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Cablegate: Jamaica: On the Brink of an Imf Deal

VZCZCXYZ0000
OO RUEHWEB

DE RUEHKG #0759/01 3481938
ZNY CCCCC ZZH
O 141938Z DEC 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0390
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHDG/AMEMBASSY SANTO DOMINGO IMMEDIATE
RUEHLO/AMEMBASSY LONDON IMMEDIATE 0118
RUEHOT/AMEMBASSY OTTAWA IMMEDIATE
RUEHCV/AMEMBASSY CARACAS
RUEHKG/AMEMBASSY KINGSTON

C O N F I D E N T I A L KINGSTON 000759

SIPDIS
STATE FOR WHA/CAR (VDEPIRRO) (WSMITH) (JMACK-WILSON)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/TRA (VLIMAYE-DAVIS)
EEB/ESC/IEC (GGRIFFIN)
EEB/IFD/ODF (MSIEMER)
EEB/ESC/IEC/EPC (MMCMANUS)
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: DECL: 2034/12/14
TAGS: ECON EFIN EAIR EINV SOCI PREL PINR TRSY IDB IMF JM
XL
SUBJECT: JAMAICA: ON THE BRINK OF AN IMF DEAL

REF: KINGSTON 956; KINGSTON 737; KINGSTON 743; KINGSTON 622
KINGSTON 800; KINGSTON 315

CLASSIFIED BY: Isiah Parnell, CDA; REASON: 1.4(B), (D)

Summary

-----------

1. (C) The Government of Jamaica (GOJ) appears on the verge of
pursuing a selective default with local debt holders in order to
secure a much needed Standby Agreement with the International
Monetary Fund (IMF). Prime Minister Bruce Golding has been adamant
in wanting to avoid any blemish on the country's flawless credit
history, but necessity has forced him to accept harsh realities.
PM Golding is keen to demonstrate to taxpayers, who for years have
had a majority of their tax payments used for debt servicing, that
local bondholders will now be required to shoulder at least some of
the burden in reducing Jamaica's indebtedness. For years, local
bondholders have derived substantial returns from low-risk,
high-yield debt instruments. However, taxpayers will not be spared
as PM Golding, for the third time in nine months, announced plans
for a new tax package effective January 1. End Summary

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IMF Team Arrives For Final Trip?

----------------------------------------

2. (C) The IMF team arrived on December 12, once again led by IMF
Caribbean Division Chief, Trevor Alleyne (Reftels A and B). Local
press mistakenly reported that the team had arrived December 9 as
originally scheduled; however, the team was delayed because of a
disagreement among its team members regarding the execution of the
debt operation. According to Ministry of Finance contacts close to
the deal, some of the financial experts from the IMF team fear that
the debt operation could have adverse affects on weaker entities in
the financial services sector. Other members of the team accept
this risk, but believe that a watered down solution would only
provide momentary relief, and might require even more serious
measures in the future. As it stands, the GOJ appears set to
pursue a "voluntary "debt exchange with lower coupons and extended
maturities, and this could affect the balance sheet of some of the
more vulnerable financial institutions, potentially leading to a
contagion effect that could cause a run on the financial sector as
investors lose confidence in the system, increasing the risk of
capital flight.

3. (C) GOJ and the IMF recognize that the national airline Air
Jamaica needs to be privatized; however, timing is an issue, given
the costs associated with divestment. Most of the costs will be
short term in nature and cannot be absorbed in the current fiscal
year. This will require some creative solutions if Air Jamaica is
to be sold this year as expected, and may require pushing some
debts into the next fiscal year (Reftel C). Also, the proposed USD
1 billion PetroJam refinery expansion could be postponed, as the
IMF is unwilling to have the GOJ provide a sovereign guarantee for
the project. This is not likely to be well received by the
Government of Venezuela, which recently purchased a 49 percent
stake in the refinery, and could have implications for Jamaica's
benefits under the PetroCaribe agreement (Reftel D).

New Taxes On The Way

----------------------------

4. (C) In an attempt to close the current budget gap of JMD 10
billion (USD 110 million) the GOJ is set to announce another major
tax package to come into effect January 1. This is the third tax
increase for the fiscal year and follows closely on the heels of an
October increase, but given that revenue collections are
anticipated to remain below expectations it is likely that even
with the tax increase there will still be a sizable budget
shortfall by the end of the fiscal year on March 31, 2010 (Reftel
E). The tax package is expected to be comprised largely of an
increase in the general consumption tax (GCT) and the special
consumption tax (SCT) on fuel. The GCT rate, currently at 16.5
percent, may rise closer to 18 percent, while the SCT on fuel will
be increased by JMD 8.75 (USD 0.10 ) the same amount by which it
was increased in April (Reftel F). At that time, there was
widespread concern the SCT increase could lead to social unrest,
but fortunately there were only a few isolated incidents. However,
with economic conditions worsening since April, the GOJ is likely
to be even more concerned about an explosive public reaction to the
tax hike.

Public Sector Cuts

---------------------

5. (C) The income tax threshold may also be increased which would
provide relief to many low income taxpayers and mitigate some of
the impact of the GCT and SCT increases. (NOTE The GOJ still only
collects about 50 percent of the tax revenue that is owed. End
Note). There are also expected to be public sector layoffs and a
three-year wage freeze. Public sector wages are second only to
debt servicing in terms of total budget expenditures. During the
two years of PM Golding's term, public sector wages have increased
by almost fifty percent, although PM Golding has frequently
highlighted the fact that these wage increases were contractual
obligations he inherited from the previous Peoples' National
Party-led administration.

Comment

----------

6. (C) After several months of vacillating and numerous speeches in
which he hinted at major reforms on the horizon, PM Golding finally
appears ready to act decisively. He is set to make another
defining speech in Parliament on December 15, which is the last
sitting of Parliament for the 2009 session; hopefully, it will
include the specifics that both the private sector and the public
have been anticipating. However, the Jamaican economy is still in
severe recession; the imposition of these new tax increases could
send the economy deeper into the abyss if the private sector is
unable to cope with additional burdens. End Comment.
Parnell

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