US embassy cable - 04SANTODOMINGO5480

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 005480 
 
SIPDIS 
 
E, EB, EB/IFD/OMA, WHA, WHA/CAR, WHA/EPSC; 
TREASURY FOR OASIA-LAMONICA, TOLOUI, LEE 
 
E.O. 12958: DECL: 10/01/2014 
TAGS: ECPS, BEXP, EFIN, DR 
SUBJECT: IMF VISIT TO DOMINICAN REPUBLIC REVEALS LITTLE 
PROGRESS 
 
 
Classified By: DCM Lisa Kubiske.  Reason: 1.4 (b) and (d). 
 
1. (C) Summary:  An IMF team led by Steven Phillips (protect) 
to Santo Domingo this week reported that the Dominican 
Republic continued to face an acute crisis.  The GODR had 
made only limited progress toward an integrated plan that 
could serve as the basis for resuming its IMF program.  The 
team reported scant evidence that the Dominicans had taken 
adequate concrete steps that would allow negotiations to 
begin.  There was a feeling that some members of the 
Dominican economic team are more open to IMF advice than 
others. Despite the disappointingly slow pace, Phillips did 
see some progress this week, with the government narrowing 
its focus in some areas, and signals that conversations on 
the margins of the Fund/Bank meetings October 2-3 could be 
important for the Fund's decision on an appropriate strategy 
for the next (revised) IMF program for the Dominican 
Republic.  End summary. 
 
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Slow progress 
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2. (C) The visit to Santo Domingo of an IMF technical team 
led by Steven Phillips, September 22-30, was one more in a 
series that started early in the year with the goal of 
reaching a plan that could allow talks aimed at resuming an 
IMF program.  Despite the many visits (most recently one in 
August), Phillips (protect) said that there were still not 
enough concrete details coming from the Dominican side to 
begin formal negotiations.  This was a disappointment after 
what had seemed to be rapid progress early this summer just 
following elections.    The Fund indicated that up to now, it 
has been trying to avoid dictating a detailed plan, 
preferring rather to give guidance to the government and 
letting the government choose its own path.  The slow pace, 
however, is leading Phillips to consider being more forceful 
with his suggestions. 
 
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Fiscal gap still hard to fill 
----------------------------- 
3. (C) Phillips said that previously, two thirds of the 2004 
gap could have been filled by the Paris Club, and the 
remaining third by the private sector.  The gap is now 
several times greater and continues into 2005, for many 
reasons, including some external causes.  Fiscal slippage and 
higher oil prices have played a role.  The fiscal package 
actually passed, he noted, brings in a full percentage point 
less (i.e. about 1.7 percent of GDP) than the package 
originally submitted to the Dominican Congress in July. 
Arrears are growing.  Additional factors are the slower 
disbursement of IFI funds and the discovery last spring of 
unreported debt.  All in all, bridging the gap remains a 
problem.  The Dominican team has put little on paper about 
how to resolve these issues.  There are still no numbers in 
the Dominican plan that add up and the ideas that the 
government has presented lack specificity.  Nonetheless, 
there was some progress this week, especially by the 
Dominican team's developing a matrix of policies and measures 
to reduce expenditures. Again, however, the matrix provided a 
rough sketch of a plan with little specific information. 
Phillips feels that more progress can be made with sustained 
international attention, and that, optimistically, putting 
together a program by the end of October is possible. 
 
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Paris Club - No information 
--------------------------- 
4. (C) The Dominicans sent a team to New York last week to 
talk with private banks about debt restructuring, but the 
government has not yet chosen any of the options presented 
during the visit (or it perhaps was unwilling to share this 
information with the Fund). As for the October 1 obligatory 
report to the Paris Club, the IMF had no information on what 
the government plans to present. 
 
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Bank Debt 
--------- 
5. (C) In the banking sector, the IMF team's emphasis is on 
coming up with a timetable and assessing weaknesses, a 
process that has also apparently lost pace over the summer. 
Phillips noted that the timetable for implementing banking 
reform had slowed.  Phillips expressed concern that in the 
face of growing domestic and international arrears, the 
government's ability to be firm with the banks would be 
undermined by its continuing need for bank loans. 
 
6. (C) While the Central Bank's announcement on September 29 
to extend maturities on certificates of deposit and index 
them to inflation is fine in principle, IMF representatives 
received no information beyond what was said in the press 
release.  They saw this as a sign that some members of 
government are not yet fully comfortable with working openly 
with IMF. 
 
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Still in Crisis 
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7. (C) On the positive side, the IMF team found no 
ideological opposition with planning, just technical issues. 
There were signs, Phillips said, of greater integration. 
Dominicans made some progress this week, as noted above, and 
the peso's rise and the decline in inflation are both 
positive signs, for now.  Unfortunately, the  Dominican 
Republic is still in crisis, and it is the single acute 
crisis case in the hemisphere, "if not in the world," 
commented IMF resrep Ousmene Mandeng.  Implementation of 
structural measures in banking slowed during the summer and 
the banking picture remains one of liquidity strength but 
capitalization weakness.  The improving strength of the peso 
and drop in inflation seem at odds with the picture above and 
are threatened by the growing arrears. 
 
8. (C) The IMF team expressed mild concern that some of the 
Dominican team members are not able to coordinate or work 
together effectively.  IMF noted a lack of both vertical and 
horizontal organization and some "really sharp differences 
and rivalries." 
 
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Ahead 
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9. (C)  Under the best of circumstances, Phillips said, 
predicting the timetable for program negotiations is 
difficult.  With a constant IMF presence, it might be 
possible to conclude a revised agreement in October.  The 
conversations in Washington on the margins of the October 2-3 
Bank/Fund meetings could well be important for deciding the 
Fund's strategy for a revised program (i.e., how strong a 
program, how front-loaded, what pre-conditions). 
HERTELL