The Creeping Modification of the Dominican Bond Repayment Law.

Last April 11, 2012, the headlines showcased Dominican economic growth. The Governor of the Central Bank of the Dominican Republic said that “the economy was on the right track“, adding that “the economy was growing within the programmed target between 4% to 5% by year end, but closer to 5%.” Maybe the Central Bank’s qualified technicians are working to achieve these growth levels: but politicians are about to rain on their parade.

While the Central Bank gave these statements, the media provided weak coverage on the modification bill of the Law on Public Debt Payment that was approved in the Senate. Like a magical act of official distraction the upper chamber approved the bill without much discussion. The news hardly made the headlines, and the intent behind it was cleverly diluted in arcane and unappealing financial jargon.

With the purported amendment of the Law on Public Debt Payment, the government is trying to hit a Grand Slam Home-run, right in the bottom of the ninth inning of the game. Basically, this bill would amend the Sovereign Bonds Law No. 193-11 of July 27, 2011, authorizing the Dominican Treasury to issue bonds (debt securities) in the tune of 7 Billion Dominican pesos. This is the second amendment of said Bond Act No. 193-11. Late last year, Law No. 352-11 had already increased the amount available for placement in debt securities (a bill that dominican taxpayers must repay) from 7 Billion to 12 Billion Dominican pesos! A modest increase of about 71.43% . Petty change, of course.

However, there is a catch to the new amendment proposal. It states that the bonds would “be used to pay the balance of administrative debt generated until December 31, 2011, by the Central Government and autonomous non-financial institutions, including the Agricultural Bank.” (Emphasis added by author). But wait a minute… why include debt generated up to December 31st 2011 within the scope of the bonds issued under Law No. 193-11? Originally, the Bonds Law No. 193-11 stated that the securities were for “partial cancellation of the balance of the Public Debt Management contracted by the Central Government in previous years from the effective date of this Act” .

By running the cut-off date, the government is financing the current year´s deficit at the expense of the existing bond program for the capitalization of the Central Bank-something that the IMF had conditioned us to do under the conveniently suspended Stand-By Arrangement. The reality is that by May 2012 the government has already spent more than what was projected for expenditure under the State Budget Law 2012.

What does this mean? That when the Dominican Congress passed the General State Budget Law for 2012, it lacked the foresight to properly plan expenditures for the election year. Therefore, in more than one occasion Congress realized that the 2012 Budget Deficit would be higher than what was initially planned.

Some economists, such as Professor Apolinar Veloz, have raised flags saying that the government has exceeded its budgeted deficit for 2012 by a whopping DOP 9 Billion. So,  by increasing its debt capacity, the government has raised the “limit on its credit card”, sweeping the expenditure incurred until 31 December 2011 under the rug. Under the rug of the bonds of Law No. 193-11, that is.

In my opinion, this amounts to a factual restructuring of the dominican local public debt. It also demonstrates the frivolous ease with which the Dominican State has discretion to modify the terms and conditions of its local debt.

When the 2012 State Budget was approved, we still had the International Monetary Fund (IMF) lurking over the shoulders of the government, checking the expenditure, controlling the agreed borrowing limits and overseeing that the government repay its debt with the Central Bank, which has been dragging on for years.

But contrary to this, what has happened is that our representatives have chosen not to continue repaying the Central Bank debt, and have decided to: (a) increase the borrowing limits by issuing local bonds, and (b) finance the fiscal deficit (including expenses of the presidential race) with internal sovereign debt to be placed in the Dominican securities market.

I am not a financial analyst at an investment bank, but I do understand that this represents a significant increase in local public debt. The leverage levels that we are undertaking as a nation can become detrimental to the payment capacity of the Dominican Government on both its local and international commitments. Eminent dominican economists such as Prof. Isidoro Santana and Prof. Veloz have been emphatically denouncing this situation: the creeping sovereign debt and its effect on our repayment ability as a country at the expense of macroeconomic stability. Which is another way of saying that the fiscal policy mismanagement by the central government is reversing the hard work and the good intentions of the Central Bank.

Dear inexhaustible dominican taxpayers: expect the coup de grace when we have to renegotiate (crawl and beg) the Stand-By Arrangement with the IMF after the electoral carnival  has passed.

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