US embassy cable - 03SANTODOMINGO7456

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 007456 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, DR 
SUBJECT: ASSISTANT SECRETARY NORIEGA GETS IMF READOUT ON 
DOMINICAN NEGOTIATIONS 
 
REF: SANTO DOMINGO 7134 
 
 1.  (SBU) Summary: In a December 11 meeting, International 
Monetary Fund representatives told WHA Assistant Secretary 
Noriega that they were close to agreement on a new IMF 
program for the Dominican Republic, but expressed concern 
that recent steps by Mejia to "talk down" the exchange rate 
could stall negotiations.  Though agreement was close on 
fiscal reforms, managing the ballooning quasi-fiscal deficit 
and tightening monetary policy deficit will be difficult. 
The Fund representatives said a deal would be fragile.  At a 
separate meeting, private sector representatives pointed to 
the confrontational atmosphere between business and 
government.  They criticized the GODR for excessive spending, 
corruption, and weak banking supervision.  They decried 
reports of new tax proposals under the prospective IMF 
agreement. End Summary. 
 
2.  (SBU) Assistant Secretary for Western Hemisphere Affairs 
(WHA) Roger Noriega met with IMF Senior Advisor Rangid Teja, 
Division/Mission Chief Marcelo Figuerola, Deputy Division 
Chief Steven Phillips and Temporary resident Representative 
Ousmene Mandeng December 11 to hear the Fund's views on 
current negotiations of a new Standby Agreement and to urge 
support for quick disbursement of International Financial 
Institution (IFI) loans once a program is in place. 
Ambassador Hertell, DCM, Treasury desk Officer and emboffs 
participated in the meeting.  A/S Noriega heard private 
sector views at a luncheon with prominent local business 
leaders representing banking, industry, energy, tourism and 
free zone sectors. 
 
QUALITY OF FISCAL ADJUSTMENT LOW 
 
3.  (SBU) IMF Senior Advisor Teja reported substantial 
progress in the negotiations, noting that they were close to 
agreement on a fiscal package, but cautioned that the quality 
of the fiscal adjustment was "low."  Teja said that the 
revenue measures in particular were weak and probably not 
sustainable.  However, he added, under the current economic 
and political circumstances, the measures were probably as 
good as the GODR could achieve, and  they would serve as a 
"stop-gap," pending more comprehensive fiscal reform.  He 
said that the GODR needed to remove exemptions currently in 
effect (for items such as medicines and school supplies). 
Teja said that 80 percent of the fiscal adjustment would come 
from spending cuts. 
 
ELECTRICITY A CONCERN 
 
4.  (SBU)  Fund representatives noted that the one of the 
"good measures" in the prospective agreement was partial 
elimination of electricity subsidies.  Currently, the GODR 
provides a subsidy to all consumers for the first 300 kw of 
electricity consumed each month. Under a new proposal, the 
GODR would subsidize only customers who use less than 200 
kw/month.  The GODR would also impose tariff increases on all 
users who exceed the 200 mw ceiling.  Teja projected that 
reduction in subsidies, when implemented, would allow the 
distributors to meet fuel-purchase needs in the short term, 
but would not be sufficient to amortize accumulated arrears. 
Responding to a question about reports from generators that 
fuel supplies would be depleted by late December, Teja said 
that the Fund had been in contact with the World Bank 
concerning a short-term strategy to "keep the lights on." 
However Teja commented that the IMF team were on shaky ground 
with regard to immediate World Bank assistance.  It might be 
that the GODR needed to look for other possibilities. 
 
YES, NEW TAXES 
 
5.  (SBU)  The officials from the Fund confirmed that the 
GODR would propose a series of additional tax measures, 
including a five-percent export tax, a two-percent import tax 
and an excise tax on alcohol and tobacco.  These taxes are in 
addition to a doubling of an "exchange rate" tax (based on 
import values stated on invoices), from 4.75 percent to 10 
percent; an increase in airport departure fees (from USD 10 
to USD 20); and a .15 percent check cashing fee.  The 
government had previously tried to implement the export tax 
by presidential decree, but the Supreme Court ruled that 
taxes could be levied only by congress.  Nevertheless, the 
GODR has continued to collect the two-percent export tax, as 
well as the check-cashing and airport fees that were 
implemented by the Monetary Board. 
 
THE QUASI-FISCAL DEFICIT 
 
6.  (SBU) The IMF has identified the ballooning amount of 
Central Bank short-term debt certificates and the 
corresponding increase in the quasi-fiscal deficit as a 
crucial issues for the GODR.  Teja said that the GODR started 
paying out cash in November to meet interest payments on 
certificates and stressed the need for the GODR to slow 
monetary growth.  The Fund did not offer details of how the 
GODR might manage the Central Bank certificates, but 
commented that Paris Club rescheduling could provide some 
relief. 
 
EXCHANGE RATE POLICY 
 
7.  (SBU) Teja said that the President's recent appointment 
of a commission to undertake vigorous enforcement in the 
exchange market (reftel), had become a very important issue 
that could delay the agreement.  He said that a specialist 
from the Fund had just arrived in the country to study the 
matter.  Teja explained that taken individually, none of the 
statements or actions taken by the GODR with regard to the 
exchange rate would be cause for concern -- "however, the 
totality of the picture is intimidation."  He noted a sharp 
reduction in trading and suggested that the recent arrests of 
illegal exchange traders were intended to preclude emergence 
of a black market. 
 
 PRIVATE SECTOR CONCERNS 
 
8.  (SBU) In a lunch with the Assistant Secretary earlier the 
same day prominent representatives of the private sector 
agreed that there was a crisis of confidence in the 
government and expressed doubt about the efficacy of an IMF 
program.  They pointed to the upcoming elections and the 
dramatic growth in the budget under the Mejia administration. 
 One interlocutor remarked that the GODR would agree to an 
IMF program now, but by February it would exceed fiscal 
targets due to spending on reelection of Mejia.  He said that 
the USG should tell Mejia to set aside ambitions for 
re-election for the good of the country. 
 
9.  (SBU) Several of the businesspeople attending the lunch 
spoke out forcefully against the various tax proposals under 
consideration.  They said the five-percent export tax, in 
particular, would have a devastating effect on the 
manufacturing sector, but suggested that the GODR was 
incapable of enforcing other forms of taxation.  Elena 
Viyella, the vocal president of the Association of 
Entrepreneurs (CONEP), said that exporters would support a 
tax of 2.5 percent. 
 
10. (SBU) The group was also critical of the government's 
handling of the banking crisis that led to the present 
economic crisis.  They said the GODR violated its own banking 
laws by bailing out a small number of large investors, and 
said that banking supervision was very weak, with no clear 
authority.  One member participant expressed serious 
reservations about the  Systemic Risk Law the GODR has 
submitted to Congress.  Although passage of the law is a 
precondition of an IMF agreement, she noted that it gave too 
much power to the Executive Branch and did not provide 
penalties for illegal banking acts.  Some members of the 
group expressed skepticism about the President's comments 
directed at lowering the peso/dollar exchange rate.  They 
said that similar efforts had failed twice before in this 
country, in the 1980s.  They seemed to agree that there was a 
real danger the peso could fall further and that the GODR 
might use "boots and guns" next time. 
 
COMMENT 
 
11.  (SBU) The GODR is facing complex economic challenges and 
has few options other than a Fund agreement.  The GODR is 
likely to continue to press to meet conditions for quick 
disbursement of IFI loans.  Passage of the budget appears 
likely, despite substantial private sector opposition to the 
proposed tax measures.  Though the private sector 
acknowledges the need for the IMF, it has a visceral distrust 
of this government. 
 
HERTELL