US embassy cable - 04SANTODOMINGO3906

UNCLAS SECTION 01 OF 04 SANTO DOMINGO 003906 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA;NSC FOR SHANNON 
AND MADISON; TREASURY FOR OASIA-LAMONICA;USDOC FOR 
3322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION; USDOC FOR 
3134/ITA/USFCS/RD/WH;DHS FOR CIS-CARLOS ITURREGUI; SOUTHCOM 
ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: PGOV, PREL, ECON, EFIN, DR, SP 
SUBJECT: DOMINICAN TRANSITION #5: PACT BECOMES FACT 
 
 
1. (SBU) This no. 5 in our series on the transition to a new 
presidential administration in the Dominican Republic. 
 
(SBU) Dominican Transition:  Pact Becomes Fact 
 
The transition teams really are cooperating.  The government 
is likely to deliver a PLD-shaped tax reform to Congress by 
the target date of July 15.  Insistent efforts of the 
Ambassador and Embassy officers helped set the process in 
motion and keep it going. 
 
It was tempting on June 22 to say that we,d all seen this 
movie before: Hipolito Mejia and Leonel Fernandez accompanied 
by a hovering Monsignor Agripino Nunez as they signed a 
document promising good behavior and respect for carefully 
articulated rules of the game.    The last time the two men 
were together was in September 2003 when they signed a 
similar set of promises for the presidential campaign, 
recognizing the newest avatar of the civil-society "Elections 
Monitoring Group" ("Comision de Seguimiento").  And then in 
February of 2004, after ugly confrontations left some party 
followers dead in the street, the Monsignor brought together 
campaign party chairmen for a "non-violence pact." 
 
In a country with electoral traditions and institutions as 
fragile as those of the Dominican Republic, this approach has 
some sense.   From his perch as rector of the catholic 
university PUCMM -- and even more as the perpetuum mobile of 
Dominican political arbitration -- Monsignor Nunez has the 
authority and credibility to insist on right conduct.  As 
before, party representatives negotiated the text, so their 
principals could come together just long enough for a chilly 
handshake and a signature.  (Our impression is that the chill 
is from Mejia; Fernandez seems to wish that the President 
would accept at least a pat on the shoulder.) 
 
Spain,s Felipe Gonzalez was the keynote speaker for the day, 
recycling socialist international themes about responsible 
government in his morning presentation before the two 
leaders, the transition teams, and the assembled Congress. 
 
Unacknowledged but fundamental to the process was the early 
engagement of the Ambassador and officers of Embassy Santo 
Domingo to urge cooperation and to carry messages between the 
two sides.  The Ambassador had lengthy private discussions 
with Fernandez and with Mejia. He invited the PLD transition 
team for a working lunch that resulted in a full-day seminar 
at his residence on June 17, bringing 85 PLD members or 
collaborating experts together with embassy counterparts. 
The Deputy Chief of Mission and EcoPol staff have 
systematically worked policymakers on both sides. 
 
And It Works 
 
The result is that the Mejia-Fernandez pact is working, at 
least in its most significant engagement -- that concerning 
Dominican commitments to the International Monetary Fund. 
 
The June 22 text sets forward the antecedents and establishes 
the following pledges: 
 
- both sides will maintain communication and furnish best 
efforts toward resolving the economic crisis; 
 
-  technicians from both sides, in consultation with the IMF, 
seek to prepare a tax reform proposal by July 10; 
 
- Mejia has already committed to submit the proposal to 
Congress not later than July 15; 
- both sides will work with members of Congress to obtain 
approval of it; 
 
- in keeping with the IMF standby, the incoming 
administration pledges to honor the terms of Central Bank 
certificates of deposit created to manage monetary policy; 
 
- also in keeping with the standby, the sides will coordinate 
actions to fulfill the pledges made to the Paris Club 
concerning the renegotiation of debt due in 2004; and 
 
- finally, the sides pledge to define and put into practice a 
plan of reforms for mid-term and long-term sustainability of 
the electricity sector. 
 
Confirming the Entente 
 
Financial policymakers for the sides held three extended 
meetings around the date of the pact.  According to Technical 
Secretary of the Presidency Carlos Despradel, at the first of 
 
SIPDIS 
these the government wanted to talk about conceptual 
approaches, while, figuratively speaking, the PLD reps had 
their calculators out and were ready to run the numbers on a 
government proposal that did not yet exist.  (Economist Andy 
Dauhajre, Jr., had drawn up an analysis and a draft for 
legislation, but the PRD was not ready to embrace it -- in 
fact, Despradel had to get the summary from the PLD,s Daniel 
Toribio.)  After the last of these three meetings, the PLD 
team appears to have taken on the job, with the assistance of 
government-employed technicians from the Finance Ministry and 
Central Bank. 
 
The President and President-elect signed their pact on 
Tuesday.  Fernandez departed immediately for meetings in New 
York.  On Friday, June 25, the Deputy Chief of Mission and 
EcoPol counselor attended a meeting at the Presidential 
Palace, where Despradel and Central Bank Governor Lois Malkun 
outlined difficulties in getting $100 million from private 
sector sources as a complement to the Paris Club official 
creditors, rescheduling (see separate report on SIPRNET). 
Sitting side by side with them, across the table from the 
Spanish ambassador, the EU ambassador, and the U.S. 
delegation, was PLD economist Julio Ortega.  Despradel and 
Malkun spoke freely in front of him; Ortega confirmed that he 
would be seeking policy guidance from Fernandez.   All three 
stressed that the transition teams were working closely 
together. 
 
Confidence 
 
At this point, strengthening confidence is the key to getting 
the Dominican Republic through its three-month transition 
still with the prospect of achieving some stability.  This 
was the principal aim of the June 22 pact.  It seems to be 
working for now.  Analysts in the international capital 
markets are making some cautiously optimistic noises, 
including about the prospect of seeing payment on the 
sovereign bond coupon due July 27.  Last week Malkun showed 
us with satisfaction the virtually flat graph for the 
exchange rate, and since that time the rate has subsided 
gradually from 48 toward 45 pesos to the dollar.   The press 
earnestly reads Fernandez,s trips to developed countries -- 
currently to Europe -- as a search for international 
investors. 
Meanwhile, widespread intermittent electricity blackouts are 
a reminder that smoke and mirrors are not sufficient for 
recovery, especially when that vital sector is completely 
decapitalized (the PLD,s Ortega commented to us, "The crisis 
already occurred in that sector, three months ago; now we,re 
trying to identify a way out"). 
 
Getting a Renewed Standby 
 
PLD senior officials Daniel Toribio and Temistocles Montas 
are in Washington today, July 1, for first formal PLD 
contacts with decision-makers at the IMF and  the U.S. 
Treasury, among other institutions, to talk about the Paris 
Club rescheduling. 
 
Their comments last week to the DCM suggest that they are 
thinking about a tax reform package that falls far short of 
closing the 2004 financing gap, something involving an 
increase in the value-added tax ("ITBIS," currently at 12 
percent with many basic consumer goods exempted).  The press 
is suggesting a 16 percent rate.  PLD sources say that they 
do not -- repeat, not -- intend to propose a significant 
widening of the application of the tax.  Montas spoke of 
raising "specific taxes" on alcohol and tobacco.  PLD 
commentators say that subsidies on gas and electricity will 
be continued but readjusted for better targeting of 
low-income households.  As of now, it appears that they have 
no intention of using Fernandez,s 57 percent mandate to take 
sweeping, painful austerity measures to achieve early 
financial stability. 
 
The PLD Enigma 
 
A major unknown in this is Fernandez himself.  The PLD 
program, though extensive, is intentionally vague.  His close 
collaborators tell us that Fernandez has set up competing 
advisory committees, so that he can receive the broadest 
possible range of options.  For example, he invited leading 
stakeholders in various sectors to collaborate to find a 
consensus of recommendations (for example, a leading dairy 
industrialist, a milk importer, and a representative of 
supermarkets); in parallel, he set PLD experts to make 
recommendations but directed the industry committees not to 
share results with them.  No one is quite sure where the 
President-elect will come out on any of this, and no one 
claims to have the slightest idea whom he will name to 
cabinet posts.  The PLD transition to date under Fernandez 
completely contrasts with the PLD,s historical stereotype of 
a rigidly doctrinaire mechanism dominated by a politburo. 
 
Getting to "Yes" 
 
Whatever the shape of the package, the PRD-dominated Congress 
will have to examine it.  Central Bank Governor Lois Malkun 
says that senators, especially, are unhappy about the 
admitted necessity of raising taxes, but that if the vote 
comes during the transition period in keeping with the June 
22 pact, they will have some political cover.  Elections both 
for the Senate and the House are less than two years away. 
Congressional leaders have assured us that legislators 
understand the urgency and will consider the proposal 
immediately.  House of Representatives chair Alfredo Pacheco 
told journalists there will be extensive public hearings on 
the measure.  The PLD is concerned that this could mean no 
vote until after the August 16 inauguration. 
 
President Mejia has confirmed several times that he will 
forward the proposal to Congress for consideration, but will 
leave implementation to the next government. Once this week 
he went so far as to say that the proposal would be entirely 
the work of the incoming authorities, not a consensus 
document.  In effect, Fernandez will have to assume the 
paternity of the reform. 
 
Much More to Do 
 
These negotiations within negotiations are driven by the 
commitment with the IMF to deliver the package to Congress by 
the end of July.  That goal is likely to be achieved.  Much 
more must be discussed, calculated, proposed and agreed 
before a revised letter of intention can go to the IMF board 
for approval.  Our optimistic estimate is that with good 
will, luck and guts the new government could get the outlines 
of an agreement with the Fund by November. 
 
2. (U) Drafted by Michael Meigs. 
 
3. (U) This report and others in our election and transition 
series can be read on the SIPRNET at 
http://www.state.sgov.gov/p/wha/santodomingo/ index.cfm 
along with extensive other current material. 
HERTELL