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Cablegate: Imf Gives Jamaica Passing Mark

This record is a partial extract of the original cable. The full text of the original cable is not available.

101341Z Aug 05





E.O. 12958: N/A


1. (SBU) Summary: The IMF Interim Staff Report, issued on June 23, gave the GOJ high marks for stabilizing the economy following the macroeconomic challenges of 2003. By expressing broad agreement with the country's economic policies, the report could have boosted public confidence in Finance Minister Omar Davies, who is aspiring to succeed Prime Minister PJ Patterson. The relatively positive report also pointed out that the GOJ's balanced budget target for 2005/06 appears to be within reach, and that recent reductions in interest rates were appropriate. However, the Fund suggested that the GOJ's medium-term economic strategy remains subject to shocks. Particular attention was drawn to the size of Jamaica's public debt and the economy's susceptibility to natural disasters. The IMF also urged caution in the continued lowering of interest rates and advised the GOJ to control expenses. To date, there has been little if any disagreement with the Fund's view of the economy. A Ministry of Finance official told emboff on July 25 that the report might have been a little bullish, while financial analyst Keith Collister said the report was in line with what the private sector expected. Despite the Fund's stamp of approval, the GOJ will have to grapple with the challenges of rising inflation and its attendant problem in upcoming months. End summary.

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2. (U) The IMF Interim Staff Report released on June 23, following discussions with GOJ and opposition members as well as local and external creditors, gave the GOJ high marks for curbing the macroeconomic instability faced in 2003. (The GOJ requested surveillance of its medium-term macroeconomic and structural policies in 2004 to provide a credible basis for the country to raise funds on the external capital markets). The IMF, in assessing the GOJ's economic framework, expressed broad agreement and opined that the GOJ's balanced budget target for 2005/06 is achievable, but will require controlled spending and full implementation of recent tax reforms. "Jamaica's exceptionally high public debt and its vulnerable structure - with three-fourths of total public debt in foreign currency or at floating interest rates - mean that even modest deviations from policy objectives could undermine confidence," the report continued. The report also states that the programmed reduction in the debt to GDP ratio to 100 percent over the next four years will be challenging and requires the generation of a primary surplus (revenues minus non-debt expenditures) of over 13 percent of GDP over the medium term.

3. (U) The IMF also posits that the balanced budget objective will depend on the GOJ's ability to devise policies during the current fiscal year to keep wages under control when the memorandum of understanding between the GOJ and unions expires in 2006. More important, though, is the Fund's concern with the funding of public sector entities. "Off-budget expenditures under the deferred financing scheme should be eliminated as planned by 2006/07," the Fund urged. The IMF is particularly concerned with the funding of Air Jamaica and has encouraged the authorities to fully implement the planned downsizing of the airline while capping subsidies (Septel reports on the problems at Air Jamaica). On the monetary policy side, the IMF supported the reductions in interest rates, but cautioned the central bank with respect to further declines, given rising inflation. The Fund also states that the current level of the exchange rate is broadly appropriate.

4. (SBU) Unlike previous reports, most GOJ and private sector officials appear to be in broad agreement with the IMF report on Jamaica. They are of the impression that the IMF has presented its most balanced view of the economy yet. Therefore, with prime ministerial favorites National Security Minister Peter Phillips and Local Government Minister Portia Simpson-Miller plagued by the country's high crime rate and burgeoning scandal at the Solid Waste Management Agency, respectively, the IMF report might have provided a much-needed fillip for Finance Minister Omar Davies, who also aspires to succeed Prime Minister PJ Patterson. However, senior XXXXXXXXXXXX at the Ministry of Finance XXXXXXXXXXXX posits that the Fund might have been a little too bullish on the economy. XXXXXXXXXXXX, who worked closely with the Fund during their latest visit, suggested to emboff on July 25 that the IMF's prognosis would have been strongly influenced by Davies' recent efforts to control the deficit. "The IMF is not the only one bullish on the economy as the private sector has also been pretty upbeat", XXXXXXXXXXXX continued. When asked about the Fund's position on Air Jamaica, XXXXXXXXXXXX told emboff that the team might have been too soft on the GOJ's handling of the national carrier, which in his estimation is the single biggest threat to fiscal policy

5. (SBU) Emboff also discussed the IMF report with analyst and private sector member Keith Collister, who posited that the report was fairly balanced and was in line with expectations, given his meeting with the IMF. Collister was, however, quick to point out that the report was not as positive as some GOJ officials have portrayed it. "That said, the level of divergence between the IMF and GOJ has narrowed to its lowest level ever," he continued. Collister, who has written a series of articles on the Air Jamaica saga, told emboff on August 3 that the IMF's position on the national carrier was sketchy, and more emphasis should have been placed on the issue, given its potentially negative impact on fiscal policy. However, he stated that the Fund's position on interest rates was spot on. "We (private sector) are of the view that the GOJ will attain a balanced budget this year unless deferred financing, which is not new, derails progress," Collister opined. "Apart from natural shocks, only Air Jamaica could create a shock to throw the fiscal targets off track," he continued.

6. (SBU) From all indications, it is not only the private sector that is buoyed by the report, as head of research and planning at the Bank of Jamaica (BOJ) Louise Brown told emboff on August 5 that, in her estimation, this could be the best report ever delivered on Jamaica by the IMF. She said it was a clear indication of the extent to which the GOJ has lived up to its fiscal obligations, following years of imprudence. "The inflationary challenges were also understood in lieu of the circumstances," added Brown in reference to the passage of two hurricanes. She also said the Fund was impressed with the current regulatory framework. In looking forward, a clearly upbeat Brown said the BOJ was not too concerned about the exchange rate, given the high level of reserves at their disposal to shore up supply, but remains only cautiously optimistic about the authorities' ability to curb the recent hike in inflation given rising oil prices and pending increases in electricity rates and bus fares.

7. (SBU) Comment: The pitch of the current IMF report was not surprising, given the steps taken by Davies to curb fiscal indiscipline. This and the improvements in the economic fundamentals are important to Davies, who is aspiring to become the next president of his party and prime minister of Jamaica. Notwithstanding the IMF's stamp of approval, Jamaica will have to grapple with the recent surge in inflation, which will be exacerbated by rising oil prices and the pending hike in bus fares and electricity rates. Increasing inflation could also stymie the reduction in interest rates, a point highlighted by the IMF, as Jamaicans already face relatively high real negative interest rates. The inflationary spiral combined with the deteriorating current account deficit could also put pressure on the exchange rate. While the immediate future appears daunting, if the authorities are able to safely navigate the country through the remainder of the hurricane season, the GOJ could well meet most of its fiscal year targets. End comment.

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