Bank scandal ruins Dominican economy

SANTO DOMINGO, Dominican Republic — When Sandro Batista smashed his banana truck into a tree in April, leaving him with two hideously shattered legs and a broken arm, his orthopedic surgeon sent his sister shopping.

The country's largest public hospital, Hospital Dario Contreras, didn't have painkillers or the steel pins, screws and plates needed to put Batista's bones back together, or even the blood to get him through the operation. So the surgeon gave Alicia Batista a list and sent her on her way.

"The quality of our medical care has deteriorated tremendously," said Guillermo Garcia Lorenzo, the surgeon who operated on Batista. "A year ago, we had a storeroom filled with everything we needed, but now, nothing."

Batista's ordeal, which cost his family about six times his monthly income as a truck driver, illustrates how quickly this country has been transformed from the envy of Latin American economies into a nation in the midst of its worst economic crisis in decades. Analysts here trace the fall largely to a single event: a banking scandal that last year cost the government $2.2 billion, or about 15 percent of the country's gross domestic product, which sent inflation soaring and severely devalued the peso, the national currency.

The result has been an almost overnight reversal in fortunes in this steamy Caribbean country, a top U.S. tourist destination just east of Cuba that shares the island of Hispaniola with Haiti. What was until recently a dependable bright spot in a region of economic and political uncertainty is now another vulnerable nation on the U.S. front porch.

So many Dominicans are trying to flee the desperate conditions that the U.S. Coast Guard is intercepting far more Dominicans at sea than Cubans or Haitians. Nearly 5,000 Dominicans have been picked up trying to reach the United States since October, compared with 1,748 in the entire year before that and fewer than 200 two years before. Last month, 55 Dominicans died at sea trying to reach Puerto Rico in a small open boat.

After a decade of strong growth, the Dominican economy shrank in 2003 for the first time since 1990. Joblessness is soaring and inflation has averaged 56 percent in the past year, according to the central bank. The peso has lost more than half its value against the dollar, causing deep pain in a nation that imports most of what it consumes. Prices have more than doubled in the past year for food, milk, propane gas for cooking and other daily necessities. Worker strikes and fuel shortages are adding to the sense of paralysis.

$6 billion foreign debt

The government inherited by President Leonel Fernandez, who was sworn in Aug. 16, is hobbled by nearly $6 billion in foreign debt, making it nearly impossible to provide even the most basic services, from medical supplies at public hospitals to trash pickup.

Power failures lasting up to 20 hours a day are causing growing frustration as the cash-strapped government is unable to provide $400 million in past-due payments to private energy companies. Without reliable power, families are unable to keep food refrigerated or fans running. Traffic lights are dark, babies are often delivered by flashlight at the country's largest maternity hospital, and surgeons at Dario Contreras said they often must stop in the middle of operations when the lights go out.

Miguel Ceara-Hatton, an economist with the United Nations Development Program here, said his agency will soon release a report concluding that at least 1 million Dominicans have slipped below the poverty line in the past three years, meaning that close to 5 million people, or nearly 60 percent of the population, live in poverty.

In La Cienaga, a poor riverside neighborhood in the capital where most men hang around the corners waiting for someone to offer them odd jobs, Belgica Amador, 53, said that in the past year or two her life has become "100 percent worse in every way."

She said that the cost of an egg has gone from one peso to five, while the prices of chicken and powdered milk have roughly tripled. She tries to cook several meals at a time to conserve propane, and her power is out about 15 hours a day.

"If you talk to young people here, they all want to get out and go to the United States," Amador said.

Bailout of one bank

Analysts here said the cause of much of the trouble was the collapse and government bailout of Banco Intercontinental SA, then the country's third-largest bank. In September 2002, investigators discovered that the bank had kept two sets of books for more than a decade, covering up massive bad loans and lavish spending.

Bank President Ramon Baez Figueroa was one of the most powerful and flamboyant men in the nation, with a private fleet of yachts, planes and helicopters, and a long record of generous giving to those in power. Central bank investigators discovered that Baez's bank provided a free credit card to the office of then-president Hipolito Mejia, and Mejia often borrowed Baez's jets for presidential trips.

In May 2003 the central bank stepped in and paid $2.2 billion to cover all the bank's deposits. The massive bailout was widely seen as political payback to save the bank's wealthy and well-connected depositors.

Ceara-Hatton said that 1 percent of the bank's customers accounted for nearly 80 percent of the deposits and that Mejia's government "decided to save them."

No one has been convicted of a crime in the case, and several analysts here said the Dominican justice system is not strong enough to fully investigate a case that involves so many of the nation's political elite.

With the devaluation and economic chaos that resulted from the central bank's decision to flood the market with newly printed pesos, the nation's GDP fell from $21.7 billion in 2002 to $16.8 billion in 2003, according to central bank numbers, and analysts predict a further decline this year.

"They destroyed everything," Ceara-Hatton said. "Everyone in this country is now paying for that decision."

Despite all the grim statistics, many here are optimistic that things could start improving with the inauguration of Fernandez, a lawyer and university professor whose first term as president, from 1996 to 2000, coincided with the country's most robust economic growth in a generation. Fernandez, whose first term was tainted by a scandal involving the disappearance of $100 million in government funds, was barred from seeking re-election by term limits that have since been abolished.

In his inaugural address, Fernandez, who defeated Mejia by a landslide in May elections, vowed government austerity and sharp cuts to the heavy spending, borrowing and government hiring that marked Mejia's term.

"The challenge for Leonel Fernandez is to convince people that the worst is over," said Bernardo Vega, a former Dominican ambassador to the United States and former head of the central bank.