DOMINICAN TRANSITION #5: PACT BECOMES FACT

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SUBJECT: DOMINICAN TRANSITION #5: PACT BECOMES FACT



1. (SBU) This no. 5 in our series on the transition to a new
presidential administration in the Dominican Republic.

(SBU) Dominican Transition: Pact Becomes Fact

The transition teams really are cooperating. The government
is likely to deliver a PLD-shaped tax reform to Congress by
the target date of July 15. Insistent efforts of the
Ambassador and Embassy officers helped set the process in
motion and keep it going.

It was tempting on June 22 to say that we,d all seen this
movie before: Hipolito Mejia and Leonel Fernandez accompanied
by a hovering Monsignor Agripino Nunez as they signed a
document promising good behavior and respect for carefully
articulated rules of the game. The last time the two men
were together was in September 2003 when they signed a
similar set of promises for the presidential campaign,
recognizing the newest avatar of the civil-society "Elections
Monitoring Group" ("Comision de Seguimiento"). And then in
February of 2004, after ugly confrontations left some party
followers dead in the street, the Monsignor brought together
campaign party chairmen for a "non-violence pact."

In a country with electoral traditions and institutions as
fragile as those of the Dominican Republic, this approach has
some sense. From his perch as rector of the catholic
university PUCMM -- and even more as the perpetuum mobile of
Dominican political arbitration -- Monsignor Nunez has the
authority and credibility to insist on right conduct. As
before, party representatives negotiated the text, so their
principals could come together just long enough for a chilly
handshake and a signature. (Our impression is that the chill
is from Mejia; Fernandez seems to wish that the President
would accept at least a pat on the shoulder.)

Spain,s Felipe Gonzalez was the keynote speaker for the day,
recycling socialist international themes about responsible
government in his morning presentation before the two
leaders, the transition teams, and the assembled Congress.

Unacknowledged but fundamental to the process was the early
engagement of the Ambassador and officers of Embassy Santo
Domingo to urge cooperation and to carry messages between the
two sides. The Ambassador had lengthy private discussions
with Fernandez and with Mejia. He invited the PLD transition
team for a working lunch that resulted in a full-day seminar
at his residence on June 17, bringing 85 PLD members or
collaborating experts together with embassy counterparts.
The Deputy Chief of Mission and EcoPol staff have
systematically worked policymakers on both sides.

And It Works

The result is that the Mejia-Fernandez pact is working, at
least in its most significant engagement -- that concerning
Dominican commitments to the International Monetary Fund.

The June 22 text sets forward the antecedents and establishes
the following pledges:

- both sides will maintain communication and furnish best
efforts toward resolving the economic crisis;

- technicians from both sides, in consultation with the IMF,
seek to prepare a tax reform proposal by July 10;

- Mejia has already committed to submit the proposal to
Congress not later than July 15;
- both sides will work with members of Congress to obtain
approval of it;

- in keeping with the IMF standby, the incoming
administration pledges to honor the terms of Central Bank
certificates of deposit created to manage monetary policy;

- also in keeping with the standby, the sides will coordinate
actions to fulfill the pledges made to the Paris Club
concerning the renegotiation of debt due in 2004; and

- finally, the sides pledge to define and put into practice a
plan of reforms for mid-term and long-term sustainability of
the electricity sector.

Confirming the Entente

Financial policymakers for the sides held three extended
meetings around the date of the pact. According to Technical
Secretary of the Presidency Carlos Despradel, at the first of

SIPDIS
these the government wanted to talk about conceptual
approaches, while, figuratively speaking, the PLD reps had
their calculators out and were ready to run the numbers on a
government proposal that did not yet exist. (Economist Andy
Dauhajre, Jr., had drawn up an analysis and a draft for
legislation, but the PRD was not ready to embrace it -- in
fact, Despradel had to get the summary from the PLD,s Daniel
Toribio.) After the last of these three meetings, the PLD
team appears to have taken on the job, with the assistance of
government-employed technicians from the Finance Ministry and
Central Bank.

The President and President-elect signed their pact on
Tuesday. Fernandez departed immediately for meetings in New
York. On Friday, June 25, the Deputy Chief of Mission and
EcoPol counselor attended a meeting at the Presidential
Palace, where Despradel and Central Bank Governor Lois Malkun
outlined difficulties in getting $100 million from private
sector sources as a complement to the Paris Club official
creditors, rescheduling (see separate report on SIPRNET).
Sitting side by side with them, across the table from the
Spanish ambassador, the EU ambassador, and the U.S.
delegation, was PLD economist Julio Ortega. Despradel and
Malkun spoke freely in front of him; Ortega confirmed that he
would be seeking policy guidance from Fernandez. All three
stressed that the transition teams were working closely
together.

Confidence

At this point, strengthening confidence is the key to getting
the Dominican Republic through its three-month transition
still with the prospect of achieving some stability. This
was the principal aim of the June 22 pact. It seems to be
working for now. Analysts in the international capital
markets are making some cautiously optimistic noises,
including about the prospect of seeing payment on the
sovereign bond coupon due July 27. Last week Malkun showed
us with satisfaction the virtually flat graph for the
exchange rate, and since that time the rate has subsided
gradually from 48 toward 45 pesos to the dollar. The press
earnestly reads Fernandez,s trips to developed countries --
currently to Europe -- as a search for international
investors.
Meanwhile, widespread intermittent electricity blackouts are
a reminder that smoke and mirrors are not sufficient for
recovery, especially when that vital sector is completely
decapitalized (the PLD,s Ortega commented to us, "The crisis
already occurred in that sector, three months ago; now we,re
trying to identify a way out").

Getting a Renewed Standby

PLD senior officials Daniel Toribio and Temistocles Montas
are in Washington today, July 1, for first formal PLD
contacts with decision-makers at the IMF and the U.S.
Treasury, among other institutions, to talk about the Paris
Club rescheduling.

Their comments last week to the DCM suggest that they are
thinking about a tax reform package that falls far short of
closing the 2004 financing gap, something involving an
increase in the value-added tax ("ITBIS," currently at 12
percent with many basic consumer goods exempted). The press
is suggesting a 16 percent rate. PLD sources say that they
do not -- repeat, not -- intend to propose a significant
widening of the application of the tax. Montas spoke of
raising "specific taxes" on alcohol and tobacco. PLD
commentators say that subsidies on gas and electricity will
be continued but readjusted for better targeting of
low-income households. As of now, it appears that they have
no intention of using Fernandez,s 57 percent mandate to take
sweeping, painful austerity measures to achieve early
financial stability.

The PLD Enigma

A major unknown in this is Fernandez himself. The PLD
program, though extensive, is intentionally vague. His close
collaborators tell us that Fernandez has set up competing
advisory committees, so that he can receive the broadest
possible range of options. For example, he invited leading
stakeholders in various sectors to collaborate to find a
consensus of recommendations (for example, a leading dairy
industrialist, a milk importer, and a representative of
supermarkets); in parallel, he set PLD experts to make
recommendations but directed the industry committees not to
share results with them. No one is quite sure where the
President-elect will come out on any of this, and no one
claims to have the slightest idea whom he will name to
cabinet posts. The PLD transition to date under Fernandez
completely contrasts with the PLD,s historical stereotype of
a rigidly doctrinaire mechanism dominated by a politburo.

Getting to "Yes"

Whatever the shape of the package, the PRD-dominated Congress
will have to examine it. Central Bank Governor Lois Malkun
says that senators, especially, are unhappy about the
admitted necessity of raising taxes, but that if the vote
comes during the transition period in keeping with the June
22 pact, they will have some political cover. Elections both
for the Senate and the House are less than two years away.
Congressional leaders have assured us that legislators
understand the urgency and will consider the proposal
immediately. House of Representatives chair Alfredo Pacheco
told journalists there will be extensive public hearings on
the measure. The PLD is concerned that this could mean no
vote until after the August 16 inauguration.

President Mejia has confirmed several times that he will
forward the proposal to Congress for consideration, but will
leave implementation to the next government. Once this week
he went so far as to say that the proposal would be entirely
the work of the incoming authorities, not a consensus
document. In effect, Fernandez will have to assume the
paternity of the reform.

Much More to Do

These negotiations within negotiations are driven by the
commitment with the IMF to deliver the package to Congress by
the end of July. That goal is likely to be achieved. Much
more must be discussed, calculated, proposed and agreed
before a revised letter of intention can go to the IMF board
for approval. Our optimistic estimate is that with good
will, luck and guts the new government could get the outlines
of an agreement with the Fund by November.


2. (U) Drafted by Michael Meigs.


3. (U) This report and others in our election and transition
series can be read on the SIPRNET at
http://www.state.sgov.gov/p/wha/santodomingo/ index.cfm
along with extensive other current material.
HERTELL