panama: country strategy with the idb (2001-2003)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

REGIONAL OPERATIONS DEPARTMENT 2 COUNTRY DIVISION 3

COUNTRY PAPER APRIL 2001

PANAMA

Contents EXECUTIVE SUMMARY I.

Introduction ..................................................................................................................9

II.

Key Macroeconomic and Development Issues ..........................................................10 A. B.

III.

Macroeconomic considerations .......................................................................10 Key development issues...................................................................................14 1.

The social equity challenge ...................................................................15 2.

The challenge of economic competitiveness.........................................18 3.

The challenge of environmental sustainability......................................21 4.

The governance challenge.....................................................................23

Objectives, Strategy, and Agenda for Dialogue.........................................................25 A. B.

C.

Objectives ........................................................................................................25 Strategy ............................................................................................................25 1.

The government’s development strategy ..............................................25 2.

The Bank’s current strategy (1997-1999): A look at outcomes ............27 3.

Portfolio execution and lessons learned ................................................28 4.

Portfolio performance and action plan ..................................................29 5.

The Bank’s main strategy targets for 2001-2003 ..................................30 6.

Coordination of private-sector support instruments..............................35 7.

Lending program scenarios ...................................................................37 8.

Risks of the strategy ..............................................................................38 9.

Monitoring the strategy and performance benchmarks.........................39 Agenda for a country dialogue.........................................................................40 1.

A frontal attack on poverty....................................................................41 2.

Economic reforms to spur competitiveness and growth .......................41 3.

Consolidation of the legal, regulatory, and institutional framework for sustainable growth.................................................................................42 4.

Institutional reforms to strengthen governance and improve transparency ..........................................................................................42

ii

ANNEXES Annex I

2000-2003 lending program

Annex II

The Bank’s strategy for 2001-2003: Summary matrix

Annex III

Loans in execution/Loan performance

BASIC SOCIOECONOMIC DATA

The basic socioeconomic data are available on the Internet at the following address: English: www.iadb.org/int/sta/english/staweb/statshp.htm Spanish: www.iadb.org/int/sta/spanish/staweb/statshp.htm

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ABBREVIATIONS ANAM APEC BDA BHN C&W CACM CGR CICH CSS DAS FFD FTAA GDP GNFS IDAAN IIC IVM MEF MERCOSUR MIDA MIF MINEDU MINJUVE MINSA NAFTA NFPS PAN PCA SIAFPA SMEs VAT WTO

National Environmental Authority Asia-Pacific Economic Cooperation Banco de Desarrollo Agropecuario (Agricultural Development Bank) Banco Hipotecario Nacional (National Mortgage Bank) Empresa Telef贸nica Cable and Wireless Central American Common Market Office of the Comptroller General of the Republic Interinstitutional Commission on the Canal Watershed Social Security Administration Social Agenda Dialogue Fondo Fiduciario para el Desarrollo (Development Trust Fund) Free Trade Area of the Americas Gross domestic product Goods and nonfactor services Water Company Inter-American Investment Corporation Disability, old age and survivor benefit plan Ministry of Economic Affairs and Finance Southern Common Market Ministry of Agricultural Development Multilateral Investment Fund Ministry of Education Ministry for Youth, Women, Children and the Family Ministry of Health North American Free Trade Agreement Nonfinancial public sector National Environment Program Panama Canal Authority Panamanian Integrated Financial Management System Small and medium-sized enterprises Value-added tax World Trade Organization

EXECUTIVE SUMMARY This paper proposes a strategy for Bank support for the Government of Panama. It is divided into three chapters, starting with an introduction in chapter I. Chapter II discusses macroeconomic issues and key development challenges for Panama. Chapter III proposes a joint Panama-IDB strategy and sets out a tentative agenda for a policy dialogue.

The Panamanian economy grew steadily in the 1990s, with continual increases in per capita gross domestic product until the last three years of the decade. This growth was underpinned by balanced fiscal accounts, substantial increases in private investment, and sweeping structural reforms. The economic and social policies in place over the decade held unemployment to about 13% and reduced the number of poor families from 44% of the total in 1991 to 37% in 1999.

On the macroeconomic front, Panama is facing five challenges as its strives to enhance equity and make its economy more competitive: (i) keep the fiscal accounts sound; (ii) pare its external debt; (iii) strengthen its budget framework; (iv) promote a more open economy; and (v) continue with economic reforms and improve regulation of the private sector.

Panama’s dual economy, its monetary system, recent political history, and lopsided accumulation of wealth pose singular economic and social development challenges.

Meanwhile, the transfer of the Panama Canal and Interoceanic Region (former Canal Military Zone) to Panamanian sovereignty is a historic opportunity for the nation to build on its comparative advantages as a world hub of trade and services. Tapping these advantages also would enable Panama to reduce pockets of poverty, invest in human capital, and even out its very unequal income distribution.

The equity challenge Poverty and inequality: The 2000 Human Development Report ranks Panama among countries with a high Human Development Index (number 59 among 150 countries), with an estimated per capita GDP of US$3,470 in 2000. The population’s average educational attainment of close to eight years is high and its aggregate health indicators are good, but these general yardsticks of well-being go hand in hand with some pronounced inequalities. Panama’s income distribution is one of the most uneven in the world.

The result of this income gap and concentrated poverty is a dual system in which a modern sector operates alongside an informal one. Unemployment and informal employment rates among the urban poor are high: the jobless rate in urban areas is nearly double the rural figure, and the poor are twice as likely to be without jobs as the nonpoor. Poor rural dwellers, particularly indigenous groups, have little access to land or credit or other factors of production.

An overview of the social sectors: In the 1990s, Panama reported one of Latin America’s highest levels of social spending, at 21% of GDP, and in the past five years social expenditure has climbed 6.3% annually. However, this outlay has not had the

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desired impact because funds have not been precisely targeted and because of bureaucratic inefficiency in the social sectors.

Poverty in Panama is concentrated in rural areas. Over three quarters of the country’s poor, and over 90% of families classed as extremely poor, live in the countryside. Poor families with 2 to 15 hectares of land have, on average, lower incomes than landless families.

The challenge of economic competitiveness In the above-mentioned dual economy, each sector’s competitiveness has depended on how open and unfettered it is and how modern a technology base it has in place.

Previously, the international services that were the cornerstone of the national economy—the Canal, the Colón Free Zone and the International Banking Center—were very competitive, gaining them a solid foothold in the global marketplace. However, given the exigencies of globalization and regional economic integration, these sectors would need to rethink their strategies if they are to stay competitive. Meanwhile, the traditional sectors (agriculture and manufacturing) have had trouble competing because of a series of protectionist measures that do nothing to spur productivity or competition.

This situation has taken a toll particularly on Panamanian consumers, who are paying more money for a smaller variety of inferior goods. These same protectionist policies have dampened export growth in Panamanian companies.

The challenge of environmental sustainability Development of environmental management: To deal with the challenges ensuing from the Environment Act and its new institutional apparatus, the government is implementing the National Environment Program (PAN). This initiative is a first step in an environmental strategy being instituted by the National Environmental Authority (ANAM), the nation’s lead agency for environmental management. Challenges for the coming years include bolstering the institutional apparatus, decentralizing environmental management, and issuing regulations to implement other provisions of the Environment Act. In parallel with the development of environmental quality and emissions standards and public-consultation requirements, the production sector should be encouraged to adopt clean technologies, which will entail striking a balance between environmental objectives and business competitiveness objectives. The country also needs baseline data and policies and programs for the management of forest, coastal and marine resources.

The Panama Canal watershed: The Canal watershed, adjacent cities, and Interoceanic Region are the economic hub of the country and are home to 50% of its population. They account for 75% of Panama’s GDP and 75% of its exports. The Region’s vast tracts of natural forest are safeguarded by a number of protected areas, the habitat of great biodiversity, that regulate the seasonal flow of water for Canal operations and provide nearby communities with a reliable water supply. A regional plan is in place for management of the eastern part of the basin but not for the western watershed, which is in need of further studies to make certain its resources are well managed and protected.

Managing the watershed is a challenge for the Panama Canal Authority (PCA), to build

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capacity for the basin’s comprehensive management via the Interinstitutional Commission on the Canal Watershed.

Sustainability of the water and sanitation sector: This sector is in crisis. The Bank has been supporting the government and IDAAN as they work to modernize the sector and ensure sustainable water and sanitation service delivery. Since none of the approaches advanced have been fully implemented, IDAAN still does not have the minimum institutional, economic, or financial resources required for it to operate effectively. In the Bank’s assessment, IDAAN’s current inefficiencies are keeping it from extending water and sewer systems to the poorest households, and are diverting resources that could be used for other priority social programs.

The challenge of governance and transparency Tackle administrative corruption and foster transparency: The Panamanian public sector needs to be more effective and efficient in its internal processes if it is to lessen the possibility of corruption in administrative procedures. This is particularly important in the areas of tendering and government permits. The government has stated its intention to conduct a thorough, systematic review of procedures in order to slash red tape. An important requirement in such an effort will be to adopt modern technologies that can at once streamline procedures and save the government a considerable amount in operating costs, freeing up money for social programs. Another requirement will be to identify international best practices for transparent funds management, to spur their adoption and prevent acts of administrative corruption.

Municipal development and decentralization: Drawing up a municipal development agenda is a priority for governance. The creation of the Decentralization Commission was a crucial step in designing and implementing a comprehensive strategy and strengthening municipal government.

Continuation of judicial reform efforts: With financial support from the Bank, Panama is carrying out a program to modernize the administration of justice, involving the judiciary, Attorney General’s Office, and the Office of the Attorney for Government Services. The judicial authorities are executing this program with the idea of seeking funding from the government and the Bank for a second stage that would take positive experiences from the first stage to the rest of the country. The country dialogue on this item needs to proceed, identifying additional areas of the justice system not included in the first phase that are important to the challenge of improving the national governance system.

Objectives of the Bank’s support strategy for 2001-2003 To be able to gauge the effectiveness and impact of a joint Panama-IDB strategy, a set of tangible development objectives that are measurable over the medium term need to be established. From a subsequent verification of outcomes it can be ascertained how much progress has been made in improving equity and competitiveness. The Bank is proposing four development objectives to underpin its joint strategy with the government: (i) make

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social investment more efficient; (ii) promote competitiveness in the business sector; (iii) achieve environmentally sustainable growth; and (iv) enable governance and transparency.

The government’s development strategy Top priorities in the development strategy of President Mireya Moscoso’s administration are poverty reduction and sustainable human development. One of the government’s key targets is to reduce the percentage of poor families from 37% of the total in 1999 to 27% in 2004.

On 13 March 2000 the government unveiled its economic and social agenda titled Socioeconomic Development and Financing Plan with Human Capital Investment. The three-part plan deals with the areas of social policy, economic policy, and financial strategy. The economic program addresses the imperative of sustained economic growth and improvements in the standard of living of Panamanians hitherto excluded from the fruits of progress.

Outcomes of the Bank’s support strategy for 1997-1999 The Bank’s strategy for Panama for 1997-1999 was built around four objectives: (i) share the benefits of social policy with more Panamanians, particularly vulnerable groups (growth with equity); (ii) foster sustainable development; (iii) spur sustained economic growth, and (iv) strengthen governance.

The government’s reform plan pursued these four goals, though the bulk of the reforms focused on the sustained-growth objective—specifically, reforms of public enterprises (via a privatization program) and of the financial sector. In keeping with the government’s emphasis on these areas, more Bank financing went toward the sustainedgrowth goal, which accounted for 59%1 of Bank approvals for Panama in 1997-1999. The other approved projects were distributed evenly and in line with the strategy objectives in priority sectors.

One important factor in executing the lending program associated with the 1997-1999 strategy was Panama’s balanced-budget policy. As the government’s fiscal policy curtailed budget funding, a number of projects were held up. Annual portfolio reviews in the period 1997-1999 pointed up weaknesses in implementing capacity in agencies receiving loan proceeds. Among these were problems relating to goods and services tendering, obstacles presented by current legislation, and executing agencies’ institutional capacity and administrative transparency.

An analysis of the implementation of the strategy mapped out in the previous country paper shows a very close tie-in between the country’s development challenges, the

1

This figure includes only lending programs (investment loans and sector loans), not technical cooperation (reimbursable or nonreimbursable).

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government’s 1994-1999 agenda, and programs funded by the Bank. However, new needs have arisen as a mounting portfolio covering many sectors has to be monitored.

Status of Bank loans During the first two years of Panama’s new administration, the Bank and the country authorities made considerable progress on a critical assessment of Bank projects in Panama and on improving their management. The objectives of Bank-funded operations matched the government’s aims very closely, particularly in the area of social programs.

For the most part, Bank projects in fiscal year 2000 received large enough budget appropriations to ensure that project funds could be expended at a satisfactory pace.

Portfolio performance and action plan: The Bank’s Panama portfolio has grown considerably in recent years. Between 1996 and 1998 the Bank approved 16 loans, averaging over US$250 million annually. Approval figures were down in 1999: two loans for US$65 million. The Bank and the government are making a concerted effort to expedite and improve portfolio performance, to improve disbursement rates after the low levels recorded in 1999 and 2000. The changeover in government and budget constraints were responsible for most of the delays. Three of the 21 operations in the portfolio are rated unlikely (low probability) to achieve their development objectives and thus are classified as “problem” projects—the agricultural modernization program (924/OC-PN), housing program (949/OC-PN, and program to support the restructuring of IDAAN (1029/OC-PN). The latter operation is rated very unlikely to achieve its objectives.

Implementation progress on four projects is unsatisfactory: the housing program (949/OC-PN), finance sector operation (1073/1074-OC-PN), tourism support program (1132/OC-PN), and program to support the restructuring of IDAAN (1029/OC-PN), the latter being rated “ very unsatisfactory” in this regard.

Throughout 2000 the Bank concentrated on loan portfolio execution. Undisbursed balances of approved loans at year-end stood at US$551 million—a high figure considering the country’s fiscal and budget constraints. The balance is expected to drop substantially by the end of 2001, to US$430 million-US$490 million. Actions being proposed to that end will focus on: (i) increasing disbursements; (ii) very close portfolio supervision, and (iii) cancellation of loans whose implementation progress is rated highly unsatisfactory.

Having examined each project in the portfolio, the Bank proposes to concentrate on the following operations: (i) finance sector (MEF, 1073/OC and 1074/OC); (ii) support for IDAAN restructuring (MEF/IDAAN, 1029/OC); (iii) tourism sector support program (1132/OC); (iv) housing program (949/OC); (v) sites and services (220/IC); (vi) sustainable development of Darién (1160/OC); (vii) health program (MINSA, 803/OC); (viii) education program (1013/OC); (ix) road rehabilitation and administration program (769/OC); and (x) agricultural modernization program (924/OC).

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Strategy for the Bank’s support in 2001-2003 The Bank’s tentative strategy for support to the Panamanian government from 2001 to 2003 would target four priority spheres: (i) support for a frontal attack on poverty and for enhancing equity; (ii) promoting economic reforms to spur competitiveness and growth; (iii) helping to consolidate the regulatory, legal, and institutional framework for sustainable growth; and (iv) contributing to institutional reforms to enhance governance and transparency.

A frontal attack on poverty, and equity enhancement: The Bank will support implementation of the poverty-reduction and equity-enhancing strategy charted in the National Government Social Development Policy and Strategy 2000-2004. As a starting point the Bank is proposing a Social Agenda Dialogue (DAS) to define priority programs and measures in the areas of health and nutrition, education, social protection, and the labor market. The DAS would be a forum in which to discuss and share ideas on policy and technical issues and look at international experiences, policy tools geared to the country’s needs, and ways of bolstering management capacity in the social sectors. In this context the government and the Bank could consider reviewing the loan portfolio and priorities for future programs with a view to reducing poverty and enhancing equity. The Bank also is proposing a national dialogue on the rural economy and rural poverty, to begin mapping out a comprehensive agricultural modernization program that could tackle the most serious socioeconomic problems in rural areas.

Economic reforms to spur competitiveness and growth: There is a need to design a national competitiveness program that would include developing an industrial and export policy and foreign trade policy and support for priority productive sectors and segments such as small and medium-sized enterprises (SMEs). As an integral part of implementing the competitiveness-heightening strategy the Bank will seek to consolidate and coordinate private-sector strengthening initiatives by way of its Private Sector Department (PRI), the Multilateral Investment Fund (MIF), and the Inter-American Investment Corporation (IIC).

Consolidation of sustainable growth: The Bank will continue to support consolidation of Panama’s environmental management framework through the National Environment Program (PAN). It also would furnish support for policy and program development for sustainability of the Canal watershed, the water and sanitation sector, the mining sector and forestry sector, and marine and coastal resources. The object of initiatives in these sectors will be to bring international best practices to Panama to conserve its natural resources and make rational and sustainable use of them.

Institutional reforms to strengthen governance and improve transparency: The Bank will give priority to developing a joint agenda with the authorities to address such issues as municipal development, deepening of modernization efforts in the judicial sector, and policies to curb corruption and make government administration more transparent and to involve civil society, particularly in social-service management.

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Lending program scenarios Estimates based on pre-2000 programming exercises put Panama’s 2000-2002 funding requirement at US$201 million (an average of US$67 million a year). This figure takes into account several factors: (i) an increase in the country’s borrowings by US$217 million a year, on average, in 1997-1999; (ii) the Bank’s sizable undisbursed portfolio for Panama at the end of 2000 (US$551 million); and (iii) the government’s announcement, as a priority strategy, of its plan to reduce its external debt in relative terms and look to its own resources and domestic sources. With these premises in mind, two lending scenarios are posited: Base-case scenario: The base-case (tendential) scenario assumes a fiscally neutral government stance (no improvement in its primary saving position), with tendential real GDP growth of 4% in 2001-2003 and a moderate Bank lending program with US$56 million in approvals in 2001. The operations pipeline for 2002 onward stands at US$414 million.

Alternative scenario: The alternative (high) scenario assumes enhanced saving capacity (higher treasury revenues, reduction and reapportionment of current expenditure), with real GDP growth of 5% in 2001-2003, a lending program of US$91 million in 2001, and a US$379 million project pipeline as of 2002.

The following would be conditions for the alternative (more approvals) scenario: (i) approval of fiscal measures to boost revenues in 2001; one element would be legislative passage of a tax modernization and streamlining package including the broadening of the VAT base and an increase in the tax rate of commercial banks; (ii) implementation of a program to contain and reduce central government current spending; and (iii) extending the Integrated Financial Management System to the entire central government. Without these core measures, the government would find it difficult to supply counterpart resources for Bank loans and still pursue its 2001-2004 zero deficit target.

Risks of the Bank’s support strategy There are three risks in the proposed Bank strategy for support for Panama. The first has to do with uncertainty as to the government’s resolve to proceed with and solidify the major structural reforms that helped Panama grow, opened up new investment opportunities, and created jobs in various sectors over the past decade.

The second risk lies in the government’s limited capacity to generate public saving to pay for mounting social needs.

A third risk is the limited institutional capacity for implementing social policies and other public-sector programs.

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Policy dialogue agenda As an adjunct to the operations support strategy the Bank is proposing, it would be desirable to hold a dialogue on priority policies for tackling Panama’s leading development challenges. Issues for such a dialogue are proposed at the end of chapter III.

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I. INTRODUCTION 1.1

This paper is the fruit of a lengthy, intensive dialogue launched on 14 August 1999 at a high-level consultation meeting with President Mireya Moscoso and members of her cabinet. Since then the Bank and Panama have engaged in a series of sector-specific dialogues on such priority areas as water supply and the finance sector. Following these initial exchanges the Bank produced a policy dialogue paper entitled Major Development Challenges and a special report on the status of its Panama loan portfolio, which were presented to the authorities for consideration in May 2000. The Bank then conducted a special policy dialogue mission in late June 2000, during which the authorities affirmed their agreement with the paper’s content and the proposals therein. On the basis of that endorsement the Bank prepared this country paper.

1.2

The paper, divided into three chapters, proposes a strategy for Bank support to the Government of Panama from 2001 to 2003. The first chapter is an introduction; the second deals with macroeconomic issues and key development challenges for Panama, and the third maps out a joint Panama-IDB strategy and a tentative agenda for a future policy dialogue.

1.3

Recent reforms: The package of economic and social reforms on which Panama embarked in the 1990s rewrote the ground rules and boosted efficiency in various sectors. In the social sector this marked the start of substantive reforms in the education system and continuing health and education infrastructure improvements. On the economic side, the country regularized its situation with external creditors (bilateral, multilateral, and commercial banks) and revamped the regulatory framework for public utilities, privatized ports, telecommunications, and the electric power industry, devised mechanisms to spur competition, and established a new legal framework for financial sector regulation and oversight. The reforms required huge amounts of funding to smooth the transition (owing to the loss of transfer monies from public enterprises) in the public sector and to pay for priority infrastructure projects in the health, education, and roads sectors.

1.4

Specific focuses of Bank support, in the form of sector loans, MIF grants, and technical cooperation, were reforms in the telecommunications, electricity, and water and sanitation sectors, and creation of the Public Utilities Regulatory Agency, Superintendency of Banks, and Competition Commission. These are viewed as some of the most solid reforms instituted in Latin America. This paper is premised on the consolidation and continuation of structural reforms in Panama.

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II. KEY MACROECONOMIC AND DEVELOPMENT ISSUES A.

Macroeconomic considerations

2.1

Throughout the 1990s the Panamanian economy expanded steadily, with continual improvements in per capita gross domestic product until the last three years of the decade. This growth was underpinned by balanced fiscal accounts, substantial increases in private investment, and sweeping structural reforms. The economic and social policies in place over that decade held unemployment to 13% and reduced the number of poor families from 44% of the total in 1991 to 37% in 1999 (World Bank, 1999).

2.2

Nevertheless, on the macroeconomic front the country is still up against a series of risks of external shocks and “reform fatigue” as Panamanians see that economic reforms are not yielding immediate social benefits. Nor have the reforms raised the standard of living of Panamanians in rural parts of the country or evened out the income distribution. This contrasts with Panama’s solid image abroad, where it is considered a prosperous country (dollarized, no inflation), politically stable and attractive to investors.

Table II.1: PANAMA. Economic indicators 1997-2004 Projected Macroeconomic indicators Real GDP (% change) External public debt/GDP (%) Inflation (CPI) (year-on-year change) Current account balance (% GDP) Open unemployment (% EAP) Fiscal indicators (% of GDP) NFPS balance Revenues and grants Current expenditure Capital expenditure

1997

1998

1999

2000p

2001

2002

2003

2004

4.5 57.8 -0.5 -6.8 13.4

4.4 58.5 1.4 -13.1 13.6

3.0 58.3 1.5 -14.0 11.8

2.7 57.9 2.0 -10.2 13.3

4.0 55.8 1.8 -7.4 -

5.0 51.8 1.5 -6.5 -

5.0 48.0 1.5 -6.1 -

5.0 44.3 1.5 -5.3 -

-0.2 28.7 24.5 4.3

-3.0 28.3 25.0 6.4

-1.4 29.2 25.9 4.8

-1.1 28.7 26.1 3.7

0.0 29.2 25.5 3.7

0.0 29.7 25.6 4.2

0.0 29.9 25.7 4.3

0.0 30.0 25.8 4.3

Sources: Office of the Comptroller General of the Republic, IDB, IMF.

2.3

To resolve this contradiction the country needs programs designed specifically to make public policies more equitable and to reduce poverty. At the same time, macroeconomic management approaches must continue to create an enabling environment for a competitive economy and private investment. Heightened competitiveness and higher investment are the key to creating jobs and permanent income sources for Panamanians.

2.4

In June 2000 the IMF approved a standby arrangement for Panama. The objectives are to consolidate fiscal-adjustment gains, lower interest rates on

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Panama’s external debt, and make more money available for investments targeted to priority social sectors. For the coming years the program’s macroeconomic premise is 4% growth in 2001 and 5% in 2002-2004. The balance-of-payments current account deficit is also expected to narrow steadily, from 14% in 1999 to 5.3% in 2004. These targets are attainable if the zero-deficit target for the nonfinancial public sector is achieved in 2001-2004. Supplementing the strategy of fiscal balance, growth, and balanced external accounts would be structural measures such as broadening the value-added tax (VAT) base, raising the tax rate on commercial-bank income, and extending the integrated financial management system (SIAFPA) throughout the entire central government. The legislature will be discussing the first two issues during the first half of 2001.

2.5

Against the above-described backdrop, this section describes five key macroeconomic challenges for Panama to be able to enhance equity and become more competitive: (i) keep its fiscal accounts sound; (ii) pare its external debt; (iii) strengthen its budget framework; (iv) foster a more open economy; and (v) continue with economic reforms and improve regulation of the private sector.

2.6

Keep the fiscal accounts sound: The Panamanian government is facing a double challenge on the fiscal front: (i) balance the public-sector accounts while lowering the external debt-to-GDP ratio, and (ii) boost public saving to be able to fund the government’s economic and social infrastructure investment program. Three salient features in the government’s budget are: (a) high debt levels; (b) modest tax revenues, and (c) high nontax revenues.

2.7

Panama’s public-spending figures top those of most other Latin American and Caribbean countries. On average, public expenditure in the nonfinancial public sector in the 1990s stood at 30% of GDP. The country’s high current expenditure (averaging 25% of GDP in the 1990s) is attributable in part to its large civil service: public employees make up over 35% of the formal urban workforce. Rationalizing current expenditure thus would yield public savings that could be used for poverty-reduction programs, to achieve substantial equity gains.

2.8

The country’s tax revenues, on the other hand (equal to about 11% of GDP in the 1990s) are lower than the Latin American average. Though Panama’s tax rate is low, its tax system is fairly rigid and complicated, and the intake from its more than 50 taxes is modest. Indirect tax rates, comparatively, are very low as well.

The country’s 5% VAT rate is very low—one of the lowest in the world—and its yield is meager. A VAT rate increase and a broader base for this levy would make it more productive and cause little distortion. Currently, receipts from workers’ income taxes are relatively high; this creates a distorting system as workers pay far higher taxes than businesses (capital taxes). A moderate tax reform thus would help Panama boost social-sector outlays and at the same time create an easier-toadminister, transparent, equitable system, with taxes on capital proportionally higher than taxes paid by employees. In Latin America’s experience, an efficient tax system with clear, simple rules spurs investment and competitiveness.

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2.9

Reduce the external debt: Panama will need a consistent external-debt reduction strategy to ease the risk of liquidity crunches, improve its country-risk rating and make way for investments in poverty reduction, human capital, and basic infrastructure. Panama’s public debt stock (domestic plus external) is around 80% of GDP, the third highest figure in the region. Until now, the government has funded its fiscal deficit with debt issues and multilateral financing. Aggregate public debt at the end of 2000 stood at US$7.732 billion (77% of GDP). US$5.6 billion of the total was external debt (56% of GDP), corresponding to 2.9 years of central government revenues.

2.10

The government also has substantial financial assets in the Social Security Trust Fund (about US$1.5 billion) and the Social Development Trust Fund (FFD) (about US$1.35 billion) that was set up to invest net privatization receipts.

Though the Social Security Trust Fund has a positive cashflow at present, obligations to future retirees tally some US$8 billion-US$11 billion, a high contingent liability. In a word, the system is running an actuarial deficit and could be completely decapitalized by 2012. The FFD, for its part, is expected to have available US$590 million net for 2001-2004, which can be used to buy back up to 20% of the external public debt and for social investment outlays. Both these uses of FFD yields are compatible with an external debt reduction strategy.

2.11

Strengthen budgetary management: Though the Panamanian government has huge infrastructure investment needs, its scant public saving capacity is forcing it to substantially curtail capital outlays at the end of each year. To be able to avoid these seasonal cuts in programmed capital spending the government needs to improve its budgeting system and establish multiyear public investment programs in line with its macroeconomic and fiscal objectives and with due regard to the various economic-growth scenarios. A first step to that end was to combine the Ministry of Finance and Treasury with the Ministry of Planning and Economic Policy to create the Ministry of Economic Affairs and Finance (MEF). The government also brought in a new integrated financial management system for the public sector (SIAFPA). At the moment the system covers a handful of central government agencies; it needs to be expanded to the entire public sector. Apart from that move, capacity-building is needed so agencies can accurately record all public-sector transactions. In the first year of SIAPFA operations many expenditures went unrecorded, causing discrepancies in fiscal-deficit calculations.

Better budgetary management coupled with tax reform and trimming of the external debt are necessary conditions for more equitable and effective public spending.

2.12

Foster an open economy: In the 1990s Panama quickly lowered barriers to trade.

After joining the World Trade Organization (WTO) in 1996, it replaced all import quotas with tariffs below the WTO 40% ceiling. The average tariff was reduced from over 35% to less than 10%. In October 1999 the new administration raised import tariffs on selected agricultural commodities to the WTO ceiling (up to 130% in the case of rice). Though the aim of the tariff hikes was to protect the

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wages of poor rural families, the regulations worsened the lot of the urban poor and pushed up the price of the basic food basket. As well, the tariff structure, with rates ranging from 5% to 130%, is distorting the use of factors of production. Low uniform tariffs and direct aid such as technology support, solid new infrastructure, and direct subsidies to rural workers would be less distorting and more effective in supporting the rural poor.

2.13

Apart from their negative effects on equity, the tariff increases mark a deviation in the trade-liberalization trend, reduce incentives for productivity and competitiveness, and run counter to the objectives of building on Panama’s comparative advantages as an investment destination for trade and goods and services exports. The government has pledged to the IMF that it will progressively lower tariffs until 2004. This gradual approach will mean delays in seeking new, more competitive exports as well as higher domestic prices and dimmer prospects for Panama to benefit from international free trade agreements.

2.14

Continue economic reforms and improve regulation of the private sector: To make the economy more competitive, spur private investment, and create jobs, the Panamanian government would need to rewrite its labor laws, proceed with the privatization process, lower the cost of doing business, and consolidate the regulatory framework for the financial and public utilities sectors.

2.15

Labor legislation: Panama’s labor laws are among the most inflexible in the world. The result is high unemployment, inequitable wage distribution, particularly among women and young people, and a vast informal sector. Reforms of these laws should simplify the wage structure, provide uniform social security coverage, and make it easier for workers to take temporary jobs and thereby bring down the unemployment rate.

2.16

Privatization: In the mid-1990s, the Panamanian government launched an aggressive privatization program, but by 1998 and 1999 the process had come to a standstill. Specifically, the government will not be privatizing the water utility (IDAAN) and has postponed the privatization of Tocumen International Airport.

President Moscoso’s administration reworked the previous government’s plan to privatize the National Mortgage Bank (BHN) and Agricultural Development Bank (BDA). These two institutions have high loan arrears ratios and are inefficiently run. Privatizing them would help segregate their lending functions from their subsidy functions, transferring the latter function to more efficient arrangements to directly help low-income families and poor farmers acquire housing. The government has decided to liquidate BHN and to audit BDA and strengthen its administration so it can achieve its objectives.

2.17

Bank supervision: A further challenge is to consolidate bank supervision and public utilities regulation. In the absence of a lender of last resort and given Panama’s bank secrecy tradition, further strengthening of bank oversight will be a difficult but important task. The rapid growth in consumer credit has weakened

Executive Summary Page 14 of 8

bank balance sheets. In 1998 and 1999, as the financial system relaxed its lending requirements, consumer lending rose 40% and 36%, respectively. In 2000 the system felt the impact of a slowing economy, and arrears rates rose 21%, climbing from 2.4% of loan portfolios in 1999 to 2.9% in 2000. The potential fragility of the banking system warrants further moves to strengthen the Banking Superintendency.

2.18

Public utilities regulation: In regulating the privatized telecommunications and electric power utilities a balance needs to be struck between equity concerns— keep rates affordable—and contractual commitments to investors. The Bank shares the government’s concern about the social impact of rate increases. The efficiency price is the cost that has to be paid to assure the quality of services, increased coverage, and sustainability of infrastructure investments. No utilityrate solution should create regulatory risks. In the Bank’s view, subsidies targeted to lower-income customers could be explored as a way of cushioning the social impact of efficiency prices. Direct, transparent subsidies, coupled with a solution to equity issues, are within the public-policy purview and do not create distortions as far as incentives to private enterprise are concerned.

2.19

The integrity of the regulatory framework and independence of the Public Utilities Regulatory Agency (ERSP) are a foundation upon which the government can put through its social agenda: they ensure that Panamanians will receive good-quality services because the right kind of economic incentives are in place.

Regulatory system failures harm the poorest and most vulnerable in society, when investors have no incentive and no real obligations for service delivery. The Bank considers it important that Panama stay the course of the reforms while seeking formulas (direct subsidies or others) to ease the reforms’ impact on the poor. This will help the country advance and assure the long-term sustainability of key sectors of the economy. The continuity of economic and social reforms is a fundamental principle for a policy dialogue between Panama and the Bank.

B.

Key development issues

2.20

Panama’s dual economy, monetary system, recent political history, and uneven accumulation of wealth pose special economic and social development challenges. The transfer of the Panama Canal and Interoceanic Region (former Canal Military Zone) to Panamanian sovereignty is offering the nation a historic opportunity to draw on its comparative advantages as a world-class trade and services hub. Tapping these advantages also would enable Panama to reduce sizable pockets of poverty, invest in human capital, and redress its pronounced income inequality.

2.21

The Bank has identified two basic analytical focuses in examining development challenges in Panama: (i) which challenges are holding up equity improvements, so these challenges can be put into a short- and medium-term perspective, and (ii) which are the challenges for competitiveness, to grow the economy more

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quickly and reduce unemployment. The interface between equity and competitiveness is a prime consideration for policy-making, rewriting of laws, and shaping development programs.

2.22

To facilitate discussion, the twin challenges of equity and competitiveness have been subdivided into four core issues to tackle: (i) social equity; (ii) economic competitiveness; (iii) environmental sustainability, and (iv) governance. This chapter analyzes these issues and their implications for Panama’s development.

The next chapter looks at possible government and Bank responses.

2.23

Poverty and inequality: The 2000 Human Development Report ranks Panama among countries having a high Human Development Index (number 59 among 150 countries), with an estimated per capita GDP of US$3,470 in 2000.

Panamanians have a high educational attainment, averaging close to eight years, and good aggregate health indicators (a life expectancy of almost 75, for instance), but these general yardsticks of well-being go hand in hand with some marked inequalities. Panama’s income distribution is one of the most uneven in the world. With a Gini coefficient of 49 for consumption distribution and an income-inequality Gini of 57.1, Panama has one of the widest income gaps in the world, approximating the situation in Brazil and South Africa where income inequality is the most pronounced.2 1.

2.24

2 3

The social equity challenge

The above-mentioned inequities have worsened pockets of poverty and extreme poverty that are concentrated in certain parts of the country. Poverty levels are very high outside the cities: 64.9% of rural dwellers are poor; 38.5% live in dire poverty and 26% are unable to satisfy their most basic needs (World Bank, 1999).3 The overall poverty rate in the indigenous population is abysmal, topping 84%. Within indigenous areas themselves, more than 95% of the population is living in poverty and 86% fall below the extreme poverty line. Though urban poverty figures are not as extreme, some 23% of city dwellers are poor. The Panama City-San Miguelito area is home to nearly 40% of the urban poor.3

Panama Poverty Assessment-World Bank, 1999.

Panama Poverty Assessment-World Bank, 1999.

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Gini coefficient of selected Latin American countries 65 60 55 50 45 40 35

Pa na m a Br El az Sa il lv N ado ic ar r G agu ua a te m H ala on d Co ura sta s Ri ca J D om ama . R ica La epu tin b A lic m er ic a

The Gini coefficient is a measure of the inequality of a country’s income distribution. A Gini approximating unity portrays a distribution near absolute inequality, i.e., one person receives all income. The closer the coefficient to 0, the more even the distribution. Panama (1999) has a Gini coefficient of 57.1, on a par with Brazil, Guatemala, and South Africa, whose income gaps are the widest in the world. This distributional inequality translates into consumption inequality: Panama’s poorest 20% account for a mere 2.3% of national consumption. Here, too, Panama ranks with countries having the widest gaps. Of the countries depicted in the graph, only Guatemala, where the poorest 20% account for 2.1% of aggregate consumption, tops Panama’s inequality index. The average for this sample for Latin America—the region with the most uneven showing in the world—is 3.5.

2.25

Child malnutrition correlates strongly with poverty in Panama. Though the nationwide chronic malnutrition rate (low height for age) is low compared to other countries in the region—16% in children under 5—the situation is more acute in the poorest rural areas and indigenous communities. This problem, in turn, has its roots in the scarcity of money in poor and indigenous households to obtain food and health care, inappropriate childcare and nutrition practices, and poor household sanitation. The lack of food money is a more serious problem than food availability. Panamanian women and children in every region and ethnic group have very high iron-deficiency and iron-deficiency anemia rates. Close to 40% of pregnant women and a similar percentage of preschool children are anemic, constituting a serious public health problem. Furthermore, obesity and chronic health problems associated with shifts in diet and lifestyle are on the rise and will soon become predominant factors in the nation’s epidemiological profile.

2.26

The result of the country’s uneven income distribution and ensuing concentration of poverty is a dual economy in which a modern sector operates alongside an informal one. Unemployment and informal employment rates are high among the urban poor. The jobless rate in large towns and cities is almost double the rural figure, and the urban poor are twice as likely to be without a job as the non-poor.

Poor rural dwellers, particularly indigenous groups, have scant access to land or credit or other factors of production. The situation is particularly difficult for indigenous communities in remote areas, who have little access to basic services or productive assets.

2.27

Compounding the uneven income distribution and dualistic economy is the limited access of the poor and the marginalized to the kind of technology tools and know-how that can boost productivity. The “digital divide”—unequal access to information and communication technologies—coupled with low education

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levels and a shortage of capital is creating a vicious circle of low productivity and poverty.

2.28

A social-sector overview: In the 1990s, Panama reported one of Latin America’s highest levels of social spending, at 21% of GDP, and in the past five years social expenditure has been rising 6.3% annually. However, this outlay has not had the desired impact because funds have not been precisely targeted and because of bureaucratic inefficiency in the social sectors.

2.29

Imprecise targeting: Because most Panamanian social programs are explicitly universal, the poorest Panamanians do not benefit most from them. For instance, the 43% of the school-age population that is poor receives only 28% of education funding.4 Spending is also regressive in geographic terms: half the school-age population lives in rural areas, but only one third of total education spending goes to these parts of the country. This pattern is replicated in virtually every social sector, causing disparities in benefits received. For example, the educational attainment of the non-poor population averages over nine years; for the urban and rural poor the average is seven and five years, respectively. In indigenous communities the average drops to three years.

2.30

Inefficiency: Social spending is not just unevenly apportioned but inefficient.

Though Panama’s education and health spending figures are among Latin America’s highest, its indicators do not reflect this outlay. In education, for instance, first-grade repeater rates are 10% in cities but over 22% in rural areas.

2.31

Inefficient social spending has to do with overcentralization and weak sector institutions. Most decisions in each social sector on matters such as staff hiring, management, administration, capital projects, and maintenance are taken centrally, with no input from those for whom the services are intended. This makes programs less relevant and weakens their impact. The social-sector ministries, for their part, are weak in corporate decision-making and planning and need information and evaluation systems. There are overlapping functions within each ministry and no incentive arrangements to enhance staff performance.

2.32

The rural economy and rural poverty: Agriculture accounts for only 7% of Panama’s aggregate GDP and less than a quarter of jobs. However, in rural areas, and particularly in poor rural households, the sector is more important: it generates 50% of jobs and over a quarter of income. Agriculture also contributes over 40% of the income of households subsisting below the poverty line and over 50% of the income of those living in extreme poverty.4

2.33

Poverty in Panama is concentrated in rural areas. Over three quarters of the country’s poor, and over 90% of extremely poor families, live in the countryside.

Poor families with 2 to 15 hectares of land bring home less money than landless families. Off-farm income is more important for landless families; it can be higher

4

Panama. Poverty Assessment. Priorities and Strategies for Poverty Reduction. (1999) The World Bank.

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than farm income, particularly in households with less than 15 hectares.

Moreover, a sluggish land market (owing to a lack of clear titles) makes it difficult for poor Panamanian farm families to raise their income.

2.34

Panama’s ethnic minorities are the Kuna, Gnobe-Buglé, Embera-Wounaan, Teribe, and Bri-Bri indigenous communities and the Afro-Latino population (Afro-Darienite y Afro-Caribbean), which are classed as poor and highly vulnerable segments of the population. Theirs is a traditional economy based on reciprocity and redistribution, with varying degrees of involvement in the marketplace, usually inefficient and unequal. They work in a segmented job market and migration is heavy, notably among Afro-Latinos. The challenge in respect of these groups is to complete moves to regularize their territories, foster sustainable land-use planning, strengthen their administration and public service delivery, safeguard and nurture their cultures and ensure food security, by protecting their traditional economies.

2.35

The conclusion of an analysis of household surveys is that the nonfarm sector offers better avenues for escaping poverty. This suggests that a rural poverty reduction strategy should also emphasize investments in nonfarm services. Thus, productive infrastructure (e.g. rural roads, electrification) that can bring down transaction costs in the agriculture sector is key to reducing rural poverty. There are solid studies on nonfarm rural activities to back up this affirmation.

2.36

In 1999, the Panamanian government raised import duties on a number of items in the basic food basket. This left the agrifood sector less able to compete internationally while doing nothing to help the country’s poorest. To the contrary, according to a World Bank simulation model, the overall net impact of higher tariffs on basic food products is negative for Panamanian households. An analysis of the distributional effects of this net overall impact can provide information for moves to offset the impact of the tariff hikes on the provinces and municipalities most affected.

2.37

In brief: there are two paramount tasks facing Panama as it tackles the social equity challenge: (i) target the benefits of social spending to the poor, and (ii) devise programs explicitly to reduce rural poverty.

2.

2.38

The challenge of economic competitiveness

In Panama’s dual economy, a sector’s competitiveness has been gauged by how open and unfettered it is and how well placed it is to use new technologies to become productive enough to compete globally. Previously, the international services that were the cornerstone of the national economy—the Canal, the Colón Free Zone and the International Banking Center—were extremely competitive, carving out a solid place for themselves in the global marketplace. Panama understands the importance of improving its regulatory and institutional framework if its economy is to be more competitive. Over the past decade the government has made huge strides, adopting reforms to shrink systemic obstacles

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to expansion, modernization, and creation of new businesses under conditions that will be sustainable in the long term. However, given the exigencies of globalization and regional economic integration, these service sectors would need to rethink their strategies if they are to stay internationally competitive. Issues of comparative advantages and technological innovation are coming to the forefront in this regard. Meanwhile, the traditional sectors (agriculture and manufacturing) have had trouble competing because of a series of protectionist measures that do nothing to spur productivity or competition. This situation has taken a toll particularly on Panamanian consumers, who are paying more money for a smaller variety of inferior goods. These same partial policies have dampened Panamanian firms’ export growth.

2.39

As a prelude to creating consistent competitiveness policies there needs to be a more thorough up-front assessment and a broadbased national dialogue in pursuit of a medium- and long-range shared public/private-sector strategy. Some priority initiatives to help make Panama more competitive are outlined in the following paragraphs.

2.40

Build on multimodal transport advantages: Apart from the Canal, Panama has a maritime and transportation infrastructure unique to Latin America, and is now expanding its road infrastructure. The Interoceanic Region offers huge potential for shipping, commerce, and industry. The electricity and telecommunications industries, which are almost entirely in private hands now, provide a solid support-services base. This infrastructure endowment in a compact geographic area offers prospects for developing a multimodal transport system to handle sizable volumes of commercial freight. In order for Panama to draw on this comparative advantage it will need an efficient regulatory framework, lower utility prices and a simple, efficient taxation system.

2.41

Boost foreign direct investment: A combination of features unique in Latin America make Panama attractive to foreign investors: low inflation, low interest rates, availability of long-term credit, a relatively low country-risk premium, and a flourishing international banking center. Prospecting for privatization opportunities in the reverted areas and opening up other infrastructure sectors to private investment are important avenues for spurring growth. Thus, an attractive, transparent private-investment climate and strategic partnerships will be vital elements in a policy framework to make Panama more competitive and secure a foothold in global market niches.

2.42

Integrate the productive sectors at home: Panama is in need of a modern industrial policy to integrate sectors that have competitive advantages for export trade. The twin foundations for a new policy are: (i) incentive schemes to consolidate priority production, marketing, and export chains and (ii) programs for technology transfer, skilled human-capital formation, information systems on potential market niches for Panamanian exports, and cutting of red tape for

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business, particularly SMEs. One top priority will be the promotion and consolidation of clusters of small and medium-sized export firms.

2.43

In 1999, the National Business Council and the Panamanian Industrial Workers Union/Panamanian Exporters Association came out with assessments and policy recommendations to improve competitiveness, pointing up Panama’s strengths and weaknesses and prospects for a national competitiveness program. At the heart of the proposals are two concepts: (i) development of a unique Panamanian productive/competitive identity, and (ii) the need for a strategy to take Panamanian businesses into the global marketplace. The first concept involves bottlenecks for quality and productivity improvements (production costs, information, financing, legislation, incentives, human capital). The second has to do with trade policy and other public policies to expedite private enterprise (economic integration, trade accords, export promotion, and technology adaptation programs, for example). The two assessments recognize the importance of explicitly addressing these issues at the SME level.

2.44

Make Panama a full partner in the global economy: Private investment (domestic and foreign) and business incentive schemes need to go hand in hand with a modern trade policy. With the signature of new trade pacts and active participation in regional economic integration forums (FTAA, CACM, Andean Community, MERCOSUR, NAFTA, APEC), Panama is poised to seize new trading opportunities that offer economies of scale for goods and services exports.

Given the long menu of possible initiatives, the country will need a policy of progressive integration, as the Office of the Deputy Minister for Foreign Trade (VICOMEX) is strengthened institutionally and a national consensus takes shape with the productive sectors. A first move in this direction will be to make strategic use of the temporary headquarters of the Technical Secretariat of the Free Trade Agreement of the Americas (FTAA 2005) from 2001 to 2003 to promote Panama’s comparative and competitive advantages in priority economic sectors.

2.45

It is anticipated that the current administration will move forward on negotiations for signature of free trade agreements with Central America and Mexico, and there could be preliminary talks with Chile to that same end. Panama is still an observer to the Andean Community, with a view to an eventual customs and free trade agreement. Such accords would pave the way for Panama to join the Andean Community in the future, though no specific date has been set as a priority. By dint of these free trade agreements Panama could make the most of its strong competitive edge in the service industries and reap the benefits of enhanced access to markets for exports of goods, though the transition costs for sectors of the traditional Panamanian economy may be substantial. As of October 2000 Panama is eligible for trading benefits under the U.S.-sponsored Caribbean Basin Initiative accords. It also will continue as an active participant in the Central American Power Grid (SIEPAC) and the AndrĂŠs Bello Agreement for education, science and technology, and culture, and in all the Rio Group ministerials.

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2.46

Mainstream all Panamanians: Panama needs to broaden its business base and create more job opportunities. Tackling these two challenges would help narrow the income gap. Without more universal access to asset ownership there can be no growth with equity in Panama. Policies to modernize the education and vocational training systems are crucial in this regard, as are aggressive urban and rural land titling programs to open the mainstream economy and bank lending services to the hitherto excluded masses. Also needed are programs explicitly designed to boost SMEs’ productive capacity by giving them access to nonfinancial services, so the fruits of economic progress can be spread more evenly among the Panamanian people.

3.

The challenge of environmental sustainability

2.47

Development of environmental management: To deal with the challenges ensuing from the Environment Act and its new institutional apparatus, the government is implementing a National Environment Program (PAN) with IDB loan funding. This initiative is a first step in an environmental strategy being pursued by the National Environmental Authority (ANAM), the nation’s lead agency for environmental management, environment units in the other ministries that are part of the environmental management network, the private sector, and civil society. Challenges for the coming years include bolstering the institutional apparatus, decentralizing environmental management, and issuing enabling regulations for the Environment Act. In parallel with the development of environmental quality and emissions standards and rules on public consultation, the production sector needs to be encouraged to adopt cleaner technologies, which will entail striking a balance between environmental objectives and business competitiveness objectives. The country also needs baseline data and policies and programs relating to forest, coastal and marine resources.

2.48

The Panama Canal watershed: The Canal basin, adjacent cities, and Interoceanic Region are the economic hub of the country. The home of 50% of the population, they account for 75% of GDP and 75% of the country’s exports.

The watershed regulates the seasonal flow of water for Canal operations and assures the supply of water to nearby communities. Further studies are needed of the western watershed to make certain that its resources are well managed and protected, and for a possible expansion of the Canal. Integrated management of the watershed poses a great challenge for the Panama Canal Authority (PCA) and the Interinstitutional Commission on the Canal Watershed (CICH), in which ANAM and other government agencies are involved. The PCA, CICH, and local governments also need to be strengthened institutionally and technically to ensure sustainable management of the entire watershed, giving communities in the basin and its area of influence a strong voice.

2.49

Sustainability of the water and sanitation sector: Panama’s water and sanitation sector is in crisis, with serious consequences for: (i) efficient and sustainable delivery of services; (ii) conservation of natural resources and

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environmental conditions in the sector, and (iii) Panamanians’ well-being and standard of living, particularly the urban and rural poor. The IDB has worked with the government and IDAAN to modernize the water and sanitation sector and assure sustainable service delivery, but the solutions advanced have not been fully implemented, so IDAAN still is without the minimum institutional, economic, and financial resources required for it to operate effectively. In the Bank’s assessment, IDAAN’s current inefficiencies are keeping it from extending service to the poorest households and are diverting resources that could be used for other priority social programs.

2.50

In 2000 the government appointed a presidential commission, with which the Bank has been working, to examine why the management model agreed upon previously has not been put into practice, and propose the best courses of action.

One outcome of the dialogue was the endorsement of a number of policy elements that are to guide sector modernization efforts: (i) replacement of Law 56 procurement procedures with a more agile approach, but still observing the principles of competition and transparency; (ii) IDAAN’s authority to calculate and propose tariffs whereby it can recover the efficiency costs of service delivery and raise the funds needed to extend its systems; (iii) arrangements for government-authorized subsidies using timely non-IDAAN resources; (iv) budgeting capacity consistent with the agency’s own resources and its policy objectives and targets; and (v) IDAAN’s authority to institute an employment regime and salary structure that will give it trained, efficient staff. These policy elements would: (i) help give IDAAN enough financial and institutional autonomy to be able to deliver its services and execute capital projects efficiently, charging rates consistent with those objectives, and (ii) help water and sewer services adhere to industrial and business efficiency criteria, subject to clear, precise regulatory standards.

2.51

Sustainable management of the mining sector: Mining currently accounts for less than 0.5% of Panama’s GDP but the industry has huge potential given the country’s world-class gold and copper deposits. Studies show that annual ore sales could reach US$250 million in 2005, yielding US$15 million in taxes and creating 3,000 direct jobs and 12,000 indirect ones. There is little mining activity today because of the industry’s weak regulatory framework as far as laws, institutions, taxation, public input, and environmental standards are concerned and because there is not enough geoscientific data. For the sector’s development to be sustainable the regulatory framework needs to be strengthened, with due regard to the rights and interests of rural communities and indigenous groups and to environmental concerns. This can be achieved by: (i) creating a mining environmental management and cultural mapping system; (ii) implementing mechanisms to give rural and indigenous communities input into every phase of mining development; (iii) revamping the sector’s legal, institutional, tax, and labor framework to enhance the investment climate; and (iv) producing and digitizing geoscientific data on Panama to construct a national geoscientific database, as a public good and an indispensable public-policy management tool.

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2.52

By adopting a modern regulatory framework for the mining industry Panama would create a new sector of sustainable economic activity with a controlled environmental impact. The sector would have a significant social impact (jobs and income) in parts of the country hitherto bypassed by development, and the Treasury would obtain needed revenues.

4.

The governance challenge

2.53

Tackle administrative corruption and foster transparency: Internal processes in Panama’s public sector need to be more effective and efficient, to reduce the chance of corruption in administrative procedures. This is particularly important in the area of public tendering and permits. The government has announced its intention to cut red tape. One important element in such a move is to adopt modern technologies that will at once streamline procedures and save the government a great deal in operating expenses, freeing up funds for social programs. International best practices in transparent funds management also need to be identified, to push for their adoption and prevent corrupt administrative acts.

The Office of the Comptroller General is interested in working in these areas, and the Banking Superintendency intends to tighten rules and requirements and improve detection of money laundering.

2.54

Municipal development: One priority for enhancing governance is a municipal development agenda. Panama is one of Latin America’s most centralized nations: local governments control less than 5% of aggregate public spending. Another singular feature of the Panamanian system is the structural weakness of the municipal level of government, owing to: (i) the separation of power between the mayor and the town council (which appoints and oversees the treasurer) and (ii) the fact that a sizable share of central government transfers is handled as ‘congressional district appropriations’ administered by members of the Panamanian Congress, not by the municipalities. A key step in devising and implementing a comprehensive municipal government strengthening strategy was the formation, by executive order of 9 February 2000, of a Decentralization Commission, with a mandate to “produce a draft bill to put the national decentralization and municipal development plan into practice”.

2.55

Continued judicial-reform efforts: With financial support from the Bank, Panama has launched a program to modernize the administration of justice, in which the court system, the Office of the Attorney General, and the Office of the Government Services Attorney are involved. This operation was designed as a first stage of funding, in line with priorities decided on with the country. The program’s central aims are to lower barriers to the justice system to provide more universal access, reorganize the management of court offices and court services, and enhance the quality and transparency of government acts and procedures in this area. Seeing this program carried through is one of the current administration’s priorities. The justice authorities are executing the operation with a view to seeking government and Bank funding for a second stage, in which the

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first-stage “pilot� experiments would be extended to the rest of the country. The dialogue with Panama on these issues needs to continue and open up to identify other related areas of the justice system not addressed in the first stage, as part of the challenge of enhancing the national governance system.

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III. OBJECTIVES, STRATEGY, AND AGENDA FOR DIALOGUE A.

Objectives

3.1

One requirement to be able to gauge the effectiveness and impact of a joint Panama-IDB strategy is a preestablished set of tangible development objectives that are measurable in the medium term. From a subsequent verification of outcomes it can be ascertained whether progress has been made on the equity and competitiveness fronts. The Bank is tentatively proposing four development objectives to pursue in its common strategy with the government: (a) make social investment more efficient; (b) spur competitiveness in the business sector; (c) achieve environmentally sustainable growth; and (d) enable governance and transparency.

B.

Strategy

3.2

Three requisites for charting a joint Panama-IDB strategy are: (i) a knowledge of the current administration’s priorities (Socioeconomic Development and Financing Plan with Human Capital Investment, 2000-2004 Social Development Policy and Strategy); (ii) an understanding of the government’s macroeconomic and fiscal constraints, and (iii) an assessment of the current loan portfolio’s prospects for supporting the government’s priorities. These three considerations, in synthesis, underpin the proposal of a common strategy for 2001-2003.

1.

The government’s development strategy

3.3

Top priorities in the development strategy of President Mireya Moscoso’s administration are poverty reduction and sustainable human development. One of the government’s key targets is to reduce the percentage of poor families from 37% in 1999 to 27% in 2004.

3.4

On 13 March 2000 the government unveiled its economic and social agenda titled Socioeconomic Development and Financing Plan with Human Capital Investment. The plan deals with three spheres: social policy, economic policy, and funding strategy. The economic program addresses the imperative of sustained economic growth and improvements in the standard of living of Panamanians who hitherto have not shared in the fruits of progress. Priorities for each chapter of the economic plan are summarized in the following paragraphs.

3.5

The social policy component lays out a broad social agenda based on a priority social investment program. The government’s four central strategy guidelines are: (i) create more and better jobs; (ii) give more Panamanians access to basic social services; (iii) foster civil society’s participation and the decentralization of social programs; and (iv) make social policies and programs financially sustainable.

These lines of action associate social policies with economic ones, to achieve

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sustainable human development and thereby enhance equity and competitiveness.

Social-policy priorities for 2000-2004 are child nutrition, health, education, rural poverty, protection of vulnerable groups, and civil society participation. These priorities coincide with assessments of social equity and the general social situation in Panama produced by the Bank and other national and international agencies. The more fiscal saving the government can generate, the more money can be added to capital spending appropriations, for instance to rehabilitate schools and health centers, and to provide direct subsidies, for example for child nutrition, housing, and microenterprise. The total capital spending program proposed by the central government for 2001-2004 stands at US$1.675 billion at 2000 prices. This sum, fixed in an IMF standby arrangement, includes US$559 million out of the FFD. 3.6

The economic policy component proposes to quicken economic growth to create new jobs and thereby reduce poverty and narrow the income gap. A priority policy focus will be to boost domestic export production (selective tariff protection, adopting modern technology, promoting SMEs). The Tocumen Airport, the Atlapa Convention Center, and the former Howard and Clayton military bases are slated for privatization. As for labor policy, the proposal is to create microenterprises, bring in a wage policy based on productivity increases, promote vocational training, and bolster job-creation incentives. A further economic-policy aim is to win private investors’ confidence by offering them greater legal and financial certainty, promoting transparency, and pursuing a balanced fiscal program.

3.7

The plan’s financial strategy component proposed the liquidation of FFD resources (that development trust fund having been set up with the proceeds of previous privatizations) and the sale of the State’s 49% share in the Cable & Wireless (C&W) Company. Hand in hand with the funding strategy would be administrative improvements in tax collection and in containing public-sector current expenditure. One of the government’s strategy targets was to reduce the public debt/GDP ratio from 57% to 39% in 2004 and thereby free up money for a social expenditure program costing some US$2 billion for 2001-2004. This financial strategy was renegotiated by the Congress and the Executive Branch in 2000. The outcome was a decision to regulate the use of FFD net income (interest) for the same purposes the government had proposed—debt buyback and capital spending, divided into five separate funds—but without decapitalizing the FFD. The C&W shares became part of the FFD’s capital.

3.8

The preeminent challenge for the Treasury as far as the social investment plan is concerned is to keep higher social outlays sustainable while keeping the fiscal accounts in balance. Unless the requisite public saving can be generated, by way of tax reforms, privatizations, or comparable measures, higher social spending would mean higher public debt or budget cuts, with a contractionary (procyclical) effect on the economy.

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3.9

Social expenditure has to be executed within a budgetary framework that is consistent with sound programming and monitoring of recurring and capital expenditures. To that end, the SIAFPA needs to be consolidated as a tool for expenditure and expenditure tracking in priority programs. Likewise, the National Public Investment System (SINIP) should take a multiyear approach, with clear evaluation methodologies, monitoring systems, and coordination with public borrowing and current revenues (tax and nontax), to make certain that priority social-investment programs can operate as planned.

2.

The Bank’s current strategy (1997-1999): A look at outcomes

3.10

The Bank’s strategy for Panama for 1997-1999 pursued four objectives: (i) spread the benefits of social policy, particularly to vulnerable groups (growth with equity); (ii) foster sustainable development; (iii) spur sustained economic growth, and (iv) strengthen governance.

3.11

In 1997-1999, the government addressed these four objectives in its reform plan, though the bulk of the Bank’s loans went to support sustained growth, specifically by way of public enterprise reform (with an aggressive privatization program) and financial-sector reforms. Over that interval, loans in pursuit of the sustainedgrowth objective accounted for 59%5 of Bank approvals for Panama. The other approved projects were divided equally and in line with the strategy objectives in priority sectors.

3.12

A look at the implementation of the 1997-1999 strategy reveals a high rate of loan approvals (14 loans). During that span the Bank approved US$650 million in all—nearly 200% higher than the US$216 million in 1994-1996 approvals. A sizable share of these funds went to shore up the budget, but they pushed up the country’s debt considerably.

5

Includes only lending programs (investment and sector loans), not technical cooperation (reimbursable or nonreimbursable).

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Table III.1: Operational outcomes of the 1997-1999 strategy Action focus/Bankresponse (Operations)

Sector investment 1997-1999 (US$ MM) 152

%total 1997-1999 investment

Undisbursed amount (US$ MM)

%inv. sector undisbursed

Growth with equity 23% 136 Education development program (1013/OC-PN) PREIDAAN (1029/OC-PN) Poverty alleviation and community development program (1226/OC-PN) Sustainable development 86 13% 82 National Environment Program (1222/OC-PN) Darién sustainable development program (1160/OC-PN) Sustained growth 382 59% 274 Financial sector reform program (1074/OC-PN) Rehabilitation of local roads and bridges (1116/OC-PN) Electric system expansion program (1113/OC-PN) Tourism sector support program (1132/OC-PN) Financial sector program (1073/OC-PN) Productive sector competitiveness (1108/OC-PN) Strengthen governance 30 5% 20 Fiscal management program (1004/OC-PN) Program of support for the administration of justice (1099/OC-PN) Total 650 100% 512 *The undisbursed balance does not include amounts already committed. The total is equivalent to 79% approved between 1997 and 1999.

3.

%of total undisbursed

90%

27%

95%

16%

72%

53%

67%

4%

100% of total investment

Portfolio execution and lessons learned

3.13

An important factor in the execution of the lending program associated with the 1997-1999 strategy was Panama’s fiscal-balance policy. Because its fiscal policy restricted budget funding availabilities, a number of projects were held up. Lesson learned: In the future, the country’s budgetary and borrowing capacity needs to be carefully analyzed in order to size loans appropriately.

3.14

Annual portfolio reviews in 1997-1999 pointed up implementing-capacity weaknesses in agencies receiving loan proceeds. Among these were problems relating to calls for bids for goods and services, obstacles presented by current legislation, and executing agencies’ institutional capacity and administrative transparency. Lesson learned: A paramount consideration in operations design is an executing agency’s capacity to handle expenditure approvals and Bank disbursement processes, by providing resources for training activities delivered by the Bank’s Panama Country Office (COF/CPN), as in the Group C and D Countries Plan.

3.15

An analysis of the execution of the strategy mapped out in the previous country paper shows a very close tie-in between Panama’s development challenges, the government’s 1994-1999 agenda, and Bank-funded programs, though new needs have arisen as a growing portfolio covering various sectors has to be monitored.

Over three quarters (79%) of total funding approved in 1997-1999 is undisbursed and uncommitted. This means that monitoring efforts need to concentrate, in part,

Annex I-A Page 29 of 3

on possible realignments of some loans to tackle the government’s new priorities, without adding to the country’s debt burden.

3.16

During the first year of Panama’s new administration, the Bank and the country authorities made considerable progress on a critical assessment of Bank projects in Panama and on improving their management. The objectives of Bank-funded operations were in line with the government’s aims, particularly in social programs. Generally speaking, the budgetary appropriations received for Bank projects in fiscal year 2000 are enough to enable their funding to be expended at an acceptable pace.

3.17

In view of the considerable stock of undisbursed funds (US$583 million), COF/CPN has set a target of reducing the balance by 40% in 2001-2002. This is in line with the government’s policy of paring the State’s external debt stock during its administration and making maximum use of the proceeds of loans already formalized with the Bank. To increase disbursements, COF/CPN will pursue specific action plans within the annual portfolio review exercise and will provide periodic status reports on the undisbursed-balance reduction targets.

4.

Portfolio performance and action plan

3.18

The Bank’s Panama portfolio has grown considerably in recent years. Between 1996 and 1998 the Bank approved 16 loans, averaging over US$250 million annually. Approval figures were down in 1999, the year of the government changeover: two loans for US$65 million. Few operations in the current portfolio are of long standing, a result of recent approvals plus a deliberate effort in 1999 to finish up old projects. The completion that year of six projects approved in the 1980s greatly streamlined the loan portfolio and left Panama and the Bank freer to concentrate on the new loans.

3.19

The Bank and the government are making a concerted effort to expedite and improve portfolio performance, given the low 1999 disbursement figures. The delays were attributable largely to the changeover of government and to budget constraints. Though funds approved in the 2000 budget were sufficient to ensure satisfactory execution of most projects, the appropriations for some operations, such as the agricultural modernization project (924/OC) and the health program (803/OC), were below commitment figures. However, the funds required were received in 2000.

3.20

Three of the 21 projects in the portfolio are rated as unlikely (low probability) to achieve their development objectives and are classified as “problem projects”: the agricultural modernization program (924/OC-PN), housing program (949/OCPN), and program to support the restructuring of IDAAN (1029/OC-PN), the latter being classed as very unlikely to achieve its objectives. Implementation progress on four projects is unsatisfactory: housing program (949/OC-PN), finance sector operation (1073/1074-OC-PN), technical-cooperation loan for a tourism support program (1132/OC-PN), and program to support IDAAN’s

Executive Summary Page 30 of 8

restructuring (1029/OC-PN). The latter operation is rated very unsatisfactory for implementation progress. The housing program (949/OC-PN) is on the “watch list” since it has been under way for more than three years but less than 30% of the funds have been disbursed, and less than 10% of the balance available at the start of 2000 was disbursed that year.

3.21

One project that has yet to become eligible is the electric system expansion project (1113/OC-PN) that the Bank’s Board of Executive Directors approved on 29 July 1998. The loan contract was signed on 18 November 2000. Three other projects in the pipeline are partially eligible and are still fulfilling the conditions precedent to disbursement of some components. These are the Darién sustainable development program (1160/OC-PN), the poverty alleviation and community development program (1226/OC-PN), and the National Environment Program (1222/OC-PN).

3.22

Throughout 2000 the Bank concentrated on loan portfolio execution. Undisbursed balances of approved loans at year-end 2000 come to US$551 million—a substantial amount, considering the country’s fiscal and budget constraints. The expectation is that by the end of 2001 this figure will have come down substantially, to US$430 million-US$490 million. To that end, a series of actions being proposed will focus on: (i) increasing disbursements; (ii) very close portfolio supervision, and (iii) cancellation of loans whose implementation progress is rated highly unsatisfactory.

3.23

In the 2000 budget the Panamanian government allocated US$73.5 million for the IDB portion in Bank-funded programs. An estimated US$74 million will be allotted in the 2001 budget for counterpart resources, to assure this year’s estimated US$109.4 million in disbursements.

3.24

Having examined each project in the portfolio, the Bank intends to focus its efforts on the following operations: (i) finance sector (MEF, loans 1073/OC and 1074/OC); (ii) support for IDAAN restructuring (MEF/IDAAN, loan 1029/OC); (iii) tourism sector support program (1132/OC); (iv) housing program (949/OC); (v) sites and services (220/IC); (vi) Darién sustainable development (1160/OC); (vii) health program (MINSA, loan 803/OC); (viii) education program (1013/OC); (ix) road rehabilitation and administration program (769/OC); and (x) agricultural modernization program (924/OC).

3.25

To monitor the proposed action plan and supervise loan-portfolio execution generally, a working group of officers of the MEF, COF/CPN, and the line ministries involved has been assembled. This team will meet monthly.

5.

3.26

The Bank’s main strategy targets for 2001-2003

To address the socioeconomic development challenges described in chapter I of this paper and in keeping with the Panamanian government’s development

Annex I-A Page 31 of 3

strategy and other considerations, the Bank is proposing a strategy for support to Panama on two levels: (i) operational responses on the Bank’s part to help enhance equity and make the economy more competitive, and (ii) priority items for a policy dialogue. The operational responses will comprise the Bank’s 20002003 lending and technical-cooperation program (see prospective 2001-2003 pipeline in Annex I and the matrix of possible coordinated activities in Annex II).

Though the operating responses will take the form of concrete funding instruments in pursuit of the strategy, nonlending products (see Table III.4) and the policy-dialogue agenda proposed in section C will help establish a common framework for actions advocated by both the government and the Bank. Details of the operating response—loans and technical cooperation—are provided in Annex II (summary matrix of interventions).

3.27

An important consideration here is that, though for the most part the government and IDB priority strategy focuses match completely, on some specific issues— Social Agenda Dialogue, IDAAN, competitiveness, the rural economy—a continuing policy dialogue will be encouraged in order to maximize Bank support for the government’s sector policies.

3.28

The Bank’s strategy for support to the Panamanian government in 2001-2003 will tentatively target four priority spheres:

A. A FRONTAL ATTACK ON POVERTY, AND EQUITY ENHANCEMENT

B. PROMOTING ECONOMIC REFORMS TO SPUR COMPETITIVENESS AND GROWTH

C. HELP CONSOLIDATE THE REGULATORY, LEGAL, AND INSTITUTIONAL FRAMEWORK FOR SUSTAINABLE GROWTH

D. CONTRIBUTE TO INSTITUTIONAL REFORMS TO STRENGTHEN GOVERNANCE AND IMPROVE TRANSPARENCY

a.

3.29

A frontal attack on poverty, and equity enhancement

The Bank will support implementation of the poverty-reduction and equity-enhancing strategy set out in the document 2000-2004 National Government Social Development Policy and Strategy. As a starting point the Bank is proposing a Social Agenda Dialogue (DAS) to come up with priority programs

Make social spending more efficient: Help make investments in the social sectors and human capital more efficient and target them more precisely. The Bank will support substantive reforms in the social sectors, sustainable increases in capital expenditure, and rationalization of current expenditure. The achievement of this objective can be verified via a subsequent analysis of the structure of social spending.

Executive Summary Page 32 of 8

and measures in the areas of health and nutrition, education, housing, social protection, labor markets, and science and technology. The DAS would provide a forum for policy and technical discussions and idea-sharing, to review international experiences, policy tools geared to Panama’s needs, and ways to build management capacity in the social sectors. In this context the government and the Bank could consider reviewing the loan portfolio and priorities for future programs with a view to reducing poverty and enhancing equity.

3.30

To help Panama realize its poverty-reduction and equity-enhancement goals the Bank is proposing the following strategic action lines: (i)

To improve targeting: (a) reapportion public social spending among programs, geographic areas, and priority groups; (b) give the poor broader access to education, employment training, health services, piped water, sanitation, electricity, and land tenure; (c) make social spending more transparent, relevant, and effective by involving communities and the citizenry at large, civil society, and the private sector in povertyreduction activities; and (d) pursue carefully targeted community programs to combat malnutrition, building them into other health, local development, or social protection programs for vulnerable groups.

(ii)

To achieve greater efficiency: (e) establish a quality control system by way of standards and continual program evaluation and monitoring; (f) develop cost-recovery arrangements to recoup the cost of services received by groups that can afford to pay for them; and (g) devise a science and technology program that can raise the standard of living of poor communities and spur “bottom-up� economic growth.

3.31

The Bank also proposes a national dialogue on the rural economy and rural poverty as a step in designing a comprehensive agricultural modernization program to tackle the most serious socioeconomic problems in rural areas, particularly land titling.

3.32

Operational response: The table below lists actions the Bank is currently supporting and potential future focuses. The operations whose names are shaded in the table are proposed new projects that would constitute continuing support for ongoing reforms.

Annex I-A Page 33 of 3

Table III.2: Actions To Improve Targeting And Efficiency Of Social Spending Area

Actions under way

A. Social Education

Possible future focuses

Supply of educational materials for poor students New curricula Improving the operating efficiency of the Ministry of Education Improvement of health services, targeted to the poor Modernization of MINSA management

• • • • • • • • •

Modernization of MIVI Low-income housing subsidies

• • •

• • •

Targeting basic social infrastructure funding to the poorest Basic housing for low-income families Modernization of MINJUVE Microfinance for women

• •

Realignment of the job training system Pilot training programs

•

Science and technology

• •

Rural poverty

•

SME information centers Business modernization and technological innovation Modernization of agricultural production

• • • •

Health

• • • B. Social safety net Social protection • Housing

Vulnerable groups

C. Productive Labor market

3.33

• • • •

• • • • •

School rehabilitation Technology use in marginalized areas Foundations for school autonomy Demand-targeted subsidies University reform and modernization Broadening access to basic services Childcare and child nutrition Reproductive health Reform of hospital management (MINSA and CSS) Institutional strengthening of MIVI Diversification of subsidy use Design of a comprehensive social safety net Expansion of the social security system Child nutrition in the indigenous and black population Programs for at-risk youth Protection of ethnic groups “School to work” education and training systems Government capacity for labor-market regulation and labor-market policy management Strengthening the national innovation system Science and mathematics teaching Promotion of productive activities Agricultural modernization II (titling)

New programs in this strategy area are: (i) school rehabilitation (PN-0124); (ii) hospital management reform (PN-0076); (iii) labor market (PN-0125); (iv) agricultural sector modernization II (PN-0141); (v) CSS modernization (PN-0146), and (vi) combating urban poverty. b.

Economic reforms to spur competitiveness and growth

3.34

A comprehensive agenda needs to be shaped to spur competitiveness, mapping out an industrial and export policy, a foreign trade policy, and support for priority productive sectors and segments such as SMEs.

3.35

Operational response: To help come up with components for a competitiveness program, the Bank proposes to support a public/privatesector dialogue to come up with a national agenda for the short, medium, and long term. It would provide this support in three stages:

3.36

Stage 1 (6-9 months): Launch a national dialogue with public and

Foster business competitiveness: Support government moves to adopt policies and programs that can make Panama more competitive and drive sustained real GDP growth of at least 5% annually from 2001 onward, improve the country-risk rating, and boost saving and private investment as a percentage of real GDP. This objective would be achieved through a thorough diagnostic assessment and a national dialogue on competitiveness.

Executive Summary Page 34 of 8

private stakeholders to assess Panama’s current competitiveness, through one or more conferences with decision-makers. Nonreimbursable technical-cooperation funding would be furnished to support this activity.

3.37

Stage 2 (3-9 months): Determine, with the authorities and civil society, pilot programs in priority areas identified in stage 1 (for instance, costs of doing business, sensitive production and marketing chains, export promotion, support for SME productivity). This initiative would be supported by the new learning and innovation loan facility (fast-track approval and progressive definition of objectives).

3.38

Stage 3 (12-24 months): Preparation, approval, and implementation of a National Competitiveness Program encompassing all sectors of the economy and issues arrived at by consensus, from the national dialogue and preliminary outcomes of the pilot programs.

3.39

The aim of the systematic, gradual consensus-building approach the Bank is proposing is to lay solid foundations for a program to equip the Panamanian economy to compete. This would unquestionably consolidate the country’s comparative advantages and spur faster and more sustainable growth that offers real opportunities for private investment, employment, and permanent income for Panamanians.

3.40

New programs in this strategy area are: (i) City of Knowledge (PN-0134); (ii) National Competitiveness Program (PAI, PN-0145); (iii) labor market (PN-0125); (iv) urban transit (PN-0140); (v) foreign trade program (PN-0142), and (vi) science and technology II (PN-n/n). c.

Consolidation of sustainable growth

3.41

The Bank will continue to support Panama’s efforts to strengthen its Achieve environmentally sustainable growth: Help lay the foundations for environmentally environmental management sustainable development, particularly in the framework through the recently Canal watershed, mining areas, forests, and approved National Environment marine and coastal resources, by supporting Program (PAN). It also would assist in government efforts to establish a regulatory, the shaping of policies and programs legal, and institutional framework. This would be reflected in an increase of at least 1% of for sustainability of the Canal GDP (nominal) in outlays for environmental watershed, the water and sanitation programs between 2001 and 2003. sector, mining sector, forestry sector, and marine and coastal resources. The aim of initiatives in these sectors will be to bring international best practices to Panama to conserve its natural resources and make rational and sustainable use of them.

3.42

Operational response: Apart from the PAN, at a preliminary stage the Bank has identified the following programs concerned with environmental sustainability:

Annex I-A Page 35 of 3

(i) Panama City and Panama Bay sanitation (PN-0062); (ii) sustainable development of the Canal watershed (PN-0139); (iii) program for sustainable management of the mining sector (PN-0114); and (iv) sustainable management of coastal areas (PN-n/n). The Bank also has identified seven technical-cooperation operations that would have an impact on environmentally sustainable development (see Annexes I and II). d.

Institutional reforms to strengthen governance and improve transparency

3.43

The Bank will give priority to charting a common agenda with the authorities regarding municipal development, deepening of modernization moves in the judicial sector, policies to curb corruption and enhance transparency in government administration and open avenues for civilsociety participation, particularly in socialservices management.

3.44

Operational response: The Bank proposes to support the Panamanian government in devising and executing a slum rehabilitation program, starting out in the municipalities of Panama City, Colón, and David. The program’s objective would be to help these three municipalities to design, implement, and fund an integrated strategy to improve their poor neighborhoods, including basic infrastructure works and social programs for vulnerable groups. Because this is a complicated area the Bank proposes to start with a pilot project in each city; the “learning and innovation loan” (PAI) facility could be used for this purpose. One component of the program would be technical assistance for the municipalities in the areas of financial and public-utilities management.

3.45

The Bank also has identified a second phase of the program for the modernization of justice. As a result of the policy dialogue, consideration also could be given to programs to curb administrative corruption and involve civil society in publicpolicy management and social-program administration.

3.46

New programs for this arm of the strategy are: (i) municipal support, rehabilitation of poor districts (PAI, PN-0143); (ii) fiscal management II, and (iii) modernization of justice II (PN-n/n). Substantial technical-cooperation funding is envisaged for the Office of the Comptroller General for prevention of administrative corruption in the public sector.

6.

3.47

Enable governance and transparency: Consolidate decentralization of decision-making, make the workings of government more transparent, and increase legal certainty for investors.

Progress toward this objective will be measured by the number of sectoral institutional-modernization programs the government implements.

Coordination of private-sector support instruments

As an integral part of implementing the competitiveness-heightening component of its strategy the Bank will seek to consolidate and coordinate actions intended to strengthen the private sector, by way of its Private Sector Department (PRI), the

Executive Summary Page 36 of 8

Multilateral Investment Fund (MIF), and the Inter-American Investment Corporation (IIC).

3.48

PRI’s support would focus on financially viable private projects to bolster legal and regulatory frameworks and thereby attract more private investment for infrastructure. A sine qua non for the Bank’s financial support will be that the country maintain the public utilities regulatory framework (for telecommunications, electricity, water and sanitation) developed in the late 1990s, which secures a place for private enterprise subject to rules of economic efficiency and transparency. In future PRI would consider funding for the energy, transportation, water, and telecommunications sectors as this becomes viable.

3.49

In pursuit of the Bank’s strategy for Panama in previous years, MIF support for the private sector has focused on: (i) expanding private enterprise in the financial and public utilities sectors, strengthening systems to protect competition, and privatizing reverted areas; (ii) labor sector reform; (iii) establishing dispute resolution mechanisms; and (iv) developing small businesses and microenterprises by giving them access to financial and business services in urban and rural areas alike. Panama also is benefiting from a number of regional projects in three areas: (i) SME development through technical assistance, training, and capital investments; (ii) capital market harmonization, and (iii) labor market modernization.

3.50

In the coming years, in line with the government’s economic agenda, the MIF will target its assistance to high-value-added areas. Focuses relating to small business and microenterprise competitiveness include: (i) policies to guide growth and consolidation of these businesses; (ii) nurturing of entrepreneurship; (iii) bolstering export capacity; (iv) clean production; (v) e-commerce, and (vi) access to financial services. Other sectors such as mining and urban transit also will come in for support via technical-cooperation funding.

3.51

The IIC would continue to explore different areas and financing facilities, including venture capital, long-term investment funds, lines of credit through financial intermediaries, and direct lending to eligible companies.

3.52

This set of private-sector support initiatives would provide financing and technical inputs for priority segments, consistent with the government’s macroeconomic and sectoral policies that aim to make businesses more competitive, boost private investment, and increase exports. In order to come up with concrete ideas for PRI, MIF, and IIC support, in June 2000 the Bank proposed to the government that a high-level mission be sent for discussions with Panama’s private sector on prospective projects for 2001-2003. The government hopes to see the mission take place in 2000-2001.

Annex I-A Page 37 of 3

7.

Lending program scenarios

3.53

Estimates based on pre-2000 programming exercises put Panama’s funding requirement at US$201 million for 2000-2002, an average of US$67 million a year. This figure takes into account several factors: (i) the country’s mounting borrowings in 1997-1999, which increased by US$217 million a year on average; (ii) the Bank’s sizable undisbursed portfolio in Panama at the end of 2002 (US$551 million); and (iii) the government’s announcement, as a strategy priority, of its plan to reduce its external debt in relative terms and look to its own resources and domestic sources. With these premises in mind, two lending scenarios are posited:

3.54

Base-case scenario: The first or base-case (tendential) scenario assumes a neutral fiscal stance on the government’s part (no improvement in its primary saving position), with tendential real GDP growth of 4% in 2001-2003 and a moderate Bank lending program of US$56 million in approvals in 2001. The operations pipeline from 2002 forward stands at US$414 million.

3.55

Alternative scenario: The alternative (high) scenario assumes enhanced saving capacity (higher fiscal revenues, reduction and reapportionment of current expenditure), with real GDP growth of 5% in 2001-2003, a lending program of US$91 million in 2001, and a US$379 million project pipeline as of 2002.

3.56

The increase in approval volumes in this scenario would be associated with the government’s fiscal capacity to generate budget funds needed to execute a larger portfolio. Note that the higher borrowing figure entailed in this scenario, and also the base-case scenario, is not contingent on structural reforms but on the government’s fiscal consolidation program.

3.57

The following would be conditions for the alternative (more approvals) scenario: (i) approval of fiscal measures to boost revenues in 2001; one element would be legislative passage of a tax modernization and streamlining package including the broadening of the VAT base and an increase in the tax rate of commercial banks; (ii) implementation of a program to contain and reduce central government current spending; and (iii) extending the Integrated Financial Management System to the entire central government. Without these core measures, the government would find it difficult to supply counterpart resources for Bank loans and still pursue its 2001-2004 zero-deficit target.

3.58

In both scenarios, 2002-2003 approval volumes will depend on the government’s fiscal programming. The programming exercise conducted in early 2001 focused on identifying priority projects for approval in 2001. Thus, approval levels for 2002-2003 would be determined in light of implementation of the abovedescribed fiscal measures and future programming exercises in 2001-2002.

Executive Summary Page 38 of 8

Table III.3 Lending scenarios SCENARIOS Real GDP (% growth) Approvals Disbursements Amortization Net flow Interest and fees Cash flow EXPOSURE RATIOS Percentage of portfolio (18%) 6 IDB DS/exports GNFS (8%) IDB DS/public DS (30%) IDB DS/multilateral DS Multilat. DS/total DS (50%) DS: Debt service; e: Estimated.

2000 2.7 3.3 60.7 27.0 33.7 42.2 -14.6 1.46% 2.2% 11.3% 43.5% 25.9%

Base case 2001 2002e 4.0 4.0 56.0 135.0 109.4 50.8 34.1 47.7 75.3 3.1 62.3 68.6 13.0 -65.5

2003e 4.0 150.0 68.6 62.4 6.2 74.0 -67.9

2000 2.7 3.3 60.7 27.0 33.7 42.2 -14.6

Alternative 2001 2002e 5.0 5.0 91.0 150.0 109.4 55.7 34.1 47.7 75.3 8.0 62.3 69.1 13.0 -61.1

2003e 5.0 150.0 76.0 62.4 13.5 75.1 -61.5

1.50% 2.7% 13.4% 43.8% 30.6%

1.52% 3.4% 20.5% 57.0% 35.2%

1.46% 2.2% 11.3% 43.5% 25.9%

1.50% 2.7% 13.4% 43.8% 30.6%

1.55% 3.5% 20.3% 57.6% 35.2%

1.49% 3.1% 10.0% 51.4% 19.2%

1.50% 3.1% 9.9% 51.5% 19.2%

3.59

Financial outcomes: In both lending scenarios, the net flows of Bank funds would be consistently negative starting in 2002 because of the increase in debt service to the Bank (payments of principal, interest, and fees). IDB disbursement levels would be more moderate than in recent years.

3.60

Country exposure: With the lending volumes proposed in the two scenarios Panama would remain within the country exposure guidelines in document GN-1835. In the base-case scenario, IDB debt service as a percentage of multilateral debt service would climb from 43.5% to 57% between 2000 and 2003. In the alternative scenario, the increase would be from 43.5% to 57.6%.

These figures point up the need to increase the public sector’s primary-saving generation capacity, directly or indirectly, by way of Bank loans, to bring down the ratio of total debt to GDP in the medium and long term.

3.61

Moderating the rate of growth of Panama’s debt to the Bank could indirectly help facilitate the aggregate public-debt service, particularly with private creditors (Brady/IRB bonds), which will become more onerous in 2002. This, too, is consistent with the government’s strategy (and need) to trim the external public debt.

8.

3.62

6

Risks of the strategy

There are three risks in the proposed Bank strategy for support for Panama. The first has to do with uncertainty as to the government’s resolve to entrench and continue with some major structural reforms that helped Panama grow, opened up investment opportunities, and created jobs in various sectors over the past decade.

The uncertainty is mounting as short-term social and political pressures prompt

Calculated from Colón Free Zone net export figures.

Annex I-A Page 39 of 3

the government to guide its policies by the perception that a country is better off if it is politically tranquil with no changes than if it is going through continual structural change with heated debates on political, social, and economic issues.

The Bank assumes that, as the national dialogue on priority reforms unfolds, the uncertainty will dissipate and the government will adopt nondistorting policies that will benefit the nation.

3.63

A second risk is the Panamanian government’s limited capacity, at present, to generate public saving to fund social-sector outlays. This means that attention needs to be given to express policies to grow the economy and adjust the fiscal accounts. The aim of Panama’s IMF standby arrangement for 2001-2002 is, in principle, continuing fiscal equilibrium. An efficient, neutral tax reform that does not hurt low-income families would mitigate the risk of insufficient public saving and prepare the way for funding pressing social investments.

3.64

The third risk is the limited institutional capacity for implementing social policies and other public-sector programs. To mitigate this risk, actions taken thus far to improve budget management (SIAFPA) and modernize public agencies, together with training for government employees to manage programs and resources, need to be amplified. This is particularly true for the management of Panama’s large portfolio of Bank-funded projects. COF/CPN will be called on to play an active part in this ongoing training and institutional modernization process, this being one of the lessons learned from the loan portfolio performance in 1994-2000.

9.

Monitoring the strategy and performance benchmarks

3.65

The Bank’s proposed support strategy will be monitored through programming missions and annual portfolio review missions. In the short term, the effective use being made of funds available in the loan portfolio will be tracked at monthly meetings of the MEF, COF/CPN, and project executing agencies. This close, continual monitoring approach comes out of the Bank’s dialogue to date with the Panamanian government.

3.66

The Management of the Bank is currently examining criteria and methods for evaluating the outcomes of strategies proposed in country papers. Thus, the performance benchmarks proposed below and in Annex II to this paper could be revised and updated once the Bank’s Evaluation and Oversight Office has defined methods and criteria. The following benchmarks will be used to measure outcomes of the Bank’s proposed strategy for 2001-2003: a.

Support for a frontal attack on poverty (objective: help enhance efficiency and improve the targeting of social and human-capital investment): The number and cost of social programs targeted exclusively to vulnerable groups will be verified, particularly in the areas of nutrition, health, and education.

Executive Summary Page 40 of 8

b.

Promotion of economic reforms to spur competitiveness and growth (objective: support policies and programs to that end): Performance will be verified by reference to real GDP growth topping 5% between 2001-2003, an investment-grade rating for Panama’s sovereign and corporate debt securities in 2003, and an increase in private investment as a percentage of GDP.

c.

Consolidation of sustainable growth (objective: lay the foundation for sustainable development, particularly in the Canal watershed, mining and forest areas, and marine and coastal resources): Performance will be assessed by reference to the increase in public investment in environmental programs.

d.

Institutional reforms to strengthen governance and increase transparency (objective: decentralize decision-making, make the workings of government transparent, and offer investors greater legal certainty): Performance will be verified by reference to the number of executive orders the government implements in the area of governance in 2001-2003.

C.

Agenda for a country dialogue

3.67

To complement the Bank’s proposed operational support strategy it is recommended that there be a dialogue on priority policies to help tackle Panama’s preeminent development challenges. Such a dialogue would be shaped around a series of nonlending products such as conferences, workshops, and studies, as summarized in the following table.

Table III.4 IDB nonlending products to support a policy dialogue 2000

(i) Social Agenda Dialogue (ii) Seminars to chart SME support policies 2001 (i) National dialogue to devise a comprehensive competitiveness program (ii) Seminar on the rural economy and rural poverty (iii) One or more special high-level missions to support private enterprise, by PRI, the IIC and the MIF (iv) Dialogue on decentralization, municipal and local development (v) Dialogue on transparency, curbing corruption, and civil society participation (vi) Dialogue on the Aylwin social-security initiative (vii) Support for promoting Panama’s image in the FTAA 2005 headquarters context

3.68

These nonlending products will facilitate the policy dialogue on priority development challenges. The Bank has identified the following issues for discussion in each of the proposed strategy areas:

Annex I-A Page 41 of 3

1.

A frontal attack on poverty

3.69

Budget allocations for the social sectors: Budget appropriations for the social sectors need to be systematically programmed, particularly for nutrition, health, and education, as part of implementing the Social Agenda. Investments in human capital should be a top priority in budget and fiscal programming.

3.70

Decentralization and targeting of social spending: In the short term the social programs operated by MINSA, MINEDU, MINJUVE and the Social Investment Fund need to be decentralized as the agencies are strengthened institutionally.

Social spending should be targeted to the poor and the vulnerable.

3.71

Human capital development: To rise to the challenges of social equity and a competitive economy, the workings of Panama’s labor market needs special attention, focusing strongly on unemployment. A policy dialogue on unemployment and job markets should address the following areas: the labor code and prospective rewrites; education and training systems, including the schoolworkforce transition; the government’s capacity to regulate the labor market and manage labor-market policy; and systems to help workers move quickly into the job market. Devising and implementing new labor policies will help form human capital and prepare skilled workers, make it easier for workers to move between jobs, put marginalized segments of society (women, young people, and the very poor, for instance) to work efficiently and treat them more equitably, and help the economy grow and become more competitive. This is consistent with the government’s proposed 2000-2004 social strategy.

3.72

The rural economy and rural poverty: A more thorough understanding is needed of the magnitude and nature of the urban-rural divide and its implications for eradicating rural poverty. With that foundation a systematic effort can be made to develop the nation’s rural economy to help reduce rural poverty.

2.

Economic reforms to spur competitiveness and growth

3.73

National Competitiveness Program: The Bank offers its support for a national dialogue on competitiveness. This would require identifying and implementing an institutional/operational arrangement with senior decision-makers.

3.74

Development of the National Innovation System: The economy needs technical support to coordinate technological change. A strategy is needed for the design and/or coordination of policies, agents, and institutions engaged in upgrading, adapting, and introducing new technologies, looking pragmatically toward the productive sectors.

3.75

Reform of government-owned banks: One crucial condition for a competitive financial system, sound fiscal accounts, and higher saving is the liquidation of BHN and, to the extent practicable, of BDA. The proposed incentive scheme to use the Special Interest Compensation Fund (FECI) as a way to effectively help

Executive Summary Page 42 of 8

small and medium-scale farmers through the transition to an open economy also needs to be reviewed. The specific aims of the proposed FECI subsidies should be set out clearly and the Fund’s administration substantially revamped.

3.76

Pension reform: Panama needs to overhaul and efficiently administer its socialsecurity disability, old age and survivor benefit (IVM) system. The object of such reforms is threefold: (i) keep the system from becoming decapitalized in the medium term; (ii) reduce government transfers (subsidies) to the IVM plan, which cut into the monies available for other social investments; and (iii) guarantee retirees a decent pension. The Bank will support the creation of a high-level commission to seek a consensus on workable approaches for an overhaul of the IVM system.

3.

Consolidation of the legal, regulatory, and institutional framework for sustainable growth

3.77

Environmental policy framework: Regulations under the 1998 Environment Act need to be finalized, as does the institutional strengthening of ANAM and implementation of the national environmental assessment and audit system. The National Environment Program (PAN) should be given sufficient budget funding to see it proceed without interruption.

3.78

Sustainability of the water and sanitation sector: The Bank supports the adoption of policies to help modernize this sector and thereby take sustainable, goodquality, efficient, and affordable water and sanitation services to the majority of the population.

3.79

Mining sector regulation: The regulatory, environmental, and legal framework of the mining sector needs to be defined to assure the industry’s sustainable operation. The Bank proposes that this be a gradual process, to allow time for extensive dialogue between the public and private sectors.

4.

Institutional reforms to strengthen governance and improve transparency

3.80

Municipal development and decentralization: Implementation of the governmentendorsed Decentralization Pact is critical for more participatory democracy and enhanced governance. Strengthening the subnational government level will result in a more efficient and effective State with more avenues for public input.

3.81

Governance and transparency: The Bank reaffirms its interest in helping to shape a work program to implement administrative-corruption prevention policies coming out of the Office of the Comptroller General of the Republic.

Annex I-A Page 43 of 3

1. PANAMA: 2000 – 2003 lending program 2. BASE-CASE SCENARIO III. Num ber

Title

Amount(*)

Status

1. Priority operations 2000 PN-0134 SUPPORT IMPL. SCIENCE, TECH. AND INNOVATION CENTER (PINO) 2001 PN-0076 HEALTH SECTOR PROGRAM PHASE 1 PN-0148 PRONAT NATIONAL LAND ADMINISTRATION PROGRAM Pipeline PN-0062 PANAMA CITY SANITATION PN-0103 MODERNIZATION MINISTRY EXTERNAL AFFAIRS PN-0114 SUSTAINABLE DEVELOPMENT MINING SECTOR

3.3 3.3

Approved

56.0 35.0 21.0

Identification Identification

100.0 4.0

Identification Identification

15.0

PN-0124 SCHOOL REHABILITATION PROGRAM

50.0

PN-0125 LABOR MARKET MODERNIZATION PN-0139 SUSTAINABLE DEVT PANAMA CANAL WATERSHED PN-0140 URBAN TRANSIT PN-0141 AGRICULTURE SECTOR MODERNIZATION II PN-0142 FOREIGN TRADE PROGRAM PN-0143 MUNICIPAL DEVELOPMENT AND CITIZEN

10.0 10.0

Profile II approved Profile II approved Identification Identification

30.0 25.0 5.0 10.0

Identification Identification Identification Identification

PN-0144 PN-0145 PN-0146 PN-0147 PN-0149

30.0 10.0 10.0 10.0 25.0

Identification Identification Identification Identification Identification

30.0 20.0 10.0

Identification Identification Identification

PARTICIPATION PROGRAM (PINO)

COMBATING URBAN POVERTY COMPETITIVENESS PROGRAM (PINO) CSS MODERNIZATION (PINO)

FISCAL MANAGEMENT II SUSTAINABLE DEVELOPMENT PROV. BOCAS DEL TORO PN-0150 RURAL ELECTRIFICATION PN-n/n MODERNIZATION OF JUSTICE II PN-n/n SUSTAINABLE DEVELOPMENT COASTAL AREAS

Executive Summary Page 44 of 8

PN-n/n

SCIENCE AND TECHNOLOGY II

(*) In millions of U.S. dollars.

PINO: Learning and Innovation loan.

10.0

Identification

Annex I-A Page 45 of 3

2. PANAMA: 2000 – 2003 lending program 3. ALTERNATIVE

SCENARIO

V. Num ber

Title

Amt (*)

2000

3.3

Status

1. Priority operations PN-0134 SUPPORT IMPL. SCIENCE, TECH. AND INNOVATION CENTER (PINO) 2001 PN-0076 HEALTH SECTOR PROGRAM PHASE I PN-0139 SUSTAINABLE DEVT PANAMA CANAL WATERSHED PN-0142 FOREIGN TRADE PROGRAM PN-0145 COMPETITIVENESS PROGRAM (PINO) PN-0147 FISCAL MANAGEMENT II PN-0148 PRONAT NATIONAL LAND ADMINISTR. PROGRAM (a) Pipeline PN-0062 PANAMA CITY SANITATION PN-0103 MODERNIZATION MINISTRY EXTERNAL RELATIONS PN-0114 SUSTAINABLE DEVELOPMENT MINING SECTOR PN-0124 SCHOOL REHABILITATION PROGRAM PN-0125 LABOR MARKET MODERNIZATION PN-0140 URBAN TRANSIT PN-0141 AGRICULTURE SECTOR MODERNIZATION II PN-0143 MUNICIPAL DEVELOPMENT AND CITIZEN PARTICIPATION PROGRAM (PINO) PN-0144 COMBATING URBAN POVERTY PN-0146 CSS MODERNIZATION (PINO) PN-0149 SUSTAINABLE DEVT PROVINCE BOCAS DEL TORO PN-0150 RURAL ELECTRIFICATION PN-n/n MODERNIZATION OF JUSTICE II

3.3

Approved

91.0 35.0 10.0

Identification Identification

5.0 10.0 10.0 21.0

Identification Identification Identification Identification

100.0 4.0

Identification Identification

15.0

Profile II approved

50.0 10.0 30.0 25.0 10.0

Profile II approved Identification Identification Identification Identification

30.0 10.0 25.0

Identification Identification Identification

30.0 20.0

Identification Identification

Annex I-B Page 46 of 3

PN-n/n PN-n/n

SUSTAINABLE MANAGEMENT COASTAL AREAS SCIENCE AND TECHNOLOGY II

(*) In millions of U.S. dollars.

PINO: Learning and Innovation loan.

10.0

Identification

10.0

Identification

2. PANAMA 3. TENTATIVE TECHNICAL COOPERATION AND MIF PROGRAM 4. At 9 April 2001

Operation No.

Title

Technical cooperation operations Municipal strengthening and development Panama City TC010400 Improving the quality of higher education: Innovation 4 and dialogue TC010302 Basic health services and nutrition for the indigenous 8 community TC010302 Decentralization and municipal development 5 TC010106 Analysis of inequity in the education sector 0 TC001101 Environmental auditing 2 TC001101 Development strategy Province of Bocas del Toro 1 TC001101 Marine and coastal resources management 0 TC991113 Workshop - Water and sanitation sector 9 TC991112 Integrated transportation planning in Panama 2 TC990603 Evaluation of academic leadership 2 TC971137 Program to foster youth participation 7 TC-n/n Support for National Competitiveness Program (PPF) TC-n/n Rural economy and rural poverty TC-n/n Support for VICOMEX/FTAA Total technical cooperation MIF operations TC0104005

TC0008001

Export development agency

TC000200 Standards, weights and measures 8 TC991119 Strengthening urban transit 5 TC991109 Development of the e-commerce market

Division

Amount (US$000)

SO2

70.0 20.0

SO2

350.0

EN2

150.0

SO2

200.0

EN2

100.0

EN2

450.0

EN2

450.0

EN2

26.0

FI2

339.8

SO2

265.5

CPN

100.0

FI2 EN2 SC2

500.0 350.0 250.0 3,621.3

SC2 SO2

1,000.0 200.0

FI2

700.0

SO2

1,000.0

EN2

-2-

6 TC9806110

Business technology acceleration in Panama

Total MIF (only amounts identified) Total tentative projects

SC2

1,200.0 4,100.0 7,721.3

THE BANK’ S STRATEGY FOR 2001-2003: S UMMARY M ATRIX PANAMANIAN GOVT. AGENDA

IDB OPERATIONS

Annex II Page 1 of 5

OPERATIONS OF OTHER AGENCIES

PERFORMANCE BENCHMARKS

Projects: • IBRD: Health sector reform pilot program (US$4.3 million) • IBRD: Basic education II (US$40 million) • IBRD: Urban poverty and violence (US$15 million) • IBRD: Health sector reform (APL/US$28 million) • IBRD: Indigenous community development (US$5 million) • UNFPA: Sexual and reproductive health • UNFPA: Prep. assistance for reproductive health, Ngobe people • UNESCO/Germany: Education in rural areas of the Central American isthmus (Regional) • UNESCO/Germany: Texts and reading resources for basic education in the Central American isthmus (Regional) • UNDP: Social development and poverty reduction (US$1.1 million) • Korea (Bilateral): Equipping hospitals (US$20 million) • Korea (Bilateral): Funding of scholarships and donations of equipment to schools in poor neighborhoods • Japan (Bilateral): Poverty reduction (nutrition, job creation, promoting rural development) • Japan (Bilateral): School rehabilitation (US$128,000) • China/Taiwan (Bilateral): Financing of a Social Investment Fund (US$30 million) • European Commission: Support for National Tuberculosis Control Program (US$197,000) • European Commission: Promotion of equal opportunities (US$9.8 million)

• Social investment and spending as a share of the national budget rises to 55% by 2002.

• Percentage of families living in poverty reduced to 33% in 2002.

• Funding of poverty-reduction programs rises in real terms.

• Funding for child nutrition increases in real terms.

• Under-5 malnutrition rate drops to 12% by 2002.

• Education spending on the poor as a percentage of the total rises from 28% in 2000 to 35% in 2002.

• Health spending on the poor as a percentage of the total increases from 14% in 2000 to 17% in 2002.

1. –Support for a frontal attack on poverty Help boost social and human capital investment and make it more efficient. The Bank would support substantive socialsector reforms, sustained increases in capital spending, and rationalization of current expenditure.

Enhance equity and extend the benefits of progress to margin alized Panamanians by targeting policies and programs to them.

• Reduce unemployment via economic growth that creates jobs.

• Reduce underemployment.

• Promote education and vocational training.

• Strengthen the rural economy.

• Lower the child malnutrition rate.

• Improve coverage and quality of health, water and sanitation services.

• Strengthen low-income housing programs.

• Create programs to protect vulnerable groups (indigenous people, children, the elderly, persons with disabilities).

• Foster genuine civilsociety participation in social-program management.

• Lower consumer prices.

Pipeline of possible projects: • PN-0124: School rehabilitation program • PN-0141: Agricultural modernization II • PN-0076: Health sector program • PN-0144: Combating urban poverty • PN-0146: CSS modernization (PINO) Pipeline of possible technical-cooperation projects: • TC9906032: Evaluation of academic leadership • TC9806011: Basic health and nutrition services for the indigenous community • TC9711377: Program to foster youth participation • TC0104004: Improving the quality of higher education: Innovation and dialogue • TC0101060: Analysis of inequity in the education sector • TC-n/n: Rural economy and rural poverty Loans in execution: • PN0029: Health program • PN0054: Social investment program • PN0069: Education program • PN0073: Education expansion and improvement program • PN0111: Poverty alleviation and community devt. program • PN0082: Housing program Technical-cooperation projects in execution: • ATN/JF-6339-PN: Health sector reform • ATN/SC-6440-PN: Support for Fundación Credimujer • ATN/SC-6469-PN: Modernization of the Ministry for Youth • ATN/JF-7059-PN: Education and knowledge in Panama • ATN/KB-7328-PN: Community involvement in schools • ATN/SF-7334-PN: Prevention programs for children and youth • ATN/SC-6468-PN: Interactive Science and Technology Museum • ATN/EM-6833-PN: Support for Cooperativa de Servicios Múltiples Juan XXIII

Nonfunding activities: • IBRD: Education sector report • IBRD: Poverty report • IBRD: Public spending review • IBRD: Report on rural development • IBRD: Update of poverty and MECOVI report 2000 • IBRD: TC/School nutrition programs • IBRD: Basic education seminar • IBRD: TC/Social policy development • IBRD: Strengthening indigenous organizations

THE BANK’ S STRATEGY FOR 2001-2003: S UMMARY M ATRIX PANAMANIAN GOVT. AGENDA

IDB OPERATIONS

OPERATIONS OF OTHER AGENCIES

Annex II Page 2 of 5 PERFORMANCE BENCHMARKS

2. Promote economic reforms to spur competitiveness and growth Support a program of further economic reforms to make the country more competitive and achieve sustained real GDP growth of at least 5% annually from 2001, improve Panama’s country risk rating and boost private investment.

Institute tariff, financial, technology support or administrative measures to develop agricultural and industrial enterprises and small businesses.

• Bring in a wage policy based on productivity increases.

• Offer incentives for private-sector production.

• Enlarge the market, supporting regional trade integration, and support free-trade economic activities.

• Strengthen domestic production of laborintensive exports.

• Do away with trade distortions and barriers.

• Lift import duties on industrial raw materials.

• Acquire and adopt business technology and training.

• Support and expedite small business.

• Develop domestic production and existing resources in recently reverted areas.

• Keep electricity costs down, tapping viable resource alternatives such as coal and natural gas.

Pipeline of possible projects: • PN-0145: National Competitiveness Program (PINO) • PN-0125: Labor market • PN-0142: Foreign trade • PN-0140: Urban transit • PN-0150: Rural electrification • PN-n/n: Science and technology II Pipeline of possible technical-cooperation projects: • TC0008001: Export development agency • TC-n/n: Support for the National Competitiveness Program (PPF) • TC0002008: Standards, weights and measures • TC9911195: Strengthening of urban transit • TC9911122: Integrated transportation planning • TC9911096: Devt. of the e-commerce market • TC9806110: Business technology acceleration • TC-n/n: Support for VICOMEX/FTAA Loans in execution: • PN0022: Road rehabilitation and administration • PN0030: Support for IDAAN restructuring • PN0032: Agricultural modernization • PN0035: CTR Public enterprise reform • PN0056: Finance sector • PN0061: Electric system expansion • PN0109: Productive sector competitiveness • PN0117: Rehabilitation of local roads and bridges • PN-0118: Chorrera energy project • PN0120: Tourism industry support • PN-0134: Support for Science, Technology and Innovation Center Technical-cooperation projects in execution: • ATN/MT-5452-PN: Arbitration mechanisms • ATN/MT-5478-PN: Agribusiness services • ATN/SI-5518-PN: Corporate restructuring for water supply • ATN/CF-5905-PN: Geothermal studies Valle de Antón – II • ATN/SI-6170-PN: Business technology acceleration in Panama • ATN/SC-6382-PN: Design of an export development agency • ATN/MH-5739-PN: Employment and training system • ATN/ME-5766-PN: Small business and microenterprise finance • ATN/MT-5785-PN: Securities Commission • ATN/MT-6284-PN: Competition promotion system • ATN/MH-6722-PN: SME business development • ATN/MH-6665-PN: Agricultural commodity exchanges • ATN/MT-6806-PN: Privatization of Interoceanic Region assets • ATN/JF-6910-PN: Chorrera hydro plant project

Projects: • IBRD: Rehabilitation of secondary roads • IBRD: Land administration • IBRD: Strategy report for the electricity sector (Regional) • JICA: Telecommunications Training Center • JICA: Improvement of the Maritime School of Panama • UNDP: Development of maritime resources, the Canal and the Interoceanic Region • Japan (Bilateral): Small-scale fishery • Japan (Bilateral): Farm development • Japan (Bilateral): Economic stability • China/Taiwan (Bilateral): Financial support for SMEs • China/Taiwan (Bilateral): Support for export processing center • Spain (Bilateral): Tourism • European Commission: City of Knowledge II • European Commission: Strengthening technical training • European Commission: Support for SMEs, central region Nonfunding activities: • IBRD: Country economic memorandum • IFC: Advisory support for electricity sector privatization • FIAS: Advisory support on foreign investment • MIGA: Advisory support • USAID: Efficient transfer of the Canal and productive use of reverted areas

• A National Competitiveness Program has been designed by 2002.

• Central American Free Trade Agreement is signed by 2002.

• An export development agency is created by 2002.

• Foreign direct investment is up 10% by 2002.

• Howard Air Force Base and Fort Sherman are privatized by 2002.

• Lending to SMEs is up 50% by 2002.

• Concession for second Bridge of the Americas is awarded in 2001.

• A National Employment Training Program is set up by 2002.

• A Tourism Development Program is implemented by 2002.

• Tourism visits are up 10% in 2002.

• PRONAT (National Land Titling Program) is implemented by 2002.

THE BANK’ S STRATEGY FOR 2001-2003: S UMMARY M ATRIX PANAMANIAN GOVT. AGENDA

IDB OPERATIONS • ATN/UE-6970-PN: Urban transit improvement, Panama City • ATN/MT-7130-PN: Enhancement of the investment climate, mining sector • ATN/SF-7225-RG: Support for the FTAA Secretariat • ATN/MT-7307-PN: Enhancement of the business climate for SMEs • ATN/MT-7333-PN: Strengthening of the regulatory and concessions framework for small and mid-sized bus companies • ATN/SF-7335-PN: Road rehabilitation and administration

OPERATIONS OF OTHER AGENCIES

Annex II Page 3 of 5 PERFORMANCE BENCHMARKS

THE BANK’ S STRATEGY FOR 2001-2003: S UMMARY M ATRIX PANAMANIAN GOVT. AGENDA

IDB OPERATIONS

OPERATIONS OF OTHER AGENCIES

Annex II Page 4 of 5 PERFORMANCE BENCHMARKS

3. Consolidate the regulatory, legal, and institutional framework for sustainable growth Help lay foundations • Supplement and closely for environmentally monitor production sustainable developactivities by reference ment, particularly in the to the Environment Canal Basin, mining Act. areas and forests, and marine and coastal resources, by supporting government moves to establish a regulatory, legal, and institutional framework, and an increase in environmental investments by at least three percentage points of GDP (nominal) between 2001 and 2003.

Pipeline of possible projects: • PN-0062: Panama City sanitation • PN-0114: Sustainable development mining sector • PN-0139: Sustainable development Canal watershed • PN-0149: Sustainable devt. Prov. Bocas del Toro • PN-n/n: Sustainable development coastal areas

Projects: • IBRD: Panama Canal basin conservation • IBRD: Working report on environmental issues (Regional) • IBRD: GEF/Atlantic biological corridor (Regional) • USAID: Canal watershed protection • JICA: TC Forestry development Pipeline of possible technical-cooperation projects: • UNDP: Environmental protection and sustainable development • TC9911150: Water resources management plan • Japan (Bilateral): Rural water supply systems • TC9911139: Workshop: Water and sanitation sector • TC9911035: Involving business in clean production (MIF) • Japan (Bilateral): Environmental management • Spain (Bilateral): Sustainable development • TC9806483: Canal watershed management and protection • TC0011012: Environmental auditing • TC0011011: Development strategy province of Bocas del Toro • TC0011010: Coastal and marine resources management Operations in execution: • PN0116: Sustainable development of Darién • PN0122: National Environment Program Technical-cooperation projects in execution: • ATN/JF-6079-PN: Prep. Darién sustainable development program • ATN/JF-6139-PN: Environmental strategy and Law • ATN/CP-6066-PN: Prep. mining sector program • ATN/CP-6403-PN: Prep. mining sector legal and institutional framework • ATN/JF-6552-RG: Disaster mitigation in Central America • ATN/NC-7015-PN: Forestry sector policy • ATN/JF-7196-PN: Canal watershed management and protection • ATN/SI-7340-PN: Water resources management plan

• Regulations under the Environment Act are issued in 2001.

• A program for sustainable management of the Canal watershed is devised by 2002.

• Mining Code reforms are finished by 2002.

• National Network of Environment Units is in place in each Panamanian ministry and agency by 2002.

• An institutional and financial sustainability plan for the water and sanitation sector is devised by 2001.

THE BANK’ S STRATEGY FOR 2001-2003: S UMMARY M ATRIX PANAMANIAN GOVT. AGENDA

IDB OPERATIONS

OPERATIONS OF OTHER AGENCIES

Annex II Page 5 of 5 PERFORMANCE BENCHMARKS

4. Contribute to institutional reforms to strengthen governance and enhance transparency Strengthen governance • Decentralize through funding to government services; assist in the review and State bureaucracy strengthening of streamlining programs government adminisand training. tration; make the • Streamline adminisworkings of governtrative procedures for ment more efficient and customer service. transparent.

• Revamp legislative policies and rules for the Administrative Career Service Act and the Wage Act. • Emphasize transparency of the State as a State policy.

• Pare government bureaucracy.

• Eliminate administrative corruption.

Pipeline of possible projects: • PN-0143: Municipal devt. and citizen participation • PN-0147: Fiscal management II • PN-n/n: Modernization of justice II • PN-0103: Modernization Ministry of External Relations

Projects: • IBRD: Public policy reform—Technical assistance • IBRD: Public policy reform—Adjustment • USAID: Criminal and commercial justice systems • UNDP: Public-sector management • Spain (Bilateral): Governance Pipeline of possible technical-cooperation projects: • Spain (Bilateral): Institution-strengthening (National • TC0104005: Panama City municipal strengthening and Police, judicial sector, local governments and development associations) • TC0103025: Decentralization and municipal development • European Commission: Citizen verification company • European Commission: Reform of the Ministry of Operations in execution: External Relations • PN0078: TC Legislative Branch • European Commission: Support for modernization of • PN0086: Administration of justice the Panamanian prison system • PN0089: Modernization of the workings of government • European Commission: Municipalities • European Commission: Restoration of Panama Technical-cooperation projects in execution: City’s historic quarter • ATN/SF-6071-RG: Tax administration • ATN/JF-6925-PN: Municipal development, Panama City • ATN/MT-7080-RG: Expediting business via customs procedures

• Decentralization and Municipal Development Act is passed by 2002.

• Integrated Financial Management System (SIAFPA) is in place throughout the entire nonfinancial public sector (ministries, enterprises, agencies, municipalities) achieved by 2002.

• Court backlog reduced from 130,000 cases in 2000 to 100,000 cases in 2002.

• Review of penal and civil procedure completed by 2002.

• Staff of Attorney General’s Office (including Judicial Technical Police) are taking part in Judicial College continuing training programs by 2002.

• The new Forensic Medicine Institute and Evidence Holding Center are built.

• Regional Judicial Units of San Miguelito and Chiriquí are consolidated in 2002.

ANNEX III Page 1 of 2

ACTIVE LOANS (at 30 March 2001) (HS = Highly Satisfactory; S = Satisfactory; U = Unsatisfactory; HU = Highly Unsatisfactory)

Implem. status S

Project No. PN0032

Loan No. 924/OC

Title Agricultural modernization program

S

PN0069

1013/OC

Education development program

ME

11-Jun-97

04-Sep-03

58,126

51,196

S

PN0025

220/IC-PN-1

Sites and services (1)

MIVI

30-Oct-97

01-Feb-01

18,000

9,642

S

PN0054

854/OC 855/OC

Social investment program

FES

21-Dec-94

18-Aug-00

30,000

0

U

PN0082

949/OC

Housing program

MIVI

18-Sep-96

01-Feb-01

26,400

19,118

S

PN0035

690/OC

TC Support for public enterprise reform

MEF

05-Aug-92

12-Aug-00

9,430

1,131

S

PN0078

923/OC

Support for Legislative Branch

Leg. Assembly

18-Mar-96

26-Mar-01

2,800

1,184

S

PN0097

970/OC

Basic infrastructure sector reform (PRIBA) (2)

MEF

20-Nov-96

17-Mar-01

3,340

2,210

HU

PN0030

1029/OC

Support for IDAAN restructuring

MEF

30-Jul-97

10-Nov-01

45,000

34,006

S

PN0089

1004/OC

Modernization of fiscal management

MEF

16-Apr-97

10-May-02

11,200

0,721

U

PN0056

1073/OC

Finance sector

MEF

10-Dec-97

16-Jun-01

120,000

88,800

U

PN0056

1074/OC

TC Support for finance sector reform

MEF

10-Dec-97

16-Jun-02

10,130

7,730

S

PN0086

1099/OC

Improvement of justice administration

Justice Administration Commission

25-Mar-98

07-Feb-03

18,900

14,379

S

PN0109

1108/OC

Support for productive sector competitiveness

SENACYT

23-Jun-98

14-Apr-02

14,200

9,305

S

PN0022

769/OC

Road rehabilitation and administration

MOP

22-Sep-93

23-Dec-00

180,000

0

S

PN0117

1116/OC-PN-1

Rehabilitation of local roads and bridges (3)

S

PN0029

803/OC

Health program

S

PN0116

1160/OC

Darién sustainable development

S

PN0061

1113/OC

Electric system expansion program (4)

U

PN0120

1132/OC

Support for tourism sector program

S

PN0122

1222/OC

National Environment Program

S

PN0111

1226/OC

S

PN0134

1273/OC-PN

Poverty alleviation and community development program Support for implem. Science, Technology and Innovation Center

23 Projects

24 Loans

TOTAL (1) (2) (3) (4)

Executing agency MIDA

Dates Approval 18-Mar-96

Final disb.

26-Mar-03

Amount (US$000) Total Available 33,600 15,110

MOP

29-Jul-98

06-Nov-01

85,000

72,402

MINSA

16-Dec-93

20-Dec-00

42,000

9,087

MEF

16-Dec-98

21-Feb-05

70,400

65,909

ETESA

29-Jul-98

79,000

78,210

IPAT

14-Oct-98

27-Jun-02

2,500

1,984

ANAM

17-Nov-99

14-Dec-03

15,800

14,479

FIS

23-Nov-99

14-Dec-03

48,850

45,957

FCS

26-Oct-00

18-May-04

3,300

3,067

Project reformulated in 1997. The other component, not included here, for community development (FES) was completed in December 1999.

The balance of loan 969/OC for this program was cancelled.

Does not include US$71 million in financing for the program’s second stage; cancelled in 2000.

Signed 18 November 2000. Awaiting eligibility

927,976

544,906

Annex III Page 2 of 2

PROJECT PERFORMANCE (at 30 March 2001) FULFILLMENT OF DEVELOPMENT OBJECTIVES Very probable

Probable

Doubtful

Very unlikely

Highly satisfactory 769/OC

Road rehabilitation and Support Legislative 923/OC administration Branch

1113/OC

Electric system expansion program

690/OC Support for public enterprise reform

IMPLEMENTATION PROGRESS

1004/OC

1099/OC

924/OC

Agricultural services modernization program

Improvement of administration of justice

969/OC Basic infrastructure sector 970/OC reform

Modernization of fiscal Support for productive 1108/OC management sector competitiveness

1222/OC National Environment Program Satisfactory 1226/OC Poverty alleviation program

854/OC Social investment 855/OC program 803/OC

Health services modernization and rehabilitation

1013/OC

Education development program

1160/OC

DariĂŠn sustainable development

220/IC

Sites and services Component 1

1116/OC

Rehabilitation of local roads and bridges

Support for implem.

1273/OC Science, Techn. And Innovation Center 1132/OC Tourism sector support program

949/OC Housing program

Unsatisfactory 1073/OC Finance sector 1074/OC Highly unsatisfactory

Support for 1029/OC IDAAN restructuring