US embassy cable - 03SANTODOMINGO6999

C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 006999 
 
SIPDIS 
 
DEPT FOR WHA/CAR, WHA/PPC, WHA/EPSC, EB GREENWOOD, EB/OMA/ 
RFRISBEE; DEPT PASS USAID/LAC, USTR; NSC FOR HCRUZ; 
TREASURY FOR NLEE, RTOLOUI, LLAMONICA; SECDEF FOR OSD; 
JUSTICE FOR OIA 
 
E.O. 12958: DECL: 12/03/2013 
TAGS: EFIN, ECON, ECIN, DR 
SUBJECT: PRESIDENT MEJIA SETS UP INVESTIGATION TO GET THE 
DOMINICAN EXCHANGE RATE RIGHT 
 
 
Classified By: DEPUTY CHIEF OF MISSION LKUBISKE.  REASON 1.5 (B&D) 
 
1. (U) Summary.  In a December 2 meeting, President Mejia 
insisted that the exchange rate must go down sharply and told 
attendees that military and police officers will be watching 
exchange houses to detect questionable transactions.  Most 
exchange houses have agreed not to sell dollars for more than 
RD40 to dollar.  The Government asserts that it is not 
instigating exchange controls but instead wants the rate to 
return what it should be -- about 30 to the dollar, according 
to some.  So-called voluntary agreements to sell dollars at a 
set rate have regularly been tried in Dominican history, with 
short-lived results.  The use of military and police is new. 
Mejia has reiterated his commitment to reaching agreement 
with the IMF on a revised program.  The Central Bank will 
publish a communique tomorrow (see final para below), 
stressing its aim of deterring criminal behavior.  Ambassador 
and emboffs raised questions on December with a wide range of 
contacts and stressed the impact that the poorly explained 
initiative could have on business confidence and the value of 
the peso.  Exchange trading is routine but thin today, at RD 
40 for the dollar.  Dollars may become even more scarce in 
coming days. End summary. 
 
BACKGROUND 
 
2. (SBU) After the peso broke the RD$40 per dollar barrier 
again in November and continued to weaken, rumors began to 
surface in late November about GODR plans to address the 
crisis.  Receiving increasing complaints about the 
depreciation of the currency, the President publicly blamed 
it on "manipulation" by currency trading houses - which 
handle roughly 70 percent of all foreign exchange trading in 
the Dominican Republic -- and issued warnings about possible 
arrests for illegal hoarding of dollars. 
 
A SHOW OF FORCE 
 
3. (C) Immediately following a meeting with his monetary 
board December 2, President Mejia harrangued a large meeting 
of private and public sector representatives on the 
"unacceptable" level of the exchange rate, asserting that the 
IMF agreement being revised would become impossible if the 
dollar remained at 45 pesos.  The palace had convened 
exporters, tourism representatives, local bankers and foreign 
exchange traders; Mejia was flanked by administration 
officials, all of the military chiefs, the Governor of the 
Central Bank, and police officials.  He announced the 
formation of a commission to investigate abuses in the 
exchange sector, composed of director of internal taxes 
Teofilo Tabar, Secretary of the Armed Forces General Jose 
Miguel Soto Jimenez, former national police chief under 
Balaguer's administration General Rafael Peralta Guerrero, 
and former national police chief during the Fernandez 
administration (and the first year of the Mejia 
administration) General Pedro de Jesus Candelier. We 
understand that a banking superintendency official will also 
participate.  The President's tough intent was clear. 
Previous governments have resorted to jawboning and temporary 
pacts on the rate; this is the first time that the military 
and police have been associated with one. Embassy does not 
know whether the President's new commission has received any 
charter or written instructions for its work, nor what 
exactly it will do. 
 
4. (C) The Dominican financial team has been examining 
irregularities in the exchange system over the last several 
weeks.  Among concerns which they had notified to Mejia were 
avoidance of taxation by exchange houses, operation of 
unlicensed exchange operations, and some large transactions 
by unknown individuals, in the range of USD 5 to 10 million. 
Banking Superintendent Julio Cross and presidential Technical 
Secretary Carlos Despradel have assured us that these 
 
SIPDIS 
suspicious activities are to be the focus of the 
investigations.  Despradel says that banking Superintendency 
personnel will be sent to at least some of the exchange 
houses to inspect and watch their operations.  The GODR 
denied reports that uniformed military personnel would be 
posted at branches of the four major currency trading houses, 
though it acknowledged having been tasked to identify the 
location of exchange houses.  During an afternoon visit to 
the leading exchange house, Embassy staff saw no military 
presence; Embassy Defense Attache learned from a military 
contact that no order has been issued on the subject. 
5. (C) Bankers and currency traders acceded "voluntarily" 
under this pressure to cap the price of the dollar at 40 
pesos.  In the discussions some exchange house 
representatives suggested that dollar purchases be set at 
RD38/1 by December 7 and then reduced progressively by 2 
pesos per week until reaching a level between RD30 to RD32 
per dollar.  Banking Superintendent Cross dismissed this 
scheme, commenting that the proposal was evidence that 
manipulation was already occurring in the markets. 
 
MONETARY BOARD INSIDER 
 
6. (SBU) Monetary Board Member Sonia Guzman (GODR Secretary 
of Industry and Commerce) commented to Econoff December 3 
that the IMF had made its most recent calculation for a new 
standby agreement based on a projected exchange rate of RD40 
per dollar.  She confirmed that Mejia had said in the meeting 
that there was zero chance of signing an agreement if the IMF 
had calculate the rate again due to depreciation.  Guzman 
said that Mejia is committed to reaching agreement with the 
IMF "no matter what the political costs," but that to do so 
the GODR had to bring the exchange rate under control. 
 
7. (C) Guzman said that Mejia was disgusted at the shortfall 
in voluntary contributions provided by exporters and tourism 
operators toward fiscal goals.  When Finance Minister 
Calderon reported contributions at only RD 74 million 
(scarcely more than USD 2 million), far short of projections, 
Mejia was so infutriated that he ordered the Minister to 
return all of the money.  (Guzman said she would approach the 
President to convince him that the GODR should retain at 
least the free trade zone companies' contributions.) 
 
A "VOLUNTARY" RATE 
 
8. (C) Embassy obtained a copy of a circular notice sent out 
by the association of exchange houses on December 2 advising 
members that the meeting had agreed that the rate would not 
exceed RD40, and that "respect for this measure is 
obligatory."  In fact, banks and exchange houses were posting 
rates in this range today -- but volumes were low and some 
houses were refusing to deal at all.  One operator of a 
legitimate exchange house commented that he was not concerned 
at all by the enforcement measures (aimed at questionable 
operations) or by the rate. 
 
EMBASSY INVESTIGATION AND ADVOCACY 
 
9. (SBU) In the course of December 3 Ambassador and Embassy 
officers contacted a wide spectrum of government and private 
sector actors, seeking clarification about these events and 
stressing the importance of preserving the free functioning 
of the exchange markets. Emboffs stressed the need for the 
GODR to make clear its measures and intentions in order to 
prevent the gathering alarm.  Presidential Technical 
Secretary Despradel, in a late afternoon visit to the 
 
SIPDIS 
Embassy, told Ambassador that in response the government had 
thought of issuing a message from the cabinet, but had 
settled on a communique from the Central Bank as more 
appropriate and easier to complete.  He subsequently faxed 
the version to the Embassy.  To be released tomorrow, 
December 4, it emphasizes the GODR adherence to the aim of 
free competition in a properly regulated market and advises 
of the intention to investigation financial irregularities 
such as money laundering.  The communique does not address 
the "agreed" rate in the market.  (See informal translation 
below.) 
 
COMMENT 
 
10. (C) Mejia's measures were a triumph of political 
grandstanding and a unsustainable approach to the exchange 
market.  A certain amount of clean-up in the sector will do 
everyone some good and could yield tax revenues and fines. 
But the President's choice of muscle for the committee was, 
in our opinion, a grave mistake.  The Armed Forces have no 
technical competencies in this area, other than the 
intelligence operations of last week to scout out the 
location of unlicensed exchange houses.  And Mejia's 
appointment of Police General Pedro Candelier is a heavy 
handed, empty threat of force.  (NOTE:  Candelier was 
notorious for corruption and for tolerating extrajudicial 
police killings during his tenure as National Police Chief.) 
 
11. (SBU)  Begin text of informal translation of Central Bank 
communique to be released on December 4: 
 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
- 
CENTRAL BANK COMMUNIQUE TO THE NATION 
 
The Central Bank and the Banking Supervision authorities wish 
to inform the public concerning the outcome of the meeting of 
Tuesday, December 2, in the presidential palace chaired by 
the President of the Republic and attended by the monetary, 
fiscal and security authorities as well as representatives of 
the banks, exchange houses and private sectors which earn 
foreign currency. 
 
1.    The reunion of the authorities with the sectors 
participating in the exchange market had as its aim the 
identification of measures to contribute to an environment 
favorable to stabilizing exchange operations and normalizing 
their functioning, in conformity with the laws regulating the 
markets. 
 
In their comments to the press, the principal spokespersons 
of the banks and the exchange houses emphasized the interest 
they share with the authorities in supporting the elimination 
of extra-market factors which prevent the exchange rate from 
corresponding to real values. 
 
2.    Exchange operations are carried out in the Dominican 
Republic in the framework of a free market, with the 
assistance and safeguards of measures in the Monetary and 
Financial Law and the regulations established by the Monetary 
Board.  As occurs with any institutionalized market, its 
functioning is bound up with the privileges of the agents 
participating in the market, which bring with them the duty 
to respect established norms and procedures. 
 
3.    As in any nation of organized institutions, exchange 
operations are supervised by the government authorities and 
are carried out according to norms and formal procedures that 
must be respected by law.  Fundamentally, the market is a 
service offered to its clients by entities that are 
constituted under law according to principles of transparency 
and certified competence. 
 
4.    On the other hand, it should be remembered that the 
Dominican Republic is signatory to a number of international 
agreements and bilateral cooperation agreements which oblige 
the country to remain vigilant and to prosecute crimes 
considered by the international community to be extremely 
serious, including money laundering, whether originated by 
narcotics trafficking, tax evasion, financial fraud, or 
terrorist financing.  These obligations involve 
responsibilities that must be complied with not only to 
protect its own citizens, but also to contribute to the 
security of other nations.  With this aim, the appropriate 
institutions are investigating exchange operations considered 
to be unusual, both for their amounts and because of their 
form -- one of the principal themes discussed in the meeting. 
 
5.    In conclusion, the monetary authorities confirm once 
again their adherence to a system of free exchange and to the 
promotion of competition, by means of which they are 
confident that stability and necessary transparency will be 
re-established in the exchange market, in benefit of all the 
clients of its services, the regular functioning of the 
productive activity of the nation, and the economic security 
of the Dominican people.. 
 
(end text) 
HERTELL