REVENUE SHORTFALLS SEND THE GODR BACK TO THE IMF

UNCLAS SANTO DOMINGO 000963

SIPDIS

E.O. 12958: N/A
TAGS: EAID EFIN EINV IMF DR
SUBJECT: REVENUE SHORTFALLS SEND THE GODR BACK TO THE IMF

REF: A. SANTO DOMINGO 286

B. SANTO DOMINGO 50


1. President Leonel Fernandez, at an 8/21 meeting of the
GoDR's economic team, instructed Central Bank Governor Hector
Valdez and Secretary of Finance Vicente Bengoa to head a
delegation to Washington this week to seek an agreement with
the International Monetary Fund (IMF) aimed at obtaining a
loan for USD 200 million in emergency budget support. The
GoDR also expects that an IMF agreement will free up the
disbursement of World Bank and Inter-American Development
Bank (IDB) loans. Those loans total USD 700 million, of
which only USD 120 million has been disbursed, with the
remainder pending the GoDR's implementation of economic
reforms, principally in the electricity sector (Ref B).


2. The mission to the IMF represents an about face by the
GoDR, which has been resisting calls for the past year from
the private sector, economists and international financial
institutions to seek a new IMF accord in response to the
international financial crisis and its negative impact on the
DR. President Fernandez, in his 2/27 State of the Union
address, provided assurances that the Government would be
able to finance its budget (Ref A). When it became clear
that shortfalls in revenue, non-disbursement of loans and
lower than expected PetroCaribe financing (only one-third of
the expected USD 300 million has been received according to
JP Morgan) were creating a large gap, the President proposed
a USD one billion sovereign bond issue. Congress adjourned
its last session on 8/13 without approving this proposal,
however, and international financial conditions made it
obvious that the GoDR would not be able to market such an
issue at reasonable rates, if at all.


3. Without alternative sources of funding, by mid-August the
GoDR was staring at an unfinanced budget deficit of USD 277.8
million. Hopes that revenues would begin to pick up during
the tourist high season were dashed, however, as the
shortfall between revenue and expenditures for the first 18
days of August totaled USD 24.8 million.


4. The Central Bank also announced on 08/24 that the GoDR
may draw upon its upcoming general and special allocations of
177 million in IMF Special Drawing Rights (SDR) (USD 275.3
million) to bolster its foreign exchange reserves and its
capacity to address balance of payments needs.


5. COMMENT: With other financing options foreclosed,
Fernandez and his economic team had little choice but to turn
to the IMF. Perhaps surprisingly in the Latin American
context, this decision has thus far garnered nearly universal
praise. The private sector and economists have applauded the
move, as the IMF offers the lowest cost for financing and
loan conditionality should result in improved fiscal
responsibility. Miguel Vargas, leader of the largest
opposition party, the Dominican Revolutionary Party (PRD),
also expressed approval, noting that the PRD has long been
calling for an IMF agreement and that it expects an accord
will lead to increased transparency and less room for
corruption and financial shenanigans by the ruling Dominican
Liberation Party (PLD). END COMMENT).
BULLEN