Dominican Republic and the IMF
Press Release: IMF Completes First Review of the Dominican Republic's Stand-By Arrangement, Approves US$66 Million Disbursement, and Grants Waivers
February 11, 2004
Addendum to the Letter of Intent
February 3, 2004
Country's Policy Intentions Documents
Free Email Notification
Dominican Republic—Letter of Intent, Supplementary Memorandum of Economic Policies, and Technical Memorandum of Understanding
Santo Domingo, January 23, 2004
Use the free Adobe Acrobat Reader to view Tables 1-4 (71 kb PDF file).
Mr. Horst Köhler
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Köhler:
1. Last August, the Government of the Dominican Republic embarked on a comprehensive economic program, supported by a Stand-By Arrangement (SBA), to restore confidence in the economy following a series of shocks. Since approval of the arrangement on August 29, 2003, we have continued to address the banking sector problems that triggered a crisis earlier in 2003, made a significant effort to contain government expenditure, and have recently taken additional measures to assure a free and unified foreign exchange market.
2. However, substantial deviations have emerged with respect to the program, and most of the quantitative targets for end-December 2003 were missed. To deal with this situation, the program has been revised to incorporate comprehensive measures to set up the basis for renewed confidence in economic policy. This is set out in the revised Memorandum of Economic Policies. Broad-based social and political support has been secured for this effort, as reflected in the recent approval by congress of the 2004 budget and associated revenue measures, which are critical elements of the revised program.
3. In support of these efforts to move ahead with the program, the government of the Dominican Republic requests: (i) waivers for nonobservance of the performance criteria pertaining to net domestic assets, net international reserves, and accumulation of arrears for end-December 2003, for the structural performance criteria on approval of by-laws to the Monetary and Financial Law and of a law on bank resolution for end-September 2003, on the unification of the foreign exchange market for end-December 2003, and the congressional approval of 2004 budget, and for the continuous performance criteria regarding exchange restrictions and multiple currency practices; (ii) waivers of applicability of quantitative performance criteria on the overall balance of the nonfinancial public sector and the domestic bank financing of that balance, and on the contracting of external debt for end-December 2003; (iii) completion of the first review under the SBA, with availability of a purchase equivalent to SDR 43.78 million (20 percent of quota) upon completion of this review; and (iv) a re-phasing of the program reviews and access (Table 4). In support of the request for waivers, we have implemented a number of prior actions set out in Table 3 of the attached supplementary memorandum, and aim to complete additional key measures by the time of Executive Board consideration of this review (Table 3).
4. We are confident that the policies set forth here are adequate to achieve program objectives, but we are prepared to take any further measures that may become necessary for this purpose. We will consult with the IMF on the adoption of these measures, and in advance of any revision to the policies contained in the attached memorandum, and in advance of any new measures in the policy areas relevant to the program, in accordance with IMF policies on such consultations.
5. We continue to make efforts to improve transparency and governance, especially in the banking system, and more recently in the electricity sector, including implementation of the recommendations of the recent IMF safeguards assessment and of the panel of international experts on the electricity sector. At the same time, we have decided to begin publication of comprehensive economic and financial data on a monthly basis, starting in March 2004.
6. Quantitative performance criteria, structural performance criteria, and structural benchmarks under the SBA have been set up for end-March and end-June 2004. Reviews under the arrangement will be completed by May, August and November 2004, and by February and May 2005. Quantitative performance criteria and structural conditionality for the rest of 2004 will be set in the context of the May review. The reviews will assess overall performance under the program and observance of the associated performance criteria and benchmarks (Tables 1-3).
A. Policy Framework
1. Performance under the program. Significant deviations emerged early on with respect to the program targets (Table 1 and 2). Legal difficulties in implementing some of the tax measures envisaged in the program, along with weaker than expected domestic demand, contributed to a shortfall in government revenues. The acquisition of two electricity distribution companies and the need to provide additional assistance to banks also contributed to new fiscal pressures. As a result, the fiscal deficit is expected to have reached 5.2 percent of GDP in 2003. This is above the programmed 3½ percent of GDP, although part of this deviation reflected a revision of the fiscal accounts in the first half of the year. A shortfall in external disbursements further strained the government's liquidity position, and we have been unable to avoid accumulating arrears to official creditors and electricity generators, or to accumulate international reserves as programmed. A continued lack of confidence, private capital outflows, and pressure on the peso--including the temporary emergence of a parallel foreign-exchange market--have aggravated the financial problems of the electricity sector and added to fiscal strains.
2. Restoring confidence. Although considerable progress has been made in alleviating the concerns that gave rise to a banking crisis in 2003, the government recognizes that much remains to be done to bring about a broader restoration of confidence in the economy and the underlying policy framework. Toward this end, we aim to (i) substantially strengthen fiscal policy, by offsetting recent and emerging slippages; (ii) stabilize the financial situation of the electricity sector, with a view to maintaining adequate supply; (iii) tighten monetary policy so as to support stabilization of the exchange rate and reduce inflation; (iv) ensure a fully flexible exchange rate regime, devoid of any direct or indirect controls; (v) progress further with banking and governance reforms; and (vi) seek further financing from the international community so as to ease the burden of economic adjustment.
3. Macroeconomic framework. Although economic activity is expected to begin recovering in the second half of 2004, real GDP is projected to decline by around 1 percent in 2004 on a full year basis, but to grow strongly thereafter. As confidence builds and domestic demand begins to recover, the surplus in the external current account should moderate. Inflation, after peaking at 43 percent in 2003, is targeted to decline to less than 14 percent in 2004 and to the single digit range in 2005. A moderate recovery of net international reserves is projected during the remainder of the program, with NIR recovering to a zero level by end-2004, and then rising to positive levels in 2005.
B. Fiscal Policies, Reforms, and Debt Sustainability
4. Fiscal objectives. The key objective of fiscal policy is to ensure a reduction of the debt of the consolidated public sector, which more than doubled to 57 percent of GDP in 2003 as a result of central bank assistance to commercial banks, government support of the electricity sector, and the real depreciation of the peso. To this end, measures have already been put in place to ensure a reduction in the combined public sector deficit to 3¾ percent of GDP in 2004, with a further reduction to 1.8 percent of GDP in 2005 after a comprehensive tax reform is put in place in 2004. This fiscal outlook, together with a resumption of strong economic growth and the sale of government-owned assets equivalent to 6 percent of GDP envisaged in the original program (real estate, mines, government stakes in certain firms, and bank collateral), will ensure a steady reduction of the public debt to around 40 percent of GDP by 2008.
5. Adjustment measures in 2004. To achieve the fiscal objective for 2004, the government has put in place a policy package equivalent to 2½ percent of GDP, consisting of about ½ percent of GDP of tax measures and 2 percent of GDP of spending cuts. The measures, which were approved by congress in January 2004, include the following:
6. Electricity subsidy. The budget also incorporates a subsidy of 0.9 percent of GDP for electricity that takes into account the broader strategy for improving the financial situation of this critical sector and the need to protect the poor from price increases (see paragraph 9, below). This still leaves a deficit of 0.6 percent of GDP of the state-owned electricity distributors, which has been factored into the overall public sector deficit target.
7. Fiscal reform. The government has implemented a number of fiscal measures that could be sustained into the long term, such as the elimination of the subsidies on gas and electricity for businesses and heavy users; the increases in excise tax rates and the elimination of certain income tax exemptions. There are some measures, however, that have had to be adopted on a temporary basis, such as export and import taxes, and some of the cuts in spending. It is our intention to introduce a tax reform in 2004. This reform will focus on widening the domestic tax base and on a revision of tax rates, in order to replace highly distorting taxes and offset the reduction in customs tariffs required under expected bilateral trade agreements, including with the US. In particular, envisaged changes include a comprehensive elimination of ITBIS (value-added tax) exemptions and of remaining income tax exemptions, and a review of tax rates including ITBIS and excise rates. A proposal is being prepared with assistance from international experts, which will be subject to technical review by end-March 2004 and submitted to congress by July 2004, in accordance with the original program, in close consultation with the IMF.
8. Strengthening tax administration. Parallel to the tax reform, the government is also taking steps to improve tax administration. A plan will be put in place, by March 2004, to improve the capacity of the internal revenue service and customs to deal with tax evasion, including through an upgrade of information systems and training. In anticipation of the tax reform, the government is considering: (i) creating an independent revenue authority for both customs and domestic revenue collection, and (ii) criminalizing tax evasion.
C. Electricity Sector
9. Near-term strategy. The finances of the electricity sector have been adversely affected by the deterioration of collection rates, the sharp depreciation of the peso, higher oil import prices, and the difficulty of raising tariffs to the levels needed to maintain the viability of the system. As a result, there have been widespread blackouts and shortages of electricity, which have imposed hardship on the population. In recent months, the government has taken increased responsibilities in this area, including through the purchase of two ailing electricity distribution companies. In order to stabilize the financial situation of the sector, we have put in place an emergency plan to deal with the most pressing problems over the next six months and minimize to the extent possible power disruptions. This plan includes a phase-in of tariff adjustments, starting in January 2004, that eliminate costly and unnecessary subsidies to non-residential and large consumers and reduce subsidies for better-off consumers, together with the provision of fuel and budgetary subsidies and the use of World Bank and IDB financing, as well as measures to maintain collection rates. Poorer households will continue to be protected by the continuation of the PRA program of electricity subsidies to low-income neighborhoods and the retargeted price subsidy. Further details of the strategy, agreed with the World Bank, are contained in our Letter of Development Policy to the World Bank of December 23, 2003.
10. Long-term reform. We intend to prepare by September 2004 a comprehensive electricity sector reform to be agreed with the World Bank, which will take into account the recommendations of the international commission of experts that looked into the recent acquisition of the electricity distribution companies Edenorte and Edesur. This reform will aim at sharply improving cash recovery by the electricity distribution companies and putting in place a more efficient functioning of the system, including of the distribution companies recently bought by the government. It will also include a plan for the full regularization of arrears in the system. As recommended by the international commission of experts, an independent international valuation of the recently purchased distribution companies will be completed by May 15, 2004, as a first step toward their eventual reprivatization. The terms of reference for such an audit have been developed.
D. Monetary Policy
11. Monetary stabilization. The overriding objective of monetary policy is to return inflation to the single-digit range within the program period. The central bank has taken decisive action to slow the growth of base money, which is now moving back toward the original program path; this path will continue to guide monetary policy in 2004. To this end, in mid-January 2004, the central bank raised its overnight deposit interest rate to 45 percent and its Lombard lending rate to 55 percent, among other rate increases. These short-term rates are being set with a view to immediately establishing clear expectations of positive returns on peso-denominated assets and to ensuring achievement of the monetary base target. If necessary, additional monetary tightening may be implemented in the near term. However, looking further ahead, we expect nominal interest rates to decline, as actual and expected inflation come down.
12. Control of base money and central bank debt. For the near-term, the control of base money will have to continue to rely substantially on the issuance of short-term central bank CDs. However, in order to reduce the cost of monetary sterilization, and the rollover risk associated with the central bank CDs, the 2004 monetary program envisages a buildup of government deposits at the central bank, as a means of limiting the money supply. Consistent with a moderate 12 percent increase in peso base money (adjusted for changes in reserve requirements), quantitative performance criteria for 2004 are proposed in Table 1 on the net domestic assets of the central bank. Monetary conditions will be monitored closely, including in the context of the next program review.
13. Money market development. To develop a domestic yield curve, improve liquidity management, and reduce rollover risk, the central bank will aim to lengthen the maturity of its certificates through market-based operations. To facilitate this process, the central bank introduced an overnight deposit window and a Lombard facility in mid-January 2004. The Lombard rate and the rate at the deposit window are already serving as signals of the overall monetary policy stance, as discussed above. To enhance the transparency of its operations, the central bank will provide on a monthly basis information on the amortization profile of its certificates.
E. Foreign Exchange Market
14. Unification of the market. The government remains committed to a unified foreign exchange market. The exchange rate in the official market was set to track that of the private market after July 2003, and most foreign exchange transactions remaining in the official market were transferred to the private market in October, with the exception of government debt service operations. Mechanisms and foreign exchange resources were put in place at the Ministry of Finance by end-December 2003 to ensure a smooth transfer of such transactions to the private market, in line with commitments under the original program. Nevertheless, full unification of the market will not take place until late-January, after some government nonreschedulable external arrears from end-2003 are cleared using central bank reserves (the exchange rate for these residual transactions continues to track that of the private market, ensuring that no multiple currency practice is created). With the clearance of these arrears, such government recourse to central bank reserves will cease and thereafter all foreign-exchange transactions will occur in the single unified foreign exchange market.
15. Freely floating exchange rate. We remain committed to a flexible exchange rate regime. While we are convinced that the exchange rate has overshot and will revert to a more normal level once confidence is reestablished, there is no official target for the exchange rate, which is free to move in both directions. The government recently created an ad hoc commission to improve supervision of the foreign exchange market, with a view to eliminating illegal trading by unauthorized dealers, money laundering and tax evasion. We reiterate that this step was not intended to influence the exchange rate or interfere with legal transactions. This commission has been dissolved and it has been clarified that responsibility for enforcing existing laws and regulations remains with the respective oversight agencies. The decree establishing a similar commission on financial security has been revoked, and the objectives of this commission will be implemented by the Central Bank Monetary Board and Superintendency of Banks, in full compliance with the Monetary and Financial Law. Going forward, we will continue to avoid administrative, informal, or other actions concerning the foreign exchange market aimed at influencing the exchange rate through non-market mechanisms.
16. Exchange market by-law. To enhance the transparency and efficiency of the exchange market, and increase competition, the Central Bank Monetary Board will approve an exchange market by-law by mid-February 2004. To support our commitment to a floating exchange rate, this by-law: (i) defines specific guidelines for the licensing, limits on open positions, and disclosure requirements of authorized foreign exchange intermediaries, through which all foreign exchange intermediation will take place; (ii) defines the scope of central bank intervention in the single unified foreign exchange market; and (iii) harmonizes the currency trading infrastructure and regulation of all exchange market intermediaries. A draft by-law was discussed with IMF staff to ensure consistency with the IMF's Article VIII, the full unification of the foreign exchange market mentioned above, and increasing market competition.
F. Banking Reform
17. Recent progress. We continue to implement the ambitious agenda of reforms designed with assistance from the IMF that aims at ensuring confidence in the system. Since approval of the program, the government has made significant progress on the resolution of the three problem banks (Baninter, Bancredito, and Banco Mercantil); launched an internationally-assisted inspection of all banks, which are to be completed by end-January 2004; and approved by-laws to the Monetary and Financial Law in the areas of sanctions, contingency fund for bank resolution, and lender-of-last resort. In addition, a law governing bank resolution under conditions of systemic risk has been approved by the Senate and is expected to be approved by the House by end-January 2004. As required by law, the government has referred to the courts the cases of alleged fraud by the former owners of Baninter and Bancredito and is actively engaged in the legal prosecution of their former owners. In addition, a forensic and legal audit has been initiated for Banco Mercantil; if necessary based on the findings of that audit, appropriate legal action will be taken.
18. Strategy to recapitalize banks. The government has prepared a broad strategy for the recapitalization of private banks, if necessary. The full details of this strategy will be finalized after reviewing the findings of the internationally-assisted inspections, which are expected by end-January 2004. A high-level committee will be appointed by end-January 2004 to approve and coordinate the strategy, which we have designed with assistance from the IMF. This strategy is in line with the Monetary and Financial Law and the soon to be approved law on bank resolution under conditions of systemic risk, and is based on the following principles:
19. Strengthening regulations. The government continues to strengthen the regulatory framework of the financial sector and will approve a number of by-laws of the MFL in the coming six months, in consultation with the IMF. By end-January 2004, it will approve by-laws pertaining to: (a) use of central bank liquidity support; (b) lending to related parties; and (c) off-shore subsidiaries. By end-February 2004, it will approve by-laws related to (d) capital adequacy, revising capital requirements and eliminating any existing forbearance on loan provisioning, to allow for the full implementation of the banking strategy; and (e) asset valuation and provisioning. By end-March 2004, it will approve by-laws related to (f) fit and proper requirements for owners and managers; (g) definition of financial group; and (h) external auditors. By end-April 2004, it will approve by-laws regarding: (i) operation of publicly-owned financial institutions; (j) implementing liquidation of financial institutions; and (k) treatment of market risk. By end-June 2004, it will approve by-laws related to (l) consolidated supervision and (m) by end-July 2004, by-laws in the area of governance rules for financial institutions. The government is working on amending legislation to better cover financial crime, which will be submitted to congress by end-March 2004, following the resolution of some constitutional issues.
20. Strengthening management of assets. We will establish, by end-February 2004, a unit under the monetary board to manage and dispose of assets acquired as a result of the resolution of the three problem banks, in order to maximize their recovery value. Proceeds of asset recovery will be used to reduce the debt of the central bank. Also by end-February 2004, we will form an additional unit in the superintendency of banks to coordinate forensic and legal audits of failed banks. Terms of reference for both units will be developed with assistance from the IMF.
21. Strengthening the Superintendency of Banks. In addition to the recent adoption of procedures to monitor banks' liquidity on a daily basis in December 2003, this will include: (i) required submission of weekly cash flow projections for all banks by February 2004, and (ii) improvement of critical areas, particularly on-site and off-site supervision, by July 2004.
22. Drawing lessons from the recent crisis. As envisaged in the original program, an independent assessment will be conducted to draw lessons from the monetary and supervisory lapses contributing to the banking problems. The scope of this assessment includes the procedures used to resolve Baninter, Bancredito, and Banco Mercantil. A panel of international experts will be appointed for this purpose by end-January 2004. The terms of reference of this panel are being developed, with assistance from the IMF, and will be finalized by end-January 2004. The work of this panel is expected to be completed by end-April 2004.
23. Strengthening other financial intermediaries. In particular, plans will be developed for a strengthening of savings and loan associations by end-June 2004.
G. Balance of Payments and Financing Assurances
24. Balance of payments: The Dominican Republic has undergone a substantial external adjustment, as the current account balance improved by more than 9 percentage points of GDP from 2002 to 2003. The main counterpart of this shift has been an abrupt rise in outflows of private capital, as a loss of confidence led the private sector to accumulate foreign assets and weakened the peso. The government considers that the confidence-building effects of the policies outlined in this memorandum, and the reduction of political uncertainty following the May presidential election, set the stage for a significant reduction of private capital outflows in 2004.
25. External financing gap 2004. The external current account is projected to remain in surplus in 2004, but a sizable financing requirement of more than US$1 billion is projected for the year. After factoring in projected disbursements from the World Bank, the IDB, and bilateral sources, there would still be a residual financing gap of some US$300 million. To cover this gap, the government is approaching its creditors with a view to obtaining a rescheduling of debt service obligations to finance the program. In this context, Paris Club creditors have agreed to consider such a request in due course.
26. External arrears: Reschedulable arrears will be regularized
as part of the expected debt treatment. The government will clear all non-reschedulable
external arrears ahead of the presentation of the revised program to the IMF
Board, and will remain current on all non-reschedulable debt service henceforth.
For purposes of transparency, monthly data on any external arrears will be
published, beginning end-March 2004.
Technical Memorandum of Understanding
1. This memorandum presents the definitions of the variables included in the quantitative performance criteria and indicative targets annexed to the Supplementary Memorandum of Economic Policies, and the information requirements needed to ensure adequate monitoring of the economic and financial situation, including actions in the banking sector.
II. Quantitative Performance Criteria: Definition of Variables
A. Cumulative Floor on the Nonfinancial Public Sector (NFPS) Balance
2. The balance of the nonfinancial public sector comprises the results of the central government and the rest of the nonfinancial public sector (decentralized entities and the public enterprises, including the newly-acquired electricity distribution companies Edenorte and Edesur).
3. The balance of the central government covers government activities as specified in the budget. Revenue (recorded when the funds are transferred to the national consolidated fund) includes part of the comisión cambiaria (8.25 percent) and will not include proceeds from the sale of public assets, which will be considered as financing, below the line. Central government expenditure (recorded when checks issued) will include transfers to noncentral government units as well as transfers to the electricity sector as a result of the operations of the fondo compensador de la tarifa eléctrica (FETE) and the programa para la reducción de apagones (PRA). Interest payments will be recorded on a due basis. Capital expenditure will also include in-kind capital expenditure defined as the externally financed investment projects (loans and grants) that are not included in the execution of the budget.
4. The balance of the central government will be measured from below the line as the change in central government's net financial position (assets minus liabilities). The net financial position of the central government must include: (a) nonfinancial central government debt, domestic and external, including short-term debt; (b) external and domestic bank borrowing and deposits, including the central bank; and (c) any other nonbank financing, domestic or external, including the sale of public assets and arrears, if any. Since the proceeds from sale of public assets are a source of funds below the line, they should be saved to avoid increasing the fiscal deficit. External debt flows, (disbursements and amortization), will be converted to Dominican pesos at the average market exchange rate of the respective months.
5. The increase in domestic debt as a result of the recognition of debts incurred prior to 2002, with a limit of RD$7.6 billion1 will not be considered as deficit, in the measurement of the central government balance.
6. The balance of the rest of the nonfinancial public sector will be measured from below the line on the basis of the information on: (i) domestic bank borrowing and deposits provided by the central bank; (ii) domestic and external arrears, if any; and (iii) external disbursements and amortization for the rest of the nonfinancial public sector. It will also include the authorizations to contract debt approved by the Secretary of Finance according to Decree #581-02 and disbursed during the relevant period.
7. Profits and losses arising from valuation changes of foreign currency denominated assets and liabilities will not be considered to determine the balance of the nonfinancial public sector.
8. For March, June, September, and December of 2004, the cumulative floor will be measured from end-December 2003.
9. The information to compute the balance of the nonfinancial public sector will be provided by the central bank based on information provided by the government's accounting office (expenditure), Secretaría de Finanzas (revenue, nonbank domestic debt and arrears), and central bank (external debt and arrears, and externally financed capital expenditure). This information will be reconciled between these three units.
B. Cumulative Ceiling on the Change in NFPS Net Borrowing from
10. NFPS net borrowing from the domestic banking system, including the central bank, is defined as the stock of loans and advances, net of deposits, to the central government and the rest of the nonfinancial public sector at each relevant date, in foreign and domestic currencies. Public bonds held by banks, will be included as loans to the central government.
11. Changes in foreign currency loans and deposits will be measured in pesos, excluding valuation changes.
12. The ceiling on the change in NFPS net borrowing will be adjusted by a total of no more than US$70 million in 2004 in the following ways:
13. Deviations in debt relief and external financing which combined exceed the ceiling of US$70 million will give rise to immediate consultations with the IMF staff to determine their nature and the need for further fiscal measures.
14. For accounting purposes, dollar figures will be converted to pesos at the exchange rate of December 4, 2003 (DR$40).
15. For March, June, September, and December of 2004, the cumulative ceiling will be measured from end-December 2003.
16. The data used to monitor this variable will be provided by the central bank.
C. Ceiling on Central Bank Net Domestic Assets (NDA)
17. Central Bank Net Domestic Assets (NDA) are defined as the difference between Augmented Monetary Base (AMB) and Augmented Net International Reserves (ANIR). AMB is the sum of emisión monetaria and deposits held by financial institutions at the central bank to meet reserve requirements on foreign currency deposits. ANIR is the sum of Net International Reserves (NIR), as defined below, and the central bank foreign currency holdings that are the counterpart of financial institutions' foreign currency deposits at the central bank. Emisión monetaria includes currency issue (currency in circulation plus cash in vault) and peso deposits held by financial institutions at the central bank (peso reserve requirements and other peso deposits).
18. To meet this performance criterion at each relevant date, the 10-day average of daily NDA values must be below the ceiling. The 10-day average will be calculated on the basis of four working days before and five working days after each relevant date.
19. The ceilings on NDA have been computed assuming that the expected conversion of certificates of Saving and Loan (S&L) institutions into reserve requirements will have the following effect (increasing NDA):
20. The ceiling on NDA will be adjusted by the difference between the actual and programmed effect of this conversion.
21. For accounting purposes, dollar figures will be converted to pesos at the exchange rate of December 4, 2003 (DR$40).
D. Continuous Ceiling on the Gross Accumulation of Public Sector External Arrears
22. The central government and any other entity of the nonfinancial public sector, as defined above, as well as the central bank, will not incur arrears in the payment of their external obligations at any time during the program. Arrears are defined as a delay in the payment of contractual obligations beyond the grace period set in the respective loan contracts.
23. Prior to possible treatment by Paris Club creditors in 2004, the ceiling on the accumulation of external arrears will be adjusted upwards by the portion of these arrears that are on reschedulable pre-cutoff date debt service. The Paris Club cutoff date is June 30, 1984.
24. The daily data used to monitor the accumulation of external arrears will be provided bi-monthly by the central bank.
E. Cumulative Ceiling on the Contracting of External Debt by the Public Sector
25. The contracting of external debt2 by the public sector is defined as the contracting or guaranteeing of medium and long-term external debt with original maturity of one year or more by the central government, the rest of the nonfinancial public sector, and the central bank, and approved by Congress by each relevant date. It will be measured in U.S. dollars (debt denominated in other currencies will be converted to dollars using the exchange rates as of end-2003) and will exclude arrangements with the IMF.
26. The ceiling on the contracting of external debt will be adjusted upwards by the amount of financing obtained under debt management operations to reduce the stock of central bank certificates.
27. For March, June, September, and December of 2004, the cumulative ceiling will be measured from end-December 2003.
28. The data used to monitor debt contracting will be provided by the central bank after reconciliation with Secretaría de Finanzas and Secretaría Técnica de la Presidencia.
F. Floor on Central Bank Net International Reserves (NIR)
29. NIR is defined as the difference between gross international reserves of the central bank and short-term liabilities. Gross international reserves include all foreign currency assets that are in the direct effective control of the central bank and are readily available for such purposes of the central bank as intervention or financing of payment imbalances. Such assets include gold (valued at US$356.05 per ounce), cash, deposits abroad (excluding funds used as collateral for central bank or other nonfinancial public sector liabilities), holdings of SDRs, and the IMF reserve position. The counterpart of financial institutions' foreign currency deposits at the central bank will not be included in the gross reserves. Short-term liabilities include deposits at the central bank in foreign currency not related to reserve requirements and debt with the IMF (valued at US$1.41 per SDR).
30. To meet this performance criterion at each relevant date, the 10-day average of daily NIR values must be above the floor. The 10-day average will be calculated on the basis of four working days before and five working days after each relevant date.
III. Indicative Targets: Definition of Variables
A. Cumulative Ceiling on Central Government Expenditure
31. The cumulative ceiling will apply to central government expenditure, as defined in I.A. above.
32. If, in any period, net financing from below the line is higher than the above the line reported deficit, reported expenditure will be increased accordingly to obtain actual expenditure.
33. The ceiling will be adjusted by adding the difference between actual and programmed external grants (donaciones).
34. For March, June, September, and December of 2004, the cumulative ceiling will be measured from end-December 2003.
B. Cumulative Ceiling on the Quasi-Fiscal Loss of the Central Bank
35. The quasi-fiscal loss of the central bank is the negative of the quasi-fiscal balance of the central bank. The quasi-fiscal balance is defined as interest earnings on gross international reserves and other earnings in cash, effectively received by the central bank, including those on other foreign and domestic assets, minus all operating expenses, commissions and interest paid on all liabilities. Revenues will include part of the comisión cambiaria (1.75 percentage points) and the fees on cleared checks of 0.15 percent.
36. Profits and losses arising from valuation changes of foreign currency denominated assets and liabilities will not be considered to determine the quasi fiscal balance.
37. For March, June, September, and December of 2004, the cumulative ceiling will be measured from end-December 2003.
38. The information on the quasi fiscal balance will be provided by the central bank.
C. Cumulative Floor on the Change in Central Government
39. Central government deposits at the central bank are defined as noninterest bearing deposits denominated in local currency. The change in deposits will be adjusted by a total of no more than US$70 million in the following way:
40. The change in deposits will be measured from end-December 2003. For accounting purposes, dollar figures will be converted to pesos at the exchange rate of December 4, 2003 (DR$40).
D. Ceiling on Monetary Base
41. Monetary base is equivalent to emisión monetaria, as defined by the central bank. Emisión monetaria includes currency issue (currency in circulation plus cash in vault) and peso deposits held by financial institutions at the central bank (peso reserve requirements and other peso deposits).
42. To meet this indicative ceiling at each relevant date, the 10-day average of daily monetary base values must be below the ceiling. The 10-day average will be calculated on the basis of four working days before and five working days after each relevant date.
43. The indicative ceilings on monetary base have been computed assuming that the expected conversion of certificates of Saving and Loan (S&L) institutions into reserve requirements will have the following effect (increasing monetary base):
44. The indicative ceiling on monetary base will be adjusted by the difference between the actual and programmed effect of this conversion.
IV. Structural Performance Criteria (Table 3)
A. No Administrative Interference in the Foreign Exchange Market (C. 4)
45. During the period of this arrangement, other than in the context of normal Central Bank operations, the authorities shall not take any administrative, informal, or other actions concerning the foreign exchange markets with a view to manipulating foreign exchange rates, as specified in paragraph 15 of the SMEP.
V. Consultation on Central Government Tax Revenue
46. Central government revenue includes all the revenue collected from existing taxes and proposed measures, nontax revenue, and capital revenue as presented in the budget, excluding grants. The projected revenue that is consistent with the program is the following:
47. If, in any period, the cumulative central government revenue for 2004 falls below this projection, the authorities will consult with the IMF staff on the need for compensatory measures, as mentioned in paragraph 5 of the SMEP.
VI. Monitoring and Control of Externally Financed Capital Expenditure
48. To ensure that total capital spending remains within the levels envisaged in the program, as mentioned in paragraph 5 of the SMEP, the International Department of the central bank, in coordination with Onapres (Oficina Nacional de Presupuesto) and Secretaría Técnica de la Presidencia, will produce monthly statistics to monitor the in-kind capital expenditure (to be included in the calculation of total central government expenditure, as mentioned in I.A). The list of projects being executed will be compared with those included in the budget approved by congress on a monthly basis.
VII. Reforms in the Banking Sector
49. All measures contained in the attached matrix of financial sector reforms (Table 1) will be implemented in full consultation with IMF staff.
VIII. Recommendations of the Safeguards Assessment Report
50. The priority recommendations of the recent IMF safeguards assessment report have been included as structural benchmarks (LOI, para. 5). The attached Table 2 contains the full description of such recommendations.
IX. Unification of the Foreign Exchange Market
51. The unification of the foreign exchange market mentioned in paragraph 14 of the Supplementary Memorandum of Economic Policies will entail that all foreign exchange transactions of the private and public sectors are settled in a single free market.
X. Information Requirements
52. To ensure adequate monitoring of economic variables and reforms, the authorities will provide the following information:
1 Including Law 104-99 (DR$2.5 billion remaining), the Law 172-03 (DR$5.1 billion).
2 This performance criterion applies not only to debt as defined in point no. 9 of the IMF's Guidelines on Performance Criteria with Respect to Foreign Debt (Decision no. 6230-(79/140), August 3, 1979, as amended by Decision nos. 11096 (95/100), October 25, 1995 and 12274 (00/85), August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received.
Mr. Horst Köhler
International Monetary Fund
Washington, D.C., USA
Dear Mr. Köhler:
Since our letter of January 23, 2004, new information on the public finances makes it virtually certain that two quantitative performance criteria set in the Stand-by Arrangement (SBA) for end-December 2003 were not observed. Therefore, the government of the Dominican Republic requests waivers for nonobservance of the performance criteria pertaining to the overall balance of the nonfinancial public sector and the domestic bank financing of that balance for end-December 2003. This request replaces the request for waivers of applicability affecting the same two performance criteria which was included in our letter of January 23.
At the same time, we request a factual correction to the third sentence of paragraph 12 of the Supplementary Memorandum of Economic Policies attached to our letter of January 23, 2003. The reference to 12 percent base money growth in 2004 is inaccurate. The associated sentence should now read as follows: "Consistent with the objective of stabilizing peso base money, quantitative performance criteria for 2004 are proposed in Table 1 on the net domestic assets of the central bank."
José Lois Malkún