DOMINICAN REPUBLIC: IMF RESREP ON TECHNICAL

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 007469 SIPDIS SENSITIVE DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/IFD; TREASURY FOR DO:NLEE, RTOLOUI, LLAMONICA; NSC FOR SHANNON, HCRUZ E.O. 12958: N/A TAGS: DR EFIN SUBJECT: DOMINICAN REPUBLIC: IMF RESREP ON TECHNICAL AGREEMENT, PARIS CLUB, TIMING REF: PIERCE/LAMONICA TELCON 12-18 ¶1. IMF ResRep Ousmene Mendeng (PLEASE PROTECT) confirmed to USAID Director and EcoPol counselor on December 18 that local press reports are generally accurate concerning the elements of the technical agreement with the IMF. The agreed overall deficit target is 3.5 pct of GDP. (Note: press on December 19 mentions a 25 percent tax on certificates held at the Central Bank by savings and loans associations -- presumably a withholding tax on income from those certificates.) ¶2. The GODR met the targets principally by adjusting expenditure. To some degree this includes slowing or stopping foreign-financed development projects. ¶3. Electricity subsidies will be reduced somewhat by the "staged" pricing structure for power: no adjustment of price on the first 200 kw, a monthly adjustment of 4 pct on the tranche from 200-400 kw, and an 8 pct monthly adjustment on amounts above 400 kw. ¶4. There is no explicit revenue target; rather the agreement is that total non-financial public sector deficit (including agencies such as those handling electricity distribution) will be 1.5 percent of GDP. There is an expenditure cap on the central government. The central government surplus will be equivalent to 1 percent of GDP. FINANCE ¶5. Summarizing likely financing: - - World Bank financing is at a USD 120 million baseline: 20 million in technical assistance and 100 million in fast-disbursing ("emergency") funds. Another USD 150 million for electricity sector restructuring may be available later in the year if everything else goes "perfectly smoothly." - - IDB will provide USD 200 million in an emergency loan and USD 100 million for the social sector. - - Assuming bilateral assistance is approximately as before, these flows might provide USD 100 million, some of it in debt relief. - - Debt service for the year will be USD 800-850 million. More than 50 pct of this is due to the U.S. Spain is the other major bilateral creditor. Once all sums are done, a financing gap of USD 300 million remains. PARIS CLUB ¶6. In order to meet the financing gap, a Paris Club rescheduling has already been initiated, at GODR insistence. The ResRep expects that the value for 2004 of a Paris Club rescheduling could be about 12 billion pesos (USD 300 million). ¶7. The rescheduling would include Paris Club bilateral debt, Paris Club non-bilateral, and commercial creditors. The Paris Club rescheduling will probably involve USD 125 million and rescheduled arrears of another USD 80 million. Amounts rescheduled are determined by the cutoff date for rescheduling (1984?) agreed in previous PC exercises. Rescheduling with commercial creditors would provide about USD 100 million. ¶8. For commercial debt, the GODR and IMF are trying to find a formula whereby the Eurobonds are not rescheduled. They might seek to reschedule only amount of the principal. ¶9. The Fund staff accepted the Paris Club approach only if used as an additional measure intended to reduce Central Bank holdings of debt certificates. The GODR is to obtain a Paris Club rescheduling and must maintain the equivalent of the rescheduled amounts in the Central Bank. In effect, this will allow the CB to lower its issuance of short-term debt paper. Since the "effort" is in pesos, this arrangement will be advantageous in that the GODR will not have to go to the market to obtain dollars for these payments. TIMETABLE ¶10. The ResRep said the GODR informed the Paris Club on December 9 of its desire to reschedule. By the next Paris Club meeting on January 14, a reply will be required. The timing is tricky; the Paris Club agreement is a requisite of the agreement, but Paris Club donors require the assurance of an agreement with the Fund. In essence, coordination is necessary for simultaneous engagements. Actual restructuring negotiations with the Paris Club would take place in March-April. CONDITIONS ¶11. Conditionalities prior to announcement of an agreement: -- the 2004 GODR budget must be approved by Congress, including required revenue measures. -- a financial stabilization plan for the electricity sector must be agreed with the World Bank (WB is about to issue a note on policy development for the sector). -- the GODR must assure that the foreign exchange market will operate freely. -- Base money must be in line with program targets. This will not be easy. At yesterday,s CB auction only about half of the paper was taken; there were few takers last week. The important point is that the GODR must make an effort to control the monetary base and must achieve an "inflection point" showing that effective action has begun to control monetary growth, which recently has been rapid. -- Paris Club assurance of re-financing. If IMF management requires a formal assurance from the PC, not possible before January 14th; if an informal assurance is sufficient, indications to the Fund from the U.S. and Spain might allow management to be flexible. ¶12. Once the above is met, the announcement will be made and documents will be circulated for a late January IMF board meeting. ¶13. Further conditionalities to be met prior to IMF board approval: -- GODR must clear non-reschedulable arrears in external debt, currently totaling about USD 63 million (IMF is asking that these be reduced in December by USD 25-27 million to about USD 40 million). -- Note that debt payments subject to PC rescheduling will grow to USD 90 million in December. -- GODR must meet the conditonalities previously established. ¶14. USAID Director noted possible problems arising if U.S. sanctions are incurred when bilateral debt is more than 60 days in arrears. IMF ResRep inquired whether a Paris Club announcement of an intent reschedule might obviate these concerns. ¶15. Projections for economy are for contraction of 1.3 percent of GDP in 2003, 1.0 percent contraction in 2004. End-of-period inflation is projected to be 14 percent, which ResRep finds "very optimistic." ¶16. Comment. Emboffs find that the program as described is tight, subject to possible disruption at any of a number of points in the program and calendar. We understand that the GODR was firm in choosing to approach the Paris Club, rather than seeking further IFI financing during the year. Our World Bank contacts were unaware - - until we spoke to them today - - of the requirement for a financial stability plan for the electricity sector prior to proceeding to the IMF board. It is not yet clear how elaborate this plan would have to be to meet IMF requirements. ¶17. Footnote: Calculations for the program were done with RD 40 = USD 1 but ResRep comments that this is simply an accounting convenience. GODR debits and credits in dollars are relatively balanced, so the actual rate probably does not have a great effect. HERTELL