. 
 
Fiscal Crisis Deepens - New BOJ Leadership 
 
--------------------------------------------- ------------ 
 
¶2. (SBU) The fiscal crunch facing Jamaica since the closure of the 
international capital markets continues unabated. The fiscal 
deficit for the eight month period to November was USD 980 million, 
USD 167 million more than targeted. At this level, the fiscal 
deficit was just below the USD 1.1 billion projected for the entire 
fiscal year and was twice the amount generated during the same 
period last year. This highlights the worsening fiscal dynamics 
facing the cash strapped economy, particularly since the beginning 
of 2009. The stagnation in revenue collections remains the 
underlying reason for the deterioration in the fiscal position. 
Revenues and grants were USD 250 million lower than projected, 
largely because of the falloff in consumption taxes. This 
underperformance in revenues is not surprising, given the sluggish 
economic conditions. The almost USD 2 billion in new taxes over the 
last five years has led to increased tax evasion, thus diminishing 
expected returns. The falloff in revenues and higher than expected 
interest costs forced the GOJ to slash programs and capital 
spending by USD 130 million. These challenges also will test the 
BOJ's new leadership: Brian Wynter assumed the position of BOJ 
Governor on December 1, 2009, replacing Derick Latibeaudiere 
(Reftel B). 
 
Investor Confidence Wanes 
 
----------------------------------- 
 
¶3. (SBU) As revenues continued to underperform, the GOJ was forced 
to tap the domestic capital market funds to finance its spending. 
However, this occurred at the same time the central bank reduced 
benchmark rates by 200 basis points. The BOJ predicated its 
decision on: the positive trends in inflation; balance of payments; 
the exchange rate; and the economic program being negotiated with 
the IMF.  The government has said this program was underpinned by a 
package of policy measures geared towards fiscal and debt 
sustainability which is expected to lay the foundation for 
stability and growth. The rate reduction, combined with the 
imposition of a USD 250 million tax-package as well as the 
uncertainty associated with the timing of an IMF Stand-by Agreement 
contributed to a further decline in confidence; investors shunned 
two securities on offer from the government. 
 
 
 
 
 
 
Central Bank Turns on Printing Press 
 
--------------------------------------------- -- 
 
¶4. (SBU) This forced the GOJ to tap the BOJ, which turned on the 
printing press to satisfy the credit appetite of its largest 
client. During November, the bank extended credit in the amount of 
USD 57 Million to the GOJ, of which only USD 28 million was repaid 
in December. With the GOJ strapped for cash, the remaining USD 29 
million had to be converted to securities. But things took a turn 
for the worse in December; with revenues declining at an increasing 
rate, the GOJ was forced to seek even more loans from the domestic 
capital markets. The GOJ offered two instruments amounting to USD 
212 million, of which only USD 12 million was taken up by the 
public. With the market shunning the offers, the bank was forced to 
prop up the government by purchasing the remaining USD 200 million. 
 
 
¶5. (SBU) In a bid to stave off criticisms, the BOJ argued that the 
extension of the credit coincided with a period of heightened 
uncertainty among investors surrounding the terms of an IMF 
agreement and the potential impact of the anticipated debt 
management initiatives.  The GOJ also held special meetings with 
major bankers on January 10 and January 11, seeking a voluntary 
agreement on lowering interest rates on government paper. Thus far, 
there is no indication of significant capital flight.  In fact, 
investors have been holding their funds at the BOJ as overnight and 
short-term deposits, suggesting they were uncomfortable with the 
prevailing rates of interest on offer, given the increasing levels 
of risk. The moving target for an IMF agreement is continuing to 
erode the little confidence remaining in the market.  (NOTE: In a 
televised address on January 13, Prime Minister Bruce Golding 
presented the GOJ's proposal, negotiated with the IMF, for a debt 
swap arrangement with domestic creditors.  The Bank of Jamaica was 
expected to explain the program in more detail in a press 
conference on January 14.  End Note). 
 
 
Comment 
 
------------ 
 
¶6. (SBU) The BOJ has been quick to point out that the practice of 
providing credit to the GOJ is a normal part of its operations. 
However, this new money, which influences demand, is bound to drive 
core inflation the longer it remains in circulation. The fact that 
increasingly skittish investors are holding significant amounts of 
funds at the BOJ at relatively low rates of interest also risks a 
run on the currency the longer current conditions prevail. In 
addition to the inflation risk, a run on the currency would also 
have serious implications for the government's interest rate 
reduction policy. But the BOJ action points to the even larger 
unsustainable fiscal and debt problems which are now threatening 
monetary stability. As debt and wage related expenditures are 
mounting, the country is running out of the cash needed to finance 
its day-to-day operations, thus further highlighting the urgency of 
an IMF Stand-by Agreement. End Comment. 
Parnell