IMF TEAM REPORTS STRONG EFFORT BUT MISSED TARGETS

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 002744

SIPDIS

SENSITIVE

DEPARTMENT FOR WHA/CAR AND EB/IDF/OMA;
NSC FOR T. SHANNON AND K. MADISON
TREASURY FOR N. LEE
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION
DHS FOR CIS-CARLOS ITURREGUI

E.O. 12958: N/A
TAGS: DR ECON EFIN ENRG
SUBJECT: IMF TEAM REPORTS STRONG EFFORT BUT MISSED TARGETS
ON PERFORMANCE CRITERIA


1. (SBU) Summary: International Monetary Fund review team
members commented May 5 that despite strong effort, the GODR
has failed to meet the Fund Standby Agreement performance
criteria on monetary, fiscal and debt levels. IMF
representatives pointed to higher-than-expected first quarter
inflation, increase in dollar-based energy costs, and the
weaker-than-expected peso as the primary reasons for not
meeting the targets. The team said that the GODR will need
to present a credible plan to get back on track with the
agreement in order for the Fund Board to consider waivers
when the Dominican Republic is next on its agenda, in late
June. End Summary.


2. (SBU) IMF review team leader Jose Fajgenbaum, team member
Steven Phillips and resident representative Ousmene Mandeng
briefed the Ambassador and Emboffs May 5 on the Fund's
initial findings from the first formal review of the
Dominican Republic since the Board approved the revised
agreement in February. They reported that the GODR missed
the performance criteria, but has shown a more focused effort
since the Paris Club agreement in mid April.

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First the Good News
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3. (SBU) The Fund Representatives said that the GODR appears
to have turned the corner on monetary policy and brought
inflation under control. They reported that inflation for
March was around 2 percent. (The Central Bank reported
cumulative inflation for January and February exceeded 24
percent -- 10 points above projections.) They gave high
marks for the Central Bank's recent handling of monetary
policy and said that although the peso was trading lower
against the dollar than the Agreement had assumed, it has
remained stable. They also said that they had not detected a
surge in election-related spending as many had feared.

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Monetary Base Target Will need to Adjust
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4. (SBU) Although the Central Bank made progress in
reducing the monetary base, the representatives said it did
not make sense to maintain the program levels for base money
because of the high first quarter inflation. Nevertheless,
the team said that the GODR would have to have a clear policy
outline before the review team could take the issue to the
IMF Board for a waiver. The GODR had reduced the monetary
base by transferring bank reserves into Central Bank
certificates of deposit, and at the same time increasing the
vault cash holding requirement for banks to five percent of
deposits.


5. (SBU) When asked about the impact of Baninter
certificates on the monetary base, the team said that most of
the certificates were being renewed as they came due. They
reported that about RD nine billion ($200 million) of the
original certificates were coming due soon, but expressed
confidence that a sufficient amount would be rolled over to
avoid much impact on the monetary base. (Note: RD nine
billion represents about 13 percent of base money.)

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Fiscal Target is Biggest Issue
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6. (SBU) The review team members were most concerned about
the fiscal targets, which they said are really the center of
the Standby Agreement. They reported that the GODR would not
meet the objectives on either the revenue or expenditure
sides of the fiscal program. They explained again that this
was partly the result of shocks, such as inflation, the weak
peso, high debt-service costs and the increase in oil prices,
but that the GODR had been slow in responding to those
shocks. Moreover, excessive expenditures were also the
result of misguided policies, such as propane and electricity
subsidies. They confirmed what a Central Bank source had
recently told Emboff that the GODR had blown through 60
percent of its annual energy subsidy budget in the first
quarter of the year. Revenue fell short of the program
target as well, though they did not specify to what extent.
The representatives also expressed concern that the GODR is
delaying payment of bills to make the shortfall appear less
serious.

7. (SBU) Unlike for the monetary side, the team said they
saw no reason to adjust fiscal targets and said that the IMF
would no longer accept vague promises. The GODR would have
to take further measures -- for example, accelerated tax
reform -- to adjust for the slippage. They expressed doubt
that the GODR would take any action prior to the May 16
election and that it might be difficult to pass meaningful
tax reform until after inauguration August 16. The Fund
members acknowledged that there has been discussion of tax
reform issues, but the GODR appeared reluctant to put forward
a firm proposal during the campaign. However, the team
suggested that the GODR would have to take concrete fiscal
measures before the Fund would consider a waiver.

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Too Much New Debt
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8. (SBU) The IMF representatives said that the GODR also
missed the RD800 million debt target by some RD300 million
($65 million). They acknowledged that a large portion of new
loans have not yet been disbursed, but explained that the IMF
considers approved loans as part of the debt total. The team
left open the possibility that some of the loans could be
reversed, but also criticized the GODR for not having an
effective system to monitor loans. They said that President
Mejia told Technical Secretary Despradel to overturn anything
the President approved that did not comply with the IMF
program. Despradel told the team that loans were a
"procedural headache." The IMF representatives remarked to
Emboffs that domestic debt, and electricity sector debt,
particularly, was difficult to monitor due to lack of
transparency. This creates problems for both the Fund and
the World Bank.

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Banking Reform
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9. (SBU) A second IMF team is in the Dominican Republic
reviewing progress on banking reforms. The Fund
representatives reported that banking reform is moving
forward, but there have been delays. They noted that
adopting international standards for bank capitalization
remains an issue and said that there is disagreement among
the banks -- and between banks and the Superintendent of
Banks -- on what form standards should take. The team
members said that the IMF is providing technical assistance
in this regard, but at this point some banks are having
difficulty meeting even local standards.

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Next Steps
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10. (SBU) The GODR will need to present a detailed plan on
how it will get back in step with the fiscal targets, and
resolve monetary and debt issues before the Fund Board will
consider waivers. The team said that the current fiscal
program is weak in specifics and that the GODR has a
credibility problem with the Fund. Nevertheless, they said
the Board will likely be sympathetic if the GODR takes
corrective actions. The next opportunity for the Board to
consider the Dominican Republic's program is in late June.
They noted that there will not be further disbursements from
the IMF before the Board meets.

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Comment
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11. (SBU) The IMF representatives seemed cautiously upbeat
in their assessment of the program, despite the missed
targets. They gave the GODR a fair amount of credit for
effort, and expressed a sympathetic view concerning the
external shocks. Nevertheless, the next few months could be
more difficult. If Mejia survives the first round of
presidential elections on May 16, he will be focused on the
battle for reelection in the second round June 30th. If he
loses in the first round, he will have three months left to
govern before transferring power to a new president. Either
scenario will be a severe test of discipline for his
administration. End comment.


12. (U) MINIMIZE CONSIDERED


HERTELL