Identifier
Created
Classification
Origin
04SANTODOMINGO3313
2004-06-06 03:38:00
CONFIDENTIAL//NOFORN
Embassy Santo Domingo
Cable title:  

DOMINICAN TRANSITION #1: TAKING REPONSIBILITY FOR

Tags:  PGOV EFIN DR 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 05 SANTO DOMINGO 003313 

SIPDIS

SENSITIVE

STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA;
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: DECL: 06/04/2014
TAGS: PGOV EFIN DR
SUBJECT: DOMINICAN TRANSITION #1: TAKING REPONSIBILITY FOR
THE MESS


Classified By: DCM Lisa Kubiske. Reason: 1.4 (a) and (d).

C O N F I D E N T I A L SECTION 01 OF 05 SANTO DOMINGO 003313

SIPDIS

SENSITIVE

STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA;
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: DECL: 06/04/2014
TAGS: PGOV EFIN DR
SUBJECT: DOMINICAN TRANSITION #1: TAKING REPONSIBILITY FOR
THE MESS


Classified By: DCM Lisa Kubiske. Reason: 1.4 (a) and (d).


1. (SBU) Following is number 1 in our series on the
Dominican presidential transition:

Taking the Responsibility for the Mess
- - - - - - - - - - - - - - - - - - - - - - - - - - -

(SBU) Both sides of this transition are apprehensive of
taking blame for the pain necessarily associated with the IMF
requirement to deliver a tax reform proposal to Congress by
July. President Mejia has told the press he will deliver to
legislators any draft text that has been fully discussed with
everyone interested. Leonel Fernandez,s transition team told
the Ambassador that they fully realize the urgency of the
task and they expect Mejia to take the responsibility.
Complicating all this is the revelation that the 2004 budget
was driven 50 percent over planned expenditures by off-budget
financing of construction and development projects. Fixing
things with the IMF will be a huge job.

Meeting of the Transition Teams
- - - - - - - - - - - - - - - - - - - - - -

(U) Dominican media of May 31 carried photos from a press
appearance of the two teams appointed to coordinate the
transition between the May 16 presidential election and the
August 16 inauguration. Leading for the Mejia government was
Mejia,s running mate Rafael "Fello" Subervi, with Finance
Minister Rafael Calderon, Intellectual Property Director
Orlando Jorge Mera and former Agriculture Minister, campaign
manager Eligio Jaquez. For Fernandez were PLD political
strategist (former presidential candidate) Danilo Medina and
PLD technical coordinator Temistocles Montas, with former
Finance Minister Daniel Toribio, PRSC notable Carlos Morales
Troncoso (sugar baron, former Vice President and former
ambassador to Washington) and representatives from three
minor parties supporting Fernandez: Pascual Prota (Fuerza
National Progresista),Jose Francisco Pea Guaba (Bloque
Institucional Social-democrata),former Lome Convention

coordinator Max Puig (Alianza por la Democracia) and Jose
Gonzalez Espinosa (Partido de los Trabajadores Dominicanos).

(U) Every individual in the photo is a politician deeply
invested in his respective camp. All the PRD representatives
are senior office holders; all the PLD representatives are
either members of the PLD Political Committee or heads of
allied parties.

IMF, Tax Reform and Finances
- - - - - - - - - - - - - - - - - - - - -

(SBU) Among the most important issues on the table between
the two transition teams is a highly charged technical issue:
the requirement in the IMF program that the government
deliver to Congress by the end of July a draft proposal for
tax reform. Both sides are leaning as far back from this
issue as possible, well aware that to be credible, any reform
will mean raising tax collections, cutting spending or ending
subsidies or some combination of the three. Short of the
generally shunned solution of abandoning efforts to revise
the badly faltering IMF program, there is no way to avoid the
pain of decision.

(SBU) And the financial situation is about to get worse.
Temporary taxes on 5 percent exports and special exchange
levies of 10 percent on imports are set to expire this month,
although such temporary measures in the past have sometimes
continued indefinitely. The government continues to roll up
debts for unpaid electricity subsidies and without a revised
standby approved by the IMF board it has no further access to
international lending to keep the electricity sector
furnished with fuel. We expect that by mid-June the sector
will be again into the sporadic widespread blackouts that
characterized the end of 2003.

(U) Workers are beginning to press for early salary
adjustments. The minimum wage is down 25 percent in real
terms since last August and labor leaders are advocating a 60
percent across-the-board wage hike. Public sector physicians
are insisting on a 100 percent wage hike. Air traffic
controllers got nothing but a lock-out just before Easter.
Government workers received a grossly inadequate 9 percent
increase in December, 2003, a year of 40 percent inflation,
and nothing since.

PLD and the Embassy
- - - - - - - - - - - - - - -

(SBU) The Ambassador hosted the full PLD transition team on
June 1 for a review of the issues of greatest importance to
the United States. Opening the meeting, team members
complained that PRD counterparts had provided nothing on the
tax reform issue, despite the stipulation by the IMF that the
package was to be prepared between January and March. The
incoming administration was well aware of the need to
preserve the IMF standby, they said, and without early
cooperation by incumbents, it might be impossible to deliver
a package to the PRD-dominated Congress before the end of

2004.

(U) The Ambassador told them that Dominicans were justifiably
proud about the conduct of the 2004 elections, and that the
political parties should strive to make this presidential
transition process the best in Dominican history. That would
require close consultation and cooperation between the
administrations, a process that the Embassy stands ready to
assist.

(SBU) Over the course of the luncheon the Ambassador outlined
ongoing programs and bilateral concerns:

- - The world has changed since Fernandez,s 1996-2000
administration. The United States places the highest priority
on measures against terrorism and corruption, regional
security and law enforcement cooperation.

- - The bilateral agenda for long-term development needs to
focus on education at all levels, institution building
(especially in the judiciary),the investment climate, and
public health concerns.

- Items requiring urgent attention in advance of the August
16 inauguration are the IMF and tax reform, airport and port
security, an approach to energy sector problems, the status
of Dominican consulates in the United States, trafficking
issues and trade, especially the Free Trade Agreement (FTA).


(C) The Ambassador advised the team of the 90-day letter on
Santo Domingo,s &Las Americas8 Airport from Homeland
Security Secretary Ridge (delivered April 28) and informed
them of the U.S. requirement to close unregistered Dominican
consulates in the United States.

(C) The PLD transition team was attentive and appeared to be
in general agreement with the Ambassador on these priorities.
One notable and somewhat embarrassing exception came from
Carlos Morales Troncoso, who sought to justify the current
effort of Dominican sugar interests to re-open the text of
the free trade agreement (in order to block any imports, of
high fructose corn syrup, even on graduated 15-year terms).
The Ambassador and senior staff told Morales that the FTA was
a carefully balanced package and not open to revision. None
of the other PLD team members made a comment.

(U) Medina and Montas as team leaders agreed to remain in
close contact with senior Embassy officials as they elaborate
the PLD set of working groups and sub-commissions over the
next two weeks.

PRD and the Ugly Reality awaiting the IMF
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

(SBU) That same afternoon the DCM and EcoPol counselor called
on Mejia,s Technical Secretary Carlos Despradel, the
official with primary responsibility for the IMF program and
international financial matters. Despradel lost no time in
laying out a financial situation far worse than he had
earlier anticipated.

(C) According to his estimates and charts prepared for the
IMF representatives arriving the next day (June 2),the
Dominican government had come close to targets in its
management of the central government budget. The government
expenditures programmed for January-March had been 24.6m
pesos, with revenues programmed to provide a significant
surplus to contribute toward the non-fiscal deficit. In
fact, revenue had been 4.5m higher than expected and
expenditure 3.6m more than expected. These were the trends
that Despradel had been reporting with a sense of
satisfaction to President Mejia. Mejia, he said, had
insisted and was continuing to insist that the government
respect the IMF standby program.

(C) Completely overwhelming these achievements was the
accumulation of untracked expenditures for sectoral projects
financed by bilateral or commercial lending or by new
liabilities to the government-owned Banco de Reservas.
Despradel hired specialists last year, principally from the
Central Bank, in order to collect and centralize information
on these activities, and the news was dismal. They had
uncovered extensive activity in 2003 and 2004 never advised
to Despradel, his staff or the IMF ) totaling approximately
1.5 pct of GDP. With these expenses rolled in, the
January-March programmed expenditures of 24.6 billion pesos
reached 37.75m, an over-expenditure of 13.1b (53.4 percent).
In formal terms these undeclared expenditures and debts
constituted misinformation and a failure to cooperate with
the IMF; Despradel was downcast about this but expressed the
hope that Fund officials would accept his good faith efforts
to document the situation.

(C) Despradel commented that foreign export credit agencies
and foreign commercial banks involved in development projects
were able to exert a great deal of pressure through the
benefiting Dominican agencies, Despradel commented, and there
had been no formal mechanism by which he could control this
activity. He had refused in most cases to authorize
acceptance of these loans, most of which were at
near-commercial rates; officials had turned to Finance
Minister Rafael Calderon, who had signed them with little
hesitation. The off-budget bilateral loans amounted to 4b
pesos.

(C) In similar fashion but subject to even less control, the
government-owned Banco de Reservas had guaranteed letters of
credit requested by various government officials (primarily,
Despradel implied, for imports for infrastructure projects).
These letters were drawn up without clearance from central
authorities; as payment came due, the guarantees were
executed and became government liabilities to the Banco de
Reservas. These off-budget liabilities totaled 3b pesos.

(C) Almost all of the remaining unprogrammed expenditure was
financed by off-budget emergency loans from the
Inter-American Development Bank and the World Bank (largely
for fuel for the electricity sector) amounting to 2.5b pesos.
Here there was no problem of misinformation; the IMF was
aware of these loans and did not object to them.

(SBU) Despradel said that President Mejia was not aware of
the extent of these uncontrolled off-budget expenditures. On
May 20 Mejia instructed government ministries to suspend
provisionally all expenditures for projects with foreign
financing and he withdrew from Congressional consideration
all previously submitted contracts for foreign-financed
projects. Despradel traveled to Washington to inform Fund
officials and was there at about the same time that the PLD
team was visiting. Despite speculation in the Dominican
press, the Fund did not conduct any joint meeting with
outgoing and incoming Dominican administrations.

Consult and Cooperate or Face the Consequences
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

(SBU) A lack of trust between the two transition teams is
unsurprising. Four years of bitter rivalry have been stirred
to a high heat by six months of campaigning. Many allege
that the outgoing Fernandez administration deliberately
delayed necessary fuel price hikes in 2000, leaving the dirty
work to Mejia. (Fernandez,s team has a different story and
set of justifications.)

(SBU) Mejia,s administration commissioned studies of tax
reform from economic advisors Fundacion Economia y Desarrollo
(Andy Dauhajre, Jr.) but the results, if any, had not been
given to Despradel, who would have consulted the Fund with
them. Mejia,s public comment is that he stands ready to
submit to Congress any proposal that has been widely
discussed and agreed. (The private sector, represented most
vigorously by the entrepreneurs, association CONEP, has a
firm grip on the political parties in any matters concerning
commercial interests and taxation.) At the same time, the
incoming Fernandez team does not want to share the blame for
the almost inevitable pain of an increase in the value-added
tax, the broadening of its application, or the cutting of
subsidies. As the Dominicans say, "No one wants to inherit
someone else,s dead bodies."

(SBU) A decision must be made, however, and if the rival
teams refuse to cooperate with the IMF and with one another
on financial stabilization, they will share the blame of
perpetuating misery - - and of postponing the chances of
recovery until some far future, perhaps even beyond the
Fernandez administration. The Ambassador and Embassy are
stepping into the gap between the mutally distrustful
political parties, emphasizing the need to set the national
interest above partisan advantage.

2. (U) Drafted by Michael Meigs .


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