Identifier
Created
Classification
Origin
03SANTODOMINGO5562
2003-10-09 01:52:00
CONFIDENTIAL
Embassy Santo Domingo
Cable title:  

DOMINICAN PRESIDENT AND TOP ECONOMIC TEAM WORRIED

Tags:  ECON EFIN EINV ENRG DR 
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C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 005562 

SIPDIS

DEPARTMENT FOR WHA/CAR/GILROY AND EB FOR A/S WAYNE
TREASURY FOR OASIA/NANCY LEE;
NSC FOR TOM SHANNON

E.O. 12958: DECL: 10/08/2013
TAGS: ECON EFIN EINV ENRG DR
SUBJECT: DOMINICAN PRESIDENT AND TOP ECONOMIC TEAM WORRIED
ABOUT IFI DELAYS

REF: SANTO DOMINGO 5391

Classified By: CHARGE LISA J. KUBISKE; REASON 1.5 (B AND D).

C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 005562

SIPDIS

DEPARTMENT FOR WHA/CAR/GILROY AND EB FOR A/S WAYNE
TREASURY FOR OASIA/NANCY LEE;
NSC FOR TOM SHANNON

E.O. 12958: DECL: 10/08/2013
TAGS: ECON EFIN EINV ENRG DR
SUBJECT: DOMINICAN PRESIDENT AND TOP ECONOMIC TEAM WORRIED
ABOUT IFI DELAYS

REF: SANTO DOMINGO 5391

Classified By: CHARGE LISA J. KUBISKE; REASON 1.5 (B AND D).


1. (C) SUMMARY: DURING AN OCTOBER 8 MEETING AT THE NATIONAL
PALACE, PRESIDENT MEJIA TOLD THE AMBASSADOR THAT HE IS
CONCERNED ABOUT DELAYS IN DISBURSEMENT UNDER THE GODR'S
STANDBY AGREEMENT WITH THE INTERNATIONAL MONETARY FUND (IMF),
DELAYS IN DISBURSEMENT OF A $1OO MILLION INTER-AMERICAN
DEVELOPMENT BANK (IDB) SOCIAL DEVELOPMENT LOAN, AND APPROVAL
OF WORLD BANK ELECTRICITY SECTOR LOANS. THE ECONOMIC TEAM IS
WORRIED THAT UNCERTAINTY OVER RELEASE OF IFI FUNDS IS
EXACERBATING THE COUNTRY'S FINANCIAL DIFFICULTIES AND SENDING
THE ECONOMY TOWARD COLLAPSE. THE PRESIDENT OUTLINED GODR
ARGUMENTS FOR THE GODR BUYBACK OF ELECTRICITY DISTRIBUTION
COMPANIES. HE PROVIDED A COPY OF A LETTER THE GODR HAD SENT
TO THE IMF OCTOBER 7 AGREEING TO A KEY IMF REQUIREMENT THAT
AN INDEPENDENT COMMISSION BE CREATED TO REVIEW THE GODR'S
RECENT AGREEMENT WITH UNION FENOSA, THE SPANISH COMPANY
BOUGHT OUT. IN SUBSEQUENT SEPARATE MEETINGS, THE THREE
CABINET OFFICIALS MOST DIRECTLY INVOLVED IN THE IMF AGREEMENT
EACH TOLD CHARGE' THAT THE GODR WAS ON TRACK WITH (OR AHEAD
OF) ALL OF THE IMF CONDITIONS FOR RELEASE OF THE SECOND
TRANCHE OTHER THAN THE CRITERIA RELATED TO ADDITIONAL
SOVEREIGN DEBT (THAT RESULTED FROM REPURCHASING THE
ELECTRICITY DISTRIBUTION COMPANIES),AND A REQUIREMENT TO
IDENTIFY A SOURCE OF REVENUE IT THE GODR CHOOSES TO OFFSET
ELECTRICITY TARIFF INCREASES. THEY EACH CONFIRMED THE GODR
REMAINED FULLY COMMITTED TO THE AGREEMENT AND TO FREE
TRADE/OPEN ECONOMIC POLICY. END SUMMARY.


--------------
PRESIDENT MEJIA AGITATED
--------------


2. (C) AMBASSADOR AND EMBOFFS MET WITH PRESIDENT MEJIA
SHORTLY BEFORE THE AMBASSADOR DEPARTED POST FOR MEETINGS IN
WASHINGTON. A VERY AGITATED PRESIDENT SAID THAT HE WAS
CONCERNED ABOUT THE IMPACT FURTHER DELAYS IN RELEASE OF THE
SECOND IMF TRANCHE WOULD HAVE ON THE FRAGILE ECONOMIC
CONDITIONS IN THE DOMINICAN REPUBLIC. HE ACKNOWLEDGED THAT

THE GOVERNMENT'S REPURCHASE OF SPANISH INTERESTS IN TWO OF
THE COUNTRY'S THREE ELECTRICITY DISTRIBUTION COMPANIES HAD
PRECIPITATED THE DELAY WHILE THE IMF REVIEWED THE IMPACT ON
GODR FISCAL COMMITMENTS UNDER THE IMF STANDBY ACCORD SIGNED
IN AUGUST (REFTEL). MEJIA SAID THAT THE GODR HAD IMPLEMENTED
TIGHT FISCAL DISCIPLINE, BUT DID NOT HAVE OTHER OPTIONS FOR
RESOLVING LONG-STANDING PROBLEMS WITH THE SCANDALOUS SPANISH
COMPANY UNION FENOSA AND HAD TO REPURCHASE THE SPANISH SHARES
OR RISK COMPLETE BANKRUPTCY OF THE SECTOR. MEJIA EXPANDED ON
EARLIER REPORTS THAT THE COMPANY HAD ENGAGED IN BUSINESS
PRACTICES THAT "ROBBED" THE GOVERNMENT. HE ALLEGED THAT
UNION FENOSA HAD EMPLOYED CRIMINALS, INCLUDING U.S.
DEPORTEES, AND THAT THESE "BANDITS" WERE ORGANIZED AND HAD
DELIBERATELY PROVOKED RECENT ELECTRICITY RIOTS. HE DESCRIBED
THE INITIAL PRIVATIZATION OF THE DISTRIBUTION COMPANIES AS A
COMPLETE FAILURE.


3. (C) MEJIA EMPHASIZED THE NEED FOR QUICK DISBURSEMENT OF A
$100 MILLION IDB LOAN FOR SOCIAL DEVELOPMENT THAT HAD BEEN
PUT ON HOLD PENDING IMF REVIEW OF THE UNION FENOSA DEAL. THE
PRESIDENT POINTED OUT THAT THERE WERE 350 PROJECTS -- SUCH AS
SCHOOLS, WATER SYSTEMS AND HOUSING -- IN POOR AREAS WHOSE
COMPLETION WAS "PARALYZED" DUE TO LACK OF FUNDS. HE
PRESENTED A LETTER THAT THE GODR HAD JUST SENT TO THE IMF
AGREEING TO AN INDEPENDENT COMMISSION TO REVIEW THE
GOVERNMENT'S PURCHASE OF UNION FENOSA AND EXPRESSED HOPE THAT
THE LETTER SHOULD MEET THE CONDITIONS FOR RELEASE OF THE
SOCIAL DEVELOPMENT LOAN.


4. (C) THE PRESIDENT ALSO RAILED AGAINST THE DOMINICAN
BUSINESS SECTOR THAT HAD "PAID CONGRESS" TO REJECT THE
RECENTLY-IMPOSED FIVE-PERCENT EXPORT TAX. HE SAID THE
COUNTRY DESPERATELY NEEDED ADDITIONAL REVENUE TO MEET IMF
FISCAL TARGETS. HE POINTED OUT THAT THE TAX HAD TARGETED
SECTORS THAT HAD BENEFITED ROYALLY FROM PESO DEVALUATION AND
QUESTIONED THE PATRIOTISM OF COMPANIES THAT OPPOSED THE
MEASURE. HE SAID THE GODR WOULD BE FORCED TO LOOK FOR OTHER
MEASURES.

--------------
ECONOMIC CABINET CONFIRMS COMMITMENT TO IFI PROGRAM AND POLICY
--------------



5. (C) IN SUBSEQUENT SEPARATE MEETINGS, TECHNICAL SECRETARY
CARLOS DESPRADEL, FINANCE SECRETARY RAFAEL CALDERON, AND
CENTRAL BANK GOVERNOR JOSE LOIS MALKUN EACH AFFIRMED TO
CHARGE AND ECONOFF THAT THE GODR WAS ON TRACK WITH (OR AHEAD
OF) ALL OF THE IMF CONDITIONS FOR RELEASE OF THE SECOND
TRANCHE OTHER THAN THE CRITERIA RELATED TO ADDITIONAL
SOVEREIGN DEBT (THAT RESULTED FROM REPURCHASING THE
ELECTRICITY DISTRIBUTION COMPANIES),AND A REQUIREMENT TO
IDENTIFY A SOURCE OF REVENUE IT THE GODR CHOOSES TO OFFSET
ELECTRICITY TARIFF INCREASES. THEY SAID THAT THE GODR HAD
(1) LIBERALIZED THE FOREIGN EXCHANGE MARKET, (2) TAKEN STEPS
TO STRENGTHEN THE BANKING SECTOR, (3) CUT FISCAL EXPENDITURES
AND (4) CUT CAPITAL EXPENDITURES. CENTRAL BANK GOVERNOR
MALKUN ALSO EXPLAINED THAT THE SUPERINTENDENT OF BANKS WAS
WORKING WITH THE IMF FOR A TEAM TO CONDUCT AN AUDIT OF THE
BANKING SECTOR, AS REQUIRED IN THE AGREEMENT. THEY EACH
INDEPENDENTLY AFFIRMED THAT THE GODR WAS COMMITTED TO THE IMF
PROGRAM AND TO FREE TRADE/OPEN ECONOMIC POLICY, UNDER WHICH
THE DOMINICAN REPUBLIC HAD PROSPERED IN THE LAST DECADE.
MALKUN WENT SO FAR AS TO SAY THAT THE GODR WOULD COMPLETE THE
REQUIREMENTS "INDEPENDENT OF THE IMF TAKING FURTHER TIME TO
REVIEW."

-------------- -
UNION FENOSA: THE MAIN OBSTACLE TO IFI SUPPORT
-------------- -


6. (C) WITH REGARD TO THE ELECTRICITY SECTOR, THE ECONOMIC
TEAM WAS IN AGREEMENT THAT THE GODR HAD TO TAKE STEPS TO
CORRECT THE SITUATION WITH UNION FENOSA. MALKUN CONFIDED
THAT HE HAD ADVISED THE PRESIDENT TO WAIT THE THIRTY DAYS THE
IMF HAD REQUESTED BEFORE SIGNING THE AGREEMENT, BUT EACH DAY
THE ELECTRICITY SITUATION WAS GETTING WORSE, AND THE
PRESIDENT HAD APPARENTLY ALREADY MADE COMMITMENTS THAT HE
FELT HE HAD TO KEEP. TECHNICAL SECRETARY DESPRADEL TOLD THE
CHARGE THAT THE PRESIDENT HAD INTELLIGENCE REPORTS ABOUT
UNION FENOSA EMPLOYEES PROVOKING RIOTS. DESPRADEL ALSO
POINTED OUT THAT AT THE SAME TIME THE IMF WAS ASKING FOR
THIRTY DAYS TO REVIEW THE AGREEMENT, THE IDB WAS DEMANDING
REPAYMENT OF ITS LOANS. HE EXPLAINED THAT THE ONLY WAY THAT
PAYMENT COULD BE MADE WAS THROUGH AN AGREEMENT WITH UNION
FENOSA. ALL OF THE ECONOMIC TEAM MEMBERS NOTED THAT THE IMF
HAD ORIGINALLY NOT CONSIDERED THAT AS A PARTNER WITH UNION
FENOSA, THE GODR WAS OBLIGATED FOR HALF OF THE DISTRIBUTION
COMPANIES' DEBTS ALREADY. THEY CLAIMED THAT THE GODR DEBT
OBLIGATION ACTUALLY DECREASED UNDER THE REPURCHASE AGREEMENT,
SINCE UNION FENOSA RETAINED SOME OBLIGATIONS.

--------------
SOME SECTORS STILL PROSPERING
--------------


7. (C) FINANCE SECRETARY RAFAEL CALDERON REVIEWED THE
COUNTRY'S ECONOMIC PERFORMANCE LEADING UP TO THE CRISIS. HE
NOTED THAT THE DOMINICAN REPUBLIC HAD WORKED HARD TO ATTRACT
FOREIGN -- ESPECIALLY U.S. -- INVESTMENT, AND THAT THE
DOMINICAN ECONOMY HAD LED THE REGION IN GROWTH FOR MOST OF
THE PAST DECADE. DESPITE THE MASSIVE BANK FRAUD AND
SUBSEQUENT ECONOMIC CRISIS THAT PRECIPITATED THE IMF ACCORD,
CALDERON POINTED OUT THAT CERTAIN SECTORS OF THE ECONOMY
REMAINED STRONG. HE AND DESPRADEL REPORTED THAT TOURISM,
FREE TRADE ZONE EXPORTS, TRADITIONAL EXPORTS AND REMITTANCES
FROM ABROAD WERE AT RECORD LEVELS, AFTER RECOVERING FROM
DIFFICULT YEARS FROM 2000-2002, (WHICH HAD BEEN DIFFICULT
PRIMARILY DUE TO THE SLOWDOWN IN THE UNITED STATES' ECONOMY).


--------------
THE ROAD AHEAD
--------------


8. (C) ALL OF THE INTERLOCUTORS STRESSED THE NEGATIVE IMPACT
THAT THE CURRENT UNCERTAINTY WAS HAVING ON MACRO-ECONOMIC
STABILITY. CENTRAL BANK GOVERNOR MALKUN SAID THAT
BUSINESSMEN HAVE BEEN HOUNDING HIM TO MAKE A REASSURING
STATEMENT TO THE PRESS TO HELP STEM CAPITAL FLIGHT AND A
FALLING EXCHANGE RATE. THE ECONOMIC CABINET SAID IT WAS
READY WITH THE INFORMATION NEEDED FOR THE IMF TALKS NEXT WEEK
IN SANTO DOMINGO. WHAT THEY NEED MOST TO AVOID ECONOMIC
COLLAPSE, THEY SAID, IS THE SPEEDY RESTORATION OF THE
ANTICIPATED IFI FUNDING. THE GODR HAD INCLUDED THE IMF, IDB
AND WORLD BANK DISBURSEMENTS IN ITS PROJECTIONS AND CLAIMS IT
CAN NOT HOPE TO MEET IMF TARGETS WITHOUT IT.

--------------
COMMENT
--------------


9. (C) WE AGREE THAT FURTHER DELAY IN IFI DISBURSEMENTS WILL
EXACERBATE A SALVAGEABLE SITUATION. IN THAT REGARD, THE
VISIT OF THE IMF TEAM NEXT WEEK IS GOOD NEWS. ONE MAJOR
STUMBLING BLOCK HAS BEEN REMOVED WITH GODR CONCURRENCE
OCTOBER 7 TO CREATE AN INDEPENDENT COMMISSION OF
INTERNATIONAL EXPERTS TO REVIEW THE ENERGY SECTOR AGREEMENT.
AT OUR MEETING, WE FOUND PRESIDENT MEJIA CLEARLY FRUSTRATED
BY THE LACK OF FUNDS THE GODR HAD COUNTED ON TO GET THEM
THROUGH THE FALL. HE WAS ACCORDINGLY SKEPTICAL OF THE
BENEFITS OF THE IMF AGREEMENT AT THAT MEETING. IN CONTRAST,
HIS TOP ECONOMIC TEAM -- THE PEOPLE THE IMF WILL WORK WITH
NEXT WEEK -- WERE CONVINCING IN THEIR COMMITMENT TO FULL
IMPLEMENTATION OF THE ACCORD. THE IMF WILL WANT TO WORK
THROUGH THE DEBT IMPLICATIONS OF THE UNION FENIOSA DEAL AND
GET ASSURANCE ON HOW THE GODR WILL MANAGE THE ELECTRICAL
SECTOR AND MEET ITS REVENUE COMMITMENTS.
KUBISKE