US embassy cable - 03SANTODOMINGO6705

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 006705 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA, WHA/CAR, WHA/EPSC; TREASURY FOR U/S TAYLOR, 
DAS N LEE, R TOLUI 
 
E.O. 12958: N/A 
TAGS: EFIN, PGOV, DR 
SUBJECT: DOMINICAN INSIDER VIEW OF FINANCIAL ISSUES, IMF 
TALKS 
 
 
1.  (U) On November 20 Technical Secretary of the Dominican 
Presidency Carlos Despradel called on DCM to outline state of 
play with the IMF.  He provided current copies of the 
worksheets elaborated with IMF help.  (See separate pages.) 
Following is his presentation (i.e., his views). 
 
2.  (SBU) Summary table,  percent of GDP 
 
                                                    2003 
                         2004 
Program     Actual            Program     Projected 
 
CENTRAL GOVT 
Expenditure       - 0.4       - 1.8       1.1         -0.9 
 
Public Sector 
Non Financial           - 0.3       -0.9        0 
-1.2 
                  --------          -------- 
---------         ------- 
SUBTOTAL          -0.7        -2.7        1.1         -2.2 
 
Quasi fiscal            -2.8        -2.9        -3.6 
-3.9 
                  -------           ------            ------- 
      ------ 
 
TOTAL       -3.5        -5.6        -2.5        -6.1 
 
Difference                               -2.1 
                          -3.6 
 
3. (SBU) Despradel is hoping that the IMF might accept a plan 
that would reduce the projected deficit to 4.0 percent of 
GDP.  This would require the GODR to raise revenues (or lower 
expenditures) by 2.1 percent of GDP, or by 12 billion RD 
pesos. 
 
4.  (SBU) IMF team insists that Congress enact any revenue 
measures before the standby is submitted to the board. 
Despradel pointed to the difficulties in Congress of the 5% 
tax on exports ) passed finally by the Senate and now going 
to the House of Representatives.  Congress meets only until 
Christmas time and then has a recess until February 27, by 
which time the election season will be in full swing. 
Presidential elections are May 16.  At that time no 
Congressman will be willing to vote tax increases. 
 
5. (SBU)  Possible sources of funds not requiring 
congressional approval could include fuel price adjustments. 
Could envisage a maximum increase in electricity rates of 40 
percent; could reduce subsidy on household cooking gas. 
Estimated yield would be up to 1.5 percent of GDP, if willing 
to face an 80 percent rise in electricity prices.  If less, 
then yield would be about 1 percent. 
 
6.  (SBU) Tax reform,  in the short term - - as demanded by 
the private sector - - is not feasible, in Despradel,s view. 
 Congress would not go along.  Private sector is apprehensive 
that a future government would not be willing to pursue 
reform.  Mejia,s ministers are refusing to take this road, 
out of political/electoral considerations.  Despradel is 
telling the IMF and private sector that this is simply not 
feasible.  He comments that the private sector endorses tax 
reform as a concept, but individual firms will continue to 
avoid taxation.  He insists that tax reform cannot be made a 
pre-condition for an IMF program.  &IMF must see that we can 
deliver only that which is possible - - right now, even the 
ruling party and the PRSC opposition party are badly split 
among themselves.  " I will tell them so when I meet them 
this afternoon." 
 
7. (SBU)  Electricity sector.    Most recent subsidy estimate 
by team from Central Bank/ Presidency/Electricity 
Council/Foreign Ministry is that @ exchange rate of RD$ 40 = 
US$ 1 and with fuel oil at today,s rate of about $26/bbl, 
the gap, and hence the government financing requirement, is 
US $28 million/month, that is, about US $168 million to get 
through the next six months.  This calculation does not 
address any GODR arrears to generators currently outstanding. 
 It does not take into account sums of  approximately $104 
million run up by Union Fenosa in its administration of 
EDESUR and EDENORTE.  The GODR budget for 2004 now has 4000 
million pesos in subsidies; ministers voted yesterday not to 
exceed that amount.  Difficulty is that cooking gas subsidy, 
previously 20 million pesos/week, is now at 60 million/week 
or 250 million/month, equal to 3000 million/year ) cooking 
gas will absorb 75 percent of planned subisidies, leaving 
little for electricity. 
 
8. (SBU) Despradel outlined the Madrid Agreement (of 2002?), 
with which the various generators agreed that in return for a 
one-time payment totaling $150 million, they would agree to 
drop contractual rates established in earlier years, all 
negotiated during crisis times and therefore above market 
rates, according to Despradel.  Instead, they would sell 
electricity at the &spot rate,8 expected to be much lower. 
The World Bank Energy Sector loan of $151 million which would 
have allowed the GODR to pay this amount was blocked by GODR 
decision to buy out Union Fenosa. 
 
9. (SBU) The World Bank is preparing instead a 
fast-disbursing Structural Adjustment Loan and has spoken of 
about $80 million, with $40 million to be available quickly 
with no or few conditions and another $40 million in six 
months time (after elections), subject to conditions. 
Despradel says given the need for $168 million in &future 
arrears8 plus the money needed to put the Madrid Agreement 
into effect and the sums owed to Union Fenosa, this would not 
be enough.  He is asking for $100 million quickly, i.e., 
without conditions, with another $50 million later.  He is 
also asking for more World Bank assistance for electricity, 
which could be conditioned on reforms. 
 
10. (SBU) The IDB is preparing an energy loan of $200 million 
to help mitigate the impact on the social sector of 
adjustment.  Initial disbursement would be $100 million. 
Despradel welcomes the finance but notes that these funds are 
needed to carry out the objective of the loan - - to maintain 
social services at previous levels. 
 
11.  (SBU) Despradel said COGENTRIX is the only generator to 
refuse to associate with the Madrid Agreement.  At the 
request of IDB president Enrique Iglesias, in mid-2003 Mejia 
agreed to pay off $42 million in arrears if Iglesias would 
assure that COGENTRIX would begin a renegotiation of contract 
terms.  Mejia is angry that COGENTRIX remained obdurate and 
has vowed not to pay until they do so.  (Current bill is 
about $25 million, and GODR is technically in default since 
November 11 - - this would allow lenders to invoke GODR 
sovereign guarantee of IDB loan of $140 million and of other 
loans, for a total of $400 million.)  Despradel noted that 
COGENTRIX contract was negotiated by the previous (Fernandez) 
government: ". . . and we can suspect what happened with 
that." 
 
12. (SBU) Bantiner.  DCM inquired about GODR efforts to 
recover money from Baninter.  Despradel replied that seizure 
and monetization of assets  is not possible until after 
conclusion of a trial. 
 
13. (SBU) Despradel said that he has not been involved in 
Baninter investigation or clean-up.  He  says GODR would 
welcome technical assistance from U.S. Treasury in this 
regard, including in tracking down Baninter funds sent abroad 
or identifying sources of Baninter deposits. 
 
14. (SBU)  Personnel expenditures.   In response to an 
inquiry about possible reductions of the government payroll, 
Despradel said that in his opinion, expenditures were indeed 
high.  He did not indicate any plans to reduce the civil 
service.   He pulled out a table showing the progression of 
government current expenditures in terms of GDP since the 
early 1980,s.  Under Balaguer, the share had progressed 
slowly from 6.8 percent to just over 8 percent; in 1997, the 
first year of the Fernandez administration, it had jumped to 
11 percent and crept higher.  The tendency was maintained, 
not initiated, in the Mejia administration.  (He did not 
point to the 2003 figure, which was increased sharply to over 
14 percent.) 
 
15. (SBU)  Incidence of taxation.   Despradel said that the 
GODR badly needed tax reform.  All talk of tax measures is 
focused on consumption taxes, which fall heavily on the 
poorest.  Despradel said that retailers commonly fail to pay 
the government the value-added tax collected from consumers. 
 Comprehensive tax reform was necessary, he said, but not 
realistic before May.  It is impossible to get a consensus on 
taxing incomes.  Despradel pulled out a chart comparing 
countries according to the sources of tax revenue; the 
Dominican Republic receives 71 percent of revenue from 
consumption taxes and only 26 percent from income taxes.  A 
Harvard consultant advising the government had initially 
discouraged the use of a 1% withholding tax on incomes; after 
analyzing the figures, the consultant had suggested a higher 
rate. 
HERTELL