US embassy cable - 05SANTODOMINGO4196

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 004196 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA, WHA/CAR, WHA/PPC, WHA/EPSC. EB/OMA; 
NSC FOR SHANNON AND MADISON; LABOR FOR ILAB; 
USCINCSO ALSO FOR POLAD; TREASURY FOR OASIA-MWAFER 
 
E.O. 12958: DECL: 08/29/2010 
TAGS: PGOV, EFIN, DR 
SUBJECT: DOMINICAN PROGRESS ON IMF STAND-BY 
 
Classified By: EcoPol Counselor Michael Meigs.  Reason: 1.4 (b) and (d) 
 
 
1. (SBU) Summary: IMF Regional Director Guy Meredith and 
Resrep Ousmene Mandeng told DCM and staff on August 24 that 
things are going generally well for the Dominicans on the 
macroeconomic side and they foresee no obstacles to 
completing the combined first and second reviews of the 
standby.  This will lead to the next distribution of funds, 
which the Dominicans do not need at this point.   IMF reps 
mentioned two areas where targets are not being met: energy 
sector reform and structural reform.  IMF expects the 
continuing high world market petroleum prices to worsen the 
outlook for the country,s energy sector, which remains in 
crisis. He said that the outlook for 2006 was problematic, 
citing revenue shortfalls, especially in the energy sector. 
End summary 
 
2. (SBU) On August 24 IMF Regional Director Guy Meredith and 
Resrep Ousmene Mandeng provided to DCM and Embassy Staff a 
status report on the IMF review of this year,s standby 
arrangement.  Delays in Dominican structural reforms and 
other measures had pushed back completion of the first 
review, originally due in June, so they will prepare a single 
report to submit to the Board in early October. 
 
3. (SBU) Meredith said that things are going well in several 
areas, calling macroeconomic performance "not bad," financial 
markets and debt restructuring favorable, and growth at an 
estimated 5.8 percent--statistically at least--good.  The DCM 
asked whether the Central Bank figures on inflation and 
growth could be believed; Meredith said that another IMF team 
had looked at the numbers in early August and found no 
evidence that they were intentionally enhanced or misleading, 
only that the Central Bank was using old methodology.  For 
instance, the Central Bank has been using for calculations a 
1971 model, which does not correspond to current economic 
structures.    The Central Bank plans to put a newer, 
1993based model into service in early 2006. 
 
4. (SBU) Growth has been concentrated in telecoms and 
consumption, much of the latter based on growth in imports, 
rather than creation of new jobs.  Meredith said that the low 
inflation figures are credible, referring to press reports 
indicating that many items have fallen in price.  The Central 
Bank is expecting inflation to pick up in the second half of 
year, owing to the increase in petroleum prices.  On exchange 
rates, Meredith said that there has been some intervention in 
the exchange market, particularly early in the year to 
prevent a rise in peso value but he did not see a problem of 
government manipulation.  Net Reserves are now  USD 650 
million, but the pace of growth in Central Bank accounts has 
dropped due to a decrease in interest rates. 
 
5. (SBU) IMF noted that even the Central Bank is expecting 
depreciation of the peso at some point, perhaps later in 
2005.  The rapid growth in imports suggests that the current 
account, now in surplus, may turn negative next year. 
 
Troubles on the Horizon for 2006 
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6. (C) Meredith said that all major elements of debt 
restructuring are in &pretty good shape.8  Commercial bank 
debt is not a problem.  However, macro/fiscal prospects for 
2006 do not look reassuring due to ongoing electricity 
subsidies and the decision to maintain a costly cooking gas 
subsidy.  There are provisions required in the 2006 budget 
that will be problematic if there are no offsets.  In 
addition, the Dominican Government plans to implement for the 
first time ever, a 2003 law that transfers 0 .5  percent of 
GDP (10 percent of the budget) to municipalities and other 
groups such as the judiciary.  This had been suspended in 
earlier years.  Meredith expressed concern that the 
Dominicans have yet to find an offset. 
 
Energy -- Still Problematic 
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7. (C) Elaborating on the electricity problem, Meredith said 
that the Dominicans did not achieve the revenue results 
targeted in the first half of the year. The Cost Recovery 
Index (CRI) stalled this past spring when distribution 
companies failed to reduce the theft of electricity.  What 
was to have been a  USD 350 million government subsidy will 
end up being USD 500 million by year end.  The government is 
in the process of putting private management in place at 
distribution companies EdeSur and Ede Norte, but has been 
slow to finalize the contracting and key positions remain 
unfilled.   The visiting Fund team is perplexed by the 
problem and the government,s inability or unwillingness to 
address it.   People are stealing power, the government knows 
and denounces the theft, but people go on stealing 
unpunished.  The IMF is not sure that private management will 
fix the problem, since it is not clear that the government 
will allow the managers to implement the necessary actions. 
The management replacement plan has been around since January 
yet there has been no movement, perhaps because the 
government is not willing to take the hard decisions until 
after 2006 congressional elections. 
 
Banking -- Mixed Results 
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8. (C) On banking reform, Meredith said that progress has 
been mixed.  The Dominicans still need to establish formal 
legal independence of the Central Bank and the Superintendent 
of Banks.  The banking sector as a whole is not strong 
because of its lopsided loan portfolio, which is too 
concentrated in the top 100 borrowers.  But it is not taking 
unreasonable risks.  Most banks are making profits, though 
not large ones. 
 
9. (C) The strongest trait of Central Bank Governor Valdez 
Albizu is his independence.  He is prudent and wants to 
retain an important role for himself.  Director General for 
Internal Revenue Juan Hernandez was put in charge of tax 
reform.  Despite resistance from private banks, 
Superintendant of Banks Rafael Camillo has done well and 
banks are coming into line. 
 
 
 With High Reserves, Next IMF Disbursement Not Needed. 
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10. (SBU) The Fund's staff expect that the Board will approve 
the next disbursement in October, based on good performance. 
The Dominicans may choose not to draw on the next 
disbursement, because reserves are high and the funds cannot 
be used to pay down the quasi-fiscal deficit.  Still 
completion of the review now will be helpful for the 
Dominican Republic's global image. 
KUBISKE