US embassy cable - 05KINGSTON893

UNCLAS SECTION 01 OF 02 KINGSTON 000893 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CAR/ (WBENT), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
E.O. 12958:  NA 
TAGS: ECON, EFIN, JM 
SUBJECT: DISCOVERY OF FINANCE MINISTRY'S ISSUES ILLEGAL 
LOAN GUARANTEES EMBARRASSES PM-HOPEFUL 
 
REF: 03 KINGSTON 3056 
 
1. (U) Summary:  The Jamaican Ministry of Finance (MOF) 
used deferred financing to support development projects 
without going to Parliament for approval.  Following an 
amendment to the Financial Administration Act (FAA) in 
2002, the MOF modified their "comfort letters" to 
financial institutions, turning them into loan guarantees 
on behalf of government agencies and not subject to 
Parliamentary review.  Parliament recently discovered the 
illegal practice, which has increased GOJ debt obligations 
by more than JD 19 billion (USD 300 million).  In hearings 
before Parliament, MOF officials admitted that they 
knowingly broke the law, though other representatives of 
the MOF told emboff that the situation was not as serious 
as Parliament believes.  Some in the MOF believe that the 
timing of these revelations is politically motivated.  End 
Summary. 
 
2. (U) On March 22, representatives of the Ministry of 
Finance (MOF) faced a special sitting of the Public 
Accounts Committee (PAC) of Parliament and admitted that 
the MOF has been acting in violation of the Financial 
Administration and Audit since 1992. The testimony 
centered on the MOF's issuance of so-called "comfort 
letters", which assured creditors that the GOJ would repay 
loans should the borrower default.  These letters served 
as de-facto loan guarantees, and have increased the GOJ's 
debt obligations by at least JD 19 billion (USD 300 
million). 
 
3. (U) The MOF has traditionally used deferred financing 
(reftel) to support a variety of build-now, pay-later 
development projects.  However, growing concern about the 
debt crisis and the burden such practices were placing on 
the budget led Parliament, in 2002, to amend the FAA, 
requiring that future deferred financing projects be 
brought to Parliament for approval. 
 
4. (U) According to March 22 testimony, the MOF responded 
to the amended legislation by largely abandoning the 
practice of deferred financing, shifting its focus instead 
to letters of undertaking (LOU).  A common practice since 
1992, these documents initially served as "comfort 
letters", reassuring lenders that the GOJ had confidence 
in a borrower's ability to pay.  Over time, however, the 
wording changed to the point where the MOF was, in 
practice, promising to pay the full value of the loan in 
the event that the borrower defaulted.  The issuance of 
such letters is not subject to legislative review, and 
Auditor General Adrian Strachan reports that MOF issuance 
of such documents significantly increased following the 
amendment of the FAA. 
 
5. (U) Robert Martin, MOF Senior Deputy Financial 
Secretary (DFS), admitted to Parliament's PAC on March 22 
 
SIPDIS 
that the MOF had known that the process of providing de- 
facto guarantees to financial institutions was illegal. 
Their stated rationale was to reduce the MOF's financial 
constraints and expand its capacity to fund development 
projects. 
 
6. (U) The PAC is concerned that the obligations made 
through the outstanding LOUs may significantly worsen the 
GOJ's debt position, and has demanded that the MOF provide 
a full accounting of all comfort letters, promissory notes 
and similar instruments.  Early indications are that at 
least JD 19.6 billion (USD 320 million) was offered by 13 
government entities to commercial banks via LOUs.  The 
largest single recipient of the illegally guaranteed funds 
was the Development Bank of Jamaica, which secured JD 4.2 
billion in loans. 
 
7.  (SBU) Senior Fiscal Economist of the Ministry of 
Finance Courtney Williams told emboff on March 24 that it 
was unfortunate that DFS Martin and Rowe had to explain 
something they had nothing to do with.  He said the 
grilling from the PAC had put so much pressure on Martin 
in particular that he had become obviously stressed out. 
This has been complicated by the scramble to get 
additional information for the next sitting of the PAC. 
Williams said that the outstanding LOUs were not much more 
than JD 19.6 billion and it would not affect the budget 
unless the entities did not make good on their 
obligations.  Williams also reiterated the difficulty 
these "off the book" expenditures had on planning.  He 
said the current development brings Finance Minister Omar 
Davies' management and leadership into question, a clear 
swipe at the latter's ambition to become the next Prime 
Minister. 
 
TIGHE