MORE ON FREE TRADE AGREEMENT TLC.

The Free Trade Agreement (TLC) with the United States is the most important topic on financial matters in the Dominican Republic. Its importance lies in the structural changes that it could produce, such as reduction of tariff bariers, not volumes, and duties. Other probable changes might affect the legal structure, particularly Law number 20-00 on Industrial Property, regarding the time granted for patent protection and information disclosure, and Law 173 ton the protection of import agents.

A corollary of these changes would be (in connection with the two laws above mentioned) that the domestic pharmaceutical industry would be totally unprotected against the possibility of a massive incursion of foreign markets with medicines priced apparently higher than those made in this country. With respect to legislation 173, its derogation would imply in theory the entry to the Dominican Republic of products and trademarks from any region, wich would affect the local industry.

The agreement has been criticized mostly by those who believe that it would not be advantegeous for this country which (according to the view point of this group) already had preferential tariffs for export volumes to the United States, not for individual items, as are currently being negociated. For those who share this opinion, a change of government might result in stagnation for the agreement, because the new government will not have the support of the Dominican Congress.

Nevertheless, the agreement seems to be a done deal, and this country should proceed to submit its letter of intent before March of this year, with a schedule of those products and items that would be the subject of customs liberalization. However, statements made by Ms. Sonia Guzmán, the Chief of the negociating team of the Dominican Republic, seem to indicate that the tariff structure will be affected within a range of 60% to 80%. This will undoubtedly represent a sacrifice in terms of government income and will probably be compensated by amending the Tax Code. According to the information received, the labor aspect of the agreement and intellectual property were left pending for the round in Washington.

THE AGREEMENT MADE WITH IMF INVOLVE CHANGES IN THE TAX SRUCTURE.

The Dominican Republic breached the first agreement made with the IMF when it bought the energy companies Union Fenosa, Edenorte and Edesur, which resulted in a huge financial deficit for the government, because it had to apply large sums to such purchases. Under the new agreement concluded with the IMF the government is commited to strengthening its tax controls and its receipts structure, and to work on preventing tax evasion, as well as to curb monetary emissions in order to control, among other things, the increase in the rate of exchange of foreign currency. The government should als refor the energy sector in order to recuperate the energy distribution companies and stabilize the system. This will result, no doubt, in higher electricity bills, which are already too high.

In 2004, the government should implement financial policies equivalent to 205% of the Gross Domestic Product; increase taxes in 0.5%, and reduce its expenses by 2%. The projections for the external account is that there should be a surplus with a financing need of more than US$1,000,000.00.

PURPOSES OF THE AGREEMENT

• To ensure the reduction of the public sector debt in order to arrive at 40% of the GDP in 2008, through strong financial growth and the sale of public assets (real estate, mines, shares of stock and securities in the Central Bank) equivalent to 6% of the GDP.

• To reduce public deficit to 3.75% in 2004, and to further another reduction of 1.8% of the GDP in 2005, after the tax reform becomes effective.

• To eliminate tax exemptions to the ITBIS (tax on the transfer of goods an services) and other Income Tax exemptions, and to review tax rates including ITBIS and Selective Consumption Tax.

• To stablish an independent tax authority for customs and for internal revenue.

• To criminalize tax evasion.

• To prepare a reform proposal by the end of March, to be submitted to Congress before July, in close consultation with the IMF. This should focus on extending the internal revenue tax base, revising the rates, eliminating distortions, and compensating for tariff reductions.

After learning of such objectives, some risk analysis entities have concluded that the Dominican Republic will not offer an appropriate enviroment for investing until after this coming May, when presidencial elections will be held. British corporation Fitch estimated that the political problem weakens the conditions for investing in the Dominican Republic. According to these analysts, at a time like this, disbursements of loans by international credit institutions may be delayed. According to this company, a change in the financial conditions of the Dominican Republic will depend to a great extent on the execution, without further interruptions, of the agreement with the IMF.