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