US embassy cable - 04SANTODOMINGO6062

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 006062 
 
SIPDIS 
 
DEPT FOR WHA/CAR, WHA/EPSC, EB/IFD/OMA; 
TREAS FOR LCARTER 
 
E.O. 12958: N/A 
TAGS: ETRD, EFIN, DR, PGOV 
SUBJECT: IFIS ON DOMINICAN FINANCES - TIGHT TIMETABLE WITH 
A LONG WAY TO GO FOR STANDBY 
 
1.  (SBU) Despite progress on institutional reforms, the 
Dominican government still has a number of decisions to make 
before a new standby agreement can be reached with the IMF. 
Concerns about electricity sector reforms and and unanswered 
questions on fiscal problems mean that a tentative IMF Board 
date of December 13 might be overly optimistic.   A Dominican 
technical team plans to begin talks with the Fund in 
Washington the week of November 8, with political 
negotiations scheduled to begin November 15. 
 
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Progress, but still more holes 
------------------------------ 
 
2.  (SBU) On November 1, local IMF, IDB and World Bank 
representatives met with the Ambassador to review the status 
of a new agreement.  IMF resrep Ousmene Mandieng (protect) 
told the Ambassador that the Dominican Republic has made 
significant progress on institutional reforms in preparation 
for an agreement, but added that many questions remain 
regarding electric sector problems, budget measures and the 
incomplete fiscal reform.  On the positive side, the 
government has increased the independence of the Central Bank 
and Banking Superintendency and also improved efficiency of 
debt management. 
 
3.  (SBU) Plans on timing of bank recapitalization and 
monetary policy have also progressed.  By the end of 
December, all banks must reach a 10 percent capital adequacy 
rate based on national standards, but will be given until the 
end of 2007 to reach international banking standards.  At 
present the size of the gap between local and international 
norms is not clear. While this is not ideal from the IMF 
perspective, Mandeng said, the long grace period was part of 
the original IMF standby agreement.  The Central Bank is 
moving to lengthen the duration of Central Bank certificates 
from the present one to six months to one to five years, and 
also plans to try to lower the cost of debt by substituting 
dollar linked debt for peso debt.  The Central Bank (CB)has 
been able to lower interest rates in recent months but they 
are still high in nominal terms (up to 30 percent in the last 
auction). Interest on the CB certificates is equivalent to 4 
percent of GDP; he expects that it will fall to about 1.5 
percent of GDP in 2005. 
 
4.  (SBU) Not enough progress has been made on fiscal reform. 
 Tax legislation passed in September did not provide the 
revenue originally sought and now any residual fiscal 
adjustment will have to be taken from the expenditure side, 
since the government has declared publicly that there will be 
no further tax increases.  There is no clear plan for where 
cuts will be made or how the Dominican government is to 
control contracting of new internal debt.  Cuts will have to 
come largely from current expenditures, not from the capital 
budget. 
 
5.  (SBU) For the troubled electricity sector, the IMF still 
requires from the government 1) credible projections of the 
monthly energy subsidy payments and transfers in order to 
calculate the budget ceilings; and 2) identification of 
specific concrete steps to be taken to reduce theft, improve 
collections and focus subsidies.   It is also still unclear 
where the Dominicans will secure much-needed external 
financing. 
 
6. (SBU) A small delegation led by Julio Ortegawent to New 
York last week to speak with commercial banks and 
bondholders, but no news of results is yet available. 
Dominican technicians will begin talks with the Fund in 
Washington during the week of November 8; political 
negotiations involving Technical Secretary Montas, Finance 
Minister Bengoa and Ortega are expected for November 15. 
 
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Details and pre conditions 
-------------------------- 
 
7.  (SBU) Mandieng said that a new Fund program would 
probably be worth $600 million over 24-28 months.  Funds 
would be deposited in the Central Bank and could not be used 
to support the budget but only to finance the balance of 
payments gap. The program would be a continuation of the 
general lines of the previous agreement but would be more 
focused on institutional strengthening, with a tax reform 
required in 2006. 
 
8.  (SBU) Preconditions for the standby will include further 
consolidation of fiscal management under the Secretary of 
Finance.  Debt decisions currently managed by the Technical 
Secretary's office need to be transferred to Secretary of 
 
SIPDIS 
Finance, as does responsibility for the Office of the Budget. 
 The IMF also requires that the government procurement 
process be made more transparent. 
9.  (SBU) Whether or not a congressional approval of the 2005 
budget will be required for an IMF agreement hinges on 
timing.  If the IMF agreement approval process slips into 
January, the IMF would probably require congressional 
approval of the 2005 budget.   Even in the case that a 
congressionally approved 2005 budget is not required, an 
accurate and clear estimate of the level of internal debt, 
government payroll and revenues and all other budgetary 
information would be required by the IMF. 
 
10.  (SBU) Still unclear is the process to be used to 
liquidate government assets, some acquired in bank 
liquidations last year.   The Central Bank governor wants to 
set up an independent agency to liquidate assets (both those 
acquired from recently failed institutions and assets owned 
by the Central Bank over a longer period). 
 
11.  (SBU) The IMF will require the Dominicans either to 
continue servicing bonds or to demonstrate that they are 
actively renegotiating them, in which case the IMF can lend 
into arrears.  There is currently $63 million in 
non-reschedulable debt that must be cleared by the end of 
December in order to meet Paris Club and IMF requirements. 
 
12.  (SBU) The long discussed deal for cheap oil from 
Venezuela is a bright spot and constitutes direct budget 
support.  It will  offer generous terms of 2 percent interest 
over 15 years to finance 25 percent of 50,000 barrels a day 
of imported Venezuelan crude. This will be worth $200 million 
or more per annum.  Even so, the IMF model suggests that the 
government will have to find between $300 million and $400 
million to close the gap, much more than might be realized 
through a bond rescheduling. 
 
13. (SBU)  The IMF model uses projections of the exchange 
rate in 2005 at 37 versus the current 32 per dollar; GDP 
growth is predicted at 1.8 percent in 2004 and 2.5 percent in 
2005; oil will be at $50/barrel; inflation will be 12 to 15 
percent, with an end-2005 projection of 13.5 percent; 
expenditures on the electricity sector will be $400 million 
in 2005; and the free trade agreement will not be implemented 
before the end of 2005 (so that no adjustment will be 
required for loss of customs revenues until 2006). 
 
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World Bank and IDB waiting 
-------------------------- 
 
14.  (SBU) World Bank Country Manager Christina Malmberg said 
that her agency has a loan of $100 million outstanding, $50 
million of which was paid out in March with the remaining $50 
million pending, held up for lack of an IMF agreement.  If 
the planned agreement goes to board, $25 million will be 
released for the energy sector.  The remaining $25 million 
for social sector expenditure will require the Dominican 
Republic to meet eight conditions, on all of which the 
Dominicans are still far short.  The World Bank loan 
authorization terminates in December 2004, and the Bank wants 
clear progress on conditionality before it will be willing to 
extend the loan offer for three months.  The World Bank also 
has two modest technical assistance loans for energy and 
financial management pending congressional approval, one of 
which is 60 percent earmarked for the Banking 
Superintendency. 
 
15.  (SBU) IDB Representative Moises Pineda said that the IDB 
has an outstanding loan of $250 million, with $50 million 
earmarked for social spending remaining to be distributed, 
pending the IMF agreement. IDB has requested an audit of the 
first disbursement to ensure that it was used appropriately. 
The government has continued to pay electricity generator 
COGENTRIX.  If the government contract with COGENTRIX falls 
into arrears or is abrogated, the IDB will have to pay a $70 
million guarantee, triggering calls on Dominican sovereign 
guarantees of $400 million, undermining any IMF agreement. 
HERTELL