Analysis: Dominican Republic fiscal reform

by Adalberto Grullon

Friday, July 9, 2004

SANTO DOMINGO, Dominican Republic (UPI): The elaboration and execution of fiscal reform demanded by the International Monetary Fund will be the task of the new Dominican Republic government taking power on August 16.

The measure was agreed upon during a meeting both Dominican presidents participated in -- current President Hipolito Mejia and President-elect Leonel Fernandez -- that was held thanks to the mediation of former Spanish Prime Minister Felipe Gonzalez.

The technical team of Fernandez was charged with drawing up legislation embodying the reforms before July 10. President Mejia has agreed to send it to Congress five days after receiving it.

Both parties committed to undertaking a constructive dialogue with the members of the Senate and the Chamber of Deputies to obtain their support for the fiscal reform legislation and ensure its passage.

Although the text of the agreement between Meja and Fernandez does not detail the scope of the projected fiscal reform, the whole country knows that it is designed to raise taxes. With the increased state revenue, the government can begin to pay down the country's the external debt while helping to solve the country's internal deficits.

The IMF also suggests that the package of reforms include the elimination of the subsidies for electricity, propane gas and food. The two measures, tax increases and elimination of subsidies are totally unpopular, but the IMF experts consider them indispensable for stabilizing the economy.

While the governing Dominican Revolutionary Party, or PRD, has an absolute majority in the Senate, it only has a plurality in the Chamber of Deputies, which is why the administration rules out automatic passage of the bill.

However, a long debate of the proposed legislation is anticipated, which will include sessions open to the public.

President of the Chamber of Deputies Alfredo Pacheco explained that while his legislative body was quick to collaborate with the new government, it ruled out a premature celebration of the approval of the fiscal reform.

Jesus Vasquez from the Senate declared himself of the same opinion, stating that it would be impossible for the legislation to pass both chambers of Congress before the new president is sworn in.

It would not be an exaggeration to label relations between Mejia's government and the IMF as strained. The original $657 million agreement between the Dominican government and the IMF stalled in August 2004. Before the agreement was suspended, $197 million had been paid out. After a more than five-month interruption, a revised agreement was negotiated and signed on February 11.

The first disbursement under the new terms of the deal was $66 million, with the country's power industry designated as a top-priority recipient.

The original agreement was interrupted when the government renationalized two of the privatized electricity distribution companies, Edesur and Edenorte, without informing the IMF. The agreement with the IMF was designed to restore confidence in the country's banking sector and the country's general economic situation policies.

The IMF gloomily predicted in 2004 a negative growth of 1 percent in gross domestic product as well as an inflation rate of 14 percent.

At the time the IMF unilaterally suspended the agreement with Mejia's government, it alleged that the primary goals mandated by the IMF to reduce public expenditure and to increase the state income had not been fulfilled.

The consequences of the suspension were both immediate and severe.

The most painful result of the IMF suspension on the Dominican economy was the freezing of loan payments contracted between the country and international organizations worth $500 million. Bilateral programs of financial and technical cooperation were also suspended at the same time.

Gonzalez took advantage of his stay in the country to convince Mejia and Fernandez that they had to lower the tone of the debate during the period of transition of presidential authority. Gonzalez has business partners and political allies in the Dominican Republic.

He brought the two rivals together, had lunch with them, and succeeded in convincing them to offer a joint public declaration that lowered the temperature of the political debates. The same day of the meeting, Gonzalez gave a well-received conference in the hall of Congress. There he proposed a political and social agreement, endorsed by the country's political and cultural leaders, to overcome the economic crisis and integrate social development options.

Businessmen, legislators and civil society leaders all welcomed the conference's outcome. Fernandez, however, is under no illusions about what working with the IMF means. While campaigning for the presidency, Fernandez said that the IMF agreement was "the only way out" for the country. He described the pact as "the lesser of two evils" and compared it to "open heart surgery without an anesthetic, with the only other option being death."

It remains to be seen if Fernandez can administer the IMF's bitter medicine to his nation without provoking massive unrest.

Adalberto Grullon is a writer with Tiempos del Mundo

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