Identifier
Created
Classification
Origin
03SANTODOMINGO7456
2003-12-19 11:16:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Santo Domingo
Cable title:  

ASSISTANT SECRETARY NORIEGA GETS IMF READOUT ON

Tags:  EFIN 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 03 SANTO DOMINGO 007456 

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN DR
SUBJECT: ASSISTANT SECRETARY NORIEGA GETS IMF READOUT ON
DOMINICAN NEGOTIATIONS

REF: SANTO DOMINGO 7134

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 007456

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN DR
SUBJECT: ASSISTANT SECRETARY NORIEGA GETS IMF READOUT ON
DOMINICAN NEGOTIATIONS

REF: SANTO DOMINGO 7134


1. (SBU) Summary: In a December 11 meeting, International
Monetary Fund representatives told WHA Assistant Secretary
Noriega that they were close to agreement on a new IMF
program for the Dominican Republic, but expressed concern
that recent steps by Mejia to "talk down" the exchange rate
could stall negotiations. Though agreement was close on
fiscal reforms, managing the ballooning quasi-fiscal deficit
and tightening monetary policy deficit will be difficult.
The Fund representatives said a deal would be fragile. At a
separate meeting, private sector representatives pointed to
the confrontational atmosphere between business and
government. They criticized the GODR for excessive spending,
corruption, and weak banking supervision. They decried
reports of new tax proposals under the prospective IMF
agreement. End Summary.


2. (SBU) Assistant Secretary for Western Hemisphere Affairs
(WHA) Roger Noriega met with IMF Senior Advisor Rangid Teja,
Division/Mission Chief Marcelo Figuerola, Deputy Division
Chief Steven Phillips and Temporary resident Representative
Ousmene Mandeng December 11 to hear the Fund's views on
current negotiations of a new Standby Agreement and to urge
support for quick disbursement of International Financial
Institution (IFI) loans once a program is in place.
Ambassador Hertell, DCM, Treasury desk Officer and emboffs
participated in the meeting. A/S Noriega heard private
sector views at a luncheon with prominent local business
leaders representing banking, industry, energy, tourism and
free zone sectors.

QUALITY OF FISCAL ADJUSTMENT LOW


3. (SBU) IMF Senior Advisor Teja reported substantial
progress in the negotiations, noting that they were close to
agreement on a fiscal package, but cautioned that the quality
of the fiscal adjustment was "low." Teja said that the
revenue measures in particular were weak and probably not
sustainable. However, he added, under the current economic
and political circumstances, the measures were probably as
good as the GODR could achieve, and they would serve as a
"stop-gap," pending more comprehensive fiscal reform. He
said that the GODR needed to remove exemptions currently in
effect (for items such as medicines and school supplies).
Teja said that 80 percent of the fiscal adjustment would come
from spending cuts.

ELECTRICITY A CONCERN


4. (SBU) Fund representatives noted that the one of the
"good measures" in the prospective agreement was partial
elimination of electricity subsidies. Currently, the GODR
provides a subsidy to all consumers for the first 300 kw of
electricity consumed each month. Under a new proposal, the
GODR would subsidize only customers who use less than 200
kw/month. The GODR would also impose tariff increases on all
users who exceed the 200 mw ceiling. Teja projected that
reduction in subsidies, when implemented, would allow the
distributors to meet fuel-purchase needs in the short term,
but would not be sufficient to amortize accumulated arrears.
Responding to a question about reports from generators that
fuel supplies would be depleted by late December, Teja said
that the Fund had been in contact with the World Bank
concerning a short-term strategy to "keep the lights on."
However Teja commented that the IMF team were on shaky ground
with regard to immediate World Bank assistance. It might be
that the GODR needed to look for other possibilities.

YES, NEW TAXES


5. (SBU) The officials from the Fund confirmed that the
GODR would propose a series of additional tax measures,
including a five-percent export tax, a two-percent import tax
and an excise tax on alcohol and tobacco. These taxes are in
addition to a doubling of an "exchange rate" tax (based on
import values stated on invoices),from 4.75 percent to 10
percent; an increase in airport departure fees (from USD 10
to USD 20); and a .15 percent check cashing fee. The
government had previously tried to implement the export tax
by presidential decree, but the Supreme Court ruled that
taxes could be levied only by congress. Nevertheless, the
GODR has continued to collect the two-percent export tax, as
well as the check-cashing and airport fees that were
implemented by the Monetary Board.

THE QUASI-FISCAL DEFICIT


6. (SBU) The IMF has identified the ballooning amount of
Central Bank short-term debt certificates and the
corresponding increase in the quasi-fiscal deficit as a
crucial issues for the GODR. Teja said that the GODR started
paying out cash in November to meet interest payments on
certificates and stressed the need for the GODR to slow
monetary growth. The Fund did not offer details of how the
GODR might manage the Central Bank certificates, but
commented that Paris Club rescheduling could provide some
relief.

EXCHANGE RATE POLICY


7. (SBU) Teja said that the President's recent appointment
of a commission to undertake vigorous enforcement in the
exchange market (reftel),had become a very important issue
that could delay the agreement. He said that a specialist
from the Fund had just arrived in the country to study the
matter. Teja explained that taken individually, none of the
statements or actions taken by the GODR with regard to the
exchange rate would be cause for concern -- "however, the
totality of the picture is intimidation." He noted a sharp
reduction in trading and suggested that the recent arrests of
illegal exchange traders were intended to preclude emergence
of a black market.

PRIVATE SECTOR CONCERNS


8. (SBU) In a lunch with the Assistant Secretary earlier the
same day prominent representatives of the private sector
agreed that there was a crisis of confidence in the
government and expressed doubt about the efficacy of an IMF
program. They pointed to the upcoming elections and the
dramatic growth in the budget under the Mejia administration.
One interlocutor remarked that the GODR would agree to an
IMF program now, but by February it would exceed fiscal
targets due to spending on reelection of Mejia. He said that
the USG should tell Mejia to set aside ambitions for
re-election for the good of the country.


9. (SBU) Several of the businesspeople attending the lunch
spoke out forcefully against the various tax proposals under
consideration. They said the five-percent export tax, in
particular, would have a devastating effect on the
manufacturing sector, but suggested that the GODR was
incapable of enforcing other forms of taxation. Elena
Viyella, the vocal president of the Association of
Entrepreneurs (CONEP),said that exporters would support a
tax of 2.5 percent.


10. (SBU) The group was also critical of the government's
handling of the banking crisis that led to the present
economic crisis. They said the GODR violated its own banking
laws by bailing out a small number of large investors, and
said that banking supervision was very weak, with no clear
authority. One member participant expressed serious
reservations about the Systemic Risk Law the GODR has
submitted to Congress. Although passage of the law is a
precondition of an IMF agreement, she noted that it gave too
much power to the Executive Branch and did not provide
penalties for illegal banking acts. Some members of the
group expressed skepticism about the President's comments
directed at lowering the peso/dollar exchange rate. They
said that similar efforts had failed twice before in this
country, in the 1980s. They seemed to agree that there was a
real danger the peso could fall further and that the GODR
might use "boots and guns" next time.

COMMENT


11. (SBU) The GODR is facing complex economic challenges and
has few options other than a Fund agreement. The GODR is
likely to continue to press to meet conditions for quick
disbursement of IFI loans. Passage of the budget appears
likely, despite substantial private sector opposition to the
proposed tax measures. Though the private sector
acknowledges the need for the IMF, it has a visceral distrust
of this government.

HERTELL