US embassy cable - 05KINGSTON2359

UNCLAS SECTION 01 OF 02 KINGSTON 002359 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY), 
EB/IFD/OMA (DJUNCKER) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
E.O. 12958:  NA 
TAGS: ECON, EFIN, JM 
SUBJECT: GOJ'S FISCAL PROGRAM OFF TRACK 
 
 
SENSITIVE BUT UNCLASSIFIED 
 
1. (SBU) Summary:  Data released by the Ministry of 
Finance on September 30 showed that the GOJ's fiscal 
deficit of USD 290 million continued to run ahead of the 
GOJ'S target of USD 270 million.  The deficit overrun was 
primarily due to lackluster revenue generation, reflecting 
a slump in consumption taxes.  To curtail the fiscal 
downturn, the GOJ slashed overall expenditures by curbing 
spending on capital projects and recurrent programs such 
as utilities and social programs.  To finance the deficit 
and amortize debt, over USD 1 billion was sourced from the 
capital markets, pushing the national debt to USD 13 
billion.  The government, already faced with the Herculean 
task of meeting its balanced budget objective, will 
encounter even greater challenges given its recent 
decision to grant public sector workers a hardship 
allowance.  The fiscal authorities will therefore have to 
find creative ways to increase compliance and broaden the 
tax base, as any major deviation from the balanced budget 
objective could upset the capital markets.  End summary. 
 
2. (SBU) Data released by the Ministry of Finance on 
September 30 revealed that GOJ operations generated a 
deficit of USD 290 million during the first five months of 
this fiscal year (April to August 2005).  This represents 
an approximately USD 20 million departure from budget 
forecasts and marks the continuation of a trend observed 
since April.  Poor revenue inflow, due largely to a slump 
in consumption, was the main reason for the deviation in 
the deficit.  Revenue collections of USD 1.1 billion were 
USD 83 million below the USD 1.2 billion budgeted for 
April to August.  During the period, General Consumption 
Taxes (GCT) amounted to USD 302 million or USD 60 million 
less than projected.  Keith Collister of the Jamaica 
Chamber of Commerce told emboff that the underperformance 
of GCT was particularly striking as it occurred within the 
context of a 1.5 percentage point increase in the rate to 
16.5 percent in April 2005. 
 
3. (SBU) However, Senior Fiscal Economist at the Ministry 
of Finance, Courtney Williams, told emboff that he was not 
surprised by the underperformance in taxes, as the target 
was overly optimistic.  Williams said that while data were 
not yet available, anecdotal evidence suggests that most 
individuals had curtailed spending due to flat wages and 
double-digit inflation.  He said inflation-based revenues 
were not a factor, as inflation was being fuelled by oil, 
which has a flat tax rate, and food, which does not 
attract taxes.  Williams said gas consumption had also 
fallen by at least two percent since the start of the 
fiscal year.  The falloff in revenues was also partly due 
to the sluggishness in the Jamaican economy, which is 
still recovering from the effects of three hurricanes in 
under a year.  Despite the downturn in overall revenues, 
there was a 26 percent increase in actual profit taxes 
over projection, reflecting the significant increase in 
the profits of large publicly-listed financial companies 
such as the Bank of Nova Scotia. 
 
4. (SBU) The falloff in revenues forced the GOJ to chop 
spending by USD 62.6 million to contain the expansion in 
the fiscal deficit.  Total expenditures for the period 
amounted to USD 1.39 billion compared to a budget of USD 
1.45 billion.  While the contraction in expenditures was 
widespread, the fiscal restraint was most evident in 
capital spending and programs (utilities, social programs 
and day-to-day spending).  Capital expenditures of USD 102 
million were slashed by 23.3 percent from projections of 
USD 125 million, while programs were cut by 9.8 percent to 
USD 264 million.  The GOJ'S decision to cut the capital 
budget following three hurricanes will lead to further 
deterioration of the island's physical infrastructure in 
general and roads in particular.  The reduction in 
spending on programs will also lower the benefits to the 
most vulnerable groups, already buckling under the high 
prices.  Collister pointed out that the notable exception 
in the expenditure restraint was the spending on domestic 
debt payment, which was USD 4.1 million above target.  He 
said the overshoot could suggest that the interest rate 
reduction program was now running behind target, 
reflecting inflation that was higher that anticipated. 
Collister said the GOJ should therefore consider borrowing 
more funds internationally, substituting cheaper external 
financing for higher domestic borrowing. 
 
5.  To finance the fiscal deficit and to amortize debt, 
the GOJ had to source USD 66 million from the capital 
markets.  This brought the total amount of debt contracted 
for the five-month period to USD 1.1 billion and the 
national debt to USD 13 billion.  While most of the 
borrowing came from the domestic market, the GOJ also 
issued a ten-year USD 300 million eurobond with a coupon 
on nine percent per year.  This is the lowest rate Jamaica 
has raised funds on the international capital market and 
occurred amidst rising US interest rates and at a time 
when investors are shunning emerging market debt.  This 
suggests that external investors continue to have a high 
level of confidence in Jamaica's ability to repay debt, 
notwithstanding the macroeconomic challenges. The 
country's continued generation of high primary surpluses 
(revenues minus non-debt spending), a measure of debt 
sustainability, would also have buoyed investor's appetite 
for Jamaican bonds. 
 
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COMMENT 
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6.  Fiscal Outlook:  The GOJ will be hard pressed to 
balance the 2005/06 fiscal budget, particularly given its 
recent decision to grant all public sector workers a 
hardship allowance - amounting to approximately USD 16 
million - to alleviate the pressure being caused by the 
wage restraint.  This combined with the increasing cost of 
providing public goods and services will make further 
expenditure restraint difficult in upcoming months. 
Domestic interest payments could also continue to outstrip 
projections, as the Bank of Jamaica (BOJ) has halted its 
interest rate reduction program due to higher than 
anticipated inflation.  Revenue collections could also 
remain moribund for the remainder of the fiscal year due 
to the sluggish economic conditions and waning business 
and consumer confidence.  The fiscal authorities will 
therefore have to find creative ways to increase 
compliance and broaden the tax base in order to bring 
revenue collections in line with projections, as any 
deviation from the balanced budget objective will be 
viewed with disfavor by an expectant capital market.  In 
particular, the country would have to pay higher rates of 
interest to borrow from both the local and international 
capital markets in 2006.  End outlook. 
 
TIGHE