DOMINICAN FINANCE OFFICIALS ACKNOWLEDGE NEED TO

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 005998 SIPDIS NSC FOR TOM SHANNON; TREASURY FOR U/S TAYLOR, N LEE, L LAMONICA; DEPT PASS AID E.O. 12958: DECL: 10/24/2005 TAGS: EFIN PREL ETRD DR SUBJECT: DOMINICAN FINANCE OFFICIALS ACKNOWLEDGE NEED TO WORK WITH IMF REF: A) STATE 299908 B) LAMONICA/URS/KUBISKE E-MAIL 10-24 Classified By: Charge d'affaires Lisa Kubiske. Reason: 1.5 b & d. ¶1. (C) Summary. On Oct 24, in reply to delivery by Charge of ref A demarche on the importance of GODR fulfillment of obligations unders its IMF standby agreement, Dominican Secretary of Finances Calderon and Central Bank Governor SIPDIS Malkun each confided separately that the GODR has been taking the standby agreement seriously and continues to work, with unofficial consultative help from the IMF, to meet its program obligations. Indeed, Malkun said, the GODR's drastic cut in spending has met IMF targets, although raising revenues in ways permitted by Dominican law remains a problem. Calderon asked for help in obtaining release of the IDB social sector loan disbursement of USD 100 million. End summary. FINANCES ¶2. (C) On October 24 Charge presented talking points from reftel a to Finance Secretary Calderon, explaining that this formal approach was evidence of deep USG concern about the GODR situation. Calderon replied that he had already spent half an hour on the telephone with Treasury U/S Taylor, who had expressed grave concern about Dominican economic figures and had noted the market's increasing discount of Dominican debt. Calderon said that IMF staff are still in country, on an unofficial basis, and working closely with the Government. He asserted that the GODR had managed to fulfill most of the performance criteria, but stressed that the delay of disbursements from the IDB and the World Bank was a major difficulty. Calderon disagreed with the assertion that the debt ratio had risen above 50 percent of GDP. The debt ratio was at 49 percent, following the conclusion of the IMF program, but the Union Fenosa buy-back would have "minimal impact." Initial evaluations in the press of the transaction had not taken into account the fact that the GODR was already a 50 percent shareholder in the enterprise; once its takeover of the assets is taken into account, there is a net decrease of USD 5 million in GODR exposure (sic). ¶3. (C) Calderon expects that the private evaluators of the electricity sector will finish their work "by next week" (Oct. 27-31) "or by November 10 at the latest." He expects that the IMF will be back to review the situation around November 15, with a view to recommending an adjusted agreement to the Board for approval on December 15. ¶4. (C) Revenue levels are the greatest concern for the GODR, particularly with the Supreme Court's overturning of the presidential decree imposing taxes on imports (the Dominican constitution does not provide for taxation by decree). The Monetary Board has just raised the levy on exchange rate transactions for importers from 4.75 percent to 10.0 percent, effective over the next 14 months -- a measure which requires no congressional action. Calderon said that private sector leaders argued last week with the GODR over draft legislation to tax exports, and the sides traded legal opinions on the matter. Elena de Viyella, president of the leading manufacturers' association CONEP, has told him that CONEP will provide "alternative proposals" next week. ¶5. (C) The Charge expressed concern that measures for new taxes on imports might affect broader trade relations. Calderon believed that "across the board" increases limited in time would not be problematic, since they would not discriminate among traded items. Looking to the mid-term, he said, the GODR and the IDB are preparing projects for fundamental reforms of the taxation system, to be instituted in mid- or late 2004 ("by the next government, which we expect to be this one!"). ¶6. (C) The Finance Secretary pressed emboffs on the GODR's urgent need for funds and twice asked for help in obtaining disbursement of the USD 200m IDB social sector loan ahead of the IMF decision -- "with the IMF's tacit approval." The Charge stressed that multilateral development banks and the IMF work very close together. She again urged the need to come to terms with the IMF. CENTRAL BANK ¶7. (C) That same morning Central Bank Governor Jose Lois Malkun received Emboffs in his shirtsleeves, seated at his worktable piled with folders. He listened attentively to the presentation and scanned the text of talking points. The situation is difficult, he acknowledged, but the GODR is working very closely with IMF staff who are in country on an unofficial basis. The financial impact of the Union Fenosa transaction is not clear, and interpretations differ. ¶8. (SBU) The Bank has withdrawn liquidity by issuing certificates of deposit, but the exchange market is being driven 90 percent by psychology, Malkun said.. ¶9. (SBU) Though the GODR has accumulated various arrears, generally of 20 to 30 days, Malkun hopes to be able to get current in debt service by early December. ¶10. (SBU) Malkun emphasized that the GODR's problem is revenue, not expenditures. Malkun pulled out an IMF table from a folder in front of him and pointed to figures showing that third-term public consumption was down 4.6 percent, with third-term public investment down 57.7 percent (in comparison to one year earlier). Malkun said that the GODR is meeting and in some cases surpassing its other fiscal targets. ¶11. (C) The President is aware of the IMF requirements, Malkun said, and is very unhappy that he can't carry out intended projects. This dilemma is a sort of "political suicide" for him. Congress does not help, because of its reluctance to approve revenue measures. He does not like the new measures to tax exchange transactions for imports; the IMF permits levies in the range of 2 to 3 percent, but 7 to 10 percent is excessive. COMMENT ¶12. (C) These same GODR officials received the Ambassador and EXIMBANK officials earlier this week and discussed some of the same concerns. Their immediate availability is an indication of the seriousness with which they take USG views. Our impression is that they do indeed understand IMF concerns and requirements, and that they are giving straight advice to a president who understands it, even if he is not pleased by it. KUBISKE