US embassy cable - 04SANTODOMINGO3617

UNCLAS SANTO DOMINGO 003617 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR WHA/CAR AND EB/IFD/ODF 
PLEASE PASS TO EX-IM BANK 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, DR 
SUBJECT: GODR PUBLIC FINANCING STRAINED 
 
 
 1.  (SBU)  Central Bank Manager Apolinar Veloz told Econoff 
June 18 that GODR non-financial public sector finances are 
seriously off track from the IMF agreement for the first 
trimester of 2004.  Veloz's remarks track with what Technical 
Secretary Carlos Despradel reported to the DCM June 1. 
 
SIPDIS 
Despradel had said that due to inadequate tracking of 
bilateral project-related loans by government credit agencies 
and government letters of credit drawn on GODR-owned Banco de 
Reservas (BanReservas), the government had accumulated 
significantly more debt than it had reported while 
negotiating the IMF agreement.  Veloz reaffirmed that 
President Mejia has frozen all project loans in an effort to 
get government expenditures back on track. 
 
2.  (SBU)  According to Veloz, non-financial public sector 
debt cannot increase if the GODR is to meet the IMF targets, 
but added that BanReservas and other banks have steadily 
increased their lending to the GODR.  Veloz said that the 
Monetary Board on June 17 approved his initiative to 
immediately stop all lending to the government by BanReservas 
and other commercial banks. 
 
3.  (SBU)  Central Bank statistics show that not counting 
off-budget "residuals," non financial public sector 
expenditures exceeded programmed amounts by 6.4 billion pesos 
($135 million).  In addition, Veloz explained that the GODR 
had spent five billion pesos on the electricity sector and an 
additional 1.5 billion pesos on propane gas subsidies that 
was off-budget.  There was also non-explained residual 
expenditures of more than 2 billion pesos.  In total, 
including current expenditures, capital expenditures and 
residual, the GODR overspent nearly 9 billion pesos ($187.5) 
during the first trimester.  Veloz estimated that the 
consolidated deficit would be about four percent of GDP. 
 
4.  (SBU)  Both the current PRD government and the incoming 
Fernandez administration recognize the urgency of the fiscal 
imbalance and are now working together on possible fiscal 
reform measures.  They have met jointly with the IMF on at 
least two occasions and debt sustainability was reportedly a 
key point in those discussions. 
 
5.  (SBU)  Debt presents a looming problem.  The Paris Club 
agreement to reschedule nearly $200 million in bilateral debt 
(plus $120 million in GODR debt to the private sector) could 
unravel if the GODR is not on track with the Fund.  None of 
the analysis takes into account the internal arrears owed to 
the electricity sector that reportedly total some $450 
million.  Veloz would not speculate on a total figure for the 
electricity sector, admitting that it was a "black hole." 
Nor does it include the quasi-fiscal deficit of nearly 80 
billion pesos the Central Bank holds in certificates of 
deposit.  Moreover those certificates carry a weighted 
average interest rate of about 40 percent, according to 
Veloz, and make it extremely difficult to meet the Fund 
program's monetary target. 
 
6.  (SBU) The practical effect of the GODR's financial woes 
is being felt first in the electrical sector.  This week, the 
country is producing less than 60 percent of demand due to 
plant shut downs over non-payment.  The Embassy also has 
reports of U.S. companies not being paid for government 
contracts.  One such case involves a water project reportedly 
backed by EX-IM Bank guarantees.  There are also reports of 
the Army not being able to purchase fuel for its vehicles or 
helicopters, and the Navy unable to purchase fuel or perform 
routine maintenance on its boats. 
 
7.  (SBU) Comment: In light of the financial uncertainty and 
USG interest in the GODR getting back on track with the IMF 
program, Embassy recommends that the USG postpone further 
consideration of bilateral lending for procurement or 
infrastructure projects.  Moving forward with such proposals 
sends conflicting messages to the GODR and puts the 
government at increased risk of default.  Moreover, new loans 
at this time may not reflect the priorities of the new 
administration that will be inaugurated August 16, and may 
not be within the framework of a fiscal reform package. 
 
KUBISKE