panama: country strategy with the idb (2010-2014)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

PANAMA

IDB COUNTRY STRATEGY

NOVEMBER 2010 – DECEMBER 2014

This document was prepared by the project team consisting of Marcelo Antinori (CID/CPN), Rafael Rodríguez-Balza (CID/CID), Cristina Pombo Rivera (CID/CID), Gina Cambra and Gerardo Arias (CID/CPN); Juan Carlos Dugand and Karina Díaz Briones (PDP/CPN); Alberto Barreix and Gilberto Chona (ICF/FMM); Guillermo Collich and Juan José Durante (ICF/CMF); Néstor Roa and Ricardo Reyes-Richa (INE/TSP); Gustavo Martinez and Rodrigo Coloane (INE/WSA); Jorge Mercado (INE/ENE); Carlos Herrán and Armando Godinez (SCL/EDU); Ferdinando Regalía, María Fernanda Merino, Federico Guanais de Aguiar, and Ana Pérez Expósito (SCL/SPH); María Eugenia Roca, Deborah Sprietzer, and Alejandra Fleitas (VPC/PDP); Janine Ferretti, Emmanuel Boulet and Ernesto Monter (VPS/ESG); and Aida Gómez (CID/CID). Rocío Medina-Bolívar and Rafael Cavazzoni Lima (VPC/VPC), Laura Alonso, Anaí Herrera, and Gina Montiel (CID/CID) also contributed with their comments and guidance.

CONTENTS

EXECUTIVE SUMMARY I.

COUNTRY CONTEXT ......................................................................................................... 1

II.

PRIORITY SECTORS OF THE BANK’ 2010-2014 STRATEGY.............................................. 3 A. B. C. D. E. F.

Public finances........................................................................................................ 3 Transport ................................................................................................................. 5 Water and sanitation ............................................................................................... 6 Energy ..................................................................................................................... 7 Education ................................................................................................................ 8 Health ...................................................................................................................... 8

III.

FINANCING FRAMEWORK ................................................................................................. 9

IV.

STRATEGY IMPLEMENTATION ........................................................................................ 11 A. B.

V.

Country systems ................................................................................................... 11 Coordination with other donors ........................................................................... 12

RISKS .............................................................................................................................. 12

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ANNEXES

Annex I Annex II Annex III Annex IV Annex V Annex VI Annex VII Annex VIII

Selected economic and social indicators The government’s strategic plan (PEG) (summary) Financing framework Recommendations of the Country Program Evaluation (OVE) Donor coordination Macroeconomic risk analysis Country Strategy dialogue and consultation process Development Effectiveness Matrix (DEM)

ELECTRONIC LINKS

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Matrix of challenges, alignment, and strategic rationale Government Strategic Plan (PEG) Millennium Development Goals (MDGs) Portfolio report Donor coordination matrix Growth diagnostics Methodological issues and estimation of tax expenses Technical note: Fiscal management Technical note: Transport Challenges and proposals for energy sector development Technical note: Energy Sector note: Water and sanitation Social inclusion in Panama: The indigenous population Technical note: Indigenous peoples Technical note: Education Indigenous Peoples and their educational challenges Technical note: Health Technical note: Fiduciary strategy Technical note: Environment Independent macroeconomic assessment (IMA) (for internal use only) Environmental action plan Public debt and fiscal sustainability analysis

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ACRONYMS AND ABBREVIATIONS

AECID ANAM ASEP BCS-PN CAF CGR CI CID CID/CPN CONADES CPE DGI EIB ETESA FAO FECASALC

GDP IDAAN IICA IMF ISLR ITBMS JAARs JBIC JICA LRSF MEDUCA MEF MINSA MOP NFPS NSG OECD

Agencia Española de Cooperación Internacional para el Desarrollo [Spanish International Development Cooperation Agency] Autoridad Nacional del Ambiente [National Environment Authority] Autoridad Nacional de los Servicios Públicos [National Public Services Authority] The Bank’s country strategy with Panama Corporación Andina de Fomento [Andean Development Corporation] Contraloría General de la República [Office of the Comptroller General of the Republic] Contingent instrument Country Department Central America, Mexico, Panama and the Dominican Republic Country Office in Panama Consejo Nacional para el Desarrollo Sostenible [National Sustainable Development Council] Country Program Evaluation Dirección General de Ingresos [Revenues Bureau] European Investment Bank Empresa de Transmisión Eléctrica S.A. [Electricity transmission company] Food and Agriculture Organization of the United Nations Fondo Español de Cooperación para Agua y Saneamiento en América Latina y el Caribe [Spanish Cooperation Fund for Water and Sanitation in Latin America and the Caribbean] Gross domestic product Instituto de Acueductos y Alcantarillados Nacionales [National Water Works and Sewerage Board] Inter-American Institute for Cooperation on Agriculture International Monetary Fund Impuesto sobre la Renta [Income tax] Impuesto de Transferencia de Bienes Corporales Muebles y la Prestación de Servicios [Goods and services sales tax] Juntas Administradoras de Acueductos Rurales [Rural water management boards] Japan Bank for International Cooperation Japan International Cooperation Agency Ley de Responsabilidad Social Fiscal [Fiscal Social Responsibility Law] Ministry of Education Ministry of Economy and Finance Ministry of Health Ministry of Public Works Nonfinancial public sector Non-sovereign guaranteed Organisation for Economic Co-operation and Development

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PAHO/WHO PEG RF SDP SEA SECMA SG SIAFPA SINECA SINIP UNDP UNEP UNFPA UNICEF USAID WB

Pan-American Health Organization/World Health Organization Plan Estratégico de Gobierno [Government strategic plan] Reserve fund Sustainable development program Strategic environmental assessment Secretaria Ejecutiva del Consejo Monetario Centroamericano [Executive Secretariat of the Central American Monetary Council] Sovereign guaranteed operation Sistema Integrado de Administración Financiera [Integrated Financial Administration System] Sistema Nacional de Evaluación de la Calidad Educativa [National Learning Quality Evaluation System] Sistema Nacional de Inversión Pública [National Public Investment System] United Nations Development Programme United Nations Environment Programme United Nations Population Fund United Nations Children’s Fund United States Agency for International Development World Bank

EXECUTIVE SUMMARY

Panama has been one of the fastest-growing emerging economies over the last few years, expanding by an average of over 9% per year in real terms between 2003 and 2008.

Following a brief slowdown in 2009 in the wake of the international financial crisis, medium-term growth prospects (2010-2014) are highly positive, ranking the country as one of the Latin American economies with the greatest growth potential over the next five years.

Although Panama has been expanding vigorously and has made major progress in the fiscal domain, its development in recent years has been characterized by great disparities, in both geographic and opportunity terms. Economic activity is concentrated around the Canal Zone, where most of the country’s infrastructure and services are located, more than half of the population lives, and over 80% of GDP is produced. In contrast, the poverty rate in rural areas is 59.7%, but just 7.7% in urban zones; and extreme poverty mostly affects the indigenous population.

In brief, Panama’s comprehensive development faces the following challenges: (a) strengthening public finances, increasing revenue, and making expenditure more efficient, to allow for the investments needed in core sectors under a framework of mediumterm fiscal sustainability; (b) developing basic infrastructure especially in the country’s provinces beyond the province of Panama and the province of Colón [hereinafter referred to as “other provinces”], thus expanding economic and social opportunities in areas outside the Canal Zone, to reduce high levels of poverty; and (c) facilitating access to quality services in education, health, and nutrition, particularly in the indigenous territories and in rural areas.

The Bank’s Country Strategy with Panama for 2010-2014 will focus on the following sectors: (i) public finance; (ii) transport; (iii) water and sanitation; (iv) energy; (v) education; and (vi) health. The Bank will also endeavor to strengthen country systems in the areas of financial management, government procurement, and the environment.

The Bank’s financial framework for sovereign-guaranteed (SG) approvals for 2010-2014 is estimated at US$990 million. This approvals framework, together with the existing portfolio, will make it possible to disburse sufficient resources to keep the Bank’s average share of Panama’s external financing at 15%.

The main macroeconomic risks affecting implementation of the Country Strategy include a slower recovery of the United States economy, which could have an impact on the country’s growth and thus generate a drop in tax revenues. Nonetheless, the likelihood of this risk materializing is low, and it would not affect the main debt indicators, as shown by the analysis of fiscal and debt sustainability.

RESULTS FRAMEWORK Objectives of the Government Strategic Plan (PEG)

IDB Intervention Sectors

IDB Strategic Objectives

Sustainable public finances:

Higher tax revenue.

Guarantee a simple and fair distribution of the tax burden, while maintaining sector competitiveness.

Public finances

A.1- Raise revenue levels and modernize tax administration.

Transport B.

Expand coverage and improve the quality and competitiveness of road infrastructure and logistical support services.

Use of public investment systems and multiyear resultsbased budgets A.2- Improve the management and efficiency of public expenditure

Modernize financial administration, strengthening institutional capital to design and evaluate investments.

Greater international tax transparency and coordination.

Modernization of the tax administration

A.

Implement resultsbased fiscal management, under a principle of discipline and timely and correct resource allocation.

Expected Strategy Outcomes

B.1- Improve the quality of road infrastructure and strengthen its maintenance in the country’s other provinces (c)

Indicators

Baseline (Source) (a)

ISLR (income tax) revenue as a percentage of GDP.

2009: 4% (Ministry of Economy and Finance MEF)

2014: 4.6% or higher

ITBMS (sales tax) revenue as a percentage of GDP

2009: 2% (MEF)

2014: 3% or higher

Number of treaties/agreements signed to avoid double taxation

2009: 0% (MEF)

2014: At least 12 treaties/agreements signed

2009: 0% (MEF)

2014: 50%

2009: 0% (DGI)

2014: At least 60%

2009: 0% (DGI)

2014: At least 20%

2009: 0% (DGI)

2014: At least 60%

2010: 0% (MEF)

2014: 90%

2010: 0% (MEF)

2014: 90%

2010: 0% (MEF)

2014: 80%

2010: 0% (MEF)

2014: 90%

% of requests for sharing of tax information responded in due time and manner, out of the total number of requests received % of DGI revenues monitored through the large taxpayer unit % of tax audits performed on large-scale taxpayers, selected using risk criteria (g) % of total sales of the commerce sector monitored through tax printers % of central government institutions using the National Public Investment System (SINIP)

Indicative Targets (b)

Use of the Single Treasury Account (CUT)

% of central government institutions using the multiyear results-based budgeting system % of central government institutions using the web-based Integrated Financial Administration System (SIAFPA) % of central government agencies’ current accounts managed through the CUT

Increase in ex ante fiscal and financial coverage of natural disaster emergency risks

Total amount covered by: Reserve Fund (RF) Contingency instrument (CI)

2009: RF: 0% of GDP CI: 0% of GDP (MEF)

2014: RF: 0.3% of GDP CI: 0.4% of GDP (p)

Increase in the percentage of km of the road network in good condition

% of km of the road network in good condition (International Roughness Index (IRI) - average of 4.0 or less

2010: 34% (Ministry of Public Works - MOP)

2014: 40%

Consolidation of integrated financial administration systems

D.

Promote adoption of measures to ensure permanent energy supply, both in terms of hydrocarbons management and for electric energy generated from various sources.

Energy

C.

Guarantee access to water and sanitation services in most of the country’s urban and rural zones

IDB Intervention Sectors

Water and sanitation

Objectives of the Government Strategic Plan (PEG)

IDB Strategic Objectives

C.1- Increase coverage and quality, and improve the management of water and sanitation services, in the country’s other provinces (c)

D.1- Reduce electricity costs and improve energy efficiency

Expected Strategy Outcomes

Indicators

Baseline (Source) (a)

Indicative Targets (b)

Increase in the proportion of the road network subject to a routine standards-based maintenance

% of the road network that is subject to routine standards-based maintenance (k)

2010: 7% (MOP)

Implementation of a plan to rehabilitate and maintain rural roads

% of rural road network subject to routine maintenance (1)

2010: 0% (MOP)

2014: 4%

Increase in water supply coverage

% of population with access to water in areas served by the National Water Works and Sewerage Board (IDAAN)

2009: 83% (IDAAN)

2015: 85%

% of IDAAN registered customers with access to water with continuous (24/7) service

2009: 80% (IDAAN)

2015: 92%

% of IDAAN water samples in compliance (out of a total sample)

2009: 56% (IDAAN)

2015: 90%

Increase in the coverage of the sanitation service

% of the population with access to sanitary sewerage services in zones served by IDAAN

2009: 62% (IDAAN)

2015: 63%

Improvement in the technical and commercial management of IDAAN

Collection index (amount collected/amount invoiced) Ratio between income collected and disbursable costs and debt service Number of employees per 1,000 water connections.

IDAAN unaccounted-for water index: volume of water not invoiced/volume of water produced

2009: 85% (IDAAN) 2009: 80% (IDAAN) 2009: 5 (IDAAN)

Increase in the quality of the water service

Reduction of marginal costs of generation per increment of transmission and electricity interconnection capacity

Long-term marginal cost of generation

Strengthening of the institutional framework of the electricity market

ETESA regulatory framework approved by the National Public Services Authority (ASEP) (d)(e)

Increase in electric power generation through renewable sources

% total electricity generation from renewable energy sources

2009: 40% (IDAAN) 2009: US$101.37/MWh (Electricity transmission company ETESA) 2009: To be determined during the design of the intervention (ETESA) (e) 2009: 49% (ETESA)

2014: 12%

2014: 90% 2014: 100% 2014: 4.5 2014: 35%

2014: US$49/MWh(n)

2014: To be determined during the design of the intervention 2014: 57% or higher

Education

Guarantee quality education with equal opportunities for men and women

IDB Intervention Sectors

E.

Objectives of the Government Strategic Plan (PEG)

IDB Strategic Objectives

E.1- Improve quality and retention, and expand the coverage of education in indigenous territories

Expected Strategy Outcomes

Indicators

Greater energy efficiency

Energy savings through energy efficiency programs (energy saved/total energy consumed prior to the intervention) (e)

Improvement of learning outcomes in Mathematics and Spanish in the early grades of basic education

% of students attaining intermediate or advanced level in Mathematics and Spanish by 3rd grade (measured by the SINECA test) in the indigenous territories

Increase in student retention through ninth grade

Cumulative retention rate (% of students entering 1st grade who complete the respective grade) at the end of 6th and 9th grades (in the program’s intervention areas)

Increase in pre-secondary and secondary school coverage

Net coverage rate, by level (in project intervention areas) pre-secondary and secondary Maternal mortality rate in indigenous territories

Reduction of maternal mortality

F.

Guarantee access to quality basic health services, giving priority to primary care and to expansion of the hospital network

Health

Maternal mortality rate in rural areas F.1-Reduce health care coverage gaps in indigenous territories and in rural communities

Infant mortality rate in indigenous territories Reduction of infant mortality Infant mortality rate in rural areas Prevalence of chronic undernourishment in children under five in indigenous territories Reduction of chronic undernourishment

Prevalence of chronic undernourishment among children under five in rural zones

Baseline (Source) (a)

Indicative Targets (b)

2009: to be determined during the design of the intervention (ETESA) (e)

2014: to be determined during the design of the intervention

2008: Mathematics 20% Spanish 12% (Ministry of Education - MEDUCA) 2009: 6th grade 48% 9th grade 22% (MEDUCA) 2009: 33.8% pre-secondary 9.6% secondary (MEDUCA) 2008: 2.69 per 1,000 live births (Ministry of HealthMINSA) 2008: 0.97 per 1,000 live births (MINSA) 2008: 18.0 per 1,000 live births (MINSA) 2008: 12.8 per 1,000 live births (MINSA) 2008: 62% (MINSA) 2008: 17.3% (MINSA)

2014: Mathematics 22.5% Spanish 14.5% 2014: 6th grade 72% 9th grade 33% 2014: 50% pre-secondary 15% secondary 2014: 2.55 per 1,000 live births

2014: 0.93 per 1,000 live births 2014: 16.9 per 1,000 live births 2014: 12.1 per 1,000 live births 2014: 59% 2014: 16.2%

Modernize financial administration, strengthening institutional capital to design and evaluate

Financial management and government procurement

Country systems Use the Panama Integrated Financial Administration System (SIAFPA)

Use of SIAFPA for financial management of IDB loans (f)

% of IDB loan portfolio executed under SIAFPA (f)

2009: 0% (MEF)

2014: 80%

Objectives of the Government Strategic Plan (PEG)

IDB Intervention Sectors

Modernization of environmental management

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r)

Strengthen institutional capacity and the functions of the country’s government procurement system Environmental Systems

investments

IDB Strategic Objectives

Consolidate the institutional, legal, and regulatory framework for environmental management

Expected Strategy Outcomes

Increase in the use of procurement modalities and the functionalities of the country’s government procurement system

Improve the institutional and regulatory framework for environmental management

Indicators

Baseline (Source) (a)

Indicative Targets (b)

% of IDB loan portfolio using the country’s government procurement information system (h)

2009: 0% (MEF)

2014: 90%

% of the IDB loan portfolio using some national procurement subsystem (i)

2009: 0% (MEF)

2014: 50%

Regulations under Law 227 approved by ANAM (d) (q)

2010: Law 227 without regulations

2014: Law 227 with regulations

Number of sector guidelines on good environmental practices prepared (d)

2010: 0

2014: at least 3

Number of environmental management agencies technically trained to manage effectiveness indicators (d) (j) (m)

2009: 0

2014: at least 4

The numerical indicators included are currently monitored by different agencies in the country and are updated at least annually.

The indicative targets will be reviewed or replaced, as the case may be, through the programming documents prepared during the country strategy period.

The country’s “other” provinces are the seven provinces beyond the province of Panama and the province of Colón.

Indicators of intermediate outputs rather than outcomes as such, since achievement of the outcomes expected from these interventions will likely extend beyond the country strategy period.

The indicator’s specific unit of measurement will be determined in the context of the respective programming document.

SIAFPA is an integrated financial administration system that includes national budget, treasury, accounting, and reporting subsystems.

Taxpayer risk criteria can be quantitative (financial ratios) or qualitative (sector, attributes, tax history).

The information system being used is the publicity module of the country’s government procurement system (PanamáCompra).

The country procurement subsystem being used is the framework agreement contracting method, which is an agreement between the parties to establish conditions governing the contracts awarded during a given period, particularly in relation to price and, where applicable, the quantity anticipated.

Indicators of the effectiveness of environmental management are: the monitoring and control of projects with environmental impacts and the monitoring of critical areas (watersheds, protected areas or provinces).

Standards-based routine maintenance is defined as the maintenance contracted for a road for a given period of time based on serviceability and safety standards (potholes repaired, cracks sealed, safety barriers replaced, rockfalls cleared, etc.).

Routine maintenance of rural roads is defined as the maintenance contracted for a rural road for a given period of time on the basis of serviceability (12-month year-round access).

The term “environmental management agencies” refers to ANAM, provincial governments, or specific agencies responsible for managing geographic areas or critical zones.

Assuming the 2009-2023 Plan for the Expansion of the National Interconnected System is carried out.

Number of treaties needed to comply with international standards.

According to the 2010 GDP, the Reserves Fund is equivalent to US$80 million and the contingency instrument is equivalent to US$100 million.

The regulations stemming from Law 227 should include at least the criteria for applying the sector guidelines on good environmental practices and specify the terms referring to environmental risk levels (low, medium, and high environmental risks).

The regulations should include, at a minimum, the assignment of the national interconnected system’s management and planning and identify the assignment of specific functions and allocation of financial resources of ETESA.

I. COUNTRY CONTEXT 1.1

Panama has been one of the fastest-growing emerging economies over the last few years, expanding by an average of over 9% per year in real terms between 2003 and 2008. Following a brief slowdown in 2009 in the wake of the international financial crisis, 1 medium-term growth prospects (2010-2014) are highly favorable, ranking Panama as one of the Latin American countries with the greatest growth potential for the next five years. 2

1.2

The financial, commercial, and logistics sectors organized around the Panama Canal have developed strongly over the last decade, fueled mainly by the expansion of world trade in that period. This dynamic has shifted the orientation of the Panamanian economy increasingly towards the services sector, which, at 78%, currently has the largest GDP share of any services sector in Latin America.

Alongside this, over the last decade, the Panamanian government pursued a policy aimed at strengthening public finances, reducing debt levels,3 maintaining macroeconomic stability, and promoting investment in infrastructure—particularly the Canal expansion—and the financial and commercial sectors. This strategy has succeeded in attracting substantial amounts of foreign capital. 4

1.3

Given the economic growth of the last few years and the sustained effort made to consolidate public finances, the fiscal deficit of the nonfinancial public sector (NFPS) narrowed from an average of 3.3% of GDP in the 2000-2004 period, to an average of 0% in 2005-2009. To remain on this stability path, the Fiscal Social Responsibility Law (LRSF), passed in 2008, sets limits on the size of the fiscal deficit and public borrowing levels. This commitment to fiscal stability has been recognized by international markets, which awarded the country investment grade in the first half of 2010. 5

1.4

Despite major progress in the fiscal area and the high growth rates achieved, Panama’s development over the last few years has been characterized by significant disparities, in both geographic and opportunity terms. For one thing, economic

1

2

3 4 5

GDP growth slowed from 11% in 2008 to 2.4% in 2009, basically owing to the impact of the international crisis: the global slump in external demand, slowdown in private construction, and reduction in foreign direct investment flows. Nonetheless, the slowdown in growth was less pronounced than in the rest of Central America, thanks to the start of Panama Canal expansion works.

According to IMF projections, Panama could grow by at least 4.8% in 2010 and by an average of 6.3% in the remainder of the period up to 2014, thus outpacing the Latin American average. Growth would be based on improved external demand as world growth increases, and greater public investment reflecting the expansion of the Panama Canal and the infrastructure works envisaged in the five-year public investment plan.

The country’s total public debt fell from 66.5% in 2000 to 45.1% in 2009.

Foreign direct investment averaged 9.6% of GDP between 2005 and 2009.

The international risk rating agency, Fitch Ratings, gave it a BBB-positive rating in March 2010, while Standard and Poor’s awarded the BBB-stable rating in May, and Moody’s rated it as “Baa3 stable” in June 2010.

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activity is concentrated in the Canal Zone (Panama City, Colón, and their surroundings), where most infrastructure and services are located, 6 where half the population lives, and where over 80% of GDP is produced. The roads that are in the best condition are in the central parts of the country, and the quality of water and sanitation services is better in those areas than in the other provinces. Moreover, the installation of new power generation and transmission capacity has favored demand in the central part of the country, to the detriment of those provinces. For another, the labor market is highly segmented: 9.6% of the population works in the services sector and is relatively well paid, whereas most of the population works in the public sector or in traditional activities such as agriculture and manufacturing, which are generally uncompetitive and located in the country’s other provinces.

1.5

Although economic growth has made it possible to reduce poverty levels by roughly four percentage points over the last five years (from 36.8% to 32.7%), the incidence of poverty is very uneven: 59.7% in rural areas, compared to just 7.7% in urban zones. Moreover, extreme poverty mostly affects the indigenous population.

In 2008 poverty and extreme poverty indicators for the indigenous population were 82% and 52%, respectively, compared to 20% and 5% among the nonindigenous population. Other standard of living indicators, such as nutrition and access to core services show similar disparities. 7

1.6

Against this backdrop, the Panamanian government presented a Strategic Plan (PEG) to the National Assembly in December 2009, which is structured around three major strategy areas: (i) an economy with sustained growth; (ii) an inclusive society with opportunities for all; and (iii) efficient and effective environmental management. Within the PEG framework, the government defined a five-year investment plan, totaling US$13.6 billion, to develop infrastructure, improve social services, and reduce poverty. The plan envisages a 104% increase in the public investment program for the 2010-2014 five-year period, compared to 2005-2009. 8

1.7

In brief, the country’s comprehensive development faces the following challenges: (a) strengthening public finances, increasing revenue, and making expenditure more efficient, to make the investments needed in core sectors under a framework of medium-term fiscal sustainability; (b) developing basic infrastructure, with a focus on the country’s other provinces, thus expanding economic and social opportunities in areas away from the Canal Zone (Panama City-Colón corridor), to reduce the high levels of poverty; and (c) facilitating access to quality services in education, health, and nutrition, particularly in the indigenous territories and in rural communities. Improvements in these services will not only promote inclusion but

6

7

8

In this document, “infrastructure” refers to the transport, water and sanitation, and energy sectors; and the “social sectors” are education and health.

About 55% of the indigenous population suffers from chronic undernutrition, compared to 10% of nonindigenous people. In terms of access to services, the indigenous territories have very low coverage rates in services such as water (57% of indigenous households) and sanitation (14.8%).

The 2010-2014 five-year investment plan identifies public investments on the order of US$13.6 billion (US$2.72 billion on average per year), compared to US$6.676 billion (an average of US$1.335 billion per year) in investments executed for the 2005-2009 five-year period.

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also make it possible to accumulate human capital throughout the country in the long run.

II. PRIORITY SECTORS OF THE BANK’ 2010-2014 STRATEGY 2.1

The Bank’s country strategy with Panama (BCS-PN) for the 2010-2014 period will target six sectors: public finances, transport, water and sanitation, energy, education, and health. These sectors, which were identified in conjunction with the government, support the PEG objectives for the same period 9 and were also selected on the basis of the Bank’s experience 10 and diagnostic studies. 11

2.2

The BCS-PN provides opportunities for programming aligned with the Bank’s approvals targets and sector priorities as defined in the Ninth General Increase in Resources of the IDB. In general, interventions approved during the country strategy period will contribute to the goal of supporting “small and vulnerable countries” (Groups C and D). Specifically, the transport, water and sanitation, education, and health sectors offer opportunities for actions that contribute to the target of “poverty reduction and equity enhancement”, while financing for the energy sector could contribute toward the goals of “climate change,12 sustainable energy, and environmental sustainability”, and “regional cooperation and integration.”

A.

Public finances

2.3

To implement the public investment plan and comply with the LRSF, the government needs to strengthen its public finances. This will require larger tax revenues and more efficient public expenditure, to consolidate its fiscal position in the medium term.

2.4

Revenue: As of late 2009, Panama had total fiscal revenue equivalent to over 20% of GDP, including net revenue from the Panama Canal worth 3% of GDP and income from contributions to the pension system of 6% of GDP. Nonetheless, the country has one of the lowest tax revenue levels in Latin America and Central America, at just 10.7% of GDP. This reflects a tax structure that has fallen behind

9 10

11 12

See Results Framework and Annex II. The Bank's portfolio in Panama as of 30 June 2010 consisted of 28 loans with an approved total of US$683.5 million, with a balance available for disbursement of US$462.9 million (67.7%). The portfolio is very young (80% approved since 2005) and its sector concentration (infrastructure 49%, social 20%, environment 7%, and reform of the State 4%), is fully consistent with the strategic orientation set out in the new country strategy, given the alignment with the sectors to be developed (see Portfolio report).

See Matrix of challenges, alignment, and strategic rationale.

The Bank has started a dialogue on climate change issues with the Panamanian government authorities, with a view to developing possible initiatives during the country strategy period. Preliminary studies on the potential impacts of climate change in Panama suggest the possibility of greater exposure to natural disasters, as well as the effect on the country’s vulnerable ecosystems and their consequences on the population.

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trends in the rest of the Americas. 13 In Panama, the tax base for sales and income taxes is relatively narrow; and the tax administration has major weaknesses in planning, infrastructure, technology, verification, and collection. Moreover, as it is an international center in which large volumes of financial and commercial transactions take place, the country is required by international taxation authorities to maintain timely and high-quality information flows. Nonetheless, the absence of agreements and institutional structures to facilitate this exchange has resulted in the country being included on the watch lists of a number of international organizations, such as the Organisation for Economic Co-operation and Development (OECD).

2.5

Panama introduced two tax reforms in 2009 and 2010, 14 which the Bank aims to complement by targeting actions to raise revenue collection levels and modernize tax administration. This will be achieved by: (i) improving the design of the goods and services sales tax (ITBMS) and income tax, expanding the tax base and setting rates based on best international practices; (ii) implementing mechanisms to improve the transparency and international coordination of taxation, complying with OECD standards on information sharing; and (iii) modernizing the tax administration, to optimize processes and make verification and the fight against tax evasion more efficient. As this is a public-sector area, no non-sovereign guaranteed (NSG) operations are envisaged.

2.6

The main risk relates to implementing the institutional and administrative reforms that these actions require. Although some of the reforms need to be approved through the parliamentary process, the current Panamanian government has a legislative majority and most of the country’s tax laws were passed recently.

Moreover, the implementation of changes in tax administration will be coupled with communication components and the application of best international practices.

2.7

Expenses: 15 As part of the PEG, the government formulated a medium-term fiscal policy that will enable it to make public expenditure more efficient and create the fiscal headroom needed to implement the investment program. To achieve this, the government needs an integrated financial system for public finances that links planning with results-based budgeting, and allows for efficient monitoring of budgetary execution and hence public expenditure. It will also make it possible to provide international markets with timely, transparent, and reliable information on expenditure management. Currently, investment programming, budget, financial administration, and treasury processes and systems only have partial coverage within the central government. They also have outdated legal frameworks and insufficient technological integration to provide the Ministry of Economy and

13

14

15

At 7%, Panama has the lowest rate of value added tax in all Latin America (average 16%), but the highest corporate income-tax rates (27.5%) compared to the Latin American average of 27% and the world average of 25.5%.

In 2009 and 2010, the Panamanian government approved two tax reforms which, among other measures, introduced changes to expand the country’s tax base, increase dividends taxation, raise the ITBMS rate, and reduce the number of exemptions.

The diagnostic assessment and activities described in this section are consistent with the actions relating to country systems (financial management) discussed in chapter IV (paragraph 4.1).

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Finance (MEF) with a timely overview of public expenditure management. The public investment system (SINIP), although based on a project bank, is still only partly developed. The process of formulating the annual budget is done online through the SIPRES-Web system, but coverage is partial in the NFPS, it does not use a multiyear framework, and it is not results-driven. The Integrated Financial Administration System (SIAFPA) has broad coverage but uses an out-of-date technological platform, so public financial management modules are still not fully integrated, and the system cannot yet produce an instantaneous consolidated balance sheet for the central government as a whole. Treasury functions are managed by the Office of the Comptroller General of the Republic (CGR), but public sector cash flow is not controlled or administered under the general treasury account concept. Moreover, given the potential for increased exposure to natural disasters as a result of the effects of climate change, 16 Panama needs to strengthen its capacity to manage the financial impact of natural disaster emergencies. This type of situation could expose the country to major unforeseen fiscal expenses.

2.8

The Bank will target its actions on improving the management and efficiency of public expenditure, by supporting: (i) the use of multiyear results-based public administration and budgeting systems; (ii) consolidation of integrated financial administration systems, to expand their coverage and promote their technological integration; (iii) use of the general treasury account as an efficient way to centralize government liquidity management and optimize the control of resource flows; and (iv) better financial management for natural disaster risks, by introducing reserve funds, risk-contingency instruments, insurance, etc. As this is a public-sector area, no NSG operations are envisaged.

2.9

The main risk concerns the coordination delays that are typical when implementing this type of expenditure management and public finance administration reform.

Although Panama has already completed the initial stages of this process, changes still need to be made to the legal framework to consolidate the functions of the MEF and coordinate activities with other public sector institutions. To mitigate this risk, the Bank will use its intervention mechanisms to promote training, dissemination, and communication of the change to make the reforms viable within the institutions.

B.

Transport

2.10

Panama has an extensive road network totaling roughly 17,000 km, of which 58% is interurban, 24% rural, and 18% urban. Nonetheless, the quality of the road infrastructure is very poor: just 37% of the interurban road network is paved, and of this, 46% is in fair or poor condition, and 80% of rural roads are in poor condition.

Panama’s road infrastructure has deteriorated owing to a lack of routine maintenance, which stems from constraints on the allocation of resources for maintenance, exacerbated by a high concentration of services provided directly by the Ministry of Public Works (MOP) and the absence of efficient road maintenance planning and execution arrangements. In addition, Panama City has an urban transport congestion problem, which lengthens journey times and affects quality of

16

See footnote 12.

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life. This is caused by a fragmented urban transport system, in which different modes of transport operate independently owing to a lack of planning mechanisms and operational integration of the system.

2.11

The Bank’s interventions will aim to improve the quality of road infrastructure and its maintenance, focusing particularly on the country’s other provinces and rural areas by: (i) developing tools for sector planning, activities programming, and works supervision, to ensure efficient use of resources and the design of systems to improve the maintenance of the paved road network and rural roads; (ii) adopting technical standards for maintenance of the rural road network, based on demand, to reduce the amount of investment in reconstruction and maintenance; and (iii) providing technical support for the design and implementation of a comprehensive transport and transit plan for Panama City, including actions to integrate all modes of public transport. No NSG operations are anticipated in this sector.

2.12

The main risks in the sector relate to operational and institutional difficulties in implementing the new road maintenance and rehabilitation system, including weaknesses in MOP supervision and the limited operating capacity of the country’s construction industry. To mitigate this risk, specific interventions will include components of MOP institutional strengthening, and mechanisms to disseminate information and provide training in the new maintenance scheme to be adopted.

C.

Water and sanitation

2.13

In Panama, the National Water Works and Sewerage Board (IDAAN) provides water and sanitation services in urban and rural centers with more than 1,500 inhabitants, whereas the rural water management boards (JAARs) serve smaller communities of fewer than 1,500 inhabitants, under the jurisdiction of the Ministry of Health (MINSA). IDAAN records a high unaccounted-for water rate (on the order of 40%, compared to 25% in Latin America as a whole) compounded by deficient micromeasurement (48%) and collection (85%), resulting in financial deficits. The JAARs, meanwhile, are poorly managed and administered and lack the technical support or supervision that would enable them to improve the quality of the service they provide. Water services cover 84% of the population (86% in urban zones and 74% in rural areas). Nonetheless, there are significant geographic disparities, with lower coverage levels in the country’s other provinces: Bocas del Toro (49%) and Chiriquí (75%). Discontinuity and poor water quality are the main problems in the country’s other provinces: 20% of inhabitants in those provinces do not have water service available 24 hours a day, and just 56% of water samples satisfy minimum standards; 52% of rural community systems do not have continuous service and, given the absence of inspection, there is no certainty that water quality standards are being met. Sanitation service coverage is 49% at the national level, one of the lowest in the region, again with major geographical disparities (62% in urban areas and just 9% in rural areas). Lastly, the indigenous territories have the greatest deficiencies in the coverage of water and sanitation, as well as in service quality.

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2.14

The Bank’s actions will support the Panamanian government in increasing coverage and raising quality, and at the same time improve the management of water and sanitation services in the country’s other provinces, by: (i) financing investments for rehabilitation and improvement of water production and treatment facilities, enhancing the quality of water supply service, and expanding coverage; (ii) financing investments to expand the coverage of the sanitation service; and (iii) implementing improvements in the administrative, financial, operational, and commercial management of IDAAN and the JAARs. No NSG operations are anticipated in this sector.

2.15

Sector risks relate to difficulties in interagency coordination between the various entities that participate in the sector (IDAAN, JAARs, MINSA), and the lack of technical capacity in IDAAN regional offices to supervise the investments to be undertaken. To mitigate these risks, the specific interventions will include the preparation of management and operating agreements between the different entities, the strengthening and structuring of technical units for project planning and execution, and the creation of supervision and operations divisions for the works to be undertaken.

D.

Energy

2.16

Over the past decade, Panama has systematically raised its electricity coverage indicators, and is now the Central American country with the second highest coverage rate (88%). Nonetheless, during the same period, generating capacity expanded on the basis of fossil fuel sources, with the result that the thermo-electric share of the power generation mix grew from 30% in 1999 to 48% in 2008.

Although this process made it possible to meet the urgent need to expand installed capacity, it also made the sector more vulnerable to rising oil prices and helped raise the average power generation price. Although Panama has potential for hydro power generation in the provinces of Bocas del Toro and Chiriquí, and for wind power in the central provinces and Colón, there has been little development in these areas. Moreover, the transmission network has not been adapted to the expansion of new generating capacity, while demand in the central zone of the country has been favored to the detriment of the other provinces, which has created bottlenecks with repercussions on energy prices for consumers. Lastly, although the institutional and policy framework has been modernized in recent years, its cumulative lag has had a negative impact on energy production costs and has impaired the sector’s capacity to guarantee timely expansion of generating capacity, at reasonable prices and with the mix of energy sources that is most efficient for Panama.

2.17

The Bank’s actions in this sector will focus on reducing the cost of electricity and improving the country’s energy efficiency, by: (i) continuing to support the consolidation and strengthening of the legal, regulatory, and institutional frameworks; (ii) financing investment projects aimed at expanding the national transmission network and promoting regional interconnection (with Colombia); and (iii) promoting energy saving and energy efficiency by developing programs on rational energy use in both the public and private sectors. In the energy sector, NSG operations are anticipated for electric power generation from lower-cost renewable sources (hydroelectricity and wind power) and to develop energy-efficiency

-8-

programs for small and medium-sized enterprises. 17 These interventions will enable the timely expansion of supply and diversification of the power generating matrix, as well as a reduction in production costs and carbon emissions.

2.18

Sector risks concern potential environmental and social impacts of the construction of hydro and interconnection projects, for which specific mitigation actions will include detailed environmental and social management plans. With regard to the institutional and corporate framework, the greatest risk is delay in the reforms, which will be mitigated in the specific interventions through communication and negotiation components.

E.

Education

2.19

Panama has made significant progress in terms of access to education and the population’s average number of years of schooling over the last 15 years.

Nonetheless, data for 2009 show that it still has a low net school coverage rates: 55% at the preschool level, 67% at the pre-secondary level, and 24% at the secondary level. The figures are worse in rural communities and particularly in indigenous territories, where coverage rates are significantly lower than the national averages (33% at the pre-secondary level and just 10% at secondary). The low coverage rates reflect access difficulties, particularly in sparsely populated areas such as the indigenous territories, as well as problems of systemic quality and low internal efficiency. Half of all 3rd-grade primary school students display serious deficiencies in basic expected learning, resulting in high rates of school failure.

These are aggravated at the pre-secondary and secondary school levels, particularly in the indigenous territories, where half of all students do not complete primary, and three quarters drop out without completing the nine years of compulsory education.

2.20

The Bank’s interventions will aim to improve quality, raise retention rates, and expand the coverage of education services, especially in indigenous territories, by: (i) financing investments to expand the supply of complete basic education— including preschool— and secondary education; and (ii) improving the quality of education in preschools and 1st, 2nd, and 3rd grades, based on a strategy to improve learning outcomes in mathematics and language, using criteria of cultural relevance, and improvements to increase school retention. No NSG operations are envisaged in this sector.

2.21

The main risk relates to the limited capacity of the Ministry of Education to manage investments and support interventions to effectively improve education quality in the indigenous territories. To mitigate this risk, specific operations will include resources and activities for institutional strengthening of the Ministry, to enable it to improve its operational and managerial capacity.

F.

Health

2.22

Panama’s health indicators reveal a number of deficits compared to other countries of similar income levels. The under-fives mortality rate fell from 24 to 20 per 1,000

17

Apart from the interventions mentioned in the energy sector, other opportunities for NSG operations are envisaged: in the tourism sector with hotel building and the possible financing of tourism developments; and opportunities with the financial sector, through interventions involving green lines.

-9-

live births between 1990 and 2007; but, in certain indigenous territories, this indicator is between 1.9 and 2.4 times higher than the national average. For 26% of the deaths among children under-five, the causes emerged in the perinatal period, which reflects the mother’s health status and quality of care during pregnancy, at childbirth, and in the neonatal period. In relation to mother-child health, 87% of pregnant women nationally receive prenatal care, although just 60% of women living in indigenous territories get such checkups, and of these, only 58% are seen by trained personnel. Nationally, 19.1% of children under five are small for their age, and about 1.7% suffer from acute undernourishment; 62% of the under-fives in the indigenous territories suffer from chronic undernutrition compared to 10.5% in urban zones.

2.23

The Bank’s interventions in the sector will aim to reduce health deficits, essentially targeting indigenous territories and rural communities, by: (i) financing investments to extend coverage and promote the use of preventive services and immediate mother-child reproductive healthcare in the indigenous territories and rural communities that still do not have access to essential health services; (ii) improving the coverage, quality, and continuity of health care by trained personnel both from nongovernmental organizations (NGOs) and institutional personnel, under pay-forperformance schemes; (iii) developing and implementing a comprehensive nutrition strategy targeting child undernourishment and the adoption of healthy behaviors in the home, under efficiency and cultural relevance criteria; and (iv) upgrading firsttier health centers to ensure the quality of care. No NSG operations are anticipated in this sector.

2.24

Sector risks are related to the acceptance by indigenous territories and rural communities of healthcare arrangements and the organization of services. To mitigate this risk, the specific interventions will take cultural relevance issues into account from the design stage to ensure the acceptance of the services.

III. FINANCING FRAMEWORK

3.1

Fiscal situation. In 2009, the Panamanian economy grew by 2.4% in real terms, and the NFPS fiscal balance (excluding the Panama Canal Authority) stood at -1% of GDP. Forecasts point to 4.8% growth in 2010 and an average of 6.3% for the rest of the country strategy period (2011-2014). The financing framework for the next four years is based on a scenario in which fiscal performance stays within the limits defined by the LRSF. These projections suggest that fiscal performance should improve steadily from -1.9% in 2010 to a surplus of 0.7% in 2014, which is consistent with the Panama’s fiscal sustainability analysis (see Public debt and fiscal sustainability analysis).

3.2

Medium-term financing needs. In keeping with the commitment to fiscal stability that the country has maintained over the last decade, and with government projections set out in the PEG, the NFPS’s gross medium-term financing requirements (fiscal deficit plus debt repayments) are estimated at around US$4.193 billion for the 2010-2014 period. As part of its strategy to develop the capital market, the government hopes to borrow more on the domestic market, by issuing

- 10 -

bonds that make it possible to improve the debt profile and yield curve. It also expects to increase its borrowing from multilateral agencies to take advantage of the terms and rates they offer. According to these projections, and given the programmed growth rates, the Bank estimates that the country’s total borrowing is expected to drop from 44.3% of GDP in 2010 to levels close to 34% in 2014.

3.3

The Bank’s lending framework. The Bank’s lending framework for sovereign guaranteed approvals in the 2010-2014 period is estimated at US$990 million.

According to the projections shown in Table 1, this implies a share of 15% on average in the country’s external financing. 18 Projected flows during the country strategy period show a steady and acceptable increase in debt exposure indicators.

This volume of lending will increase the ratio of IDB debt to public debt from 9.8% in 2009 to 15.8% in 2014, while at the same time amounts owed to the Bank will remain stable at around 5.4% of GDP over the period, similar to the historical average of 4.4% of GDP (see Table 1). 19 Table 1: Estimated lending and net flows IDB approvals IDB disbursements Repayments Net lending flow Public debt with the IDB Public debt IDB/External public debt Public debt IDB/Multilateral public debt Public debt IDB/Public debt Multilateral public debt/Public debt Public debt IDB/GDP External debt /GDP Public debt/GDP

3.4

18 19

2010 390 301 96 204 1,277 12.0 68.5 11.0 16.1 4.9 40.7 44.3

2011 250 402 103 299 1,576 14.5 72.6 13.1 18.0 5.6 38.7 43.1

2012 200 421 109 312 1,888 17.1 73.5 15.4 20.9 6.3 36.6 40.8

2013 110 162 109 54 1,942 17.2 69.1 16.0 23.2 6.0 34.8 37.4

2014 40 35 109 ‐74 1,868 17.2 66.2 15.8 23.9 5.4 31.2 34.0

The country strategy envisages nonreimbursable operations being structured simultaneously with the loan operations program, thus ensuring their consistency with the country’s priorities and with the Bank’s operations cycle. Agreements will be reached with the government, during the programming of operations, for an annual knowledge products program.

The average for 2005-2009 was 11%.

The impact of a macroeconomic shock on the lending framework is simulated in Annex VI.

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IV. STRATEGY IMPLEMENTATION A.

Country systems 20

4.1

In relation to financial management, the latest diagnostic study (Country Financial Accountability Assessment (CFAA, 2006) showed that fiduciary risk in Panama is low. During the country strategy period, the diagnostic assessment of public financial administration will be updated using the Public Expenditure and Financial Accountability (PEFA) methodology. The Bank is making partial use of financial administration systems. Challenges have been identified relating to application of International Public Sector Accounting Standards (IPSAS), expenditure monitoring and evaluation, and development and use of the SIAFPA. 21 The Bank will thus be supporting the MEF in using the SIAFPA as the sole financial management tool by indigenous territories and rural communities in Bank projects. With regard to external government oversight by the CGR, technical and resource constraints mean that Bank-financed projects are externally audited by private auditors (see Technical note fiduciary strategy by indigenous territories and rural communities).

4.2

In relation to the government procurement system, in 2008 the government evaluated the system using the methodology of the OECD’s Development Assistance Committee (DAC). This revealed significant progress in terms of increased competition, creation of the lead agency, and the electronic “PanamáCompra” government procurement system. Nonetheless, to maintain the pace of public investment and eliminate risks of delays and nonfulfillment, the government has proposed procurement mechanisms that provide for a rising proportion of direct contracting 22 and tend to use best-value bidding processes, measured through the assigning of scores, in which price is not the decisive factor for the contract award. The Bank will support the government in improving procurement mechanisms and contract management; and it will also provide support to develop standardized bidding documents to help strengthen institutional capacity and meet the challenges of the government’s investment plan.

4.3

As regards environmental systems, in the first half of 2010, the Bank made an initial diagnostic assessment of the legal and institutional framework governing the environmental area. This analysis identified weaknesses stemming from recent changes in environmental legislation, as well as limited institutional and technical

20

21

22

The Bank’s diagnostic assessment of country planning systems (public investment system) and monitoring and evaluation (results-based management) are presented as part of the analysis of the expenditure area in the public finances sector (paragraph 2.7). The Bank is not currently using these subsystems to manage its operations, because they are only partly developed and do not cover all of the NFPS. The Bank’s interventions in the expenditure area (utilization of the SINIP and multiyear results-based budgeting system, paragraph 2.8) will seek to increase the use and coverage of these subsystems (see Results Matrix, public finances sector).

The Bank will help the government meet these challenges relating to expenditure monitoring and evaluation and the development and use of the SIAFPA, pursuant to the strategic actions mentioned in the section on public finances, paragraphs 2.7 and 2.8.

22% in 2008 and 41% in 2009.

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capacity among the environmental management and oversight agencies. 23 It also identified key lines of action to strengthen environmental management. The Bank will support the government in consolidating the institutional, legal, and regulatory framework of environmental management, to bring it into line with international standards. These technical support and strengthening interventions will fall within the framework of the environmental action plan to be developed as part of country strategy execution. 24 B.

Coordination with other donors

4.4

In conjunction with other multilaterals, the Bank has endeavored to simplify and harmonize procedures to minimize the transaction and administrative costs faced by executing agencies. From a sector standpoint, the main coordination activities involve the following areas: (a) road rehabilitation with the Andean Development Corporation (CAF); (b) in the water sector with the World Bank, the Spanish Cooperation Fund for Water and Sanitation in Latin America and the Caribbean (FECASALC), and the CAF; (c) in the sanitation sector with the European Investment Bank (EIB), the Japan International Cooperation Agency (JICA), and the CAF; (d) on public finances with the World Bank and the International Monetary Fund (IMF); and (e) in the social sphere, a major effort to coordinate and distribute areas of action was undertaken with the World Bank and the United Nations Development Programme (UNDP), with a view to collaboration on the social safety net and health. For further details, Annex V provides a summary of activities in sectors where coordination actions are being undertaken.

V. RISKS

5.1

Macroeconomic risks. The potential macroeconomic risks to implementation of the Bank’s country strategy with Panama include a slower-than-expected recovery of the United States economy, which could have repercussions on the country’s growth and cause tax revenues to fall. Although the chances of this risk materializing are small (see Annex VI), a potential drop in tax revenues could cause the NFPS deficit to breach the LRSF limits. To mitigate this risk, the government has drawn up a plan to strengthen public finances, which has already been initiated with the implementation of the 2009 and 2010 reforms, which are expected to boost tax revenues.

5.2

Political risks. The new government’s program of investments and actions is highly ambitious, and implementing it will require strong political leadership by the Executive Branch. The government currently has a parliamentary majority, given the alliance between the ruling party and other political forces within the legislature. Nonetheless, a future breakup of this alliance could make it hard to implement the strategy as a whole, and particularly the reforms in the public finance and social sectors. Although this type of risk is also unlikely to materialize,

23

24

The term “environmental management agencies” encompasses the ANAM, provincial governments, and specific agencies responsible for managing geographic areas or critical zones.

See Environmental action plan.

- 13 -

to mitigate it, the government has embarked on wide-ranging dialogue with the different political sectors and civil society to make these reforms viable. If requested by the government, the Bank could provide technical support for this dialogue.

5.3

Institutional capacity. Limited institutional capacity in the public sector could affect implementation of the strategy as a whole. Basically, limitations in relation to financial administration, the methodology applied in public bidding processes, and the environmental analysis, could delay the public investment program and thus hinder execution of the country strategy. To mitigate this risk, the Bank will take active steps to help the government strengthen country fiduciary and environmental systems, as described in detail in chapter IV.

Annex I Page 1 of 1

PANAMA Selected Economic and Social Indicators

Panama: Selected macroeconomic and social indicators--2002-2009 1/

2002 Real GDP growth (%) GDP at current prices (US$ billion) GDP per capita (US$)

2,2 12,3 4.010

Consumer prices (%) end of period Broad Money or M2 (% annual variation) Exchange rate (PN$/US$), annual average Effective real exchange rate (index), annual average 2/

1,8 0,9 1,0 85,9

Current account balance (% of GDP) Financial and capital account balance (% of GDP) Foreign direct investment (% of GDP) Gross international reserves (US$ million) 3/ Gross international reserves (% of GDP) 3/

-0,8 3,1 0,8 1.208 9,8

Overall central government balance (% of GDP) Primary central government balance (% of GDP) Overall NFPS balance (% GDP) Primary NFPS balance (% GDP) Public sector debt (% of GDP) Public sector external debt (% of GDP)

-2,7 1,5 -3,3 0,9 63,7 51,7

Population (millions) Unemployment rate (%) Percentage of population with income of $1.25 per day or less (PPP) Percentage of the population with income of two dollars a day or less (PPP)

3,1 14,1

2003

2004

2005 2006 2007 2008 Real sector 4,2 7,5 7,2 8,7 11,2 10,7 12,9 14,2 15,5 17,1 19,5 23,1 4.150 4.470 4.791 5.218 5.921 6.812 Monetary variables, prices, and exchange rate -0,3 1,6 3,4 2,2 6,4 6,8 4,6 8,6 8,5 21,5 15,9 18,4 1,0 1,0 1,0 1,0 1,0 1,0 93,1 98,5 98,6 99,3 101,3 99,5 External Sector -4,5 -7,5 -4,9 -3,1 -7,2 -11,6 2,8 -1,2 15,0 0,9 16,2 12,8 6,3 7,2 5,9 14,6 9,1 10,4 1.036 657 1.236 1.440 2.044 2.711 8,0 4,6 8,0 8,4 10,5 11,7 Public finances 4/ -3,7 -5,4 -3,2 0,2 1,2 0,3 0,7 -1,2 1,2 4,4 4,7 3,4 -4,7 -4,9 -2,6 0,5 3,5 0,4 -0,3 -0,7 1,8 4,8 6,9 3,5 60,1 62,2 58,3 52,6 46,4 39,0 47,4 47,6 45,5 40,5 38,0 32,9 Social indicators 5/ 3,1 3,2 3,2 3,3 3,3 3,4 13,4 12,4 10,2 9,1 7,3 6,4

2009 2,4 24,6 7.133 1,9 8,8 1,0 94,8 -1,6 2,6 7,1 3.406 13,9 -1,5 1,4 -1,0 1,9 44,6 41,3 3,5 6,6

10,8

-

9,2

-

9,5

-

-

-

20,0

-

18,0

-

17,9

-

-

-

Notes: 1/ Sources: 2002-2008 IMF, 2009 office of the contra agenda of the Republic 2/ Source: Prepared by the authors on the basis of SECMA data; values above 100 indicate a real depreciation.

3/ Reserves pertain to net external assets held by Banco Nacional de Panamรก (a public commercial bank) 4/ The NFPS excludes the Panama Canal authority (ACP) 5/ Source: World Bank for poverty data.

Annex II Page 1 of 2

SUMMARY OF THE GOVERNMENT’S STRATEGIC PLAN (PEG) Country Vision 2010-2014: Panama is a country with a high standard of living and equality of opportunity, with a sustainable economy in a competitive environment, recognized and positioned as the hub of the Americas.

Strategy area 1: An economy with sustained growth that attaches priority to investment in sectors with competitive advantages and development needs, with a coordinated and integrated productive structure in line with the challenges of the global economy.

General objectives Specific objectives 1.1.1 Consolidate and capitalize on the geographic location advantages that enable the country to offer unique value-added logistics services to the region.

1.1 World-class center for value-added logistics services.

1.1.2 Expand coverage and improve the quality and competitiveness of road infrastructure and logistics support services.

1.1.3 Develop an investment-friendly environment that ensures a procompetitive business climate.

1.1.4 Improve customs procedures through efficient and transparent institutions using unified technology systems.

1.1.5 Strengthen government institutions and ties with the private sector.

1.2.1 Target investment and regulatory changes on zones that have greatest potential to become world-class luxury destinations.

1.2 Competitive, diversifiable, and sustainable luxury tourism sector.

1.2.2 Promote the sustainable development of tourism areas.

1.2.3 Promote connectivity between the center of the country and destinations with high tourism potential.

1.2.4 Coordinate efforts between the various sectors and the Panamanian Tourism Authority (ATP) with aligned incentives that attract anchor investors.

1.2.5 Develop a national promotion strategy.

1.3 Sustainable and high-value agriculture.

1.3.1 Develop efficient, strong, and transparent institutions that coordinate export marketing and promotion.

1.3.2 Implement national irrigation systems, increasing the productive area and generating hydroelectric reserves.

1.3.3 Develop main artery strategy by strengthening the country’s road infrastructure.

1.3.4 Generate suitable high-quality conditions in the transport chain that takes agricultural products to their final destinations.

1.3.5 Design a system of clear and transparent incentives and assistance for producers to increase their production of high valueadded crops.

1.4.1 Implement results-based fiscal management, under a principle of discipline and timely and correct allocation of resources.

1.4 Sustainable public finances.

1.4.2 Modernize financial administration, by strengthening institutional capital to design and evaluate investments.

1.4.3 Ensure a simple and fair distribution of the tax burden, while maintaining sector competitiveness.

1.4.4 Target public expenditure on more vulnerable population groups and those with less access to services.

Annex II Page 2 of 2

Strategy area 2: An inclusive society with opportunities for all, which reduces levels of poverty and promotes the formation of high-quality human capital for development.

General objectives 2.1. Human capital formation

2.2 Social inclusion opportunities for the less developed regions and social spheres.

Specific objectives 2.1.1 Develop a competent and specialized labor force throughout the country and across specific sectors.

2.1.2 Guarantee quality education with equal opportunity for men and women.

2.1.3 Develop training programs to upgrade workers’ skills.

2.2.1 Help eradicate undernourishment by specially targeting early childhood and pregnant women.

2.2.2 Guarantee access to water and sanitation services in most of the country’s urban and rural areas.

2.2.3 Guarantee access to quality basic health services, giving priority to primary health care and expansion of the hospital network.

2.2.4 Facilitate the population’s access to decent housing, by providing incentives for low-income housing, construction and land titling.

2.2.5 Guarantee safe and efficient public transport in Panama City, by building the first metro line and reforming the bus system.

2.2.6 Increase citizen safety.

2.2.7 Provide social protection for vulnerable groups, strengthening family capacities through conditional economic assistance and a network to support the poorest families and older adults.

2.2.8 Strengthen the range of opportunities to exercise sports and artistic skills and talents, and encourage outstanding athletes and artists to participate in international events.

2.2.9 Promote measures that ensure permanent energy supply both for hydrocarbons management, and for electricity generated from various sources.

Strategy area 3: Efficient and effective environmental management to meet the twin challenges of promoting growth and protecting the environment and natural resources.

General objectives

3.1. Modernization of environmental management

3.2 Development of an environmental culture.

Source: 2010-2014 Government Strategic Plan

Specific objectives 3.1.1 Consolidate environmental management functions in a single administrative body, to fulfill the tasks of conservation and protection of the environment and natural resources.

3.1.2 Improve the efficiency of processes by strengthening environmental institutions.

3.1.3 Strengthen the environmental strategic and policy framework.

3.1.4 Promote integrated watershed management.

3.2.1 Strengthen citizen participation.

3.2.2 Promote corporate environmental responsibility.

3.3.3 Promote the use of renewable energies.

3.3.4 Adopt a climate change adaptation approach

Annex III Page 1 of 2

LENDING FRAMEWORK Fiscal situation. In 2009, Panama posted real GDP growth of 2.4%, and an NFPS fiscal balance of -1% of GDP (excluding the Panama Canal Authority). Forecasts point to 4.8% growth in 2010, and an average of 6.3% for the rest of the country strategy period.

The estimated financing framework is based on a scenario in which the fiscal position remains within the limits defined by the LRSF. In that regard, it is assumed that tax revenue increases as a result of the reforms; that nontax income grows by 10% in nominal terms assuming moderate growth of dividends from the Panama Canal Authority, and that investment expenditure is executed as per the five-year public investment plan. These projections suggest that fiscal outcomes should improve significantly from -1.9% in 2010 to a surplus of 0.7% in 2014, which is consistent with Panama’s fiscal sustainability analysis (see Public debt and fiscal sustainability analysis)

1.

Table 1. NFPS fiscal balance and financing needs 2010-2014

2009

2010

2011

2012

2013

2014

Fiscal balance (% of GDP) Total revenues Tax revenues

25.1% 10.8%

25,4% 11,2%

25,4% 12,0%

25,5% 12,0%

25,4% 12,0%

25,4% 12,0%

Total expenditures Primary expenditure Interest

26.2% 14.7% 2,9%

27,3% 14.0% 2,9%

20,0% 13.1% 2,9%

19,8% 12.2% 2,7%

19,5% 11.3% 2,5%

18,8% 10.5% 2,4%

Fiscal balance, rest of NFPS Central government fiscal balance NFPS primary balance NFPS overall balance Financing (US$ million) Gross financing requirements NFPS overall balance Amortization

0.5% -1,5% 1,9% -1,0%

-1,1% -0,8% 1,0% -1,9%

-0,7% -0,6% 1,6% -1,3%

-0,4% -0,3% 2,0% -0,7%

-0,1% 0,0% 2,4% -0,1%

0,1% 0,7% 3,1% 0,7%

748 253 495

1158 501 657

1133 359 774

827 206 621

954 41 913

121 -255 376

748 409 339

1158 288 870

1133 621 512

827 367 460

955 363 592

121 121 0

Gross financing sources External Internal Source: Calculations based on MEF data.

2.

Medium-term financing requirements. In keeping with the commitment to fiscal stability that the country has maintained over the last decade and with government projections set out in the PEG, the NFPS’s gross medium-term financing requirements (fiscal deficit plus debt repayments) are estimated at around US$4.193

Annex III Page 2 of 2

billion for the 2010-2014 period. As part of its strategy to develop the domestic capital market, the government hopes to obtain more of its financing on the domestic market, by issuing government bonds that make it possible to improve the debt profile and its yield curve. The country also plans to borrow more from multilaterals, to take advantage of the maturities and rates such organizations offer. In addition, the Bank estimates that the country’s total borrowing in relation to GDP will decline from 45.1% in 2009 to around 34% in 2014—which is consistent with the country’s target of strengthening public finances, reducing its overall debt, and maintaining investment-grade status on international debt markets.

3.

The Bank’s lending framework. The Bank’s lending framework for sovereign guaranteed approvals for 2010-2014 is estimated at US$990 million. According to the Bank’s projections, this lending framework would give it a share of 15% on average in Panama’s external financing, compared to the historical average of 11%.

Projected flows during the country strategy period show a steady and acceptable increase in debt exposure indicators. This volume of lending will cause the ratio of IDB debt to total public debt to rise to from 9.8% in 2009 to 15.8% in 2014, while at the same time the amounts owed to the Bank will remain stable at around 5.4% of GDP over the period, similar to the historical average of 4.4% of GDP

4.

The Bank’s country strategy with Panama envisages knowledge generation and technical cooperation being structured simultaneously with the loan operations program, to ensure their consistency with the country’s priorities and with the Bank’s operations cycle. During the programming of operations, an agreement will be reached with the government on an annual technical-cooperation program focusing its sector activities on: public finances (to support the country in its program of government income and expenditure reforms); infrastructure (to support technical and corporate consolidation of the transport and water and sanitation sectors); the social sector (to help prepare interventions to benefit indigenous territories and rural communities); and to promote progress in country systems (basically consolidation of the legal and regulatory framework on environmental issues in line with international standards, and support for sustainable energy development). This program will be updated annually to ensure the timeliness of its interventions and adaptation to the cycle of operational work with the country.

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RECOMMENDATIONS OF THE COUNTRY PROGRAM EVALUATION (OVE) Recommendations of the country program evaluation Recommendation 1: The next strategy should design an assistance program aimed at closing the gap that exists between Panama City and Colón, and the rest of the country; and the program should be on a scale commensurate with the size of the problem. This means that the assistance program should work in a coordinated fashion on institutional strengthening issues at the regional and municipal level— institutional strengthening should not be understood as financing infrastructure or personnel, but rather as improving institutions’ management capacity and it is contingent on, among other things, professionalizing the civil service and sound employment management in the State. A necessary condition for Panama to achieve its goal of resolving its duality problem is that the State must effectively reach the interior of the country.

Recommendation 2: If Panama maintains its plan to leverage promotion of the technological sector—one of the comparative advantages identified by the country—to resolve the problem of the duality of its economy, the country must enhance the quality of education in the long term, and this requires immediate attention. Despite the consensus on this issue, the Bank's action in the education sector has been limited by economic policy problems that go beyond the effective jurisdiction of the interventions proposed. When this type of orthodox intervention is costly from a political standpoint, the Bank should consider using innovative intervention models, through pilot programs, to gradually build consensus and enhance the policy dialogue with the country.

Recommendation 3: The Bank should increase the technical value of operations aimed at enhancing the country's competitiveness. This recommendation was made in the previous CPE and remains relevant. The competitiveness strategy has placed greater emphasis on the sectors identified by the country as having the greatest comparative advantages— tourism, technology, agroindustry, and logistics (the latter two to a lesser extent). Improving the effectiveness of the portfolio in this area requires better targeting and design of interventions based on the strategy’s objective—which for the period 2004-

Incorporation into the country strategy (BCS-PN) 2010-2014 The new country strategy pays special attention to reducing the duality that characterizes the country, in particular helping the government to effectively reach the country’s the provinces other than the province of Panama and the province of Colón.

The Bank will help the government direct its actions towards the rest of the country, developing institutional capacity and interventions aimed essentially at providing social services and improving infrastructure in the provinces in the following sectors: (i) Transport (expansion of the road network and institutional improvement of road maintenance planning and execution mechanisms) (see paragraphs 2.11 and 2.12); (ii) Water and sanitation (including expansion of the coverage and quality of the water and sanitation service in the country’s other provinces, and institutional improvement of IDAAN and the JAARs to enable them to provide better services there (see paragraphs 2.14 and 2.15); (iii) Energy (expansion of transmission lines, basically aimed at taking energy into the rest of the country) (see paragraphs 2.17 and 2.18); (iv) Education (to improve education quality, with special emphasis on school infrastructure and the institutional improvement of education service management, in indigenous zones in the rest of the country) (see paragraphs 2.20 and 2.21); and (v) Health (with special emphasis on nutrition and mother-neonatal health, including vaccination and early childhood care, in the indigenous territories and in rural communities) (see paragraphs 2.23 and 2.24).

One of the priority sectors in the new country strategy is to improve the quality of education, by supporting the expansion of access to full basic education, particularly through innovative ways of serving indigenous territories (identified as the most vulnerable population group), targeting new investments in education infrastructure to support an expansion of access to high-quality complete basic education, including preschool and middle school, in the indigenous territories (see paragraphs 2.20 and 2.21).

The new country strategy’s priorities do not include improving Panama’s competitiveness, either directly or through a specific intervention. Instead, the strategy has a sector focus, and targets its interventions to improve the country’s productivity in both the short and long terms. In the short run, interventions in the transport, water and sanitation, and energy sectors aim to overcome the main deficiencies in services that impair enterprise productivity and the population’s quality of life (see paragraphs 2.11 to 2.18). In the long run, actions in the education and health sectors aim to address potential long-term

Annex IV Page 2 of 4

Recommendations of the country program evaluation 2008 was to support sustainable economic growth and reduce poverty. To that end, interventions must be selected that maximize the benefits to the country given their potential impact on productivity and competitiveness in Panama. It should also be borne in mind that by focusing on the service sector and neglecting the manufacturing and agriculture sectors and not including labor sector-related issues, the problem of the economy’s duality is exacerbated, and the causes of social segmentation remain.

Recommendation 4: As technical support, the Bank should take steps to evaluate the effectiveness of the “compensatory” programs targeting less competitive sectors and supporting Panama in designing policies that make it possible to channel resources into the modern sectors of the economy. The free trade agreement between Panama and the United States opens a window of opportunity for preparing the country to cope with the gradual market liberalization that will accompany the process. In the less competitive sectors, liberalization could have a short-run adverse effect on the well-being of the most disadvantaged population, and the Bank should be ready to support Panama in this area. It is essential that this support be provided without creating incentives that distort resource allocation towards uncompetitive sectors in the long run. As a short-term solution, the support should be given through measures to mitigate adverse effects on the situation of the most vulnerable population groups. The success of the Opportunities Network in terms of targeting and its impact on the welfare of beneficiaries since 2004 is an example of the support that the IDB, together with the World Bank, can provide the country to mitigate the adverse effects on the vulnerable population.

Recommendation 5: Interagency coordination problems have hindered project execution. They are especially acute in projects that are complex in terms of the number of entities involved and the breadth of the objectives to be achieved. In some cases, operational delays tend to be the result of design failings that need to be corrected once the project is under way, and which are more prevalent the more complex the project; in other cases they are the result of shortcomings in measures to mitigate potential coordination problems between peers. The Bank should consider designing less complex programs and use loan instruments that allow for adjustments to be made during execution—loans in phases. In the case of projects involving several entities, permanent support is required from the Bank to overcome interagency coordination problems, which are particularly acute in Panama.

Recommendation 6: There are several undeniable advantages to the intervention model used in the Sustainable Development Programs (SDPs): they have an executing unit with sufficient influence to coordinate the various line ministries, owing to its attachment to the Ministry of the Office of the President—the

Incorporation into the country strategy (BCS-PN) 2010-2014 growth constraints, and in particular boost human capital accumulation in the poorest and most isolated areas of the country, namely the indigenous territories and rural communities (see paragraphs 2.20 to 2.24).

Bank support in the framework of the new country strategy will focus on improving productivity in the regions of the country outside the province of Panama and the province of Colón, by developing basic infrastructure (see paragraphs 2.11 and 2.18) and helping the government to design efficient budgetary policies and processes, together with public investment planning to allow resources to be channeled towards the modern sectors of the economy (see paragraphs 2.7 and 2.8). In addition, Bank support to compensate and mitigate adverse effects on vulnerable population groups is being channeled through portfolio operations that are currently being executed (see loan 1867/OC-PN, Social Protection Program and Support for the Opportunities Network, which is currently active in the IDB’s portfolio in Panama).

The new country strategy envisages a major portfolio restructuring effort to target and simplify the execution of various projects by consolidating separate interventions (CONADES sustainable development program (SDPs)), and to reduce and consolidate the number of executing agencies (cadastre, administration, sanitation, and road rehabilitation) (see portfolio report in electronic link 4). This effort to consolidate interventions and entities significantly reduces the transaction costs faced by executing agencies and improves the efficiency of sector interventions by consolidating the Bank’s action in a given sector (transformation of CONADES programs into one water and sanitation operation), or by reducing administration costs. This portfolio reformulation effort also demonstrates the flexibility and timeliness of the Bank’s response to the need for simplification and greater efficiency in the operations by the government, as a way to solve interagency coordination problems.

In the context of the strategy, the Bank has embarked on a process to reformulate CONADES operations, to transform them into a single water and sanitation operation, targeted on the country’s other provinces (see portfolio report in electronic link 4). This reformulation is actively incorporating line

Annex IV Page 3 of 4

Recommendations of the country program evaluation evidence suggests, particularly within Panama, such coordination between peers is difficult to achieve. Nonetheless, although the supraministerial nature of the executing unit enables it to speed up the implementation process, it also can make it harder to plan the activities of the ministries, because the intervention model makes them less important in the implementation process. The exclusion of sector institutions— responsible for works operation and maintenance—from the planning and implementation process, in some cases generates low levels of project ownership leading potentially to a lack of financial sustainability—i.e. the recovery of operating and maintenance costs by charging fees. The goal of institutional strengthening in the regional offices of ministries and municipios has been overshadowed by the urgency of meeting the needs of populations in the regions. Nonetheless, both objectives are compatible and can be tackled simultaneously if an effort is made to incorporate the line ministries and municipios in the planning and execution activities carried out

by CONADES. For this, the personnel constraints these institutions face must be resolved.

Recommendation 7: Although a large portion of the Bank's portfolio in Panama is aimed at the development of the regions through SDPs and the Municipal Development and Decentralization Support Program, OVE has not found there to be effective coordination between the municipal and regional institutional strengthening components of these programs. Very little progress has been made in this respect, and in many cases it is limited to providing equipment and building offices. It is essential for the Panamanian State to effectively and sustainably reach the regions and municipios through strengthened institutions, if it is to close the quality-of-life gap among its inhabitants.

Recommendation 8: Approval of the Fiscal Accountability Act achieved its objective of limiting NFPS deficits to 1% of GDP in the last few years. Budgetary constraints on the disbursement of programs by multilateral organizations, which stem from application of the law, could pose a risk for planned project execution. In this context, Bank support for the Investment Programming Division, which was designed as one of the components under the Program to Strengthen and Modernize Economic and Fiscal Management II, is becoming even more relevant and urgent. Until the objectives of that component are achieved, the Bank has an opportunity to support Panama in analyzing resource allocation to Bank

Incorporation into the country strategy (BCS-PN) 2010-2014 ministries (MINSA) and the competent authorities (IDAAN and JAARs) in specific planning activities and particularly in execution functions (see paragraphs 2.13 to 2.15). The result is that financial execution is managed centrally by CONADES, while operational execution and planning is coordinated entirely with the sector bodies in question, thus achieving ownership of the project and execution by the corresponding technical entities. Alongside this portfolio reformulation exercise, in the context of the country strategy, the Bank will be strengthening the institutional capacity of the various agencies involved in the sector, to ensure the institutional sustainability for this type of intervention (see paragraphs 2.14 and 2.15).

In the context of the country strategy, the Bank has embarked on a process to reformulate CONADES operations, and combine them into a single water and sanitation operation, aimed basically at serving the country’s other provinces (see portfolio report in electronic link 4). This reformulation will not only supply infrastructure to the provinces, but also support the strengthening of the institutional capacity of sector bodies working to improve the quality of life of provincial inhabitants.

As part of this portfolio reformulation exercise, in the context of the country strategy, the Bank will be strengthening the institutional capacity of the various entities involved in the sector (MINSA, IDAAN, JAARs and CONADES), to ensure the institutional sustainability of this type of intervention (see paragraph 2.14 and 2.15). In addition, Bank actions in the education and health sectors will target institutional capacity strengthening in the respective ministries to plan and execute interventions in the indigenous territories and in rural communities, which are the areas with the greatest service deficits in the country (see paragraphs 2.20, 2.21, 2.23, and 2.24).

Within the context of the country strategy, the Bank expects to provide support to “improve public expenditure management and efficiency,” in particular through the implementation of public investment systems and multiyear results-based budgeting and the consolidation of integrated financial administration systems (see paragraphs 2.7 to 2.9). This will enable the government to optimize its planning, budgeting, and public expenditure administration mechanisms, with the management of projects with multilateral agencies being included in a planned and timely manner in budgets and investment plans. The country strategy also includes strengthening for country financial management and

Annex IV Page 4 of 4

Recommendations of the country program evaluation projects, to ensure that the country has sufficient information for efficient allocation of funds.

Recommendation 9: The complexity and importance of the SDPs requires greater monitoring and evaluation work to make it possible to increase the technical capital of the country and the Bank in this area. According to interviews held in ANAM for the purpose of this evaluation, progress is being made on the targets for the Program for Modernization of Environmental Management for Competitiveness related to the strategic environmental assessment (SEA) in the country. Consulting services are working to define the conceptual framework to be adopted in Panama, and the pilot cases to be evaluated include issues of land management, mining, and the energy sector in general. This could be exploited jointly to encourage an indepth assessment of the results obtained through the SDPs and establish provincial sustainable development strategies also financed by the Bank. This evaluation would form part of the context of the land management SEA in the country, and could be aligned with the Bank’s recent efforts in preparing Strategic Environmental Assessment Guidelines.

Recommendation 10: In the context of a change in government, early dissemination of projects to the new authorities improves the execution of operations. The Bank must take steps to communicate the objectives of projects in execution as soon as a new government takes office, or whenever there are changes at the ministerial level. Many projects currently in execution are delayed because the Bank failed in this task and it took the government time to recognize the advantages of these projects.

Recommendation 11: The permanent presence of sector specialists in the Bank's Country Office has been recognized by the executing agencies as significant value added by the Bank.

The Bank's new organizational structure was positively evaluated when the interviewees interacted with specialists in the Bank's Country Office in Panama, but not with specialists stationed in a neighboring country from which they served Panama's needs. The Bank should permanently monitor this situation with a view to making adjustments as necessary.

Incorporation into the country strategy (BCS-PN) 2010-2014 government procurement systems, which will help improve the programming and management of public investments financed by multilateral agencies (see paragraphs 4.1 and 4.2). In addition, the Bank is providing, and will continue to provide, significant support through technical-cooperation operations in the areas of results-based management and medium-term programming—elements that will enable the government to efficiently allocate the funds needed for its five-year public investment plan (see paragraph 2.8).

Under the new country strategy, Bank support is expected to consolidate the institutional, legal, and regulatory framework of environmental management in line with international standards (see paragraph 4.3). Moreover, within the portfolio currently being executed, the Bank is working actively to incorporate SEA within the country’s environmental institutional framework (see loan 1912/OC-PN “Modernization of Environmental Management for Competitiveness,” which is currently being executed.

The new country strategy is particularly well aligned with the PEG as a way of guaranteeing greater effectiveness of the Bank’s program in support of the country’s initiatives (see Annex II). In addition, since the start of the current administration, the Bank has maintained an ongoing dialogue with the government authorities to promote the effective execution of projects in the portfolio. This early and direct dialogue with the authorities made it possible to initiate a major portfolio restructuring effort, to target and simplify the execution of various projects by consolidating different interventions, and by reducing and consolidating the number of executing agencies, as described in the responses to recommendations 5, 6, and 7, noted above.

The Bank has strengthened the permanent presence of sector specialists in the Country Office in Panama (CID/CPN), for the water and sanitation sectors, renewable resources, and procurement. The Bank is also continuing with a process of strengthening the CID/CPN, bringing together all regional experience in the health sector and integrating it into the Meso-American Health Initiative, headquartered in the CID/CPN.

Annex V Page 1 of 2

DONOR COORDINATION 1.

In accordance with the government’s strategy to promote cofinancing, the Bank has favored work with other entities in all sectors of activity, seeking at the same time to simplify procedures to minimize the administrative needs of the executing agencies.

For this reason, the Bank maintains close coordination with multilateral agencies and bilateral development support organizations.

2.

In the case of development banks (World Bank, CAF, EIB, Japan Bank for International Cooperation (JBIC), and multilateral and bilateral development agencies (UNDP, United States Agency for International Development (USAID), and the Spanish International Development Cooperation Agency (AECID)), coordination is maintained through monthly meetings to share information and coordinate activities.

3.

As a result of these meetings, the various donor agencies decided to prepare a donor matrix, which includes the 13 main institutions present in the country: AECID, IDB, World Bank, CAF, the Food and Agriculture Organization of the United Nations (FAO), the Inter-American Institute for Cooperation on Agriculture (IICA), the Japan International Cooperation Agency (JICA), the World Health Organization/PanAmerican Health Organization (PAHO/WHO), UNDP, the United Nations Environment Programme (UNEP), the United Nations Population Fund (UNFPA), the United Nations Childrens’ Fund (UNICEF) and USAID. The matrix reflects the 23 main sectors of activity: road transport, urban transport, air transport, energy, education, health, housing, gender, water and sanitation, HIV/AIDS, childhood, social protection, protection of vulnerable population groups, local development, financial sector, medium-sized and small business, employment, environment, climate change, citizen safety, justice, fiscal management, and institutional modernization. A preliminary version of the donor matrix was prepared and will be discussed by the participating institutions in November 2010. For further details on the sectors of joint work and the participating institutions, see the summary of the donor matrix shown in Table 1.

4.

In the urban transport sector, coordination work between the Bank and the CAF is based on joint activities (missions, technical meetings), which have made it possible to efficiently distribute responsibilities between the two institutions. In some cases these activities also include the World Bank, EIB, and JBIC. In the road transport sector, support for the MOP was always coordinated with the World Bank and CAF, which share the same executing agency.

5.

In the energy sector, support from the Bank’s private window for hydroelectric power generation projects is cofinanced with the International Finance Corporation (IFC) and the CAF.

Annex V Page 2 of 2

6.

In the social sector (education and health), Bank support for the conditional transfer program (Opportunities Network) is shared with the World Bank. All supervision missions are coordinated and undertaken jointly, which ensures alignment with respect to the activities and actions programmed.

7.

In the drinking water and sanitation sector, the Bank, the World Bank, and CAF have been working in coordination with IDAAN to avoid duplicating effort, by defining territorial intervention areas, developing synergy, and making the most of the resources allocated. The Bank is also coordinating activities in this area with FECASALC. In the sanitation sector, financing in support of the BahĂ­a sanitation project is shared with the EIB, JBIC, and CAF.

8.

In the public finances sector, fiscal support for the government is being coordinated closely with the World Bank for operations in 2010, because support activities in the strategy period will be financed with that institution.

Table1: Summary of the donor coordination matrix Major strategy areas

Issues Road transport Urban transport Infrastructure Air transport Energy Education Health Housing Gender Water Social sector HIV/AIDS Childhood Social Protection Protection of vulnerable groups Local, rural, and agricultural development Support for the financial sector Support for small and medium-sized Private sector enterprises Labor market development Environment Environmental sustainability Climate change Risk management Citizen participation and dialogue Political and electoral system Democratic governance Citizen safety Justice Fiscal management Modernization of the State Institutional modernization Total

AECID

1

IDB 4 1

WB 1

CAF

FAO

IICA

JICA PAHO/WHO UNDP

UNEP

1 1 1 2

7 3 1

1

5

2

UNFPA

UNICEF

USAID

1 3

1 1

1

2

2 1 1 3 1 3

1 2 1 1

5

2

1

1 1 4

2

1

1 2

1

2

1

2

2

7

2

1

3 3

1

18 3

1

3 1 2 2

5 1

1

1

2 1

1

1 1

1 1

15

1 1 2 3 39

8

1 9

Priority areas of the BCS-PN 2010-2014

11

2 5

5

13

1 1 3 2 1 1 1 2 1 1 9 28

3 1 2 1

0

11

2 3 1 2 25

Total 5 2 1 8 8 14 1 7 13 8 4 4 9

5

3 3 16 6 3 3 1 7 6 4 17 174

Annex VI Page 1 of 2

MACROECONOMIC RISK ANALYSIS 1.

For 2010 and 2011, the economy is expected to recover by 4.8% and 5.6%, respectively. The largest contribution will come from Panama Canal expansion works, where a boost equivalent to almost 5% of GDP is anticipated in both 2010 and 2011. NFPS investment in 2011 is projected in the government strategic plan (PEG) at 8.5% of GDP, almost three percentage points above its historical level.

2.

The potential risks facing the Panamanian economy include a slower-thanexpected recovery in the United States economy, with repercussions on the country’s growth rate, which could generate a drop in tax revenue. Although the probability of this risk materializing is low, the effect of a slowdown in growth rates can be simulated; to calculate the impact on financing needs, it is assumed that growth recovery only reaches half of the expected level for 2010-2014 (in other words, it remains at 3%). Given the potential drop in tax revenue, the NFPS deficit from 2010 to 2014 would exceed the LRSF limits by the end of the period (assuming the investment plan is fully executed). The simulation shows that a funding deficit would be produced from 0.4% of GDP in 2010 to 1.3% in 2014. This would represent additional funding requirements of about US$1.660 billion over the period (about 1.1% of GDP per year on average). Given this situation, the Bank could cover 15% of the gap, by increasing its lending framework by close to an additional US$250 million over the period (an average of US$50 million per year).

Table 1. NFPS funding needs (2010-2014) Macroeconomic risk scenario Estimates Items

Estimated fiscal balance (% of GDP) GDP growth rate Tax revenues Primary expenditure Balance, rest of NFPS NFPS primary balance NFPS overall balance

2009

2,4% 10,7 15.9 -2,4 1,9 -1,0

2010

3,0% 10,8 19.6 (1,1) 0,6 (2,3)

2011

3,0% 10,8 19.3 (0,7) 0,4 (2,5)

2012

3,0% 10,8 18.8 (0,4) 0,8 (1,9)

2013

3,0% 10,7 18.3 (0,1) 1,1 (1,4)

2014

3,0% 10,7 17.8 0,1 1,8 (0,6)

Financing calculated (US$ million)

Gross financing requirements NFPS overall balance Amortization Increase in financing requirements Additional IDB financing Increase in financing requirements (% of GDP) Additional IDB financing (% of GDP)

748,0 253,2 494,8

1.262 605 657

1.461 687 774

1.192 571 621

1.362 449 913

575 199 376

-

104 21

327 65

366 73

408 82

454 91

0,0% 0,0%

0,4% 0,1%

1,2% 0,2%

1,2% 0,2%

1,3% 0,3%

1,3% 0,3%

Anexo VI PĂĄgina 2 de 2

3.

Even under these assumptions, the medium-term projections and sustainability analysis show that the debt would remain at sustainable levels. Both the sustainability analysis and the government’s medium-term fiscal framework show that the country has fiscal results that are consistent with a favorable and stable medium-term debt profile.

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COUNTRY STRATEGY DIALOGUE AND CONSULTATION PROCESS

Background Sector technical notes: To support the policy dialogue with the new authorities and provide a basis for formulating the new BCS-PN 2010-2014, the Bank embarked on a process of systemizing its cumulative knowledge and conducting new research on the country. As a result of this process, a study program was designed by the Bank’s teams and various consultants under the leadership of the CID Regional Economic Advisor. In August 2009, the Bank delivered a document to the government containing the “Background studies prepared for the policy dialogue with the Government of Panama.” This document included 13 of the studies undertaken, divided into three broad topics: growth and economic policy (three studies); sector studies and decentralization (four studies); and social inclusion and protection (six studies). These actions help to strengthen the Bank’s knowledge on key development issues in the country and generated a climate conducive to strengthening the Bank’s financial support with a view to the new country strategy.

OVE Country Program Evaluation (CPE): In April 2009, an OVE mission visited the country to assess implementation of the 2005-2009 strategy. The results of the interviews held and the sector research done by the team were used to produce a preliminary version of the CPE, which was discussed with the Panamanian government in September 2009. A final version was subsequently prepared and presented to the Board of Executive Directors in November 2009.

BCS-PN consultation (a) Consultation with the Panamanian government: Consultations with the government were held between December 2009 (when the PEG was presented to the National Assembly) and June 2010, at both the technical and the political levels, led by the Country Office and with participation by all institutions relevant to the country strategy. The process was moved forward thanks to meetings held between the Office of the Manager of CID and the Panamanian government’s economic team. Based on these discussions, the following sectors were identified for actions: public finances, transport, water and sanitation, energy, education, and health. It was agreed to integrate country fiduciary and environmental systems into the joint strategic action. (b) Consultation with other bilateral and multilateral agencies: Consultations with the main cooperation agencies took place through monthly meetings with the aid community.

At these meetings, the various sectors to be targeted by the Bank in the country strategy were presented, and it was agreed to produce a “Donor Matrix,” which is shown in Annex V.

Annex VII Page 2 of 2

(c) Consultation with civil society: The country strategy consultation process with the Civil Society Council (CONSOC)25 involved two work meetings and various electronic consultations, in which all members of the Council participated. (i)

The first meeting, on 30 August, was used to present the sectors to be targeted by the Bank in the context of the country strategy. CONSOC expressed its agreement with the sectors identified on this occasion.

(ii)

At the second meeting, held on 16 September, the detailed strategic content of each sector was presented, together with the objectives and outcomes that the Bank expects to obtain during the country strategy period. This dialogue gave rise to the following (mainly general) recommendations, which were incorporated into the country strategy: (i) the need to strengthen Panamanian institutions; (ii) the need for the projects to take into account the specific characteristics of indigenous peoples; (iii) the importance of taking a long-term view on water resources; and (iv) support for adaptation measures to reduce the country’s vulnerability to weather phenomena.

25

The members of which are: Alberto Barrow (Etnia Negra [African Ethnicity] representative), Alida Spadafora (National Association for the Conservation of Nature – ANCON), Zuleika Pinzón (Foundation for the Conservation of Natural Resources – Fundación Natura), Mayté González (The Nature Conservancy, Panama – TNC), Gabriela Etchelecu (MARVIVA Foundation), Enrique A. De Obarrio (in a personal capacity), Mariela Itzel Arce (Democracy and Citizen Participation Program – CEASPA), Francisco De Ycaza (Panamanian Business Executives Association - APEDE), Rufina Venado (Traditional Authorities - Ngobé Buglé peoples), Mario Jaramillo (Secretaria Nacional para la Concertación para el Desarrollo [National Secretariat for Consensus- building for Development]).

Annex VIII Page 1 of 1

DEVELOPMENT EFFECTIVENESS MATRIX (DEM) COUNTRY STRATEGY: DEVELOPMENT EFFECTIVENESS MATRIX In August 2008, the Board of Executive Directors approved the Development Effectiveness Framework (GN-2489) to Increase the evaluabiliy of all Bank development products.

The Development Effectiveness Matrix for Country Strategies (DEM-CS) is a checklist of the elements that are necessary to evaluate a country strategy. It is based on the evaluation criteria developed by the Evaluation Cooperation Group of the Multilateral Development Banks in the "Good Practice Standards for Country Strategy and Program Evaluation."

The DEM-CS is a yes/no system with a partial score for each of the four evaluation criteria.

SCORE I. RELEVANCE

10.0

A. Ownership and alignment: establishing consistency of CS objectives with the government's plans & priorities

10.0

B. Coherence: establishing (i) the definition of country strategy focus in terms of anticipated results and (ii) the integration across Bank instruments/products

10.0

II. EFFECTIVENESS

8.8

A. Strategy results framework

9.3

B. Financial transfers

10.0

C. Build up and use of country systems

5.9

III. EFFICIENCY

IV. RISKS

to be determined in programming document

10.0