DOMINICAN ELECTIONS #44: CANDIDATES ON MACRO AND

UNCLAS SECTION 01 OF 06 SANTO DOMINGO 002742

SIPDIS

SENSITIVE

STATE FOR WHA, WHA/CAR, WHA/PPSC AND DRL;
NSC FOR SHANNON AND MADISON
LABOR FOR ILAB; USCINCSO ALSO FOR POLAD;TREASURY FOR
OASIA-LAMONICA
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI

E.O. 12958: N/A
TAGS: PGOV ECON DR
SUBJECT: DOMINICAN ELECTIONS #44: CANDIDATES ON MACRO AND
FINANCIAL POLICY



1. (SBU) Following is number 44 in our Dominican elections
series:

Candidates on Macro and Financial Policy

In April all three of the principal candidates for the
Dominican presidency addressed the American
Chamber of Commerce on their visions for economic policy for
2004-2008. The full texts in Spanish
are available on the SIPRNET site of Embassy Santo Domingo.
Following is our informal translation of
a May 2 piece by journalist Carmen Carvajal of the "Hoy"
newspaper, comparing those speeches.

As Carvajal's summary makes clear, there was very little
difference of approach among the candidates; the only
marked exceptions are the promises of President Mejia to
reduce income taxes by 40 to 60 percent and
to promote a 30 percent salary increase -- "when
macroeconomic stabilization allows it." Each candidate
avoided fully discussing the upcoming tax reform, which will
almost inevitably require a sharp increase
in the value-added tax and a widening of its application.

(begin translation)

Electoral Offers, Macroeconomic stability is the primary goal.
Hoy, May 2, 2004
Parties promise to find the revaluation of the family income,
in order for the Dominicans to improve their quality of life.

Achieving macroeconomic stability, regaining trust at home
and in foreign capitals, returning to the path of growth and
reconstituting Dominican purchasing power with the
stabilization of the peso and improvement of income
constitute the primary program goals offers of the three
majority political parties competing in the May 16 elections.

As of press time, only the Dominican Liberation Party (PLD)
had made available to the press and public a printed
proposal. Candidates of the others, the Christian Socialist
Reform Party (PRSC) and the Dominican Revolutionary Party
(PRD),presented their offer in speeches brought before the
members of the American Chamber of Commerce.

In that setting, President Hipolito Mejia, who aspires to
re-election, and who spoke last on Wednesday the 28th,
declared that "our first duty is to return the purchasing
power to our currency; that the money remain meaningful,
prices go down and then stabilize, and that the uncertainty
of the financial crisis caused by others finally end."

To achieve this goal, President Mejia sees the need to
"attack the causes which shattered price stability and the
currency exchange rate."

For this reason, he said, he will carry out a tax reform and
direct measures to rationalize public expenditure, "
guaranteeing, at all times, that subsidies for the poor will
not be reduced."

As part of his tax reform proposal he includes lower income
tax and elimination of taxation on inheritances and legacies.
Mejia's offer includes maintaining and expanding social
programs destined to improve housing for the poor, issuing
titles to those occupying state-owned lands and altering the
focus of some subsidies.

The "Purple" Offer of the PLD
Ex-president Leonel Fernandez, presidential candidate for the
PLD, presents a proposal suggesting his economic policy is
geared towards re-establishing stability and a path to growth.

In his speech before the AmCham, Fernandez indicated that if
he wins the elections, his government will define an
austerity policy and reduce expenditures. On the other hand,
he understands that the biggest challenge of the government
will be made up of four elements;

- - A fair solution to the quasi-fiscal deficit of Banco
Central;
- - a solution in the short and medium term of financial
sustainability of the electric sector;
- - a realistic approach to the external debt problem; and
- - a fiscal reform within the context of the FMI agreement
that will balance public finances and modify the tax
structure.

The Reformista Program

Eduardo Estrella committed himself to "push forward a vast
program of reform and modernization of all productive
sectors, so Dominicans can feel motivated to invest their
savings in the development of the Dominican Republic."

He will also support the technological modernization of the
State. His policy will develop in a frame of " realism,
modernism and growth. It will have a pro-export orientation,
stimulating production and external commerce."

"This means reducing inflation, reducing production costs and
inducing the gradual reduction of interest rates on
investments and the strength of our national currency."

Basic Points of the Economic Programs

PLD

Fiscal Policy

Its objectives are guaranteeing fiscal balance and cautious
and rational management of public finances, improving the
efficiency, wealth distribution and re-distribution.

It will contribute to creating a macroeconomic framework that
will make possible stability and sustainable economic growth
as well as re-establishing faith in participants in the
economy.

It will sponsor fiscal and tariff reform within the framework
agreed upon with the FMI. The basic objective should be to
"replace the exorbitant taxes that have been set lately, as
well as compensating for the major losses arising from the
Free Trade Agreement with the United States."

Concerning revenue, the policy will move toward improving the
efficiency of tax administration, bettering the country's
capacity to collect taxes and modernizing the functions and
mechanisms of the system.

When it comes to expenditures, a fiscal program of austerity
will be applied to adjust spending as well as restructuring
expenditures to promote equality.

To fulfill these objectives, the fiscal reform will eliminate
taxes that are difficult to manage and provide low yield,
will create mechanisms to control tax evasion such as the
exchange of information, and current "transitory taxes" will
gradually be eliminated.

Quasi-fiscal Deficit

Fernandez proposes that the resources used in bank rescues
and tied up Central Bank certificates would cease to be a
problem, through creating a special entity, separated
judicially from Central Bank so its operations will not
affect monetary policy, where all of the assets and
liabilities of the Central Bank and the Banking
Superintendency would be transferred.

With the sale of the assets from the bankrupt banks, a
portion of the funds would be recovered and the rest would be
covered by the State through a long-term instrument or
through resorting to an international loan.

Public Debt

As for the public debt, the first thing would be to prevent a
default or cessation of payments, Fernandez told the AmCham.

His government would press to enlarge the scope of
renegotiation, and extend the repayment periods to keep
service of interest and capital repayment from hindering
improvements to the Dominicans' quality of life.

His policy would also look to exchange bilateral debts for
equity investment, especially in the border area, to promote
progress in that area.

He would reverse the policy to giving priority to external
debt on preferential terms and would turn to mulitlateral
institutions to obtain funds at concessional terms.

Monetary Policy

The PLD program plans to create an institutional setting that
will encourage determination of the rate of exchange through
competitve market mechanisms that are efficient and
transparent, establishing a value for the peso that will help
maintain the internal and external balance in the long and
short term and reconstitute international reserves.

In order to do this, a PLD government would seek to increase
earnings in foreign currency, encourage the return of the
flight capital, and maintaining a flexible and unified
market, so that market forces set the rate, creating
conditions favorable for foreign investment, and supporting
the export sector.

Energy

In this area, Fernandez favors adjusting distortions in the
sector so as to guarantee harmonious, sustainable development.

For this, he proposes a "Compensation Fund for Energy Sector
Sustainability, which should guarantee the financial
viability of the sector."

The Fund will have as collateral the state-owned shares in
privatized industries and it would by augmented by
contributions of the companies, consumers, and multilateral
institutions.
He proposes a redefinition of the role of the state in this
sector. He said he will propose that the government to
oversee and regulate the activities of the sector closely,
"while it elaborates and approves modern standards
appropriate for today that will attract and motivate
investment."

PRSC --------------

Fiscal Reform
Eduardo Estrella, reformist presidential candidate, believes
that tax reform cannot wait for the August 16 inauguration,
but must be carried out immediately, taking all possible
measures to avoid raising unemployment and the cost of food.

This reform itself should be a mechanism for the creation of
wealth, within a realistic, modern, approach friendly to
development. It should also promote exports to stimulate the
production and trade.

"This means reducing inflation, lowering production costs and
bringing about the gradual reduction of interest rates on
investments and strengthening the value of the peso."

Estrella plans to sponsor a Fiscal Responsibility Law that
will set goals or limits to the levels of domestic and
foreign debt as well as limiting the fiscal deficit of the
consolidated public sector.

It will also reduce the discretion of the executive in
expenditures, imposing severe sanctions on officials who
contravene the law.

Energy

Estrella suggests in his program that the energy industries
work on distributing energy, realizing savings in the costs
of operation and improving bill collection, without
interference from the State. "He who supplies the power
should collect."

He would try to improve and expand the capacity of the Energy
Superintendency to regulate the sector, especially the rates
the consumer will have to pay.

The companies should offer the users the possibility of
utilizing meters with a pre-paid system, similar to the
current telephone system.

Hydroelectric generation will remain in government hands and
rural electrification and alternative energy sources will be
promoted.

Debt

Estrella plans to replace a policy of debt financing with one
of recourse to internal savings. He would continue the
renegotiation of the debt with the Paris Club so as to obtain
deferred payment of 320 million dollars, trying to achieve a
minimum deferred term of ten years, so as use those resources
in development projects.

Expatriate Dominicans

Estrella will propose a Law for Investments for the
Dominicans Abroad that will provide tax exemptions to return
to the country and make investments that bring foreign
exchange into the Central Bank. Among other incentives would
be a five-year exemption from income tax.

Housing

He proposes a broad plan of construction and financing of
housing through the Investment Bank for Development and
Production, using the savings from pension funds and
insurance companies, through the approach of a "second-story"
banking scheme.

The idea is for the Dominicans to purchase housing with
long-term financing at low interest rates.

Free Trade Agreement

Estrella will support the free trade agreements and will
institute a national plan to improve competitiveness as an
instrument to support national industry and provide market
openings for national products and services.

He will propose trade negotiations with the European Union.

PRD --------------

Fiscal Reform

President Mejia specifies as the primary objective of the
reform the elimination of the fiscal deficit and the
establishment of policy of rational spending, in order to
reduce inflation.

His reform proposals contemplate a reduction in income tax
from 25 percent to 15 percent , which will benefit the
professions and the middle class, as well as industry.
(EMBASSY NOTE: Mejia said, "If it were entirely up to me, I
would reduce it to 10 percent.")

The tax on inheritances, that is, on estates and legacies,
will be eliminated.

The maximum tariffs will go down from a maximum of 20 percent
to 15 percent. He will also propose an increase in salary of
30 percent to be approved once macroeconomic stability is
achieved.

Monetary Policy

President Meja promises to maintain strict control of
monetary policy, "Until the fiscal reform begins to generate
additional income that will assure the elimination of the
complete deficit of the public sector."

Regarding the quasi-fiscal deficit, he said there will be no
freezing of Central Bank certificates of deposit or
unilateral cuts on the exchange rates applied for interest
and principal payments to owners of Central Bank certificates
denominated in foreign currency.

Investments

National investments in infrastructure will be maintained ,
with the goal of reaching a public annual investment of 5
percent of GDP, equivalent to 30 trillion pesos.

Maintenance and rehabilitation will be continued on highways,
irrigation canals, aqueducts, and local roads.
The government's 1500 construction project currently underway
throughout the country will be completed.

Energy

A PRD government will seek modification of the Energy Law to
restructure the industry along lines agreed through a process
of consensus of all the key players.
Energy reform will aim at increasing quality of service,
lowering tariffs, and reaching financial stability,
eliminating the high subsidies.

A new approach to re-nationalized enterprises will be
defined, following the report by the special commission, and
the government will seek support from the World Bank and the
Inter-American Development Bank to make sure this process is
carried out transparency.


2. Translation by Marietta Diaz.


3. (U) This report and others in our series are available on
our SIPNET site at
http://www.state.sgov.gov/p/wha/santodomingo/ along with
extensive other material.
HERTELL