US embassy cable - 05KINGSTON1905

UNCLAS SECTION 01 OF 02 KINGSTON 001905 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY) 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR L LAMONICA 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, JM 
SUBJECT: IMF GIVES JAMAICA PASSING MARK 
 
REF: KINGSTON 00386 
 
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. 
 
 
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 fiscal economist at the Ministry of Finance Courtney 
Williams posits that the Fund might have been a little too 
bullish on the economy.  Williams, 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", Williams 
continued.  When asked about the Fund's position on Air 
Jamaica, Williams 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. 
TIGHE