GODR PRESIDENT MEJIA ON IMF AGREEMENT

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 000232

SIPDIS

STATE FOR WHA AND EB
TREASURY FOR OASIS: J.TAYLOR, N.LEE, R.TOLOUI AND L.LAMONICA
NSC FOR K.MADISON AND H.CRUZ

E.O. 12958: DECL: 01/12/2014
TAGS: EFIN PREL DR
SUBJECT: GODR PRESIDENT MEJIA ON IMF AGREEMENT

REF: A. STATE 6404


B. GODR PRESIDENT MEJIA,S JANUARY 5 LETTER TO
PRESIDENT BUSH

Classified By: DCM Lisa Kubiske for reasons, 1.5 (b) and (d).


1. (C) Summary: In response to Ambassador,s points drawn
from reftel A, President Mejia expressed strong support for
staying the course toward resumption of the IMF standby,
including maintaining a market-based exchange rate policy.
He seeks greater flexibility on the part of the international
financial institutions with respect to payment of arrears to
Cogentrix, a U.S. independent power producer whose investment
comes from loans backed by a guarantee from the Interamerican
Development Bank (IDB). Continued non-payment of arrears by
the GODR could derail future IDB lending to the Dominican
government. Such lending is a key component of the
international community,s recovery strategy for the
Dominican economy. Thus, Washington agencies should
encourage the IDB and the GODR (and ultimately the GODR and
Cogentrix,s creditors) to identify a way out of the impasse.
End summary.


2. (C) Per instructions (ref A),the Ambassador,
accompanied by DCM Kubiske, called on Dominican Republic
President Mejia January 12 to respond to Mejia,s January 5
letter to President Bush (ref B) by encouraging the GODR to
stay on course toward resumption of an IMF stand-by
arrangement, which can result in additional lending by the
Interamerican Development Bank and the World Bank.


3. (C) President Mejia responded that the DR was doing
"everything" to meet the Fund requirements, and that the
final piece of legislation, the systemic risk law, was due to
him for signature today.


4. (C) Asked about what he meant by the paragraph in his
letter regarding (quote) taking measures, controversial as
they might be in financial circles, for the short-term
stabilization of the economy (unquote),Mejia said he was
referring to the coming price increases and tax increases
required by the IMF program. Everyone would really have to
tighten their belts now, he said. Asked specifically about
his exchange rate policy, Mejia said the GODR is doing what
the Fund is asking. He doesn't like it, thinks the peso will
weaken significantly, and thinks this policy will be damaging
to the country, he said. That notwithstanding, he added, he
is, in fact, doing what the Fund wants.


5. (C) The Ambassador asked what he had in mind by
requesting US help to encourage the international financial
institutions to show more flexibility. Mejia said he wanted
more flexibility regarding Cogentrix, the U.S. independent
power producer with an investment in the Dominican Republic.
Mejia said he didn't want to pay Cogentrix,s creditors when
the plant was not generating. We reminded Mejia that the
creditors had legal rights. Mejia responded by calling it
morally wrong for the Dominican Republic to have to pay a
plant that has been closed for a year. We explained that
Mejia,s position could jeopardize the flow of IDB funds to
the country (given that creditors have had the right since
November to call the sovereign guarantees on IDB and private
sector lending, amounting to approximately USD 400 million).
We encouraged him to share his views with IDB - Enrique
Iglesias.

Comment and Next Steps
--------------
Mejia seemed very pleased with the legislative actions
supporting the Fund program and was emphatic he would
continue down the path to resumption of the IMF program. He
left a strong impression that he is still committed to this
policy path, with all that this implies ) including allowing
the exchange rate to be determined by the market.

It appears from this conversation that the GODR and
Cogentrix,s creditors are at an impasse. The best hope may
be for a senior representative of the IDB to meet with Mejia
to discuss the matter, in search of a way forward; otherwise,
we may be headed for a train wreck of IDB lending, which
constitutes a pillar of the international community support
for the Dominican economy,s recovery.

On January 14-15 Washington agencies will have an opportunity
to talk directly with Carlos Despradel, Mejia,s Technical
Secretary and key member of the economic team to get more

SIPDIS
information and share views. Despradel understands the
implications of the situation but has told us repeatedly that
he has been unable to change the President,s mind on this
issue. End comment.
HERTELL