US embassy cable - 04SANTODOMINGO3313

C O N F I D E N T I A L SECTION 01 OF 05 SANTO DOMINGO 003313 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA; 
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: DECL: 06/04/2014 
TAGS: PGOV, EFIN, DR 
SUBJECT: DOMINICAN TRANSITION #1: TAKING REPONSIBILITY FOR 
THE MESS 
 
 
Classified By: DCM Lisa Kubiske.  Reason:  1.4 (a) and (d). 
 
1.  (SBU) Following is number 1 in our series on the 
Dominican presidential transition: 
 
Taking the Responsibility for the Mess 
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(SBU) Both sides of this transition are apprehensive of 
taking blame for the pain necessarily associated with the IMF 
requirement to deliver a tax reform proposal to Congress by 
July.  President Mejia has told the press he will deliver to 
legislators any draft text that has been fully discussed with 
everyone interested. Leonel Fernandez,s transition team told 
the Ambassador that they fully realize the urgency of the 
task and they expect Mejia to take the responsibility. 
Complicating all this is the revelation that the 2004 budget 
was driven 50 percent over planned expenditures by off-budget 
financing of construction and development projects. Fixing 
things with the IMF will be a huge job. 
 
Meeting of the Transition Teams 
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(U) Dominican media of May 31 carried photos from a press 
appearance of the two teams appointed to coordinate the 
transition between the May 16 presidential election and the 
August 16 inauguration.  Leading for the Mejia government was 
Mejia,s running mate Rafael "Fello" Subervi, with Finance 
Minister Rafael Calderon, Intellectual Property Director 
Orlando Jorge Mera and former Agriculture Minister, campaign 
manager Eligio Jaquez.  For Fernandez were PLD political 
strategist (former presidential candidate) Danilo Medina and 
PLD technical coordinator Temistocles Montas, with former 
Finance Minister Daniel Toribio, PRSC notable Carlos Morales 
Troncoso (sugar baron, former Vice President and former 
ambassador to Washington) and representatives from three 
minor parties supporting Fernandez: Pascual Prota (Fuerza 
National Progresista), Jose Francisco Pea Guaba (Bloque 
Institucional Social-democrata), former Lome Convention 
coordinator Max Puig (Alianza por la Democracia) and Jose 
Gonzalez Espinosa (Partido de los Trabajadores Dominicanos). 
 
(U) Every individual in the photo is a politician deeply 
invested in his respective camp.  All the PRD representatives 
are senior office holders; all the PLD representatives are 
either members of the PLD Political Committee or heads of 
allied parties. 
 
IMF, Tax Reform and Finances 
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(SBU) Among the most important issues on the table between 
the two transition teams is a highly charged technical issue: 
the requirement in the IMF program that the government 
deliver to Congress by the end of July a draft proposal for 
tax reform.  Both sides are leaning as far back from this 
issue as possible, well aware that to be credible, any reform 
will mean raising tax collections, cutting spending or ending 
subsidies or some combination of the three.  Short of the 
generally shunned solution of abandoning efforts to revise 
the badly faltering IMF program, there is no way to avoid the 
pain of decision. 
 
(SBU) And the financial situation is about to get worse. 
Temporary taxes on 5 percent exports and special exchange 
levies of 10 percent on imports are set to expire this month, 
although such temporary measures in the past have sometimes 
continued indefinitely.  The government continues to roll up 
debts for unpaid electricity subsidies and without a revised 
standby approved by the IMF board it has no further access to 
international lending to keep the electricity sector 
furnished with fuel.  We expect that by mid-June the sector 
will be again into the sporadic widespread blackouts that 
characterized the end of 2003. 
 
(U) Workers are beginning to press for early salary 
adjustments.  The minimum wage is down 25 percent in real 
terms since last August and labor leaders are advocating a 60 
percent across-the-board wage hike.  Public sector physicians 
are insisting on a 100 percent wage hike.  Air traffic 
controllers got nothing but a lock-out just before Easter. 
Government workers received a grossly inadequate 9 percent 
increase in December, 2003, a year of 40 percent inflation, 
and nothing since. 
 
PLD and the Embassy 
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(SBU) The Ambassador hosted the full PLD transition team on 
June 1 for a review of the issues of greatest importance to 
the United States.  Opening the meeting, team members 
complained that PRD counterparts had provided nothing on the 
tax reform issue, despite the stipulation by the IMF that the 
package was to be prepared between January and March.   The 
incoming administration was well aware of the need to 
preserve the IMF standby, they said, and without early 
cooperation by incumbents, it might be impossible to deliver 
a package to the PRD-dominated Congress before the end of 
2004. 
 
(U) The Ambassador told them that Dominicans were justifiably 
proud about the conduct of the 2004 elections, and that the 
political parties should strive to make this presidential 
transition process the best in Dominican history.  That would 
require close consultation and cooperation between the 
administrations, a process that the Embassy stands ready to 
assist. 
 
(SBU) Over the course of the luncheon the Ambassador outlined 
ongoing programs and bilateral concerns: 
 
- - The world has changed since Fernandez,s 1996-2000 
administration. The United States places the highest priority 
on measures against terrorism and corruption, regional 
security and law enforcement cooperation. 
 
- - The bilateral agenda for long-term development needs to 
focus on education at all levels, institution building 
(especially in the judiciary), the investment climate, and 
public health concerns. 
 
 - Items requiring urgent attention in advance of the August 
16 inauguration are the IMF and tax reform, airport and port 
security, an approach to energy sector problems, the status 
of Dominican consulates in the United States, trafficking 
issues and trade,  especially the Free Trade Agreement (FTA). 
 
 
(C) The Ambassador advised the team of the 90-day letter on 
Santo Domingo,s &Las Americas8 Airport from Homeland 
Security Secretary Ridge (delivered April 28) and informed 
them of the U.S. requirement to close unregistered Dominican 
consulates in the United States. 
 
(C) The PLD transition team was attentive and appeared to be 
in general agreement with the Ambassador on these priorities. 
 One notable and somewhat embarrassing exception came from 
Carlos Morales Troncoso, who sought to justify the current 
effort of Dominican sugar interests to re-open the text of 
the free trade agreement (in order to block any imports, of 
high fructose corn syrup, even on graduated 15-year terms). 
The Ambassador and senior staff told Morales that the FTA was 
a carefully balanced package and not open to revision.  None 
of the other PLD team members made a comment. 
 
(U) Medina and Montas as team leaders agreed to remain in 
close contact with senior Embassy officials as they elaborate 
the PLD set of working groups and sub-commissions over the 
next two weeks. 
 
PRD and the Ugly Reality awaiting the IMF 
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(SBU) That same afternoon the DCM and EcoPol counselor called 
on Mejia,s Technical Secretary Carlos Despradel, the 
official with primary responsibility for the IMF program and 
international financial matters.  Despradel lost no time in 
laying out a financial situation far worse than he had 
earlier anticipated. 
 
(C) According to his estimates and charts prepared for the 
IMF representatives arriving the next day (June 2), the 
Dominican government had come close to targets in its 
management of the central government budget.  The government 
expenditures programmed for January-March had been 24.6m 
pesos, with revenues programmed to provide a significant 
surplus to contribute toward the non-fiscal deficit.  In 
fact, revenue had been 4.5m higher than expected and 
expenditure 3.6m more than expected.  These were the trends 
that Despradel had been reporting with a sense of 
satisfaction to President Mejia.  Mejia, he said, had 
insisted and was continuing to insist that the government 
respect the IMF standby program. 
 
(C) Completely overwhelming these achievements was the 
accumulation of untracked expenditures for sectoral projects 
financed by bilateral or commercial lending or by new 
liabilities to the government-owned Banco de Reservas. 
Despradel hired specialists last year, principally from the 
Central Bank, in order to collect and centralize information 
on these activities, and the news was dismal.  They had 
uncovered extensive activity in 2003 and 2004 never advised 
to Despradel, his staff or the IMF  ) totaling approximately 
1.5 pct of GDP.  With these expenses rolled in, the 
January-March programmed expenditures of 24.6 billion pesos 
reached 37.75m, an over-expenditure of 13.1b (53.4 percent). 
In formal terms these undeclared expenditures and debts 
constituted misinformation and a failure to cooperate with 
the IMF; Despradel was downcast about this but expressed the 
hope that Fund officials would accept his good faith efforts 
to document the situation. 
 
(C) Despradel commented that foreign export credit agencies 
and foreign commercial banks involved in development projects 
were able to exert a great deal of pressure through the 
benefiting Dominican agencies, Despradel commented, and there 
had been no formal mechanism by which he could control this 
activity.  He had refused in most cases to authorize 
acceptance of these loans, most of which were at 
near-commercial rates; officials had turned to Finance 
Minister Rafael Calderon, who had signed them with little 
hesitation.  The off-budget bilateral loans amounted to 4b 
pesos. 
 
(C) In similar fashion but subject to even less control, the 
government-owned Banco de Reservas had guaranteed letters of 
credit requested by various government officials (primarily, 
Despradel implied, for imports for infrastructure projects). 
These letters were drawn up without clearance from central 
authorities; as payment came due, the guarantees were 
executed and became government liabilities to the Banco de 
Reservas.  These off-budget liabilities totaled 3b pesos. 
 
(C) Almost all of the remaining unprogrammed expenditure was 
financed by off-budget emergency loans from the 
Inter-American Development Bank and the World Bank (largely 
for fuel for the electricity sector) amounting to 2.5b pesos. 
 Here there was no problem of misinformation; the IMF was 
aware of these loans and did not object to them. 
 
 (SBU) Despradel said that President Mejia was not aware of 
the extent of these uncontrolled off-budget expenditures.  On 
May 20 Mejia instructed government ministries to suspend 
provisionally all expenditures for projects with foreign 
financing and he withdrew from Congressional consideration 
all previously submitted contracts for foreign-financed 
projects.  Despradel traveled to Washington to inform Fund 
officials and was there at about the same time that the PLD 
team was visiting.  Despite speculation in the Dominican 
press, the Fund did not conduct any joint meeting with 
outgoing and incoming Dominican administrations. 
 
Consult and Cooperate or Face the Consequences 
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(SBU) A lack of trust between the two transition teams is 
unsurprising.  Four years of bitter rivalry have been stirred 
to a high heat by six months of campaigning.  Many allege 
that the outgoing Fernandez administration deliberately 
delayed necessary fuel price hikes in 2000, leaving the dirty 
work to Mejia.  (Fernandez,s team has a different story and 
set of justifications.) 
 
(SBU) Mejia,s administration commissioned studies of tax 
reform from economic advisors Fundacion Economia y Desarrollo 
(Andy Dauhajre, Jr.) but the results, if any, had not been 
given to Despradel, who would have consulted the Fund with 
them.  Mejia,s public comment is that he stands ready to 
submit to Congress any proposal that has been widely 
discussed and agreed.  (The private sector, represented most 
vigorously by the entrepreneurs, association CONEP, has a 
firm grip on the political parties in any matters concerning 
commercial interests and taxation.)  At the same time, the 
incoming Fernandez team does not want to share the blame for 
the almost inevitable pain of an increase in the value-added 
tax, the broadening of its application, or the cutting of 
subsidies.  As the Dominicans say, "No one wants to inherit 
someone else,s dead bodies." 
 
(SBU) A decision must be made, however, and if the rival 
teams refuse to cooperate with the IMF and with one another 
on financial stabilization, they will share the blame of 
perpetuating misery - - and of postponing the chances of 
recovery until some far future, perhaps even beyond the 
Fernandez administration.  The Ambassador and Embassy are 
stepping into the gap between the mutally distrustful 
political parties, emphasizing the need to set the national 
interest above partisan advantage. 
2.  (U) Drafted by Michael Meigs . 
 
3. (U)  This report and other reporting series are available 
on our SIPNET site at 
http://www.state.sgov.gov/p/wha/santodomingo/   along with 
extensive other material. 
HERTELL