DR BUDGET RAISES MORE QUESTIONS THAN IT ANSWERS

UNCLAS SANTO DOMINGO 000003 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN EINV DR SUBJECT: DR BUDGET RAISES MORE QUESTIONS THAN IT ANSWERS REF: 09 SANTO DOMINGO 1343 ¶1. (U) SUMMARY: The 2010 budget of the Government of the Dominican Republic (GoDR) fails to make any significant progress in making the budget process more transparent and, equally troubling, misses several marks set by the IMF as part of its Standby Agreement. The budget allocates 11.4 percent of its resources to the Office of the Presidency, seriously undermining the ability of line ministries to prioritize and control resources and failing any international standards of budget transparency. The budget also does not meet several benchmarks established by the IMF in the October 2009 Letter of Intent: it registers significant increases in primary expenses, fails to dedicate five percent of GDP to capital expenditures, and misses the primary deficit benchmark of .4 percent. It also contains apparent mathematical discrepancies that make it difficult to assess year-on-year changes. END SUMMARY. ST. PETER, MEET ST. PAUL: BORROWING TO FUND THE DEFICIT AND SERVICE THE DEBT ¶2. (U) In 2010, the government expects to run a RD 47.9 billion (USD 1.3 billion, at a RD 36.05/USD 1 exchange rate) deficit, collecting RD 263 billion (USD 7.3 billion) in income and incurring RD 310.9 billion (USD 8.6 billion) in expenses. Given the GDP estimate of RD 1.8 trillion (USD 49.9 billion),the deficit will comprise 2.6 percent of GDP, hitting the mark established by the IMF Standby Agreement. However, subtracting out interest payments, the primary deficit will be RD 11.4 billion (USD 316 million),or .6 percent of GDP, which exceeds the IMF's .4 percent goal. (NOTE: The text actually cites a figure of RD 10.6 billion for the primary deficit. Examining the numbers, it appears this figure was reached by not only omitting interest payments in calculating the primary deficit but also excluding some RD 800 million worth of legally mandated severance payments to officials fired during the GoDR's 2009 cost-cutting spree. See the comment in paragraph 6 for a discussion of some of the discrepancies within the budget. END NOTE.) Adding in the RD 68 billion (USD 1.9 billion) in debt payments that will be covered by financing (see next paragraph), the DR's total 2010 budget will be RD 378.9 billion (USD 10.5 billion). ¶3. (U) In order to fund the RD 47.9 billion deficit and to pay its debt, the GoDR is expecting to borrow RD 115.9 billion (USD 3.2 billion). RD 80.9 billion (USD 2.2 billion) will come from external sources: RD 22.7 billion (RD 630 million) in global bonds, RD 9.9 billion (USD 275 million) from PetroCaribe, RD 21.8 billion (USD 605 million) from the multilateral development banks (MDBs),and RD 26.5 billion (USD 735 million) from banks. Of the borrowed funds, RD 68 billion (USD 1.9 billion) will be dedicated to debt payments: RD 65 billion (USD 1.8 billion) will go to payments on existing debt and RD 3 billion (almost USD 90 million) will go to reducing the stock of debt. The remaining RD 47.9 billion (USD 1.3 billion) will cover the fiscal deficit. One way to look at the DR's planned borrowing is that the MDBs and the external banks will fund the fiscal deficit - since their inputs total RD 48.3 billion (USD 1.3 billion) , a little more than the deficit - and the global bonds, PetroCaribe funds, and the internal financing will cover paying debts - since their inputs total RD 67.6 billion (USD 1.9 billion), which is a little less than what they owe in debt payments. IT'S GOOD TO BE KING: OFFICE OF THE PRESIDENCY RECEIVES OVER 11 PERCENT OF THE BUDGET ¶4. (U) The RD 378.9 billion (USD 10.5 billion) budget will fund a number of departments, agencies, and entities. The top five recipients will be: -- the Office of the Presidency: RD 43.2 billion (USD 1.2 billion),or 11.4 percent of the budget; -- the Secretary of State for Education: RD 37.4 billion (USD 1.04 billion),or 9.8 percent of the budget; -- the Secretary of State for Public Health: RD 36 billion (USD 999 million),or 9.5 percent of the budget; -- the Secretary of State for Public Works and Communications: RD 29.7 billion (USD 823 million),or 7.8 percent of the budget; and -- the Secretary of State for the Interior and Police: RD 23.9 billion (USD 663 million),or 6.3 percent of the budget. ¶5. (SBU) The dedication of over 11 percent of the budget to the Office of the Presidency raises several transparency and efficiency concerns. First, it undermines the cohesion of the budget process and centrality of decision making by placing similar projects in different places. For example, the Presidency's Office of the Supervisor of State Works has a budget of RD 3.7 billion (USD 102 million),with most of its projects focused on the construction of schools, hospitals, and clinics. Moving these projects from the Presidency to the responsible line ministries would improve transparency, streamline bureaucracy, and improve efficiency. However, given the political impact of these projects, the Presidency is unlikely to cede control. Moreover, although the items above appear specifically in the budget, large sections of the Presidency's allocation have no description: over RD 8.2 billion (USD 227.5 million) is dedicated to "Administration of Special Contributions," but no further details are provided. Finally, the Presidency is also clearly using the budget to keep control over key parts of the government bureaucracy. The Central Electoral Board (JCE) recently told us that their budget allocation remained the same from last year despite the fact they will be running the 2010 Congressional and municipal elections. When asked how they planned on running the elections without sufficient funding, the JCE officials responded that they expected to get the funding they needed from the Presidency (Reftel). COMMENT ¶6. (SBU) The 2010 budget has some improvements over previous years. It includes two new reports, one detailing the assumptions used in drafting the budget and the other describing the framework for the 2011-2012 financial program the GoDR negotiated with the IMF. Moreover, the Office of Public Credit succeeded in getting the details of projects financed by its office included as specific items in the budget. The government also followed the advice of the IMF to control overall spending, hitting the mark set for the overall fiscal deficit. However, a careful examination of the budget poses more questions than it answers. The budget claimed that 2010 primary expenses will be cut by 24.1 percent over 2009 levels, but that figure seems to be based on an erroneously inflated 2009 aggregate. When comparing the components and not aggregates, it actually appears that primary expenses will increase by 4.4 percent. Focusing on the components also shows that the GODR is missing targets set by the IMF in the primary expenses category. In the Letter of Intent, the IMF called on the GoDR to limit growth in wages and salaries as well as goods and services. Instead, these items appear to increase by 4.3 percent and 20.6 percent, respectively, over 2009 levels. The GoDR also missed the mark of dedicating five percent of GDP to capital expenditures; in the current budget, only 4.7 percent of GDP will be so dedicated. Post plans to meet with GoDR budget officials to gather more information, including plans to meet mandatory education spending targets. However, even without the mathematical discrepancies, the budget falls short of international standards of fiscal transparency and the moderate goals outlined by the IMF Agreement. END COMMENT. Lambert