Identifier
Created
Classification
Origin
03SANTODOMINGO6705
2003-11-20 21:44:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Santo Domingo
Cable title:  

DOMINICAN INSIDER VIEW OF FINANCIAL ISSUES, IMF

Tags:  EFIN PGOV DR 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 SANTO DOMINGO 006705 

SIPDIS

SENSITIVE

DEPT FOR WHA, WHA/CAR, WHA/EPSC; TREASURY FOR U/S TAYLOR,
DAS N LEE, R TOLUI

E.O. 12958: N/A
TAGS: EFIN PGOV DR
SUBJECT: DOMINICAN INSIDER VIEW OF FINANCIAL ISSUES, IMF
TALKS


UNCLAS SECTION 01 OF 03 SANTO DOMINGO 006705

SIPDIS

SENSITIVE

DEPT FOR WHA, WHA/CAR, WHA/EPSC; TREASURY FOR U/S TAYLOR,
DAS N LEE, R TOLUI

E.O. 12958: N/A
TAGS: EFIN PGOV DR
SUBJECT: DOMINICAN INSIDER VIEW OF FINANCIAL ISSUES, IMF
TALKS



1. (U) On November 20 Technical Secretary of the Dominican
Presidency Carlos Despradel called on DCM to outline state of
play with the IMF. He provided current copies of the
worksheets elaborated with IMF help. (See separate pages.)
Following is his presentation (i.e., his views).


2. (SBU) Summary table, percent of GDP

2003
2004
Program Actual Program Projected

CENTRAL GOVT
Expenditure - 0.4 - 1.8 1.1 -0.9

Public Sector
Non Financial - 0.3 -0.9 0
-1.2
-------------- --------------
-------------- --------------
SUBTOTAL -0.7 -2.7 1.1 -2.2

Quasi fiscal -2.8 -2.9 -3.6
-3.9
-------------- -------------- --------------
--------------

TOTAL -3.5 -5.6 -2.5 -6.1

Difference -2.1
-3.6


3. (SBU) Despradel is hoping that the IMF might accept a plan
that would reduce the projected deficit to 4.0 percent of
GDP. This would require the GODR to raise revenues (or lower
expenditures) by 2.1 percent of GDP, or by 12 billion RD
pesos.


4. (SBU) IMF team insists that Congress enact any revenue
measures before the standby is submitted to the board.
Despradel pointed to the difficulties in Congress of the 5%
tax on exports ) passed finally by the Senate and now going
to the House of Representatives. Congress meets only until
Christmas time and then has a recess until February 27, by
which time the election season will be in full swing.
Presidential elections are May 16. At that time no
Congressman will be willing to vote tax increases.


5. (SBU) Possible sources of funds not requiring
congressional approval could include fuel price adjustments.
Could envisage a maximum increase in electricity rates of 40
percent; could reduce subsidy on household cooking gas.
Estimated yield would be up to 1.5 percent of GDP, if willing
to face an 80 percent rise in electricity prices. If less,

then yield would be about 1 percent.


6. (SBU) Tax reform, in the short term - - as demanded by
the private sector - - is not feasible, in Despradel,s view.
Congress would not go along. Private sector is apprehensive
that a future government would not be willing to pursue
reform. Mejia,s ministers are refusing to take this road,
out of political/electoral considerations. Despradel is
telling the IMF and private sector that this is simply not
feasible. He comments that the private sector endorses tax
reform as a concept, but individual firms will continue to
avoid taxation. He insists that tax reform cannot be made a
pre-condition for an IMF program. &IMF must see that we can
deliver only that which is possible - - right now, even the
ruling party and the PRSC opposition party are badly split
among themselves. " I will tell them so when I meet them
this afternoon."


7. (SBU) Electricity sector. Most recent subsidy estimate
by team from Central Bank/ Presidency/Electricity
Council/Foreign Ministry is that @ exchange rate of RD$ 40 =
US$ 1 and with fuel oil at today,s rate of about $26/bbl,
the gap, and hence the government financing requirement, is
US $28 million/month, that is, about US $168 million to get
through the next six months. This calculation does not
address any GODR arrears to generators currently outstanding.
It does not take into account sums of approximately $104
million run up by Union Fenosa in its administration of
EDESUR and EDENORTE. The GODR budget for 2004 now has 4000
million pesos in subsidies; ministers voted yesterday not to
exceed that amount. Difficulty is that cooking gas subsidy,
previously 20 million pesos/week, is now at 60 million/week
or 250 million/month, equal to 3000 million/year ) cooking
gas will absorb 75 percent of planned subisidies, leaving
little for electricity.


8. (SBU) Despradel outlined the Madrid Agreement (of 2002?),
with which the various generators agreed that in return for a
one-time payment totaling $150 million, they would agree to
drop contractual rates established in earlier years, all
negotiated during crisis times and therefore above market
rates, according to Despradel. Instead, they would sell
electricity at the &spot rate,8 expected to be much lower.
The World Bank Energy Sector loan of $151 million which would
have allowed the GODR to pay this amount was blocked by GODR
decision to buy out Union Fenosa.


9. (SBU) The World Bank is preparing instead a
fast-disbursing Structural Adjustment Loan and has spoken of
about $80 million, with $40 million to be available quickly
with no or few conditions and another $40 million in six
months time (after elections),subject to conditions.
Despradel says given the need for $168 million in &future
arrears8 plus the money needed to put the Madrid Agreement
into effect and the sums owed to Union Fenosa, this would not
be enough. He is asking for $100 million quickly, i.e.,
without conditions, with another $50 million later. He is
also asking for more World Bank assistance for electricity,
which could be conditioned on reforms.


10. (SBU) The IDB is preparing an energy loan of $200 million
to help mitigate the impact on the social sector of
adjustment. Initial disbursement would be $100 million.
Despradel welcomes the finance but notes that these funds are
needed to carry out the objective of the loan - - to maintain
social services at previous levels.


11. (SBU) Despradel said COGENTRIX is the only generator to
refuse to associate with the Madrid Agreement. At the
request of IDB president Enrique Iglesias, in mid-2003 Mejia
agreed to pay off $42 million in arrears if Iglesias would
assure that COGENTRIX would begin a renegotiation of contract
terms. Mejia is angry that COGENTRIX remained obdurate and
has vowed not to pay until they do so. (Current bill is
about $25 million, and GODR is technically in default since
November 11 - - this would allow lenders to invoke GODR
sovereign guarantee of IDB loan of $140 million and of other
loans, for a total of $400 million.) Despradel noted that
COGENTRIX contract was negotiated by the previous (Fernandez)
government: ". . . and we can suspect what happened with
that."


12. (SBU) Bantiner. DCM inquired about GODR efforts to
recover money from Baninter. Despradel replied that seizure
and monetization of assets is not possible until after
conclusion of a trial.


13. (SBU) Despradel said that he has not been involved in
Baninter investigation or clean-up. He says GODR would
welcome technical assistance from U.S. Treasury in this
regard, including in tracking down Baninter funds sent abroad
or identifying sources of Baninter deposits.


14. (SBU) Personnel expenditures. In response to an
inquiry about possible reductions of the government payroll,
Despradel said that in his opinion, expenditures were indeed
high. He did not indicate any plans to reduce the civil
service. He pulled out a table showing the progression of
government current expenditures in terms of GDP since the
early 1980,s. Under Balaguer, the share had progressed
slowly from 6.8 percent to just over 8 percent; in 1997, the
first year of the Fernandez administration, it had jumped to
11 percent and crept higher. The tendency was maintained,
not initiated, in the Mejia administration. (He did not
point to the 2003 figure, which was increased sharply to over
14 percent.)


15. (SBU) Incidence of taxation. Despradel said that the
GODR badly needed tax reform. All talk of tax measures is
focused on consumption taxes, which fall heavily on the
poorest. Despradel said that retailers commonly fail to pay
the government the value-added tax collected from consumers.
Comprehensive tax reform was necessary, he said, but not
realistic before May. It is impossible to get a consensus on
taxing incomes. Despradel pulled out a chart comparing
countries according to the sources of tax revenue; the
Dominican Republic receives 71 percent of revenue from
consumption taxes and only 26 percent from income taxes. A
Harvard consultant advising the government had initially
discouraged the use of a 1% withholding tax on incomes; after
analyzing the figures, the consultant had suggested a higher
rate.
HERTELL