GODR PUBLIC FINANCING STRAINED

UNCLAS SANTO DOMINGO 003617

SIPDIS

SENSITIVE

DEPARTMENT FOR WHA/CAR AND EB/IFD/ODF
PLEASE PASS TO EX-IM BANK

E.O. 12958: N/A
TAGS: EFIN ECON DR
SUBJECT: GODR PUBLIC FINANCING STRAINED



1. (SBU) Central Bank Manager Apolinar Veloz told Econoff
June 18 that GODR non-financial public sector finances are
seriously off track from the IMF agreement for the first
trimester of 2004. Veloz's remarks track with what Technical
Secretary Carlos Despradel reported to the DCM June 1.

SIPDIS
Despradel had said that due to inadequate tracking of
bilateral project-related loans by government credit agencies
and government letters of credit drawn on GODR-owned Banco de
Reservas (BanReservas),the government had accumulated
significantly more debt than it had reported while
negotiating the IMF agreement. Veloz reaffirmed that
President Mejia has frozen all project loans in an effort to
get government expenditures back on track.


2. (SBU) According to Veloz, non-financial public sector
debt cannot increase if the GODR is to meet the IMF targets,
but added that BanReservas and other banks have steadily
increased their lending to the GODR. Veloz said that the
Monetary Board on June 17 approved his initiative to
immediately stop all lending to the government by BanReservas
and other commercial banks.


3. (SBU) Central Bank statistics show that not counting
off-budget "residuals," non financial public sector
expenditures exceeded programmed amounts by 6.4 billion pesos
($135 million). In addition, Veloz explained that the GODR
had spent five billion pesos on the electricity sector and an
additional 1.5 billion pesos on propane gas subsidies that
was off-budget. There was also non-explained residual
expenditures of more than 2 billion pesos. In total,
including current expenditures, capital expenditures and
residual, the GODR overspent nearly 9 billion pesos ($187.5)
during the first trimester. Veloz estimated that the
consolidated deficit would be about four percent of GDP.


4. (SBU) Both the current PRD government and the incoming
Fernandez administration recognize the urgency of the fiscal
imbalance and are now working together on possible fiscal
reform measures. They have met jointly with the IMF on at
least two occasions and debt sustainability was reportedly a
key point in those discussions.


5. (SBU) Debt presents a looming problem. The Paris Club
agreement to reschedule nearly $200 million in bilateral debt
(plus $120 million in GODR debt to the private sector) could
unravel if the GODR is not on track with the Fund. None of
the analysis takes into account the internal arrears owed to
the electricity sector that reportedly total some $450
million. Veloz would not speculate on a total figure for the
electricity sector, admitting that it was a "black hole."
Nor does it include the quasi-fiscal deficit of nearly 80
billion pesos the Central Bank holds in certificates of
deposit. Moreover those certificates carry a weighted
average interest rate of about 40 percent, according to
Veloz, and make it extremely difficult to meet the Fund
program's monetary target.


6. (SBU) The practical effect of the GODR's financial woes
is being felt first in the electrical sector. This week, the
country is producing less than 60 percent of demand due to
plant shut downs over non-payment. The Embassy also has
reports of U.S. companies not being paid for government
contracts. One such case involves a water project reportedly
backed by EX-IM Bank guarantees. There are also reports of
the Army not being able to purchase fuel for its vehicles or
helicopters, and the Navy unable to purchase fuel or perform
routine maintenance on its boats.


7. (SBU) Comment: In light of the financial uncertainty and
USG interest in the GODR getting back on track with the IMF
program, Embassy recommends that the USG postpone further
consideration of bilateral lending for procurement or
infrastructure projects. Moving forward with such proposals
sends conflicting messages to the GODR and puts the
government at increased risk of default. Moreover, new loans
at this time may not reflect the priorities of the new
administration that will be inaugurated August 16, and may
not be within the framework of a fiscal reform package.

KUBISKE