Identifier
Created
Classification
Origin
03SANTODOMINGO6871
2003-11-26 20:51:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Santo Domingo
Cable title:  

DOMINICAN TREASURY CONCERN ABOUT IMF NEGOTIATIONS,

Tags:  EFIN PGOV DR 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 SANTO DOMINGO 006871 

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN PGOV DR
SUBJECT: DOMINICAN TREASURY CONCERN ABOUT IMF NEGOTIATIONS,
POSSIBLE ACTION AGAINST EXCHANGE SPECULATORS

REF: KUBISKE & MEIGS E-MAILS/WHA-WHA/CAR-TREASURY-EB

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 006871

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN PGOV DR
SUBJECT: DOMINICAN TREASURY CONCERN ABOUT IMF NEGOTIATIONS,
POSSIBLE ACTION AGAINST EXCHANGE SPECULATORS

REF: KUBISKE & MEIGS E-MAILS/WHA-WHA/CAR-TREASURY-EB


1. (SBU) Summary. Dominican Technical Secretary of the
Presidency Carlos Despradel says that President Mejia and his
team are close to an agreement with the IMF but are concerned
that speculation in the foreign exchange market may be
undermining all calculations. Strong action against
speculators is possible. End summary.


2. (U) DCM and EcoPol Counselor were invited to meet
Technical Secretary of the Presidency Carlos Despradel on
November 26 for a read-out of talks with the IMF, as a
follow-up to the visit of Treasury Under Secretary John
Taylor. Emboffs were received by technical advisor Luis
Reyes Santos, who mentioned that IMF team leader Figuerola
and IMF resrep Mandeng were both in flight to Washington for
Thanksgiving holiday. One fiscal specialist, Geremia
Palomba, is still in Santo Domingo but was out of contact.


3. (SBU) Technical Secretary Despradel arrived ten minutes
later, directly from a meeting with President Mejia. He
provided a chart of the IMF negotiations as of November 24
and November 25:

PROGRAM AS OF NOVEMBER 24: Percent of GDP


1. Central Bank quasi-fiscal deficit - 4.0


2. Electricity Sector
includes rate increases averaging 42 percent
(1% monthly adjustments for consumers of
less than 300 kw, 4% monthly adj for consumers
of 300-700 kw, elimination of subsidies for
all consuming more than 700 kw0); total
of subsidies is 0.8 percent GDP
-1.0
- - - - - -

SUBTOTAL DEFICIT (1 2) -
5.0

GOVERNMENT SURPLUS, including
Measures to reduce expenditures by
a further 1.1 percent of GDP; includes
the projected yield of the 5% export tax
0.5
- - - - -
GLOBAL DEFICIT
- 4.5 percent

GAP requiring financing, according to IMF 1.0
percent

- - - - - - - - - - - - - - - - -
AS OF NOVEMBER 25
- - - - - - - - - - - - - - - - -

Proposed additional measures

1. Further spending cuts (0.4 percent)

2. New taxes (0.6 percent)
1.0 percent


4. (SBU) Despradel stressed that adding further taxes would
be a very difficult undertaking and could well delay approval

of the 2004 budget beyond the December timeframe. President
Mejia has told advisors that he is determined to reach
agreement with the Fund and says that he will persuade
congress and other interests of the need to enact them.
Despradel said that one approach might be raising the VAT
from 12 percent currently to 14 or 15 percent, with
exceptions for basic necessities.


5. (U) Note. President of the Business Council (CONEP)
Elena Viyella has emphasized to us in recent days that
businesses find unacceptable the draft for the 5 percent tax
on exports. In the version approved by the Senate there is
no legal mechanism specified for collecting the tax. CONEP
believes that the law should to some extent mirror the
mechanisms and rates embodied in the private sector voluntary
agreements made with the administration since October. She
notes that the export tax doesn,t address Free Zone exports
and is not adequate in dealing with the dollar earnings of
the hotel sector.

Central Bank debt - Request to USG


6. (SBU) Despradel stressed the deep concern of the
financial team about the short-term debt held by the Central
Bank (CB) in the form of certificates of deposit (largely
originating as guarantees of Baninter deposits). He
estimates this stock at 60 billion pesos currently. At an
annualized interest rate of 30 percent, the CB will have to
issue further certificates regularly to offset the liquidity
created by interest payments. The program projects the
resulting stock of CB debt at 65 billion in March 2004, 76
billion in June, 84 billion in September, and 81 billion
(sic) in December. Despradel supposes that in unchanged
circumstances the debt would rise from 81 billion to 100
billion in 2005. He finds unrealistic the IMF suggestion to
raise taxes further so as to offset this growth in debt.

7.(U) Note. Banks are growing increasingly reluctant to
roll over the government,s short term debt. The most recent
offering was of 7.5 billion pesos -- and only 4.8 billion was
placed at an average maturity of 19.1 days. None of the CB
offerings over the past ten weeks has been fully subscribed.


8. (SBU) Despradel and staff are preparing a letter to the
USG through U/S Taylor requesting help in obtaining a large
sum of financing so as to reduce the stock of CB certificates
and lower payments. They want to restructure the debt into
long-term obligations, perhaps in dollars, and to lower the
rate.

(SBU) Rumors, liquidity, exchange rate -- arrests?


9. (SBU) Despradel said the President,s meeting that
morning had been scheduled to examine the possible elements
of expenditure cuts and new taxes. Participants had
concentrated instead on the upsurge in rumors and pressure
related to the exchange rate. "Very strong" rumors assert
that further banks are in trouble (to our understanding, this
view is erroneous). The peso is trading currently at about
45 to the dollar, up from about 41 earlier this week.
Despradel said that the administration believes that there is
a deliberate effort to instill panic so as to drive the
exchange rate yet higher. Well-respected business persons
are asking for government action, and "the President thinks
that something must be done."


10. (SBU) Despradel said that there is a strong possibility
that the government will take action against exchange houses
and individuals thought to be engaged in this effort. The
administration might make high profile raids for tax
inspections or might ask for arrest warrants. Despradel says
that he himself is very moderate on these questions and knows
that the effect might be negative -- but the policymakers are
tending to the view that market manipulation must be stopped,
to prevent the rate from hitting 50 to the dollar. &This is
a very delicate moment.8


11. (SBU) Note. The IMF team suggested that the GODR could
go onto the market to purchase dollars for international
payments of US $ 150-200 million due from now until the end
of calendar year 2003. This would place additional demand on
the exchange market.


12. (U) Despradel stressed that the IMF negotiations have
been premised on an exchange rate of about 40 pesos to the
dollar. Further depreciation of the currency would mean
complete redrawing of the program.

Request: Fund flexibility


13. (SBU) Despradel does not believe it is possible to make
any public statement about the status of the negotiations
with the fund. He asks that the USG seek to convince the
Fund negotiators to be more flexible. He understands their
institutional interest in staying tough but is concerned that
&this approach could destroy the country."


14. (U) Expenditures. The Technical Secretary provided in
tabular form a summary of government expenditures for 1995
(14.3 percent of GDP in Balaguer,s last year),1999 (16.2
percent of GDP in Fernandez,s last year) and 2003 (15.1
percent),as a defense against assertions of lavish spending
by the Mejia administration.


15. (SBU) Further IFI loans. Despradel says that the
InterAmerican Development Bank is planning a fast disbursing
loan of US $ 200 million, with $150 million in the first
tranche. The World Bank is planning a Structural Adjustment
Loan of US $80 million (Despradel will ask for US $100
million) "to keep the lights on." Of this, about US $70
million would be used for energy. The loan,s conditions
will require maintaining levels of social expenditures.

KUBISKE