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