US embassy cable - 04SANTODOMINGO2744

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 002744 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR WHA/CAR AND EB/IDF/OMA; 
NSC FOR T. SHANNON AND K. MADISON 
TREASURY FOR N. LEE 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
DHS FOR CIS-CARLOS ITURREGUI 
 
E.O. 12958: N/A 
TAGS: DR, ECON, EFIN, ENRG 
SUBJECT: IMF TEAM REPORTS STRONG EFFORT BUT MISSED TARGETS 
ON PERFORMANCE CRITERIA 
 
1.  (SBU) Summary: International Monetary Fund review team 
members commented May 5  that despite strong effort, the GODR 
has failed to meet the Fund Standby Agreement performance 
criteria on monetary, fiscal and debt levels.  IMF 
representatives pointed to higher-than-expected first quarter 
inflation, increase in dollar-based energy costs, and the 
weaker-than-expected peso as the primary reasons for not 
meeting the targets.  The team said that the GODR will need 
to present a credible plan to get back on track with the 
agreement in order for the Fund Board to consider waivers 
when the Dominican Republic is next on its agenda, in late 
June.  End Summary. 
 
2.  (SBU) IMF review team leader Jose Fajgenbaum, team member 
Steven Phillips and resident representative Ousmene Mandeng 
briefed the Ambassador and Emboffs May 5 on the Fund's 
initial findings from the first formal review of the 
Dominican Republic since the Board approved the revised 
agreement in February.  They reported that the GODR missed 
the performance criteria, but has shown a more focused effort 
since the Paris Club agreement in mid April. 
 
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First the Good News 
------------------- 
 
3.  (SBU) The Fund Representatives said that the GODR appears 
to have turned the corner on monetary policy and brought 
inflation under control.  They reported that inflation for 
March was around 2 percent.  (The Central Bank reported 
cumulative inflation for January and February exceeded 24 
percent -- 10 points above projections.)  They gave high 
marks for the Central Bank's recent handling of monetary 
policy and said that although the peso was trading lower 
against the dollar than the Agreement had assumed, it has 
remained stable.  They also said that they had not detected a 
surge in election-related spending as many had feared. 
 
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Monetary Base Target Will need to Adjust 
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4.  (SBU)  Although the Central Bank made progress in 
reducing the monetary base, the representatives said it did 
not make sense to maintain the program levels for base money 
because of the high first quarter inflation.  Nevertheless, 
the team said that the GODR would have to have a clear policy 
outline before the review team could take the issue to the 
IMF Board for a waiver.  The GODR had reduced the monetary 
base by transferring bank reserves into Central Bank 
certificates of deposit, and at the same time increasing the 
vault cash holding requirement for banks to five percent of 
deposits. 
 
5.  (SBU)  When asked about the impact of Baninter 
certificates on the monetary base, the team said that most of 
the certificates were being renewed as they came due.  They 
reported that about RD nine billion ($200 million) of the 
original certificates were coming due soon, but expressed 
confidence that a sufficient amount would be rolled over to 
avoid much impact on the monetary base.  (Note:  RD nine 
billion represents about 13 percent of base money.) 
 
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Fiscal Target is Biggest Issue 
------------------------------ 
 
6.  (SBU)  The review team members were most concerned about 
the fiscal targets, which they said are really the center of 
the Standby Agreement.  They reported that the GODR would not 
meet the objectives on either the revenue or expenditure 
sides of the fiscal program.  They explained again that this 
was partly the result of shocks, such as inflation, the weak 
peso, high debt-service costs and the increase in oil prices, 
but that the GODR had been slow in responding to those 
shocks.  Moreover, excessive expenditures were also the 
result of misguided policies, such as propane and electricity 
subsidies.  They confirmed what a Central Bank source had 
recently told Emboff that the GODR had blown through 60 
percent of its annual energy subsidy budget in the first 
quarter of the year.  Revenue fell short of the program 
target as well, though they did not specify to what extent. 
The representatives also expressed concern that the GODR is 
delaying payment of bills to make the shortfall appear less 
serious. 
7.  (SBU) Unlike for the monetary side, the team said they 
saw no reason to adjust fiscal targets and said that the IMF 
would no longer accept vague promises.  The GODR would have 
to take further measures -- for example, accelerated tax 
reform -- to adjust for the slippage.  They expressed doubt 
that the GODR would take any action prior to the May 16 
election and that it might be difficult to pass meaningful 
tax reform until after inauguration August 16.  The Fund 
members acknowledged that there has been discussion of tax 
reform issues, but the GODR appeared reluctant to put forward 
a firm proposal during the campaign.  However, the team 
suggested that the GODR would have to take concrete fiscal 
measures before the Fund would consider a waiver. 
 
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Too Much New Debt 
----------------- 
 
8.  (SBU) The IMF representatives said that the GODR also 
missed the RD800 million debt target by some RD300 million 
($65 million).  They acknowledged that a large portion of new 
loans have not yet been disbursed, but explained that the IMF 
considers approved loans as part of the debt total.  The team 
left open the possibility that some of the loans could be 
reversed, but also criticized the GODR for not having an 
effective system to monitor loans.  They said that President 
Mejia told Technical Secretary Despradel to overturn anything 
the President approved that did not comply with the IMF 
program.  Despradel told the team that loans were a 
"procedural headache."  The IMF representatives remarked to 
Emboffs that domestic debt, and electricity sector debt, 
particularly, was difficult to monitor due to lack of 
transparency.  This creates problems for both the Fund and 
the World Bank. 
 
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Banking Reform 
-------------- 
 
9.  (SBU) A second IMF team is in the Dominican Republic 
reviewing progress on banking reforms.  The Fund 
representatives reported that banking reform is moving 
forward, but there have been delays.  They noted that 
adopting international standards for bank capitalization 
remains an issue and said that there is disagreement among 
the banks -- and between banks and the Superintendent of 
Banks -- on what form standards should take.  The team 
members said that the IMF is providing technical assistance 
in this regard, but at this point some banks are having 
difficulty meeting even local standards. 
 
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Next Steps 
---------- 
 
10.  (SBU) The GODR will need to present a detailed plan on 
how it will get back in step with the fiscal targets, and 
resolve monetary and debt issues before the Fund Board will 
consider waivers.  The team said that the current fiscal 
program is weak in specifics and that the GODR has a 
credibility problem with the Fund.  Nevertheless, they said 
the Board will likely be sympathetic if the GODR takes 
corrective actions.  The next opportunity for the Board to 
consider the Dominican Republic's program is in late June. 
They noted that there will not be further disbursements from 
the IMF before the Board meets. 
 
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Comment 
------- 
 
11.  (SBU) The IMF representatives seemed cautiously upbeat 
in their assessment of the program, despite the missed 
targets.  They gave the GODR a fair amount of credit for 
effort, and expressed a sympathetic view concerning the 
external shocks.  Nevertheless, the next few months could be 
more difficult.  If Mejia survives the first round of 
presidential elections on May 16, he will be focused on the 
battle for reelection in the second round June 30th.  If he 
loses in the first round, he will have three months left to 
govern before transferring power to a new president.  Either 
scenario will be a severe test of discipline for his 
administration.  End comment. 
 
12. (U) MINIMIZE CONSIDERED 
 
 
HERTELL