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  On "Subject" mention article name and author

"Grocery shop' in need of overhaul"

By Canute James

Financial Times, Apr 10, 2001

Fernando Alvarez Bogaert has a straightforward approach to the job of managing his country's finances. "The government is handling itself like a small grocery shop," says the Dominican Republic's finance minister. "The state is strictly spending only the money that comes in."

Standing at the helm of what the United Nations Economic Commission for Latin America and the Caribbean says is the fastest expanding economy in the hemisphere, Mr. Alvarez's approach is about to become more challenging. There are indications that the country of 8m people, sharing the island of Hispaniola with Haiti, is developing a widening deficit despite Mr. Alvarez's dictums.

However, Hipolito Mejia, a social democrat who became president eight months ago, maintains that a package of social programs, to be financed by new and increased taxes, will not be changed because of the critics.

Mr. Mejia took over with a widening deficit. The president has blamed Leonel Fernandez, his predecessor. "The previous administration 'forgot' the most elementary norms of prudence in managing the budget, and. . . created a situation of apparent bonanza that some merrily called an economic miracle," the president says.

The International Monetary Fund concurs that Mr. Fernandez incurred "election-related expenditure overruns" in the face of last year's presidential election. But the government is being warned its policies could make the problem worse.

Mr. Mejia's spending programs includes the completion of public works left unfinished by the Fernandez administration, meeting debt obligations, "combating poverty", subsidizing agriculture and freezing the prices of basic food. The administration has raised consumption taxes and is taking more from sales of alcohol and motor vehicles.

Collecting enough to finance the program is a difficult task. The country's tax machinery is inefficient; tax evasion is rampant. Teofilo Tabar, the director of internal revenue, is not hopeful. He says that only one out of every six companies is paying sales tax.

This is compounded by the government's inclination to spend more on the state sector. The central bank reports that the public sector wage bill increased by 28.4 per cent between January and September of last year.

Mr. Alvarez has rejected charges that a wider-than-expected deficit in January was caused by increased employment by the government. Instead he says it was the result of a Dollars 130m loan from private banks to meet foreign debt obligations "inherited from the previous administration".

The economy, based on tourism, agriculture, mining and manufacturing, is also confronted by the high cost of imported oil. This helped to push inflation last year to 9 per cent, the highest in the past five years.

Business is worried. The government's tax measures have led to a slowdown in spending and sales, said Antonio Espin, president of the Herrera Association of Industries.

Doubts about maintaining the current rate of economic expansion are increasing. The Antillean Center for Economic Studies, a local economic think-tank, has forecast that the government will need to sign a loan agreement with the IMF this year.

It says the economy will decelerate by about 20 per cent, with inflation getting close to 14 per cent. It also forecasts a depreciation of the Dominican peso. International reserves will decline, it says. It forecasts economic expansion of 6.2 per cent for 2001.

As one of the country's leading bankers comments: "Mr. Alvarez's 'small grocery shop' will still be in business, but in some difficulty, and will need a credit facility. Mr. Mejia's economic policies will force Mr. Alvarez to spend more than he is collecting."


April 29, 2001
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