US embassy cable - 03SANTODOMINGO6871

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 006871 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, PGOV, DR 
SUBJECT: DOMINICAN TREASURY CONCERN ABOUT IMF NEGOTIATIONS, 
POSSIBLE ACTION AGAINST EXCHANGE SPECULATORS 
 
REF: KUBISKE & MEIGS E-MAILS/WHA-WHA/CAR-TREASURY-EB 
 
1.  (SBU) Summary.  Dominican Technical Secretary of the 
Presidency Carlos Despradel says that President Mejia and his 
team are close to an agreement with the IMF but are concerned 
that speculation in the foreign exchange market may be 
undermining all calculations.  Strong action against 
speculators is possible.  End summary. 
 
2.  (U)  DCM and EcoPol Counselor were invited to meet 
Technical Secretary of the Presidency Carlos Despradel on 
November 26 for a read-out of talks with the IMF, as a 
follow-up to the visit of Treasury Under Secretary John 
Taylor.  Emboffs were received by technical advisor Luis 
Reyes Santos, who mentioned that IMF team leader Figuerola 
and IMF resrep Mandeng were both in flight to Washington for 
Thanksgiving holiday.  One fiscal specialist, Geremia 
Palomba, is still in Santo Domingo but was out of contact. 
 
3.  (SBU) Technical Secretary Despradel arrived ten minutes 
later, directly from a meeting with President Mejia.  He 
provided a chart of the IMF negotiations as of November 24 
and November 25: 
 
PROGRAM AS OF NOVEMBER 24:          Percent of GDP 
 
1.  Central Bank quasi-fiscal deficit                 - 4.0 
 
2. Electricity Sector 
   includes rate increases averaging 42 percent 
   (1% monthly adjustments for consumers of 
    less than 300 kw, 4% monthly adj for consumers 
    of 300-700 kw, elimination of subsidies for 
    all consuming more than 700 kw0); total 
    of subsidies is 0.8 percent GDP 
   -1.0 
- - - - - - 
 
SUBTOTAL DEFICIT (1   2)                                    - 
5.0 
 
GOVERNMENT SURPLUS, including 
  Measures to reduce expenditures by 
  a further 1.1 percent of GDP; includes 
  the projected  yield of the 5% export tax 
  0.5 
- - - - - 
GLOBAL DEFICIT 
    - 4.5 percent 
 
GAP requiring financing, according to IMF                 1.0 
percent 
 
- - - - - - - - - - - - - - - - - 
AS OF NOVEMBER 25 
- - - - - - - - - - - - - - - - - 
 
Proposed additional measures 
1.    Further spending cuts  (0.4 percent) 
2.    New taxes (0.6 percent) 
1.0   percent 
 
4.  (SBU)  Despradel stressed that adding further taxes would 
be a very difficult undertaking and could well delay approval 
of the 2004 budget beyond the December timeframe.  President 
Mejia has told advisors that he is determined to reach 
agreement with the Fund and says that he will persuade 
congress and other interests of the need to enact them. 
Despradel said that one approach might be raising the VAT 
from 12 percent currently to 14 or 15 percent, with 
exceptions for basic necessities. 
 
5.  (U) Note.  President of the Business Council (CONEP) 
Elena Viyella has emphasized to us in recent days that 
businesses find unacceptable the draft for the 5 percent tax 
on exports.  In the version approved by the Senate there is 
no legal mechanism specified for collecting the tax.  CONEP 
believes that the law should to some extent mirror the 
mechanisms and rates embodied in the private sector voluntary 
agreements made with the administration since October.  She 
notes that the export tax doesn,t address Free Zone exports 
and is not adequate in dealing with the dollar earnings of 
the hotel sector. 
 
Central Bank debt - Request to USG 
 
 6. (SBU) Despradel stressed the deep concern of the 
financial team about the short-term debt held by the Central 
Bank (CB) in the form of certificates of deposit (largely 
originating as guarantees of Baninter deposits).  He 
estimates this stock at 60 billion pesos currently.   At an 
annualized interest rate of 30 percent, the CB will have to 
issue further certificates regularly to offset the liquidity 
created by interest payments.  The program projects the 
resulting stock of CB debt at 65 billion in March 2004, 76 
billion in June, 84 billion in September, and 81 billion 
(sic)  in December.  Despradel supposes that in unchanged 
circumstances the debt would rise from 81 billion to 100 
billion in 2005.  He finds unrealistic the IMF suggestion to 
raise taxes further so as to offset this growth in debt. 
 
7.(U)  Note.  Banks are growing increasingly reluctant to 
roll over the government,s short term debt.  The most recent 
offering was of 7.5 billion pesos -- and only 4.8 billion was 
placed at an average maturity of 19.1 days.  None of the CB 
offerings over the past ten weeks has been fully subscribed. 
 
8.  (SBU) Despradel and staff are preparing a letter to the 
USG through U/S Taylor requesting help in obtaining a large 
sum of financing so as to reduce the stock of CB certificates 
and lower payments.  They want to restructure the debt into 
long-term obligations, perhaps in dollars, and to lower the 
rate. 
 
(SBU) Rumors, liquidity, exchange rate -- arrests? 
 
9.  (SBU) Despradel said the President,s meeting that 
morning had been scheduled to examine the possible elements 
of expenditure cuts and new taxes. Participants had 
concentrated instead on the upsurge in rumors and pressure 
related to the exchange rate. "Very strong" rumors assert 
that further banks are in trouble (to our understanding, this 
view is erroneous).  The peso is trading currently at about 
45 to the dollar, up from about 41 earlier this week. 
Despradel said that the administration believes that there is 
a deliberate effort to instill panic so as to drive the 
exchange rate yet higher.  Well-respected business persons 
are asking for government action, and "the President thinks 
that something must be done." 
 
10.  (SBU) Despradel said that there is a strong possibility 
that the government will take action against exchange houses 
and individuals thought to be engaged in this effort.  The 
administration might make high profile raids for tax 
inspections or might ask for arrest warrants.  Despradel says 
that he himself is very moderate on these questions and knows 
that the effect might be negative -- but the policymakers are 
tending to the view that market manipulation must be stopped, 
to prevent the rate from hitting 50 to the dollar.  &This is 
a very delicate moment.8 
 
11.  (SBU) Note.  The IMF team suggested that the GODR could 
go onto the market to purchase dollars for international 
payments of US $ 150-200 million due from now until the end 
of calendar year 2003.  This would place additional demand on 
the exchange market. 
 
12.  (U) Despradel stressed that the IMF negotiations have 
been premised on an exchange rate of about 40 pesos to the 
dollar.  Further depreciation of the currency would mean 
complete redrawing of the program. 
 
Request: Fund flexibility 
 
13. (SBU)  Despradel does not believe it is possible to make 
any public statement about the status of the negotiations 
with the fund.  He asks that the USG seek to convince the 
Fund negotiators to be more flexible.  He understands their 
institutional interest in staying tough but is concerned that 
&this approach could destroy the country." 
 
14.  (U)  Expenditures.  The Technical Secretary provided in 
tabular form a summary of government expenditures for 1995 
(14.3 percent of GDP in Balaguer,s last year), 1999 (16.2 
percent of GDP in Fernandez,s last year) and 2003 (15.1 
percent), as a defense against assertions of lavish spending 
by the Mejia administration. 
 
15. (SBU)  Further IFI loans.  Despradel says that the 
InterAmerican Development Bank is planning a fast disbursing 
loan of US $ 200 million, with $150 million in the first 
tranche.  The World Bank is planning a Structural Adjustment 
Loan of US $80 million (Despradel will ask for US $100 
million) "to keep the lights on."  Of this, about US $70 
million would be used for energy.  The loan,s conditions 
will require maintaining levels of social expenditures. 
 
KUBISKE