US embassy cable - 04SANTODOMINGO5972

C O N F I D E N T I A L SECTION 01 OF 04 SANTO DOMINGO 005972 
 
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-LCARTER 
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 TECHNICAL SECRETARY OUTLINES PROGRESS 
WITH IMF, VENEZUELAN OIL TALKS AND FISCAL PLANS 
 
Classified By: DCM Lisa Kubiske.  Reason:  1.4 (a) and (d). 
 
1. (SBU) Dominican Technical Secretary of the Dominican 
presidency Temistocles Montas received the Ambassador and 
senior staff last night, October 28 to discuss a variety of 
topics, including the progress in discussions on a new IMF 
program, the Paris Club, the country,s new oil finance deal 
with Venezuela, the free trade agreement (CAFTA) and other 
topics. 
 
Moving Forward with the IMF 
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2. (C) Montas told the Ambassador that the economic team has 
"almost finished" defining the elements of a letter of 
intention with the IMF for a renewed standby.  The Dominicans 
are expecting Fund staff to provide them with clean working 
versions in Spanish and English next week (November 1-5), 
which Montas will give to the Embassy for transmission to the 
USG.  After that, on November 8, a Dominican team will travel 
to Washington to finish the work.  Montas said that they 
might call on the Department of State at that time. 
 
3. (C) The Fund is requiring unspecified tough previous 
measures, several of which the administration will announce 
next week.  The administration acknowledges that the 
Dominican Republic has a credibility problem with the Fund 
and it must furnish to Fund directors proof of a new 
seriousness.  Fernandez is well aware of this and intends to 
deliver in full on undertakings to the Fund.  Montas 
reiterated his understanding that this year would be a &year 
of sacrifice8 for the Dominican Republic. 
 
4. (C) Some of the new measures will require congressional 
action.  Others require realizing significant savings on 
programs of domestic spending. 
 
5. (C) He said that President Fernandez and his team had 
spent "all day" Saturday, October 23 with the Fund, World 
Bank, and Inter-american Development Bank.  (This session was 
an initiative of IDB senior staff , who believed that the 
institutions, message would be conveyed most effectively if 
they met with Fernandez as a group. IDB president Enrique 
Iglesias was the senior institutional represenative.) 
 
6. (C) The Saturday seminar with the international financial 
institutions had been helpful, Montas said.  The fundamental 
issues were familiar to all.  Montas said that the Fund had 
expressed general satisfaction with the progress made to 
date.  Presentations by the World Bank and by USAID-financed 
consultants on the electricity sector had impressed upon 
everyone that actions to sustain electricity supply will be 
crucial to any program.  Montas said that the strategic 
approach to the sector should be ready for implementation by 
mid-November. 
 
7. (C) After the Saturday meeting and a further lengthy 
session with the consultants on Sunday, Fernandez  accepted 
the necessity of electricity tariff rate increases.  Rates 
will go up in January, along with a restructuring and 
retargeting of subsidies.  Montas cited the consultants, 
recommendations and bottom-line figures: stabilization of the 
sector by the end of 2005 can probably be achieved with 
vigorous adjustments and additional expenditures of USD 260 
million, while without adjustment the sector would require 
more than USD 800 million. 
 
8. (C) The administration had also come to an accommodation 
with Dominican private banks to allow them to start making 
further provisions against dubious loans after January 1, an 
approach that will allow them to post profits for calendar 
year 2004.  Montas emphasized that the banks would still have 
to improve capital ratios but they now have a period of 3 
years during which to get to the 10 percent required to meet 
international norms.  This is a change in the target 
implementation date for  banking reforms required by the 
Fund.  He implied that the Fund had agreed to this change in 
the calendar. 
9. (C) Economic Council president Julio Ortega is now in New 
York, consulting with private banks to obtain a financing 
package of about USD 150 million from Citigroup and others as 
a contribution toward an identified USD 300m financing gap. 
 
Venezuela Will Offer Soft Terms on Petroleum 
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10. (C) Montas and presidential chief of staff Danilo Medina 
were closely involved in negotiating the petroleum deal to be 
signed with Venezuela in mid-November.  They had sought 
extensive concessions but the Venezuelans determined that 
their OPEC obligations limited the possible scope. In 
addition, the Venezuelans  wanted to avoid giving their 
domestic opposition grounds for criticism of the Chavez 
administration. 
 
11. (C) During the visit last week to Santo Domingo of the 
Venezuelan petroleum minister, the sides agreed to modify an 
agreement negotiated by the Mejia administration but never 
sent to congress for ratification.   That accord envisioned 
long-term financing for 25 percent of Dominican imports of 
20,000 bb/day.  The revision just negotiated will provide 
financing for 25 percent of Dominican imports of 53,000 
bb/day, at 2 percent per annum with a 15-year grace period. 
The arrangement is for one year with possibility of renewal. 
  This is by no means all of Dominican oil consumption, which 
runs 150,000 bb/day, but it will nevertheless provide payment 
relief of between USD 200 million and USD 260 million per 
year.  (Montas noted that the Dominicans had sought to get 
the Venezuelans to apply these terms to  70,000 bb/day.) 
Some of the funds made available will be applied to the 
Central Bank,s quasi-fiscal deficit and some will go toward 
payments in the electricity sector.  The IMF was consulted on 
the arrangement. 
 
12. (C) Montas said Venezuela had not requested any specific 
concession for this arrangement; he noted that it allows 
Venezuela to recoup some of the market share lost during the 
Mejia administration.  Shipping charges for Venezuela 
purchases are lower than those for Mexican or Colombian 
petroleum.  He noted that since the Dominican Republic 
purchases a significant mix of &white products8 (refined 
petroleum), the cost is sharply higher than posted 
international prices for crude.  The government of Panama has 
asked for a copy of the text, in hopes of reaching a similar 
arrangement with Venezuela. 
 
Government Procurement, Transparency and Sacrifice 
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13. (C) After hearing the energy experts, analysis, 
President Fernandez has dropped the notion of importing 
coal-fired generating plants from Texas.  These are expensive 
and would take time to install, Montas said, but the 
fundamental objection is that they would provide generating 
capacity disproportionate to the system.  To be economically 
viable, the Dominican peak demand would have to be closer to 
4000 megawatts than the current 1700 megawatts.  The 
installations would require an extensive system of new high 
tension lines built to higher standards than those now in the 
grid.  Montas commented that in the course of the discussion 
last weekend, participants strongly advocated measures to 
increase competition on the basis of lowest-cost generation. 
The Madrid Accord to lower rates paid by the state in return 
for one-time payments was a non-competitive fix and probably 
not viable. 
 
14. (C) As for the much-discussed proposal that Brazilian 
interests build an urban tramline or underground subway, 
Montas dismissed it outright, at least in the medium term. 
"We cannot be seeking out new financing," he said, "when 
already there is as much as USD 1.8 billion in international 
lending on hold pending completion of the IMF agreement.  We 
can authorize some studies and preparation for such a 
project, but the administration will be tightening its belt 
in the first year and making sacrifices.  Maybe in a second 
year we could start to think about it." 
 
15. (C) The administration intends to use the IMF 
negotiations to help impose greater transparency on 
government contracting and financing, Montas said.  Public 
works are of particular concern.  The first Fernandez 
administration presented congress a law along these lines but 
at that time Congress "was not interested." 
 
Clearing Arrears, Paris Club 
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16. (C) On Dominican arrears on bilateral official debt, 
Montas noted that the administration recently paid more than 
USD 2 million on U.S. accounts.  The IMF agreement and Paris 
Club agreement require clearing all bilateral official 
arrears, and Finance Minister Bengoa has assured him there 
will be sufficient funds available to do this by the end of 
the calendar year.  The administration intends to make the 
payments.  The DCM noted the principle that there should be 
no preferences in scheduling payments due to Paris Club 
creditors. 
 
17. (C) In the Paris Club process, the Dominican 
administration must submit each bilateral rescheduling 
agreement to Congress upon signature; the agreement enters 
into force once approved by Congress.  Montas foresees no 
delays in obtaining congressional approval after signature. 
Embassy officers explained that for the USG the agreement 
does not enter into force until 30 days after notification of 
the U.S. Congress. 
 
Free Trade Agreement and the Tax on Fructose 
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18. (C) The Ambassador outlined to Montas the need for the 
administration to obtain quick repeal of the protectionist 
tax on fructose-sweetened drinks.  Montas assured him that 
Fernandez is "totally committed" to the free trade agreement 
(FTA).  The Ambassador urged Montas to advocate Dominican 
leadership in obtaining early ratification by the Dominican 
congress and conveyed to Montas a comment by IDB president 
Iglesias -- that the Dominican Republic would be "non-viable" 
without the FTA.  (Montas agreed.) The Ambassador asked 
Montas not only to encourage a vote as soon as possible to 
repeal the tax, but also to pay attention to the presentation 
and handling of the matter.  It would not help repeal the tax 
while affirming the intention to take the USG through dispute 
procedures in the WTO. .  The Ambassador warned that the 
Dominican Republic has lost credibility with other trading 
partners and was already losing access to mechanisms for 
coordination and assistance. 
19. (C) Montas commented that the matter should get resolved 
in the next couple of weeks.  Congres is currently scheduled 
to meet through November 26, he noted, but the session may 
run  longer, since it will have to consider the 2005 budget. 
 
Response for Treasury Under Secretary Taylor 
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20. (C) Montas said that in response to a telephone call from 
Treasury Under Secretary John Taylor the previous day, the 
Dominicans would be providing the Embassy with copies in 
Spanish and English of the draft letter of intention.  Texts 
available in Santo Domingo are tentative and incomplete, and 
in some places translations are inaccurate.  He prefers to 
give the USG the most recent and most accurate material, 
which will be coming next week from the IMF. 
 
21. (C) Montas said that he had asked Taylor for help in 
getting technical assistance on customs and tax collections, 
and that the Under Secretary had expressed willingness to 
organize this.  Montas mentioned that his October 8 visit to 
Taylor at Treasury had been undertaken on very short notice, 
with a Saturday departure to make a Monday appointment; he 
had not been able to coordinate with the Embassy or even with 
all of the Dominican team. 
 
November 15 Availability 
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22.(SBU) Montas expects to be back in Santo Domingo by 
November 15 and he indicated that President Fernandez will 
probably be here as well at that time. 
 
Coordination 
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23. (SBU) Montas will provide the Embassy with a list of the 
experts in his team to improve coordination.  He offered to 
help arrange meetings with the President whenever this might 
be needed, and he is ready to convey to Fernandez any 
sensitive or confidential messages from the Ambassador.  The 
Ambassador noted that in similar fashion the Embassy could 
help smooth the way for Dominican officials in Washington. 
HERTELL