US embassy cable - 04SANTODOMINGO2525

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 002525 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA AND DRL; NSC FOR SHANNON AND MADISON 
LABOR FOR ILAB; USCINCSO ALSO FOR POLAD 
TREASURY FOR OASIA-LAMONICA 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI 
 
E.O. 12958: N/A 
TAGS: PGOV, ECON, EFIN, ENRG, DR 
SUBJECT: DOMINICAN ELECTIONS #41: FERNANDEZ AND ESTRELLA 
BOTH CALL FOR ECONOMIC AUSTERITY 
 
 
1. (SBU) This is no. 41 in our series on the Dominican 
presidential election: 
 
Fernandez and Estrella Attack Mejia's Economics, Preach 
Austerity 
 
Leonel's Paradoxical Proposals 
 
PLD presidential candidate Leonel Fernandez, spoke April 21 
before the American Chamber of Commerce (full text available 
on our SIPRNET site).  He proposed creation of an economic 
"crisis management team" for the first 100 days of his 
presidency to restore the public's confidence in the economy 
and overcome a "leadership credibility problem." The team 
would draw on experts from Harvard University and the Earth 
Institute of Columbia University (economist Jeffrey Sachs) 
and a study by the Economist Intelligence Unit -- entities 
sometimes critical of U.S. economic policies and the IMF. The 
proposed make-up of the crisis team fits awkwardly with his 
track record of energy sector privatization in the late 1990s 
and his promises to respect the nation's IMF accord. 
Nonetheless, most of his policy prescriptions emphasized 
austerity, fiscal responsibility and attracting private 
investment, and he would involve business and civil society 
groups in discussions with the team. 
 
If elected, Fernandez said, he would separate handling of 
short-term debt created by the Central Bank's massive bailout 
of depositors in three failed commercial banks last year from 
the Central Bank,s monetary policy. He blamed domestic 
mismanagement, not external shocks, for the country's 
"enormous crisis." This mismanagement included: 
 
---Mejia,s campaign rhetoric in the 2000 presidential 
election debunking the prosperity and achievements of the 
previous administration and sowing public distrust; 
 
---Deficit spending and tax increases, due to expansion of 
the public payroll (Fernandez noted that President Bush had 
cut taxes at the start of this term; Mejia had raised them); 
 
---Government's inability to regulate the banking and private 
sectors; 
 
---Soaring public debt and government competition with 
private firms for credit; and 
 
---Lack of coordination among fiscal, monetary and exchange 
rate policy. 
 
Fernandez promised a quick start for the country's economic 
recovery.  He would stabilize the exchange rate, lower 
interest rates, and stimulate job creation. He acknowledged 
he would face many obstacles: 
 
---Excessive savings certificates at the Central Bank 
(quasi-fiscal deficit); 
 
---Financial sustainability problems of the energy sector; 
 
---The recent doubling of the country's foreign debt and 
quadrupling of domestic debt; and 
 
---A need for fiscal reform, in accordance with the IMF 
agreement, to balance public finances and modernize the tax 
structure. 
 
Resolving the Energy Crisis 
 
Fernandez blamed the nation's frequent electrical blackouts 
on two Mejia decisions: the Madrid Agreement and the buyback 
of electricity distribution companies (EDE-Norte and EDE-Sur) 
from private Spanish firm Union Fenosa. The Madrid Agreement 
to lower contracted electricity generation tariffs in 
exchange for substantial one-time payments violated Dominican 
law according to Fernandez, and the purchase of the EDEs led 
to suspension of the IMF standby agreement for four months, 
until it was revised and renewed in February. Fernandez 
proposed setting up a compensation fund to sustain the energy 
sector and make it financially viable, using state shares in 
the EDEs as collateral.  Financing would come from the 
utility companies, consumers and international financial 
institutions . 
 
The candidate called for the government to redefine its role 
with regard to energy.  Authorities should adopt a spirit of 
reform, regulate the sector's activities in accordance with 
the law and modernize regulations.  These steps in turn would 
attract more private investment and reduce state involvement 
as an owner and operator. 
 
Stabilization and Tax Reform 
 
A PLD government, Leonel said, would prefer to borrow from 
multilateral organizations on soft terms rather than from 
private international banks. He would eventually renegotiate 
the debt and extend the terms, but would never default on the 
payments. He would proceed with tax reform according to the 
IMF guidelines, suspending the "distorted taxes" of the Mejia 
administration and compensating for a loss of tariff revenues 
expected upon implementation of the U.S.-Dominican free trade 
agreement. With this and the other measures, Fernandez 
promises to put the country back on the path of progress and 
modernization by 2005. 
 
Estrella Sings Similar Tune 
 
The same day, PRSC presidential candidate Eduardo Estrella 
spoke to the prominent National Council of Private Enterprise 
(CONEP), promising to reduce public expenditures, promote 
investments, and provide assistance to small businesses, and 
adopt development plans looking out 20 years instead of only 
four. Estrella expressed determination to pursue his election 
campaign, regardless of disappointing poll numbers and the 
recent defection to Fernandez of PRSC leader former vice 
president Jacinto Peynado and various of the PRSC "old guard." 
 
2. (U) Drafted by Leticia Cantu. 
 
3. (U) This report and others in this series can be read on 
the SIPRNET at 
http://www.state.sgov.gov/p/wha/santodomingo/ index.cfm along 
with extensive current material. 
HERTELL