Idb - Country Strategy With Panama

8/22/2019 Idb - Country Strategy With Panama

1/61

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

REGIONAL OPERATIONS DEPARTMENT 2

COUNTRY DIVISION 3

COUNTRY PAPER

APRIL 2001


2/61


3/61

Contents

EXECUTIVE SUMMARY

I. Introduction ..................................................................................................................9

II. Key Macroeconomic and Development Issues..........................................................10

A. Macroeconomic considerations .......................................................................10B. Key development issues...................................................................................14

1. The social equity challenge...................................................................152. The challenge of economic competitiveness.........................................183. The challenge of environmental sustainability......................................214. The governance challenge.....................................................................23

III. Objectives, Strategy, and Agenda for Dialogue.........................................................25

A. Objectives ........................................................................................................ 25B. Strategy ............................................................................................................ 25

1. The governments development strategy ..............................................252. The Banks current strategy (1997-1999): A look at outcomes ............273. Portfolio execution and lessons learned................................................284. Portfolio performance and action plan ..................................................29


4/61

ii

ANNEXES

Annex I 2000-2003 lending program

Annex II The Banks strategy for 2001-2003: Summary matrix

Annex III Loans in execution/Loan performance

BASIC SOCIOECONOMIC DATA

Th b i i i d t il bl th I t t t th f ll i dd


5/61

iii

ABBREVIATIONS

ANAM National Environmental AuthorityAPEC Asia-Pacific Economic CooperationBDA Banco de Desarrollo Agropecuario (Agricultural Development Bank)BHN Banco Hipotecario Nacional (National Mortgage Bank)C&W Empresa Telefnica Cable and WirelessCACM Central American Common Market

CGR Office of the Comptroller General of the RepublicCICH Interinstitutional Commission on the Canal WatershedCSS Social Security AdministrationDAS Social Agenda DialogueFFD Fondo Fiduciario para el Desarrollo (Development Trust Fund)FTAA Free Trade Area of the AmericasGDP Gross domestic productGNFS Goods and nonfactor servicesIDAAN Water CompanyIIC Inter-American Investment CorporationIVM Disability, old age and survivor benefit planMEF Ministry of Economic Affairs and FinanceMERCOSUR Southern Common MarketMIDA Ministry of Agricultural DevelopmentMIF Multilateral Investment Fund


6/61


7/61

EXECUTIVE SUMMARY

This paper proposes a strategy for Bank support for the Government of Panama. It isdivided into three chapters, starting with an introduction in chapter I. Chapter II discussesmacroeconomic issues and key development challenges for Panama. Chapter III proposesa 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 percapita gross domestic product until the last three years of the decade. This growth wasunderpinned by balanced fiscal accounts, substantial increases in private investment, andsweeping structural reforms. The economic and social policies in place over the decadeheld unemployment to about 13% and reduced the number of poor families from 44% ofthe total in 1991 to 37% in 1999.

On the macroeconomic front, Panama is facing five challenges as its strives to enhanceequity 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 openeconomy; and (v) continue with economic reforms and improve regulation of the privatesector.

Panamas dual economy, its monetary system, recent political history, and lopsidedaccumulation of wealth pose singular economic and social development challenges.Meanwhile, the transfer of the Panama Canal and Interoceanic Region (former CanalMilitary Zone) to Panamanian sovereignty is a historic opportunity for the nation to buildon its comparative advantages as a world hub of trade and services. Tapping thesed l ld bl P d k f i i h


8/61

Executive SummaryPage 2 of 8

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

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

The challenge of economic competitiveness

In the above-mentioned dual economy, each sectors competitiveness has depended onhow 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 nationaleconomythe Canal, the Coln Free Zone and the International Banking Centerwerevery competitive, gaining them a solid foothold in the global marketplace. However,given the exigencies of globalization and regional economic integration, these sectorswould need to rethink their strategies if they are to stay competitive. Meanwhile, the

traditional sectors (agriculture and manufacturing) have had trouble competing becauseof 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 payingmore money for a smaller variety of inferior goods. These same protectionist policieshave dampened export growth in Panamanian companies.

The challenge of environmental sustainability

f i d l i h h h ll i


9/61


capacity for the basins comprehensive management via the InterinstitutionalCommission on the Canal Watershed.

Sustainability of the water and sanitation sector: This sector is in crisis. The Bank hasbeen supporting the government and IDAAN as they work to modernize the sector andensure sustainable water and sanitation service delivery. Since none of the approachesadvanced have been fully implemented, IDAAN still does not have the minimuminstitutional, economic, or financial resources required for it to operate effectively. In theBanks assessment, IDAANs current inefficiencies are keeping it from extending water

and sewer systems to the poorest households, and are diverting resources that could beused for other priority social programs.

The challenge of governance and transparency

Tackle administrative corruption and foster transparency: The Panamanian publicsector needs to be more effective and efficient in its internal processes if it is to lessen thepossibility of corruption in administrative procedures. This is particularly important in the

areas of tendering and government permits. The government has stated its intention toconduct a thorough, systematic review of procedures in order to slash red tape. Animportant requirement in such an effort will be to adopt modern technologies that can atonce streamline procedures and save the government a considerable amount in operatingcosts, freeing up money for social programs. Another requirement will be to identifyinternational best practices for transparent funds management, to spur their adoption andprevent acts of administrative corruption.


10/61


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

The governments development strategy

Top priorities in the development strategy of President Mireya Moscosos administrationare poverty reduction and sustainable human development. One of the governments keytargets 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 titledSocioeconomic Development and Financing Plan with Human Capital Investment. Thethree-part plan deals with the areas of social policy, economic policy, and financialstrategy. The economic program addresses the imperative of sustained economic growthand improvements in the standard of living of Panamanians hitherto excluded from thefruits of progress.

Outcomes of the Banks support strategy for 1997-1999

The Banks strategy for Panama for 1997-1999 was built around four objectives: (i) sharethe benefits of social policy with more Panamanians, particularly vulnerable groups(growth with equity); (ii) foster sustainable development; (iii) spur sustained economicgrowth, and (iv) strengthen governance.

Th t f l d th f l th h th b lk f th f


11/61


governments 1994-1999 agenda, and programs funded by the Bank. However, newneeds have arisen as a mounting portfolio covering many sectors has to be monitored.

Status of Bank loans

During the first two years of Panamas new administration, the Bank and the countryauthorities made considerable progress on a critical assessment of Bank projects inPanama and on improving their management. The objectives of Bank-funded operationsmatched the governments aims very closely, particularly in the area of social programs.For the most part, Bank projects in fiscal year 2000 received large enough budgetappropriations to ensure that project funds could be expended at a satisfactory pace.

Portfolio performance and action plan: The Banks Panama portfolio has grownconsiderably 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 loansfor US$65 million. The Bank and the government are making a concerted effort toexpedite and improve portfolio performance, to improve disbursement rates after the lowlevels recorded in 1999 and 2000. The changeover in government and budget constraintswere responsible for most of the delays. Three of the 21 operations in the portfolio arerated unlikely (low probability) to achieve their development objectives and thus areclassified as problem projectsthe 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


12/61


Strategy for the Banks support in 2001-2003

The Banks tentative strategy for support to the Panamanian government from 2001 to2003 would target four priority spheres: (i) support for a frontal attack on poverty andfor enhancing equity; (ii) promoting economic reforms to spur competitiveness andgrowth; (iii) helping to consolidate the regulatory, legal, and institutional frameworkfor sustainable growth; and (iv) contributing to institutional reforms to enhancegovernance and transparency.

A frontal attack on poverty, and equity enhancement: The Bank will supportimplementation of the poverty-reduction and equity-enhancing strategy charted in theNational Government Social Development Policy and Strategy 2000-2004. As a startingpoint the Bank is proposing a Social Agenda Dialogue (DAS) to define priority programsand measures in the areas of health and nutrition, education, social protection, and thelabor market. The DAS would be a forum in which to discuss and share ideas on policyand technical issues and look at international experiences, policy tools geared to thecountrys 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 andpriorities for future programs with a view to reducing poverty and enhancing equity. TheBank also is proposing a national dialogue on the rural economy and rural poverty, tobegin mapping out a comprehensive agricultural modernization program that could tacklethe most serious socioeconomic problems in rural areas.

Economic reforms to spur competitiveness and growth: There is a need to design anational competitiveness program that would include developing an industrial and export


13/61


Lending program scenarios

Estimates based on pre-2000 programming exercises put Panamas 2000-2002 fundingrequirement at US$201 million (an average of US$67 million a year). This figure takesinto account several factors: (i) an increase in the countrys borrowings byUS$217 million a year, on average, in 1997-1999; (ii) the Banks sizable undisbursedportfolio for Panama at the end of 2000 (US$551 million); and (iii) the governmentsannouncement, as a priority strategy, of its plan to reduce its external debt in relativeterms 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 neutralgovernment stance (no improvement in its primary saving position), with tendential realGDP growth of 4% in 2001-2003 and a moderate Bank lending program withUS$56 million in approvals in 2001. The operations pipeline for 2002 onward stands atUS$414 million.

Alternative scenario: The alternative (high) scenario assumes enhanced saving capacity(higher treasury revenues, reduction and reapportionment of current expenditure), withreal GDP growth of 5% in 2001-2003, a lending program of US$91 million in 2001, anda 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 belegislative passage of a tax modernization and streamlining package including the


14/61


Policy dialogue agenda

As an adjunct to the operations support strategy the Bank is proposing, it would bedesirable to hold a dialogue on priority policies for tackling Panamas leadingdevelopment challenges. Issues for such a dialogue are proposed at the end of chapter III.


15/61

Annex I-APage 9 of 3

I. INTRODUCTION

1.1 This paper is the fruit of a lengthy, intensive dialogue launched on 14 August1999 at a high-level consultation meeting with President Mireya Moscoso andmembers of her cabinet. Since then the Bank and Panama have engaged in aseries of sector-specific dialogues on such priority areas as water supply and thefinance sector. Following these initial exchanges the Bank produced a policydialogue paper entitledMajor Development Challenges and a special report on the

status of its Panama loan portfolio, which were presented to the authorities forconsideration in May 2000. The Bank then conducted a special policy dialoguemission in late June 2000, during which the authorities affirmed their agreementwith the papers content and the proposals therein. On the basis of thatendorsement the Bank prepared this country paper.

1.2 The paper, divided into three chapters, proposes a strategy for Bank support to theGovernment of Panama from 2001 to 2003. The first chapter is an introduction;

the second deals with macroeconomic issues and key development challenges forPanama, and the third maps out a joint Panama-IDB strategy and a tentativeagenda for a future policy dialogue.

1.3 Recent reforms: The package of economic and social reforms on which Panamaembarked in the 1990s rewrote the ground rules and boosted efficiency in varioussectors. In the social sector this marked the start of substantive reforms in theeducation system and continuing health and education infrastructure


16/61


II. KEY MACROECONOMIC AND DEVELOPMENT ISSUES

A. Macroeconomic considerations

2.1 Throughout the 1990s the Panamanian economy expanded steadily, withcontinual improvements in per capita gross domestic product until the last threeyears 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 to13% and reduced the number of poor families from 44% of the total in 1991 to37% in 1999 (World Bank, 1999).

2.2 Nevertheless, on the macroeconomic front the country is still up against a seriesof risks of external shocks and reform fatigue as Panamanians see thateconomic reforms are not yielding immediate social benefits. Nor have thereforms raised the standard of living of Panamanians in rural parts of the country

or evened out the income distribution. This contrasts with Panamas solid imageabroad, where it is considered a prosperous country (dollarized, no inflation),politically stable and attractive to investors.

Table II.1: PANAMA. Economic indicators 1997-2004


17/61


Panamas external debt, and make more money available for investments targetedto priority social sectors. For the coming years the programs macroeconomicpremise is 4% growth in 2001 and 5% in 2002-2004. The balance-of-paymentscurrent account deficit is also expected to narrow steadily, from 14% in 1999 to5.3% in 2004. These targets are attainable if the zero-deficit target for thenonfinancial public sector is achieved in 2001-2004. Supplementing the strategyof fiscal balance, growth, and balanced external accounts would be structuralmeasures such as broadening the value-added tax (VAT) base, raising the tax rateon commercial-bank income, and extending the integrated financial management

system (SIAFPA) throughout the entire central government. The legislature willbe discussing the first two issues during the first half of 2001.

2.5 Against the above-described backdrop, this section describes five keymacroeconomic challenges for Panama to be able to enhance equity and becomemore 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 doublechallenge on the fiscal front: (i) balance the public-sector accounts while loweringthe external debt-to-GDP ratio, and (ii) boost public saving to be able to fund thegovernments economic and social infrastructure investment program. Threesalient features in the governments budget are: (a) high debt levels; (b) modesttax revenues, and (c) high nontax revenues.


18/61


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

2.10 The government also has substantial financial assets in the Social Security TrustFund (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 highcontingent liability. In a word, the system is running an actuarial deficit and couldbe 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 to20% of the external public debt and for social investment outlays. Both these usesof FFD yields are compatible with an external debt reduction strategy.

2.11 Strengthen budgetary management: Though the Panamanian government hashuge infrastructure investment needs, its scant public saving capacity is forcing itto substantially curtail capital outlays at the end of each year. To be able to avoidthese seasonal cuts in programmed capital spending the government needs to


19/61


wages of poor rural families, the regulations worsened the lot of the urban poorand 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. Lowuniform tariffs and direct aid such as technology support, solid new infrastructure,and direct subsidies to rural workers would be less distorting and more effectivein supporting the rural poor.

2.13 Apart from their negative effects on equity, the tariff increases mark a deviation inthe trade-liberalization trend, reduce incentives for productivity andcompetitiveness, and run counter to the objectives of building on Panamascomparative advantages as an investment destination for trade and goods andservices exports. The government has pledged to the IMF that it willprogressively lower tariffs until 2004. This gradual approach will mean delays inseeking new, more competitive exports as well as higher domestic prices anddimmer prospects for Panama to benefit from international free trade agreements.

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

2.15 Labor legislation: Panamas labor laws are among the most inflexible in theworld. The result is high unemployment, inequitable wage distribution,particularly among women and young people, and a vast informal sector. Reforms


20/61


bank balance sheets. In 1998 and 1999, as the financial system relaxed its lendingrequirements, 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 potentialfragility of the banking system warrants further moves to strengthen the BankingSuperintendency.

2.18 Public utilities regulation: In regulating the privatized telecommunications andelectric power utilities a balance needs to be struck between equity concernskeep rates affordableand contractual commitments to investors. The Bankshares the governments concern about the social impact of rate increases. Theefficiency price is the cost that has to be paid to assure the quality of services,increased coverage, and sustainability of infrastructure investments. No utility-rate solution should create regulatory risks. In the Banks view, subsidies targetedto lower-income customers could be explored as a way of cushioning the socialimpact of efficiency prices. Direct, transparent subsidies, coupled with a solutionto 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 PublicUtilities Regulatory Agency (ERSP) are a foundation upon which the governmentcan put through its social agenda: they ensure that Panamanians will receivegood-quality services because the right kind of economic incentives are in place.Regulatory system failures harm the poorest and most vulnerable in society, wheninvestors have no incentive and no real obligations for service delivery. The Bank


21/61


quickly and reduce unemployment. The interface between equity andcompetitiveness 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 havebeen subdivided into four core issues to tackle: (i) social equity; (ii) economiccompetitiveness; (iii) environmental sustainability, and (iv) governance. Thischapter analyzes these issues and their implications for Panamas development.The next chapter looks at possible government and Bank responses.

2.23 Poverty and inequality: The 2000 Human Development Report ranks Panamaamong countries having a high Human Development Index (number 59 among150 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, forinstance), but these general yardsticks of well-being go hand in hand with somemarked inequalities. Panamas income distribution is one of the most uneven inthe world. With a Gini coefficient of 49 for consumption distribution and anincome-inequality Gini of 57.1, Panama has one of the widest income gaps in theworld, approximating the situation in Brazil and South Africa where incomeinequality is the most pronounced.2

1. The social equity challenge

2.24 The above-mentioned inequities have worsened pockets of poverty and extreme


22/61


The Gini coefficient is a measure of theinequality of a countrys income distribution. AGini approximating unity portrays a distributionnear absolute inequality, i.e., one person receivesall income. The closer the coefficient to 0, themore even the distribution. Panama (1999) has aGini coefficient of 57.1, on a par with Brazil,Guatemala, and South Africa, whose income gapsare the widest in the world. This distributionalinequality translates into consumption inequality:Panamas poorest 20% account for a mere 2.3%

of national consumption. Here, too, Panama rankswith countries having the widest gaps. Of thecountries depicted in the graph, only Guatemala,where the poorest 20% account for 2.1% ofaggregate consumption, tops Panamas inequalityindex. The average for this sample for LatinAmericathe region with the most unevenshowing in the worldis 3.5.

Gini coefficient of selected Latin

American countries

35

40

45

50

55

60

65

Panama

Brazil

ElSalv

ador

Nicaragua

Guate

mala

Honduras

Costa

Rica

Jamaica

Dom.

Republic

Latin

America

2.25 Child malnutrition correlates strongly with poverty in Panama. Though thenationwide chronic malnutrition rate (low height for age) is low compared toother countries in the region16% in children under 5the situation is moreacute in the poorest rural areas and indigenous communities. This problem, inturn, has its roots in the scarcity of money in poor and indigenous households toobtain food and health care, inappropriate childcare and nutrition practices, andpoor household sanitation The lack of food money is a more serious problem than


23/61


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

2.28 A social-sector overview: In the 1990s, Panama reported one of Latin Americashighest levels of social spending, at 21% of GDP, and in the past five years socialexpenditure has been rising 6.3% annually. However, this outlay has not had thedesired impact because funds have not been precisely targeted and because ofbureaucratic 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 educationfunding.4 Spending is also regressive in geographic terms: half the school-agepopulation lives in rural areas, but only one third of total education spending goesto these parts of the country. This pattern is replicated in virtually every socialsector, causing disparities in benefits received. For example, the educationalattainment of the non-poor population averages over nine years; for the urban andrural poor the average is seven and five years, respectively. In indigenouscommunities the average drops to three years.

2.30 Inefficiency: Social spending is not just unevenly apportioned but inefficient.Though Panamas education and health spending figures are among LatinAmericas highest, its indicators do not reflect this outlay. In education, forinstance, first-grade repeater rates are 10% in cities but over 22% in rural areas.


24/61


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 Panamas ethnic minorities are the Kuna, Gnobe-Bugl, Embera-Wounaan,Teribe, and Bri-Bri indigenous communities and the Afro-Latino population(Afro-Darienite y Afro-Caribbean), which are classed as poor and highlyvulnerable segments of the population. Theirs is a traditional economy based onreciprocity and redistribution, with varying degrees of involvement in themarketplace, usually inefficient and unequal. They work in a segmented job

market and migration is heavy, notably among Afro-Latinos. The challenge inrespect of these groups is to complete moves to regularize their territories, fostersustainable land-use planning, strengthen their administration and public servicedelivery, safeguard and nurture their cultures and ensure food security, byprotecting their traditional economies.

2.35 The conclusion of an analysis of household surveys is that the nonfarm sectoroffers better avenues for escaping poverty. This suggests that a rural povertyreduction strategy should also emphasize investments in nonfarm services. Thus,productive infrastructure (e.g. rural roads, electrification) that can bring downtransaction costs in the agriculture sector is key to reducing rural poverty. Thereare 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 inthe basic food basket. This left the agrifood sector less able to compete


25/61


to expansion, modernization, and creation of new businesses under conditions thatwill be sustainable in the long term. However, given the exigencies of

globalization and regional economic integration, these service sectors would needto rethink their strategies if they are to stay internationally competitive. Issues ofcomparative advantages and technological innovation are coming to the forefrontin this regard. Meanwhile, the traditional sectors (agriculture and manufacturing)have had trouble competing because of a series of protectionist measures that donothing to spur productivity or competition. This situation has taken a tollparticularly on Panamanian consumers, who are paying more money for a smallervariety of inferior goods. These same partial policies have dampened Panamanianfirms export growth.

2.39 As a prelude to creating consistent competitiveness policies there needs to be amore thorough up-front assessment and a broadbased national dialogue in pursuitof a medium- and long-range shared public/private-sector strategy. Some priorityinitiatives to help make Panama more competitive are outlined in the followingparagraphs.

2.40 Build on multimodal transport advantages: Apart from the Canal, Panama hasa maritime and transportation infrastructure unique to Latin America, and is nowexpanding its road infrastructure. The Interoceanic Region offers huge potentialfor shipping, commerce, and industry. The electricity and telecommunicationsindustries, which are almost entirely in private hands now, provide a solidsupport-services base. This infrastructure endowment in a compact geographicarea offers prospects for developing a multimodal transport system to handle


26/61


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

2.43 In 1999, the National Business Council and the Panamanian Industrial WorkersUnion/Panamanian Exporters Association came out with assessments and policyrecommendations to improve competitiveness, pointing up Panamas strengthsand weaknesses and prospects for a national competitiveness program. At theheart of the proposals are two concepts: (i) development of a unique Panamanianproductive/competitive identity, and (ii) the need for a strategy to takePanamanian 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 todo with trade policy and other public policies to expedite private enterprise(economic integration, trade accords, export promotion, and technologyadaptation programs, for example). The two assessments recognize theimportance 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 handwith a modern trade policy. With the signature of new trade pacts and activeparticipation in regional economic integration forums (FTAA, CACM, AndeanCommunity, MERCOSUR, NAFTA, APEC), Panama is poised to seize newtrading opportunities that offer economies of scale for goods and services exports.Given the long menu of possible initiatives, the country will need a policy ofprogressive integration, as the Office of the Deputy Minister for Foreign Trade


27/61


2.46 Mainstream all Panamanians: Panama needs to broaden its business base andcreate more job opportunities. Tackling these two challenges would help narrow

the income gap. Without more universal access to asset ownership there can be nogrowth with equity in Panama. Policies to modernize the education and vocationaltraining systems are crucial in this regard, as are aggressive urban and rural landtitling programs to open the mainstream economy and bank lending services tothe hitherto excluded masses. Also needed are programs explicitly designed toboost SMEs productive capacity by giving them access to nonfinancial services,so the fruits of economic progress can be spread more evenly among thePanamanian people.

3. The challenge of environmental sustainability

2.47 Development of environmental management: To deal with the challengesensuing from the Environment Act and its new institutional apparatus, thegovernment is implementing a National Environment Program (PAN) with IDBloan funding. This initiative is a first step in an environmental strategy beingpursued by the National Environmental Authority (ANAM), the nations lead

agency for environmental management, environment units in the other ministriesthat are part of the environmental management network, the private sector, andcivil society. Challenges for the coming years include bolstering the institutionalapparatus, decentralizing environmental management, and issuing enablingregulations for the Environment Act. In parallel with the development ofenvironmental quality and emissions standards and rules on public consultation,the production sector needs to be encouraged to adopt cleaner technologies, which


28/61


environmental conditions in the sector, and (iii) Panamanians well-being andstandard of living, particularly the urban and rural poor. The IDB has worked with

the government and IDAAN to modernize the water and sanitation sector andassure sustainable service delivery, but the solutions advanced have not been fullyimplemented, so IDAAN still is without the minimum institutional, economic,and financial resources required for it to operate effectively. In the Banksassessment, IDAANs current inefficiencies are keeping it from extending serviceto the poorest households and are diverting resources that could be used for otherpriority social programs.

2.50 In 2000 the government appointed a presidential commission, with which theBank has been working, to examine why the management model agreed uponpreviously 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 elementsthat are to guide sector modernization efforts: (i) replacement of Law 56procurement procedures with a more agile approach, but still observing theprinciples of competition and transparency; (ii) IDAANs authority to calculateand propose tariffs whereby it can recover the efficiency costs of service deliveryand raise the funds needed to extend its systems; (iii) arrangements forgovernment-authorized subsidies using timely non-IDAAN resources;(iv) budgeting capacity consistent with the agencys own resources and its policyobjectives and targets; and (v) IDAANs authority to institute an employmentregime and salary structure that will give it trained, efficient staff. These policyelements would: (i) help give IDAAN enough financial and institutionalautonomy to be able to deliver its services and execute capital projects efficiently


29/61


2.52 By adopting a modern regulatory framework for the mining industry Panamawould create a new sector of sustainable economic activity with a controlled

environmental impact. The sector would have a significant social impact (jobs andincome) in parts of the country hitherto bypassed by development, and theTreasury would obtain needed revenues.

4. The governance challenge

2.53 Tackle administrative corruption and foster transparency: Internal processesin Panamas public sector need to be more effective and efficient, to reduce the

chance of corruption in administrative procedures. This is particularly importantin the area of public tendering and permits. The government has announced itsintention to cut red tape. One important element in such a move is to adoptmodern technologies that will at once streamline procedures and save thegovernment a great deal in operating expenses, freeing up funds for socialprograms. International best practices in transparent funds management also needto 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 andimprove detection of money laundering.

2.54 Municipal development: One priority for enhancing governance is a municipaldevelopment agenda. Panama is one of Latin Americas most centralized nations:local governments control less than 5% of aggregate public spending. Anothersingular feature of the Panamanian system is the structural weakness of the


30/61


first-stage pilot experiments would be extended to the rest of the country. Thedialogue 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 ofthe challenge of enhancing the national governance system.


31/61


III. OBJECTIVES, STRATEGY, AND AGENDA FORDIALOGUE

A. Objectives

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

B. Strategy

3.2 Three requisites for charting a joint Panama-IDB strategy are: (i) a knowledge ofthe current administrations priorities (Socioeconomic Development andFinancing Plan with Human Capital Investment, 2000-2004 Social DevelopmentPolicy and Strategy); (ii) an understanding of the governments macroeconomicand fiscal constraints, and (iii) an assessment of the current loan portfoliosprospects for supporting the governments priorities. These three considerations,in synthesis, underpin the proposal of a common strategy for 2001-2003.


32/61


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. Thesepriorities coincide with assessments of social equity and the general socialsituation in Panama produced by the Bank and other national and internationalagencies. The more fiscal saving the government can generate, the more moneycan be added to capital spending appropriations, for instance to rehabilitateschools and health centers, and to provide direct subsidies, for example for childnutrition, housing, and microenterprise. The total capital spending programproposed by the central government for 2001-2004 stands at US$1.675 billion at

2000 prices. This sum, fixed in an IMF standby arrangement, includesUS$559 million out of the FFD.

3.6 The economic policy component proposes to quicken economic growth to createnew jobs and thereby reduce poverty and narrow the income gap. A prioritypolicy focus will be to boost domestic export production (selective tariffprotection, adopting modern technology, promoting SMEs). The TocumenAirport, the Atlapa Convention Center, and the former Howard and Claytonmilitary bases are slated for privatization. As for labor policy, the proposal is tocreate microenterprises, bring in a wage policy based on productivity increases,promote vocational training, and bolster job-creation incentives. A furthereconomic-policy aim is to win private investors confidence by offering themgreater legal and financial certainty, promoting transparency, and pursuing abalanced fiscal program.


33/61


3.9 Social expenditure has to be executed within a budgetary framework that isconsistent with sound programming and monitoring of recurring and capital

expenditures. To that end, the SIAFPA needs to be consolidated as a tool forexpenditure and expenditure tracking in priority programs. Likewise, the NationalPublic Investment System (SINIP) should take a multiyear approach, with clearevaluation methodologies, monitoring systems, and coordination with publicborrowing and current revenues (tax and nontax), to make certain that prioritysocial-investment programs can operate as planned.

2. The Banks current strategy (1997-1999): A look at outcomes

3.10 The Banks strategy for Panama for 1997-1999 pursued four objectives: (i) spreadthe benefits of social policy, particularly to vulnerable groups (growth withequity); (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 Banks loans went to support sustained growth, specifically

by way of public enterprise reform (with an aggressive privatization program) andfinancial-sector reforms. Over that interval, loans in pursuit of the sustained-growth objective accounted for 59%5 of Bank approvals for Panama. The otherapproved projects were divided equally and in line with the strategy objectives inpriority sectors.

3.12 A look at the implementation of the 1997-1999 strategy reveals a high rate of loan


34/61


Table III.1: Operational outcomes of the 1997-1999 strategy

Action focus/Bank response

(Operations)

Sectorinvestment

1997-1999

(US$ MM)

% total

1997-1999

investment

Undisbursed

amount

(US$ MM)

% inv. sector

undisbursed

% of total

undisbursed

Growth with equity 152 23% 136 90% 27%Education development program (1013/OC-PN)PREIDAAN (1029/OC-PN)Poverty alleviation and community development

program (1226/OC-PN)Sustainable development 86 13% 82 95% 16%

National Environment Program (1222/OC-PN)Darin sustainable development program

(1160/OC-PN) Sustained growth 382 59% 274 72% 53%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 67% 4%Fiscal management program (1004/OC-PN)Program of support for the administration of justice(1099/OC-PN)

Total 650 100% 512 100%*The undisbursed balance does not include amounts already committed. The total is equivalent to 79% of total investmentapproved between 1997 and 1999.

3. Portfolio execution and lessons learned

3.13 An important factor in the execution of the lending program associated with the199 1999 fi l b l li i fi l li


35/61


on possible realignments of some loans to tackle the governments new priorities,without adding to the countrys debt burden.

3.16 During the first year of Panamas new administration, the Bank and the countryauthorities made considerable progress on a critical assessment of Bank projectsin Panama and on improving their management. The objectives of Bank-fundedoperations were in line with the governments aims, particularly in socialprograms. Generally speaking, the budgetary appropriations received for Bankprojects in fiscal year 2000 are enough to enable their funding to be expended atan 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 isin line with the governments policy of paring the States external debt stockduring its administration and making maximum use of the proceeds of loansalready formalized with the Bank. To increase disbursements, COF/CPN willpursue specific action plans within the annual portfolio review exercise and willprovide periodic status reports on the undisbursed-balance reduction targets.

4. Portfolio performance and action plan

3.18 The Banks Panama portfolio has grown considerably in recent years. Between1996 and 1998 the Bank approved 16 loans, averaging over US$250 millionannually. Approval figures were down in 1999, the year of the governmentchangeover: two loans for US$65 million. Few operations in the current portfolio


36/61


restructuring (1029/OC-PN). The latter operation is rated very unsatisfactory forimplementation 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% ofthe funds have been disbursed, and less than 10% of the balance available at thestart of 2000 was disbursed that year.

3.21 One project that has yet to become eligible is the electric system expansionproject (1113/OC-PN) that the Banks Board of Executive Directors approved on29 July 1998. The loan contract was signed on 18 November 2000. Three otherprojects in the pipeline are partially eligible and are still fulfilling the conditions

precedent to disbursement of some components. These are the Darin sustainabledevelopment program (1160/OC-PN), the poverty alleviation and communitydevelopment program (1226/OC-PN), and the National Environment Program(1222/OC-PN).

3.22 Throughout 2000 the Bank concentrated on loan portfolio execution. Undisbursedbalances of approved loans at year-end 2000 come to US$551 millionasubstantial amount, considering the countrys fiscal and budget constraints. The

expectation is that by the end of 2001 this figure will have come downsubstantially, to US$430 million-US$490 million. To that end, a series of actionsbeing proposed will focus on: (i) increasing disbursements; (ii) very closeportfolio supervision, and (iii) cancellation of loans whose implementationprogress is rated highly unsatisfactory.

3.23 In the 2000 budget the Panamanian government allocated US$73.5 million for the


37/61


strategy and other considerations, the Bank is proposing a strategy for support toPanama on two levels: (i) operational responses on the Banks part to help

enhance equity and make the economy more competitive, and (ii) priority itemsfor a policy dialogue. The operational responses will comprise the Banks 2000-2003 lending and technical-cooperation program (see prospective 2001-2003pipeline in Annex I and the matrix of possible coordinated activities in Annex II).Though the operating responses will take the form of concrete fundinginstruments in pursuit of the strategy, nonlending products (see Table III.4) andthe policy-dialogue agenda proposed in section C will help establish a commonframework for actions advocated by both the government and the Bank. Details of

the operating responseloans and technical cooperationare provided in AnnexII (summary matrix of interventions).

3.27 An important consideration here is that, though for the most part the governmentand IDB priority strategy focuses match completely, on some specific issuesSocial Agenda Dialogue, IDAAN, competitiveness, the rural economyacontinuing policy dialogue will be encouraged in order to maximize Bank supportfor the governments sector policies.

3.28 The Banks strategy for support to the Panamanian government in 2001-2003 willtentatively target four priority spheres:

A. A FRONTAL ATTACK ON POVERTY, AND EQUITY

E i S


38/61


and measures in the areas of health and nutrition, education, housing, socialprotection, labor markets, and science and technology. The DAS would provide a

forum for policy and technical discussions and idea-sharing, to reviewinternational experiences, policy tools geared to Panamas needs, and ways tobuild management capacity in the social sectors. In this context the governmentand the Bank could consider reviewing the loan portfolio and priorities for futureprograms with a view to reducing poverty and enhancing equity.

3.30 To help Panama realize its poverty-reduction and equity-enhancement goals theBank is proposing the following strategic action lines:

(i) To improve targeting: (a) reapportion public social spending amongprograms, geographic areas, and priority groups; (b) give the poorbroader access to education, employment training, health services, pipedwater, sanitation, electricity, and land tenure; (c) make social spendingmore transparent, relevant, and effective by involving communities andthe citizenry at large, civil society, and the private sector in poverty-reduction activities; and (d) pursue carefully targeted community

programs to combat malnutrition, building them into other health, localdevelopment, or social protection programs for vulnerable groups.

(ii) To achieve greater efficiency: (e) establish a quality control system byway of standards and continual program evaluation and monitoring;(f) develop cost-recovery arrangements to recoup the cost of servicesreceived by groups that can afford to pay for them; and (g) devise a

A I A


39/61


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

Area Actions under way Possible future focuses

A. Social

Education Supply of educational materials for poorstudents

New curricula Improving the operating efficiency of

the Ministry of Education

School rehabilitation Technology use in marginalized areas Foundations for school autonomy Demand-targeted subsidies University reform and modernization

Health Improvement of health services,targeted to the poor

Modernization of MINSA management

Broadening access to basic services Childcare and child nutrition Reproductive health Reform of hospital management

(MINSA and CSS)Housing Modernization of MIVI

Low-income housing subsidies

Institutional strengthening of MIVI Diversification of subsidy use

B. Social safety netSocial protection Targeting basic social infrastructure

funding to the poorest Basic housing for low-income families

Design of a comprehensive social safetynet

Expansion of the social security systemVulnerable groups Modernization of MINJUVE

Microfinance for women Child nutrition in the indigenous and

black population Programs for at-risk youth Protection of ethnic groups

C. ProductiveLabor market Realignment of the job training system

Pilot training programs

School to work education and

training systems Government capacity for labor-marketregulation and labor-market policymanagement

Science andtechnology

SME information centers Business modernization and

technological innovation

Strengthening the national innovationsystem

Science and mathematics teachingRural poverty Modernization of agricultural

production Promotion of productive activities Agricultural modernization II (titling)

Executive Summary


40/61


private stakeholders to assess Panamas current competitiveness, through one ormore 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, pilotprograms in priority areas identified in stage 1 (for instance, costs of doingbusiness, sensitive production and marketing chains, export promotion, supportfor SME productivity). This initiative would be supported by the new learningand innovation loan facility (fast-track approval and progressive definition ofobjectives).

3.38 Stage 3 (12-24 months): Preparation, approval, and implementation of aNationalCompetitiveness Program encompassing all sectors of the economy and issuesarrived at by consensus, from the national dialogue and preliminary outcomes ofthe pilot programs.

3.39 The aim of the systematic, gradual consensus-building approach the Bank isproposing is to lay solid foundations for a program to equip the Panamanian

economy to compete. This would unquestionably consolidate the countryscomparative advantages and spur faster and more sustainable growth that offersreal opportunities for private investment, employment, and permanent income forPanamanians.

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

Annex I A


41/61


(i) Panama City and Panama Bay sanitation (PN-0062); (ii) sustainabledevelopment of the Canal watershed (PN-0139); (iii) program for sustainable

management of the mining sector (PN-0114); and (iv) sustainable management ofcoastal areas (PN-n/n). The Bank also has identified seven technical-cooperationoperations that would have an impact on environmentally sustainabledevelopment (see Annexes I and II).

d. Institutional reforms to strengthen governance and improve

transparency

3.43 The Bank will give priority to charting acommon agenda with the authoritiesregarding municipal development, deepeningof modernization moves in the judicialsector, policies to curb corruption andenhance transparency in governmentadministration and open avenues for civil-society participation, particularly in social-

services management.

3.44 Operational response: The Bank proposes to support the Panamaniangovernment in devising and executing a slum rehabilitation program, starting outin the municipalities of Panama City, Coln, and David. The programs objectivewould be to help these three municipalities to design, implement, and fund anintegrated strategy to improve their poor neighborhoods, including basic

Enable governance and transparency:

Consolidate decentralization o

decision-making, make the workings o

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.

Executive Summary


42/61


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

3.48 PRIs support would focus on financially viable private projects to bolster legaland regulatory frameworks and thereby attract more private investment forinfrastructure. A sine qua non for the Banks financial support will be that thecountry maintain the public utilities regulatory framework (fortelecommunications, electricity, water and sanitation) developed in the late 1990s,which secures a place for private enterprise subject to rules of economicefficiency 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 Banks strategy for Panama in previous years, MIF support forthe private sector has focused on: (i) expanding private enterprise in the financialand public utilities sectors, strengthening systems to protect competition, andprivatizing reverted areas; (ii) labor sector reform; (iii) establishing disputeresolution mechanisms; and (iv) developing small businesses andmicroenterprises by giving them access to financial and business services in urban

and rural areas alike. Panama also is benefiting from a number of regionalprojects in three areas: (i) SME development through technical assistance,training, and capital investments; (ii) capital market harmonization, and (iii) labormarket modernization.

3.50 In the coming years, in line with the governments economic agenda, the MIF willtarget its assistance to high-value-added areas. Focuses relating to small business

Annex I-A


43/61

Annex I APage 37 of 3

7. Lending program scenarios

3.53 Estimates based on pre-2000 programming exercises put Panamas fundingrequirement at US$201 million for 2000-2002, an average of US$67 million ayear. This figure takes into account several factors: (i) the countrys mountingborrowings in 1997-1999, which increased by US$217 million a year on average;(ii) the Banks sizable undisbursed portfolio in Panama at the end of 2002(US$551 million); and (iii) the governments announcement, as a strategypriority, of its plan to reduce its external debt in relative terms and look to its ownresources and domestic sources. With these premises in mind, two lending

scenarios are posited:

3.54 Base-case scenario: The first orbase-case (tendential) scenario assumes a neutralfiscal stance on the governments part (no improvement in its primary savingposition), with tendential real GDP growth of 4% in 2001-2003 and a moderateBank lending program of US$56 million in approvals in 2001. The operationspipeline from 2002 forward stands at US$414 million.

3.55 Alternative scenario: The alternative (high) scenario assumes enhanced savingcapacity (higher fiscal revenues, reduction and reapportionment of currentexpenditure), with real GDP growth of 5% in 2001-2003, a lending program ofUS$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 thegovernments fiscal capacity to generate budget funds needed to execute a larger

Executive Summary


44/61


Table III.3 Lending scenarios

Base case Alternative

SCENARIOS 2000 2001 2002e 2003e 2000 2001 2002e 2003e Real GDP (% growth) 2.7 4.0 4.0 4.0 2.7 5.0 5.0 5.0

Approvals 3.3 56.0 135.0 150.0 3.3 91.0 150.0 150.0

Disbursements 60.7 109.4 50.8 68.6 60.7 109.4 55.7 76.0

Amortization 27.0 34.1 47.7 62.4 27.0 34.1 47.7 62.4

Net flow 33.7 75.3 3.1 6.2 33.7 75.3 8.0 13.5

Interest and fees 42.2 62.3 68.6 74.0 42.2 62.3 69.1 75.1

Cash flow -14.6 13.0 -65.5 -67.9 -14.6 13.0 -61.1 -61.5

EXPOSURE RATIOS

Percentage of portfolio (18%) 1.46% 1.50% 1.49% 1.52% 1.46% 1.50% 1.50% 1.55% IDB DS/exports GNFS (8%)6 2.2% 2.7% 3.1% 3.4% 2.2% 2.7% 3.1% 3.5%

IDB DS/public DS (30%) 11.3% 13.4% 10.0% 20.5% 11.3% 13.4% 9.9% 20.3%

IDB DS/multilateral DS 43.5% 43.8% 51.4% 57.0% 43.5% 43.8% 51.5% 57.6%

Multilat. DS/total DS (50%) 25.9% 30.6% 19.2% 35.2% 25.9% 30.6% 19.2% 35.2%

DS: Debt service; e: Estimated.

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 debtservice to the Bank (payments of principal, interest, and fees). IDB disbursementlevels would be more moderate than in recent years.

3.60 Country exposure: With the lending volumes proposed in the two scenariosPanama would remain within the country exposure guidelines in documentGN-1835. In the base-case scenario, IDB debt service as a percentage of

Annex I-A


45/61

Page 39 of 3

the government to guide its policies by the perception that a country is better off ifit 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, theuncertainty will dissipate and the government will adopt nondistorting policiesthat will benefit the nation.

3.63 A second risk is the Panamanian governments limited capacity, at present, togenerate public saving to fund social-sector outlays. This means that attentionneeds to be given to express policies to grow the economy and adjust the fiscal

accounts. The aim of Panamas IMF standby arrangement for 2001-2002 is, inprinciple, continuing fiscal equilibrium. An efficient, neutral tax reform that doesnot hurt low-income families would mitigate the risk of insufficient public savingand prepare the way for funding pressing social investments.

3.64 The third risk is the limited institutional capacity for implementing social policiesand other public-sector programs. To mitigate this risk, actions taken thus far toimprove budget management (SIAFPA) and modernize public agencies, together

with training for government employees to manage programs and resources, needto be amplified. This is particularly true for the management of Panamas largeportfolio of Bank-funded projects. COF/CPN will be called on to play an activepart in this ongoing training and institutional modernization process, this beingone of the lessons learned from the loan portfolio performance in 1994-2000.

9. Monitoring the strategy and performance benchmarks

Executive Summary


46/61

yPage 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 Panamas sovereign and corporate debtsecurities in 2003, and an increase in private investment as a percentage of

GDP.

c. Consolidation of sustainable growth (objective: lay the foundation forsustainable development, particularly in the Canal watershed, mining andforest areas, and marine and coastal resources): Performance will be

assessed by reference to the increase in public investment in environmentalprograms.

d. Institutional reforms to strengthen governance and increase transparency(objective: decentralize decision-making, make the workings of governmenttransparent, and offer investors greater legal certainty): Performance will beverified 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 Banks proposed operational support strategy it isrecommended that there be a dialogue on priority policies to help tackle Panamaspreeminent development challenges. Such a dialogue would be shaped around aseries of nonlending products such as conferences, workshops, and studies, as

Annex I-A


47/61

Page 41 of 3

1. A frontal attack on poverty

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

3.70 Decentralization and targeting of social spending: In the short term the socialprograms operated by MINSA, MINEDU, MINJUVE and the Social InvestmentFund 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 acompetitive economy, the workings of Panamas labor market needs specialattention, focusing strongly on unemployment. A policy dialogue onunemployment and job markets should address the following areas: the labor codeand prospective rewrites; education and training systems, including the school-workforce transition; the governments capacity to regulate the labor market and

manage labor-market policy; and systems to help workers move quickly into thejob market. Devising and implementing new labor policies will help form humancapital and prepare skilled workers, make it easier for workers to move betweenjobs, put marginalized segments of society (women, young people, and the verypoor, for instance) to work efficiently and treat them more equitably, and help theeconomy grow and become more competitive. This is consistent with thegovernments proposed 2000-2004 social strategy.

Executive Summary


48/61

Page 42 of 8

small and medium-scale farmers through the transition to an open economy alsoneeds to be reviewed. The specific aims of the proposed FECI subsidies should be

set out clearly and the Funds administration substantially revamped.

3.76 Pension reform: Panama needs to overhaul and efficiently administer its social-security disability, old age and survivor benefit (IVM) system. The object of suchreforms is threefold: (i) keep the system from becoming decapitalized in themedium term; (ii) reduce government transfers (subsidies) to the IVM plan, whichcut into the monies available for other social investments; and (iii) guaranteeretirees 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 theIVM system.

3. Consolidation of the legal, regulatory, and institutional framework for

sustainable growth

3.77 Environmental policy framework: Regulations under the 1998 Environment Actneed to be finalized, as does the institutional strengthening of ANAM and

implementation of the national environmental assessment and audit system. TheNational Environment Program (PAN) should be given sufficient budget fundingto see it proceed without interruption.

3.78 Sustainability of the water and sanitation sector: The Bank supports the adoptionof policies to help modernize this sector and thereby take sustainable, good-quality, efficient, and affordable water and sanitation services to the majority of

Annex I-AP 43 f 3


49/61

Page 43 of 3

1. PANAMA: 2000 2003 lending program

2. BASE-CASE SCENARIO

III. Num

ber

Title Amount(*) Status

1. Priority operations

2000 3.3

PN-0134 SUPPORT IMPL. SCIENCE, TECH. ANDINNOVATION CENTER (PINO)

3.3 Approved

2001 56.0

PN-0076 HEALTH SECTOR PROGRAM PHASE 1 35.0 Identification

PN-0148 PRONAT NATIONAL LAND ADMINISTRATIONPROGRAM 21.0 Identification

Pipeline

PN-0062 PANAMA CITY SANITATION 100.0 Identification

PN-0103 MODERNIZATION MINISTRY EXTERNALAFFAIRS

4.0 Identification

Executive SummaryP 44 f 8


50/61

Page 44 of 8

PN-n/n SCIENCE AND TECHNOLOGY II 10.0 Identification

(*) In millions of U.S. dollars.PINO: Learning and Innovation loan.



51/61

Page 45 of 3

2. PANAMA: 2000 2003 lending program

3. ALTERNATIVE SCENARIO

V. Num

ber

Title Amt (*) Status

1. Priority operations

2000 3.3

PN-0134 SUPPORT IMPL. SCIENCE, TECH. ANDINNOVATION CENTER (PINO)

3.3 Approved

2001 91.0

PN-0076 HEALTH SECTOR PROGRAM PHASE I 35.0 IdentificationPN-0139 SUSTAINABLE DEVT PANAMA CANALWATERSHED

10.0 Identification

PN-0142 FOREIGN TRADE PROGRAM 5.0 Identification

PN-0145 COMPETITIVENESS PROGRAM (PINO) 10.0 Identification

PN-0147 FISCAL MANAGEMENT II 10.0 Identification

PN-0148 PRONAT NATIONAL LAND ADMINISTR. 21.0 Identification

Annex I-BPage 46 of 3


52/61

Page 46 of 3

PN-n/n SUSTAINABLE MANAGEMENT COASTALAREAS

10.0 Identification

PN-n/n SCIENCE AND TECHNOLOGY II 10.0 Identification

(*) In millions of U.S. dollars.PINO: Learning and Innovation loan.


53/61

2. PANAMA

3. TENTATIVE TECHNICAL COOPERATION AND MIF PROGRAM

4. At 9 April 2001

Operation

No.Title Division

Amount

(US$000)

Technical cooperation operationsTC0104005 Municipal strengthening and development Panama City EN2 70.0

TC0104004

Improving the quality of higher education: Innovationand dialogue

SO2 20.0

TC0103028

Basic health services and nutrition for the indigenouscommunity

SO2 350.0

TC0103025

Decentralization and municipal development EN2 150.0

TC0101060

Analysis of inequity in the education sector SO2 200.0

TC0011012

Environmental auditing EN2 100.0

TC0011011

Development strategy Province of Bocas del Toro EN2 450.0

- 2 -


54/61

6TC9806110 Business technology acceleration in Panama SC2 1,200.0

Total MIF (only amounts identified) 4,100.0

Total tentative projects 7,721.3


55/61

Annex II

THEBANK S STRATEGY FOR2001-2003: SUMMARY MATRIX Page1 of 5

PANAMANIANGOVT. AGENDA

IDB OPERATIONS OPERATIONS OF OTHER AGENCIES PERFORMANCE BENCHMARKS

1. Support for a frontal attack on poverty

Help boost social andhuman capital invest-ment and make it more

efficient. The Bankwould supportsubstantive social-sector reforms,

sustained increases incapital spending, andrationalization ofcurrent expenditure.

Enhance equity and extendthe benefits of progress tomarginalized Panamanians

by targeting policies andprograms to them. Reduce unemployment

via economic growththat creates jobs.

Reduceunderemployment.

Promote education andvocational training.

Strengthen the ruraleconomy.

Lower the childmalnutrition rate.

Improve coverage andquality of health, waterand sanitation services.

Strengthen low-incomehousing programs.

Create programs toprotect vulnerablegroups (indigenouspeople, children, theelderly, persons withdisabilities).

Foster genuine civil-society participation insocial-programmanagement.

Lower consumer prices.

Pipeline of possible pr ojects:

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 t echnical-cooperation pr ojects:

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 povertyLoans 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 programTechnical-cooperation projects in execution:

ATN/JF-6339-PN: Health sector reform ATN/SC-6440-PN: Support for Fundacin 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

Mltiples Juan XXIII

Projects:

IBRD: Health sector reform pilot program (US$4.3million)

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$20million)

Korea (Bilateral): Funding of scholarships anddonations of equipment to schools in poorneighborhoods

Japan (Bilateral): Poverty reduction (nutrition, jobcreation, promoting rural development)

Japan (Bilateral): School rehabilitation(US$128,000)

China/Taiwan (Bilateral): Financing of a SocialInvestment Fund (US$30 million)

European Commission: Support for NationalTuberculosis Control Program (US$197,000)

European Commission: Promotion of equalopportunities (US$9.8 million)

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

Social investment and spending as ashare of the national budget rises to55% by 2002.

Percentage of families living inpoverty 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 apercentage of the total increases from14% in 2000 to 17% i n 2002.


56/61

Annex II




2. Promote economic reforms to spur competitiveness and growthSupport a program offurther economicreforms to make thecountry more competi-

tive and achievesustained real GDPgrowth of at least 5%annually from 2001,improve Panamascountry risk rating and

boost privateinvestment.

Institute tariff, financial,technology support oradministrative measures todevelop agricultural and

industrial enterprises andsmall businesses. Bring in a wage policy

based on productivityincreases.

Offer incentives forprivate-sectorproduction.

Enlarge the market,supporting regionaltrade integration, andsupport free-tradeeconomic activities.

Strengthen domesticproduction of labor-intensive exports.

Do away with tradedistortions and barriers.

Lift import duties onindustrial raw materials.

Acquire and adoptbusiness technologyand training.

Support and expeditesmall business.

Develop domesticproduction and existingresources in recentlyreverted areas.

Keep electricity costsdown, tapping viableresource alternativessuch as coal and naturalgas.


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 IIPipeline of possible t echnical-cooperation pr ojects:

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: Supp ort for VICOMEX/FTAALoans 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 Antn 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 Programhas been designed by 2002.

Central American Free TradeAgreement is signed by 2002.

An export development agency iscreated by 2002.

Foreign direct investment is up 10% by2002.

Howard Air Force Base and FortSherman 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.


57/61

Annex II




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 buscompanies

ATN/SF-7335-PN: Road rehabilitation and administration


58/61

Annex II




3. Consolidate the regulatory, legal, and institutional framework for sustainable growth

Help lay foundationsfor environmentallysustainable develop-

ment, particularly in theCanal Basin, miningareas and forests, andmarine and coastalresources, bysupporting governmentmoves to establish aregulatory, legal, andinstitutional framework,and an increase inenvironmental invest-ments by at least threepercentage points ofGDP (nominal)between 2001 and2003.

Supplement and closelymonitor productionactivities by reference

to the EnvironmentAct.


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 areasPipeline of possible t echnical-cooperation pr ojects:

TC9911150: Water resources management plan TC9911139: Workshop: Water and sanitation sector TC9911035: Involving business in clean production (MIF) TC9806483: Canal watershed management and

protection

TC0011012: Environmental auditing TC0011011: Development strategy province of Bocas del

Toro

TC0011010: Coastal and marine resources managementOperations in execution:

PN0116: Sustainable development of Darin PN0122: National Environment ProgramTechnical-cooperation projects in execution:

ATN/JF-6079-PN: Prep. Darin sustainable developmentprogram

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

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 UNDP: Environmental protection and sustainable

development Japan (Bilateral): Rural water supply systems Japan (Bilateral): Environmental management Spain (Bilateral): Sustainable development

Regulations under the EnvironmentAct are issued in 2001.

A program for sustainable managementof the Canal watershed is devised by2002.

Mining Code reforms are finished by2002.

National Network of EnvironmentUnits is in place in each Panamanianministry and agency by 2002.

An institutional and financialsustainability plan for the water andsanitation sector is devised by 2001.


59/61

Annex II




4. Contribute to institutional reforms to strengthen governance and enhance transparency

Strengthen governancethrough funding toassist in the review andstrengthening ofgovernment adminis-tration; make theworkings of govern-ment more efficient andtransparent.

Decentralizegovernment services;State bureaucracystreamlining programsand training.

Streamline adminis-trative procedures forcustomer service.

Revamp legislativepolicies and rules forthe AdministrativeCareer Service Ac

Idb - Country Strategy With Panama

Documents

Transcript of Idb - Country Strategy With Panama