US embassy cable - 03SANTODOMINGO7469

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 007469 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/IFD; TREASURY FOR 
DO:NLEE, RTOLOUI, LLAMONICA; NSC FOR SHANNON, HCRUZ 
 
E.O. 12958: N/A 
TAGS: DR, EFIN 
SUBJECT: DOMINICAN REPUBLIC: IMF RESREP ON TECHNICAL 
AGREEMENT, PARIS CLUB, TIMING 
 
REF: PIERCE/LAMONICA TELCON 12-18 
 
1.  IMF ResRep Ousmene Mendeng (PLEASE PROTECT) confirmed to 
USAID Director and EcoPol counselor on December 18 that local 
press reports are generally accurate concerning the elements 
of the technical agreement with the IMF.  The agreed overall 
deficit target is 3.5 pct of GDP.  (Note: press on December 
19 mentions a 25 percent tax on certificates held at the 
Central Bank by savings and loans associations -- presumably 
a withholding tax on income from those certificates.) 
 
2.  The GODR met the targets principally by adjusting 
expenditure.  To some degree this includes slowing or 
stopping foreign-financed development projects. 
 
3.  Electricity subsidies will be reduced somewhat by the 
"staged" pricing structure for power:  no adjustment of price 
on the first 200 kw, a monthly adjustment of 4 pct on the 
tranche from 200-400 kw, and an 8 pct monthly adjustment on 
amounts above 400 kw. 
 
4.  There is no explicit revenue target; rather the agreement 
is that total non-financial public sector deficit (including 
agencies such as those handling electricity distribution) 
will be 1.5 percent of GDP.  There is an expenditure cap on 
the central government.  The central government surplus will 
be equivalent to 1 percent of GDP. 
 
FINANCE 
 
5.  Summarizing likely financing: 
 
- - World Bank financing is at a USD 120 million baseline: 20 
million in technical assistance and 100 million in 
fast-disbursing ("emergency") funds. Another USD 150 million 
for electricity sector restructuring may be available later 
in the year if everything else goes "perfectly smoothly." 
 
- - IDB will provide USD 200 million in an emergency loan and 
USD 100 million for the social sector. 
 
- - Assuming bilateral assistance is approximately as before, 
these flows might provide USD 100 million, some of it in debt 
relief. 
 
- - Debt service for the year will be USD 800-850 million. 
More than 50 pct of this is due to the U.S.  Spain is the 
other major bilateral creditor. 
 
Once all sums are done, a financing gap of USD 300 million 
remains. 
 
PARIS CLUB 
 
6.  In order to meet the financing gap, a Paris Club 
rescheduling has already been initiated, at GODR insistence. 
The ResRep expects that the value for 2004 of a Paris Club 
rescheduling could be about 12 billion pesos (USD 300 
million). 
 
7.  The rescheduling would include Paris Club bilateral debt, 
Paris Club non-bilateral, and commercial creditors.  The 
Paris Club rescheduling will probably involve USD 125 million 
and rescheduled arrears of another USD 80 million.  Amounts 
rescheduled are determined by the cutoff date for 
rescheduling (1984?) agreed in previous PC exercises. 
Rescheduling with commercial creditors would provide about 
USD 100 million. 
 
8.  For commercial debt, the GODR and IMF are trying to find 
a formula whereby the Eurobonds are not rescheduled.  They 
might seek to reschedule only amount of the principal. 
 
9.  The Fund staff accepted the Paris Club approach only if 
used as an additional measure intended to reduce Central Bank 
holdings of debt certificates.   The GODR is to obtain a 
Paris Club rescheduling and must maintain the equivalent of 
the rescheduled amounts in the Central Bank.  In effect, this 
will allow the CB to lower its issuance of short-term debt 
paper.  Since the "effort" is in pesos, this arrangement will 
be advantageous in that the GODR will not have to go to the 
market to obtain dollars for these payments. 
 
TIMETABLE 
 
10.  The ResRep said the GODR informed the Paris Club on 
December 9 of its desire to reschedule.  By the next Paris 
Club meeting on January 14, a reply will be required.  The 
timing is tricky; the Paris Club agreement is a requisite of 
the agreement, but Paris Club donors require the assurance of 
an agreement with the Fund.  In essence, coordination is 
necessary for simultaneous engagements.  Actual restructuring 
negotiations with the Paris Club would take place in 
March-April. 
 
CONDITIONS 
 
11. Conditionalities prior to announcement of an agreement: 
 
-- the 2004 GODR budget must be approved by Congress, 
including required revenue measures. 
 
-- a financial stabilization plan for the electricity sector 
must be agreed with the World Bank (WB is about to issue a 
note on policy development for the sector). 
 
-- the GODR must assure that the foreign exchange market will 
operate freely. 
 
-- Base money must be in line with program targets.  This 
will not be easy.  At yesterday,s CB auction only about half 
of the paper was taken;  there were few takers last week. 
The important point is that the GODR must make an effort to 
control the monetary base and must achieve an "inflection 
point" showing that effective action has begun to control 
monetary growth, which recently has been rapid. 
 
-- Paris Club assurance of re-financing.  If IMF management 
requires a formal assurance from the PC, not possible before 
January 14th; if an informal assurance is sufficient, 
indications to the Fund from the U.S. and Spain might allow 
management to be flexible. 
 
12. Once the above is met, the announcement will be made and 
documents will be circulated for a late January IMF board 
meeting. 
 
13. Further conditionalities to be met prior to IMF board 
approval: 
 
--  GODR must clear non-reschedulable arrears in external 
debt, currently totaling about  USD 63 million (IMF is asking 
that these be reduced in December by USD 25-27 million to 
about USD 40 million). 
 
-- Note that debt payments subject to PC rescheduling will 
grow to USD 90 million in December. 
 
-- GODR must meet the conditonalities previously established. 
 
14.  USAID Director noted possible problems arising if U.S. 
sanctions are incurred when bilateral debt is more than 60 
days in arrears.  IMF ResRep inquired whether a Paris Club 
announcement of an intent reschedule might obviate these 
concerns. 
 
15.  Projections for economy are for contraction of 1.3 
percent of GDP in 2003, 1.0 percent contraction in 2004. 
End-of-period inflation is projected to be 14 percent, which 
ResRep finds "very optimistic." 
 
16.  Comment.  Emboffs find that the program as described is 
tight, subject to possible disruption at any of a number of 
points in the program and calendar.  We understand that the 
GODR was firm in choosing to approach the Paris Club, rather 
than seeking further IFI financing during the year.  Our 
World Bank contacts were unaware - - until we spoke to them 
today - - of the requirement for a financial stability plan 
for the electricity sector prior to proceeding to the IMF 
board.  It is not yet clear how elaborate this plan would 
have to be to meet IMF requirements. 
 
17.  Footnote: Calculations for the program were done with RD 
40 = USD 1 but ResRep comments that this is simply an 
accounting convenience.  GODR debits and credits in dollars 
are relatively balanced, so the actual rate probably does not 
have a great effect. 
 
HERTELL