IMF: DOMINICANS MISSING FISCAL TARGETS

UNCLAS SANTO DOMINGO 002987

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA, WHA/CAR, WHA/AND, INR, EB/ESC/IEC/EPC;
TREASURY FOR OASIA-JLEVINE; DEPT PASS USDA FOR FAS; USDOC
FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION
USDOC FOR 3134/ITA/USFCS/RD/WH;

E.O. 12958: N/A
TAGS: ETRD EFIN DR
SUBJECT: IMF: DOMINICANS MISSING FISCAL TARGETS


1. (U) Summary: IMF resrep Erik Offerdal told the Ambassador
on September 13 that the Dominican government has failed to
meet fiscal targets so far this year and that the IMF told
the Dominicans it expects the problem to be alleviated to
keep the standby on track. The Dominican Republic missed its
June 2006 target by 0.4 percent of GDP and is expected to
miss the year-end target as well. Continuing problems with
the electricity sector, the government,s overspending before
May congressional elections and other government spending are
the reported causes. A recent visit by IMF management
resulted in a commitment by the Dominican government to
present an initial plan at the September IMF/World Bank
meetings in Singapore explaining steps the government intends
to take to resolve the fiscal problem and to meet remaining
standby commitments in the coming year. End summary.


2. (SBU) On September 13, IMF resrep Erik Offerdal told the
Ambassador that the Dominican Republic is not meeting its
fiscal goals under the standby agreement, which began last
year. The Dominican Republic missed its June ,06 target by
0.4 percent of GDP and the IMF expects that it will miss its
year-end target by about 0.2 percent of GDP.


3. (SBU) The primary cause of the fiscal problem is
subsidies for the troubled electricity sector, long plagued
by theft and fraud. This year the government is expected to
spend over $600 million, up from $505 million last year. A
second cause is rampant spending on publicity, projects, and
other handouts ahead of the May congressional elections, a
fact the Fernndez administration readily acknowledged in its
discussions with IMF management earlier this year. Offerdal
also pointed to spending on capital projects, the largest
being the new subway system ("Metro"),as cause for the
fiscal difficulties.


4. (SBU) IMF management will meet with the Dominican
monetary team on the fringe of the IMF/World Bank meetings in
Singapore September 19-20. Offerdal said the team faces "an
uphill battle" to convince the IMF that it can meet future
standby targets. The Dominicans must work on a new fiscal
reform package as part of the long-term fix. The base for
the value-added tax must be broadened and excise taxes
expanded. Offerdal acknowledged that immediate cuts in
capital expenditures are all that reasonably can be expected
to improve the situation this year. It is unlikely that the
President will cut his cherished Metro project, however.


5. (SBU) Offerdal said that Fernndez faces tough decisions
in the coming months, adding that the President realizes that
if he allows the standby agreement to fail, he could lose
credibility gained from economic stability in the last two
years. Another IMF team is expected to visit Santo Domingo
in October and in January to present a combined 5th and 6th
review to the IMF board.


6. (U) Drafted by Stephen Wheeler


7. This piece and others in our series can be consulted at
our SIPRNET site
http://www.state.sgov.gov/p/wha/santodomingo/
along with extensive other material.
BULLEN