US embassy cable - 04SANTODOMINGO2742

UNCLAS SECTION 01 OF 06 SANTO DOMINGO 002742 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/PPSC 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, DR 
SUBJECT: DOMINICAN ELECTIONS #44:  CANDIDATES ON MACRO AND 
FINANCIAL POLICY 
 
 
1.  (SBU) Following is number 44 in our Dominican elections 
series: 
 
Candidates on Macro and Financial Policy 
 
In April all three of the principal candidates for the 
Dominican presidency addressed the American 
Chamber of Commerce on their visions for economic policy for 
2004-2008.  The full texts in Spanish 
are available on the SIPRNET site of Embassy Santo Domingo. 
Following is our informal translation of 
a May 2 piece by journalist Carmen Carvajal of the "Hoy" 
newspaper, comparing those speeches. 
 
As Carvajal's summary makes clear, there was very little 
difference of approach among the candidates; the only 
marked exceptions are the promises of President Mejia to 
reduce income taxes by 40 to 60 percent and 
to promote a 30 percent salary increase -- "when 
macroeconomic stabilization allows it." Each candidate 
avoided fully discussing the upcoming tax reform, which will 
almost inevitably require a sharp increase 
in the value-added tax and a widening of its application. 
 
(begin translation) 
 
Electoral Offers, Macroeconomic stability is the primary goal. 
Hoy, May 2, 2004 
Parties promise to find the revaluation of the family income, 
in order for the Dominicans to improve their quality of life. 
 
Achieving macroeconomic stability, regaining trust at home 
and in foreign capitals, returning to the path of growth and 
reconstituting Dominican purchasing power with the 
stabilization of the peso and improvement of income 
constitute the primary program goals offers of the three 
majority political parties competing in the May 16 elections. 
 
As of press time, only the Dominican Liberation Party (PLD) 
had made available to the press and public a printed 
proposal.  Candidates of the others, the Christian Socialist 
Reform Party (PRSC) and the Dominican Revolutionary Party 
(PRD), presented their offer in speeches brought before the 
members of the American Chamber of Commerce. 
 
In that setting, President Hipolito Mejia, who aspires to 
re-election, and who spoke last on Wednesday the 28th, 
declared that "our first duty is to return the purchasing 
power to our currency; that the money remain meaningful, 
prices go down and then stabilize, and that the uncertainty 
of the financial crisis caused by others finally end." 
 
To achieve this goal, President Mejia sees the need to 
"attack the causes which shattered price stability and the 
currency exchange rate." 
 
For this reason, he said, he will carry out a tax reform and 
direct measures to rationalize public expenditure, " 
guaranteeing, at all times, that subsidies for the poor will 
not be reduced." 
 
As part of his tax reform proposal he includes lower income 
tax and elimination of taxation on inheritances and legacies. 
 Mejia's offer includes maintaining and expanding social 
programs destined to improve housing for the poor, issuing 
titles to those occupying state-owned lands and altering the 
focus of some subsidies. 
 
The "Purple" Offer of the PLD 
Ex-president Leonel Fernandez, presidential candidate for the 
PLD, presents a proposal suggesting his economic policy is 
geared towards re-establishing stability and a path to growth. 
 
In his speech before the AmCham, Fernandez indicated that if 
he wins the elections, his government will define an 
austerity policy and reduce expenditures.  On the other hand, 
he understands that the biggest challenge of the government 
will be made up of four elements; 
 
- - A fair solution to the quasi-fiscal deficit of Banco 
Central; 
- -  a solution in the short and medium term of financial 
sustainability of the electric sector; 
- -  a realistic approach to the external debt problem; and 
- - a fiscal reform within the context of the FMI agreement 
that will balance public finances and modify the tax 
structure. 
 
The Reformista Program 
 
Eduardo Estrella committed himself to "push forward a vast 
program of reform and modernization of all productive 
sectors, so Dominicans can feel motivated to invest their 
savings in the development of the Dominican Republic." 
 
He will also support the technological modernization of the 
State.  His policy will develop in a frame of " realism, 
modernism and growth.  It will have a pro-export orientation, 
stimulating production and external commerce." 
 
"This means reducing inflation, reducing production costs and 
inducing the gradual reduction of interest rates on 
investments and the strength of our national currency." 
 
Basic Points of the Economic Programs 
 
PLD 
 
Fiscal Policy 
 
Its objectives are guaranteeing fiscal balance and cautious 
and rational management of public finances, improving the 
efficiency, wealth distribution and re-distribution. 
 
It will contribute to creating a macroeconomic framework that 
will make possible stability and sustainable economic growth 
as well as re-establishing faith in participants in the 
economy. 
 
It will sponsor fiscal and tariff reform within the framework 
agreed upon with the FMI.  The basic objective should be to 
"replace the exorbitant taxes that have been set lately, as 
well as compensating for the major losses arising from the 
Free Trade Agreement with the United States." 
 
Concerning revenue, the policy will move toward improving the 
efficiency of tax administration, bettering the country's 
capacity to collect taxes and modernizing the functions and 
mechanisms of the system. 
 
When it comes to expenditures, a fiscal program of austerity 
will be applied to adjust spending as well as restructuring 
expenditures to promote equality. 
 
To fulfill these objectives, the fiscal reform will eliminate 
taxes that are difficult to manage and provide low yield, 
will create mechanisms to control tax evasion such as the 
exchange of information, and current "transitory taxes" will 
gradually be eliminated. 
 
Quasi-fiscal Deficit 
 
Fernandez proposes that the resources used in bank rescues 
and tied up Central Bank certificates would  cease to be a 
problem, through creating a special entity, separated 
judicially from Central Bank so its operations will not 
affect monetary policy, where all of the assets and 
liabilities of the Central Bank and the Banking 
Superintendency would be transferred. 
 
With the sale of the assets from the bankrupt banks, a 
portion of the funds would be recovered and the rest would be 
covered by the State through a long-term instrument or 
through resorting to an international loan. 
 
Public Debt 
 
As for the public debt, the first thing would be to prevent a 
default or cessation of payments, Fernandez told the AmCham. 
 
His government would press to enlarge the scope of 
renegotiation, and extend the repayment periods to keep 
service of interest and capital repayment from hindering 
improvements to the Dominicans' quality of life. 
 
His policy would also look to exchange bilateral debts for 
equity investment, especially in the border area, to promote 
progress in that area. 
 
He would reverse the policy to giving priority to external 
debt on preferential terms and would turn to mulitlateral 
institutions to obtain funds at concessional terms. 
 
Monetary Policy 
 
The PLD program plans to create an institutional setting that 
will encourage determination of the rate of exchange through 
competitve market mechanisms that are efficient and 
transparent, establishing a value for the peso that will help 
maintain the internal and external balance in the long and 
short term and reconstitute international reserves. 
 
In order to do this, a PLD government would seek to increase 
earnings in foreign currency, encourage  the return of the 
flight capital, and maintaining a flexible and unified 
market, so that market forces set the rate, creating 
conditions favorable for foreign investment, and supporting 
the export sector. 
 
Energy 
 
In this area, Fernandez favors adjusting distortions in the 
sector so as to guarantee harmonious, sustainable development. 
 
For this, he proposes a "Compensation Fund for Energy Sector 
Sustainability, which should guarantee the financial 
viability of the sector." 
 
The Fund will have as collateral the state-owned shares in 
privatized industries and it would by augmented by 
contributions of the companies, consumers, and multilateral 
institutions. 
He proposes a redefinition of the role of the state in this 
sector.  He said he will propose that the government to 
oversee and regulate the activities of the sector closely, 
"while it elaborates and approves modern standards 
appropriate for today that will attract and motivate 
investment." 
 
PRSC ---- 
 
Fiscal Reform 
Eduardo Estrella, reformist presidential candidate, believes 
that tax reform cannot wait for the August 16 inauguration, 
but must be carried out immediately, taking all possible 
measures to avoid raising unemployment and the cost of food. 
 
This reform itself should be a mechanism for the creation of 
wealth, within a realistic, modern, approach friendly to 
development.  It should also promote exports to stimulate the 
production and trade. 
 
"This means reducing inflation, lowering production costs and 
bringing about the gradual reduction of interest rates on 
investments and strengthening the value of the peso." 
 
Estrella plans to sponsor a Fiscal Responsibility Law that 
will set goals or limits to the levels of domestic and 
foreign debt as well as limiting the fiscal deficit of the 
consolidated public sector. 
 
It will also reduce the discretion of the executive  in 
expenditures, imposing severe sanctions on officials who 
contravene the law. 
 
Energy 
 
Estrella suggests in his program that the energy industries 
work on distributing energy, realizing savings  in the costs 
of operation and improving bill collection, without 
interference from the State.  "He who supplies the power 
should collect." 
 
He would try to improve and expand the capacity of the Energy 
Superintendency to regulate the sector, especially the rates 
the consumer will have to pay. 
 
The companies should offer the users the possibility of 
utilizing meters with a pre-paid system, similar to the 
current telephone system. 
 
Hydroelectric generation will remain in government hands and 
rural electrification and alternative energy sources will be 
promoted. 
 
Debt 
 
Estrella plans to replace a policy of debt financing with one 
of recourse to internal savings.  He would continue the 
renegotiation of the debt with the Paris Club so as to obtain 
deferred payment of 320 million dollars, trying to achieve a 
minimum deferred term of ten years, so as use those resources 
in development projects. 
 
Expatriate Dominicans 
 
Estrella will propose a Law for Investments for the 
Dominicans Abroad that will provide tax exemptions to return 
to the country and make investments that bring foreign 
exchange into the Central Bank.  Among other incentives would 
be a five-year exemption from income tax. 
 
Housing 
 
He proposes a broad plan of construction and financing of 
housing through the Investment Bank for Development and 
Production, using the savings from pension funds and 
insurance companies, through the approach of a "second-story" 
banking scheme. 
 
The idea is for the Dominicans to purchase housing with 
long-term financing at low interest rates. 
 
Free Trade Agreement 
 
Estrella will support the free trade agreements and will 
institute a national plan to improve competitiveness as an 
instrument to support  national industry and provide market 
openings for national products and services. 
 
He will propose trade  negotiations with the European Union. 
 
PRD ----- 
 
Fiscal Reform 
 
President Mejia specifies as the primary objective of the 
reform the elimination of the fiscal deficit and the 
establishment of policy of rational spending, in order to 
reduce inflation. 
 
His reform proposals contemplate a reduction in income tax 
from 25 percent to 15 percent , which will benefit  the 
professions and the middle class, as well as industry. 
(EMBASSY NOTE: Mejia said, "If it were entirely up to me, I 
would reduce it to 10 percent.") 
 
The tax on inheritances, that is, on estates and legacies, 
will be eliminated. 
 
The maximum tariffs will go down from a maximum of 20 percent 
to 15 percent.  He will also propose an increase in salary of 
30 percent to be approved once macroeconomic stability is 
achieved. 
 
Monetary Policy 
 
President Meja promises to maintain strict control of 
monetary policy, "Until the fiscal reform begins to generate 
additional income that will assure the elimination of the 
complete deficit of the public sector." 
 
Regarding the quasi-fiscal deficit, he said there will be no 
freezing of Central Bank certificates of deposit or 
unilateral cuts on the exchange rates applied for interest 
and principal payments to owners of Central Bank certificates 
denominated in foreign currency. 
 
Investments 
 
National investments in infrastructure will be maintained , 
with the goal of reaching a public annual investment of 5 
percent of GDP, equivalent to 30 trillion pesos. 
 
Maintenance and rehabilitation will be continued on highways, 
 irrigation canals, aqueducts, and local roads. 
The government's 1500 construction project currently underway 
throughout the country will be completed. 
 
Energy 
 
A PRD government will seek modification of the Energy Law to 
restructure the industry along lines agreed through a process 
of consensus of all the key players. 
Energy reform will aim at increasing quality of service, 
lowering tariffs, and reaching financial stability, 
eliminating the high subsidies. 
 
A new approach to re-nationalized enterprises will be 
defined, following the report by the special commission, and 
the government will seek support from the World Bank and the 
Inter-American Development Bank to make sure this process is 
carried out transparency. 
 
2.  Translation by Marietta Diaz. 
 
3. (U)  This report and others in our series are available on 
our SIPNET site at 
http://www.state.sgov.gov/p/wha/santodomingo/   along with 
extensive other material. 
HERTELL