This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 006999

SIPDIS

DEPT FOR WHA/CAR, WHA/PPC, WHA/EPSC, EB GREENWOOD, EB/OMA/
RFRISBEE; DEPT PASS USAID/LAC, USTR; NSC FOR HCRUZ;
TREASURY FOR NLEE, RTOLOUI, LLAMONICA; SECDEF FOR OSD;
JUSTICE FOR OIA

E.O. 12958: DECL: 12/03/2013
TAGS: EFIN ECON ECIN DR
SUBJECT: PRESIDENT MEJIA SETS UP INVESTIGATION TO GET THE
DOMINICAN EXCHANGE RATE RIGHT

Classified By: DEPUTY CHIEF OF MISSION LKUBISKE.  REASON 1.5 (B&D) 

¶1. (U) Summary.  In a December 2 meeting, President Mejia
insisted that the exchange rate must go down sharply and told
attendees that military and police officers will be watching
exchange houses to detect questionable transactions.  Most
exchange houses have agreed not to sell dollars for more than
RD40 to dollar.  The Government asserts that it is not
instigating exchange controls but instead wants the rate to
return what it should be -- about 30 to the dollar, according
to some.  So-called voluntary agreements to sell dollars at a
set rate have regularly been tried in Dominican history, with
short-lived results.  The use of military and police is new.
Mejia has reiterated his commitment to reaching agreement
with the IMF on a revised program.  The Central Bank will
publish a communique tomorrow (see final para below),
stressing its aim of deterring criminal behavior.  Ambassador
and emboffs raised questions on December with a wide range of
contacts and stressed the impact that the poorly explained
initiative could have on business confidence and the value of
the peso.  Exchange trading is routine but thin today, at RD
40 for the dollar.  Dollars may become even more scarce in
coming days. End summary. 

BACKGROUND 

¶2. (SBU) After the peso broke the RD$40 per dollar barrier
again in November and continued to weaken, rumors began to
surface in late November about GODR plans to address the
crisis.  Receiving increasing complaints about the
depreciation of the currency, the President publicly blamed
it on "manipulation" by currency trading houses - which
handle roughly 70 percent of all foreign exchange trading in
the Dominican Republic -- and issued warnings about possible
arrests for illegal hoarding of dollars.

A SHOW OF FORCE

¶3. (C) Immediately following a meeting with his monetary
board December 2, President Mejia harrangued a large meeting
of private and public sector representatives on the
"unacceptable" level of the exchange rate, asserting that the
IMF agreement being revised would become impossible if the
dollar remained at 45 pesos.  The palace had convened
exporters, tourism representatives, local bankers and foreign
exchange traders; Mejia was flanked by administration
officials, all of the military chiefs, the Governor of the
Central Bank, and police officials.  He announced the
formation of a commission to investigate abuses in the
exchange sector, composed of director of internal taxes
Teofilo Tabar, Secretary of the Armed Forces General Jose
Miguel Soto Jimenez, former national police chief under
Balaguer's administration General Rafael Peralta Guerrero,
and former national police chief during the Fernandez
administration (and the first year of the Mejia
administration) General Pedro de Jesus Candelier. We
understand that a banking superintendency official will also
participate.  The President's tough intent was clear.
Previous governments have resorted to jawboning and temporary
pacts on the rate; this is the first time that the military
and police have been associated with one. Embassy does not
know whether the President's new commission has received any
charter or written instructions for its work, nor what
exactly it will do.

¶4. (C) The Dominican financial team has been examining
irregularities in the exchange system over the last several
weeks.  Among concerns which they had notified to Mejia were
avoidance of taxation by exchange houses, operation of
unlicensed exchange operations, and some large transactions
by unknown individuals, in the range of USD 5 to 10 million.
Banking Superintendent Julio Cross and presidential Technical
Secretary Carlos Despradel have assured us that these
suspicious activities are to be the focus of the
investigations.  Despradel says that banking Superintendency
personnel will be sent to at least some of the exchange
houses to inspect and watch their operations.  The GODR
denied reports that uniformed military personnel would be
posted at branches of the four major currency trading houses,
though it acknowledged having been tasked to identify the
location of exchange houses.  During an afternoon visit to
the leading exchange house, Embassy staff saw no military
presence; Embassy Defense Attache learned from a military
contact that no order has been issued on the subject.

¶5. (C) Bankers and currency traders acceded "voluntarily"
under this pressure to cap the price of the dollar at 40
pesos.  In the discussions some exchange house
representatives suggested that dollar purchases be set at
RD38/1 by December 7 and then reduced progressively by 2
pesos per week until reaching a level between RD30 to RD32
per dollar.  Banking Superintendent Cross dismissed this
scheme, commenting that the proposal was evidence that
manipulation was already occurring in the markets. 

MONETARY BOARD INSIDER

¶6. (SBU) Monetary Board Member Sonia Guzman (GODR Secretary
of Industry and Commerce) commented to Econoff December 3
that the IMF had made its most recent calculation for a new
standby agreement based on a projected exchange rate of RD40
per dollar.  She confirmed that Mejia had said in the meeting
that there was zero chance of signing an agreement if the IMF
had calculate the rate again due to depreciation.  Guzman
said that Mejia is committed to reaching agreement with the
IMF "no matter what the political costs," but that to do so
the GODR had to bring the exchange rate under control.

¶7. (C) Guzman said that Mejia was disgusted at the shortfall
in voluntary contributions provided by exporters and tourism
operators toward fiscal goals.  When Finance Minister
Calderon reported contributions at only RD 74 million
(scarcely more than USD 2 million), far short of projections,
Mejia was so infutriated that he ordered the Minister to
return all of the money.  (Guzman said she would approach the
President to convince him that the GODR should retain at
least the free trade zone companies' contributions.)

A "VOLUNTARY" RATE
 
¶8. (C) Embassy obtained a copy of a circular notice sent out
by the association of exchange houses on December 2 advising
members that the meeting had agreed that the rate would not
exceed RD40, and that "respect for this measure is
obligatory."  In fact, banks and exchange houses were posting
rates in this range today -- but volumes were low and some
houses were refusing to deal at all.  One operator of a
legitimate exchange house commented that he was not concerned
at all by the enforcement measures (aimed at questionable
operations) or by the rate.

EMBASSY INVESTIGATION AND ADVOCACY

¶9. (SBU) In the course of December 3 Ambassador and Embassy
officers contacted a wide spectrum of government and private
sector actors, seeking clarification about these events and
stressing the importance of preserving the free functioning
of the exchange markets. Emboffs stressed the need for the
GODR to make clear its measures and intentions in order to
prevent the gathering alarm.  Presidential Technical
Secretary Despradel, in a late afternoon visit to the
Embassy, told Ambassador that in response the government had
thought of issuing a message from the cabinet, but had
settled on a communique from the Central Bank as more
appropriate and easier to complete.  He subsequently faxed
the version to the Embassy.  To be released tomorrow,
December 4, it emphasizes the GODR adherence to the aim of
free competition in a properly regulated market and advises
of the intention to investigation financial irregularities
such as money laundering.  The communique does not address
the "agreed" rate in the market.  (See informal translation
below.)

COMMENT

¶10. (C) Mejia's measures were a triumph of political
grandstanding and a unsustainable approach to the exchange
market.  A certain amount of clean-up in the sector will do
everyone some good and could yield tax revenues and fines.
But the President's choice of muscle for the committee was,
in our opinion, a grave mistake.  The Armed Forces have no
technical competencies in this area, other than the
intelligence operations of last week to scout out the
location of unlicensed exchange houses.  And Mejia's
appointment of Police General Pedro Candelier is a heavy
handed, empty threat of force.  (NOTE:  Candelier was
notorious for corruption and for tolerating extrajudicial
police killings during his tenure as National Police Chief.)

¶11. (SBU)  Begin text of informal translation of Central Bank
communique to be released on December 4:

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

-
CENTRAL BANK COMMUNIQUE TO THE NATION

The Central Bank and the Banking Supervision authorities wish
to inform the public concerning the outcome of the meeting of
Tuesday, December 2, in the presidential palace chaired by
the President of the Republic and attended by the monetary,
fiscal and security authorities as well as representatives of
the banks, exchange houses and private sectors which earn
foreign currency.

¶1.    The reunion of the authorities with the sectors
participating in the exchange market had as its aim the
identification of measures to contribute to an environment
favorable to stabilizing exchange operations and normalizing
their functioning, in conformity with the laws regulating the
markets. 

In their comments to the press, the principal spokespersons
of the banks and the exchange houses emphasized the interest
they share with the authorities in supporting the elimination
of extra-market factors which prevent the exchange rate from
corresponding to real values.

¶2.    Exchange operations are carried out in the Dominican
Republic in the framework of a free market, with the
assistance and safeguards of measures in the Monetary and
Financial Law and the regulations established by the Monetary
Board.  As occurs with any institutionalized market, its
functioning is bound up with the privileges of the agents
participating in the market, which bring with them the duty
to respect established norms and procedures.

¶3.    As in any nation of organized institutions, exchange
operations are supervised by the government authorities and
are carried out according to norms and formal procedures that
must be respected by law.  Fundamentally, the market is a
service offered to its clients by entities that are
constituted under law according to principles of transparency
and certified competence.

¶4.    On the other hand, it should be remembered that the
Dominican Republic is signatory to a number of international
agreements and bilateral cooperation agreements which oblige
the country to remain vigilant and to prosecute crimes
considered by the international community to be extremely
serious, including money laundering, whether originated by
narcotics trafficking, tax evasion, financial fraud, or
terrorist financing.  These obligations involve
responsibilities that must be complied with not only to
protect its own citizens, but also to contribute to the
security of other nations.  With this aim, the appropriate
institutions are investigating exchange operations considered
to be unusual, both for their amounts and because of their
form -- one of the principal themes discussed in the meeting.

¶5.    In conclusion, the monetary authorities confirm once
again their adherence to a system of free exchange and to the
promotion of competition, by means of which they are
confident that stability and necessary transparency will be
re-established in the exchange market, in benefit of all the
clients of its services, the regular functioning of the
productive activity of the nation, and the economic security
of the Dominican people..(end text)
HERTELL