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Document of The World Bank FOR OFFICIAL USE ONLY Report No. 46289-PA INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$lOO MILLION TO THE REPUBLIC OF PANAMA FOR A SECOND COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT DEVELOPMENT POLICY LOAN November 14,2008 Poverty Reduction and Economic Management 1 Operations Services Central America Country Management Unit Latin America and Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript of World Bankdocuments.worldbank.org/curated/en/716191468147307234/pdf/462… · Document of The World...
Document o f The World Bank
FOR OFFICIAL USE ONLY
Report No. 46289-PA
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
FOR A
PROPOSED LOAN
IN THE AMOUNT OF US$lOO MILLION
TO THE
REPUBLIC OF PANAMA
FOR A
SECOND COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT DEVELOPMENT POLICY LOAN
November 14,2008
Poverty Reduction and Economic Management 1 Operations Services Central America Country Management Unit Latin America and Caribbean Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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PANAMA - GOVERNMENT FISCAL YEAR January 1 - December 3 1
CURRENCY EQUIVALENTS (Exchange Rate Effective as o f November 5,2008)
Currency Unit Balboa US$l .oo B./1 .OO
Weights and Measures Metric System
ABBREVIATION AND ACRONYMS
ACPDC BNP National Bank o f Panama CAS Country Assistance Strategy CCT Conditional Cash Transfer CEA Country Environmental Analysis CEM/ICA Country Economic Memorandum/Investment Climate Assessment CFAA/CPAR Country Financial Accountability and Procurement Assessment Report CFZ Colon Free Zone CGR Office o f the Controller General o f the Republic CICYT Inter-Ministerial Council of Science, Technology and Innovation CNC National Competitiveness Center COBE System o f Public Works Control CONCYT Commission o f Science, Technology and Innovation CPS Country Partnership Strategy css Social Security Institute (Caja de Seguro Social) DCP Public Credit Directorate DGCP Public Procurement Directorate DGA General Directorate o f Customs DGI General Revenue Directorate DPL Development Policy Loan EGP Electronic Government Procurement FRL Fiscal Responsibility Law FTA Free Trade Agreement
Authority for Consumer Protection and the Defense o f Competition
" FY Fiscal Year GDP Gross Domestic Product GNI Gross National Income GOP Government o f Panama IBRD IADB Inter-American Development Bank IFARHU Human Resources Institute IFC International Finance Corporation IMF International Monetary Fund INADEH National Training Institute I S N Interim Strategy Note LAC Latin America Region LDP Letter o f Development Policy MDGs Millennium Development Goals
International Bank for Reconstruction and Development
FOR OFFICIAL USE ONLY
MEF MINEDUC Ministry o f Education NFPS Non-Financial Public Sector OECD
Ministry o f Economy and Finance
Organization for Economic Cooperation and Development PanamaCompra Public e-Procurement system PBL Policy Based Loan PCA Panama Canal Authoritv PCN Project Concept Note PEFA PFIDPL PFM Public Financial Management PIN Public Information Notices PPTAL QAG Quality Assurance Group ROC Regional Operations Committee ROSC R&D Research and Development SDR Special Drawing Rights SENACYT Secretariat for Science, Technology and Innovation SIAFPA Integrated financial management system SIGUEME Document Tracking and Management System SINIP National System of Public Investment SPIG Presidential Secretariat for Government Innovation UNDP United Nations Development Program
Public Expenditure and Financial Accountability Public Finance and Institutional Development Policy Loan
Public Policy Technical Assistance Loan
Report on the Observance o f Standards and Codes
Vice President: Pamela Cox Country Director: Laura Frigenti Sector Directors:
Task Team Leaders: Marcel0 Giugale and Stefan Koeberle Aquiles Almansi and Manuel Vargas
This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.
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PANAMA
I . I1 .
I11 .
I V .
V . V I .
SECOND COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT DEVELOPMENT POLICY LOAN
TABLE OF CONTENTS
INTRODUCTION ......................................................................................................... 1 COUNTRY CONTEXT ................................................................................................ 2
A . Recent Economic Developments in Panama ...................................................... 2
THE GOVERNMENT’S PROGRAM ........................................................................ 6 A . The Competitiveness Program ............................................................................ 8
BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ................................. 21 A . Link to the Country Partnership Strategy ........................................................... 21 B . Collaboration with the IMF. Other Bank Operations. and Other Donors .......... -22 C . Lessons Learned ................................................................................................. 22 D . Analytical Underpinnings ................................................................................... 24
THE PROPOSED OPERATION ................................................................................ 24 A . Operation Description ........................................................................................ -24
OPERATION IMPLEMENTATION ......................................................................... 33 A . Poverty and Social Impacts ................................................................................ 33 B . Environmental Aspects ...................................................................................... -33 C . Implementation. Monitoring and Evaluation.. ................................................... -33 D . Fiduciary Aspects ............................................................................................... 34 E . Disbursements ..................................................................................................... 34 F . Risks and Risk Mitigation ................................................................................... 34
B . Macroeconomic Outlook and Debt Sustainability .............................................. 4
B . The Public Financial Management Program ....................................................... 16
ANNEXES
ANNEX 2 . MATRIX OF POLICY ACTIONS AND EXPECTED OUTCOMES .................... 40 ANNEX 3 . FUND RELATIONS NOTE ....................................................................................... 44 ANNEX 4 . THE PUBLIC POLICY REFORM TECHNICAL ASSISTANCE PROJECT ..... 47 ANNEX 5 . OPERATIONS PORFOLIO (IBRD/IDA AND GRANTS) ...................................... 48 ANNEX 6 . IFC COMMITTED AND DISBURSED OUTSTANDING INVESTMENT PORTFOLIO .................................................................................................................................... 49 ANNEX 7 . PANAMA AT A GLANCE ........................................................................................ 50
ANNEX 1 . LETTER OF DEVELOPMENT POLICY ................................................................ 36
The Panama Second Competitiveness and Public Financial Management DPL was prepared by an IBRD team consisting o f Aquiles Almansi. Pablo Fajnzylber. Enrique Fanta. Ruben Gomez. Lars Moller. Helena Ramos. Manuel Vargas. Josio N . Veiga Malta. and Antonio Velandia . The team i s grateful to the Government o f Panama for the close collaboration during loan preparation . Todd Crawford. Ulrich Lachler and Humberto Lopez supported the team with internal quality oversight . The peer reviewers are Albert0 Leyton and Esperanza I Lasagabaster .
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LOAN AND PROGRAM SUMMARY
PANAMA
SECOND COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT DEVELOPMENT POLICY LOAN
Borrower Implementing Agency Financing Data
Operation Type
Main Policy Areas
Key Outcome Indicators
Republic o f Panama Ministry o f Economy and Finance IBRD Loan Terms: Fixed Spread Loan (FSL) in US Dollars with level repayments o f principal commitment-linked, payable in 25 years, including a 2 year grace period. Front-end Fee i s o f 0.25 percent on principal amount, payable not later than 60 days after the Effectiveness Date. Amount: US$ 100 Mill ion The proposed Loan i s the second in a programmatic series o f two DPLs. I t comprises a single tranche to be disbursed upon loan effectiveness. This DPL series focuses on actions aimed at: 0 Promoting broad-based growth through the enhancement o f
private sector competitiveness, by reducing bureaucratic red tape, improving training policies, and increasing investments in innovation. Consolidating fiscal sustainability, transparency and efficiency through the modernization o f public financial management systems for revenue, debt, fiscal reporting, and public procurement.
Competitiveness: Reduced bureaucratic red tape for private businesses: 0 Consolidation and elimination o f more than 200 administrative
processes, together with digitalization o f existing processes to 90 on-line transactions.
Improved worker training policies: Increase in number o f workers trained from 42,000 in 2006 to 200,000 in 2008.
Increased investments in innovation: Increase in R&D expenditures per population, from $1 1.76 in 2005 to $20 in 2008 (excluding the Smithsonian Institution).
Public Financial Management: Improved revenue and debt policy and management: Improved debt sustainability, as measured by the reduction in total consolidated NFPS debt to 54% of GDP or less (from 65.9% in 2004).
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Program Development Objectives and Contribution to CPS
Risks and Risk Mitigation
Operation ID Number
Enhanced fiscal transparency and financial management governance: Reduced payment arrears, as measured by reduction in the average No. o f days to process payments to providers, to at most 90 days (from 175 days in 2004).
Improved expenditure efficiency and transparency through public procurement: 0 Cost savings o f at least 10% against market prices in key items
(computer equipment, vehicles and office supplies) procured through framework contracts.
Note: The full l i s t o f outcome indicators can be found in Annex 2. The D P L program supports staged progress towards medium-term program outcomes related to two CPS objectives: promoting broad- based economic growth by means o f measures designed to enhance Panama’s competitiveness, and establishing modern public financial management systems and institutions (Table 2 highlights the CPS areas directly connected to the D P L Program). The medium-term outlook i s not completely without risks, although macroeconomic vulnerabilities in Panama have fallen in recent years, as growth has accelerated, debt has declined as a share o f GDP, and fiscal balances have improved. As elaborated in section V I (part F), the proposed DPL program takes into account potential risks in three areas: economic, political and institutional strategy.
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INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED
SECOND COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT DEVELOPMENT POLICY LOAN To PANAMA
I. INTRODUCTION
1. This program document describes a single-tranche Second Competitiveness and Public Financial Management Development Policy Loan (Second C&PFM DPL) to the Republic o f Panama for US$lOO mi l l ion equivalent. This operation i s being proposed as the second in the programmatic series that continues to support the Government’s program to consolidate fiscal discipline and increase public sector transparency and efficiency, as means for -inter alia- enhancing private sector competitiveness. These two sets o f objectives are mutually reinforcing, as public financial management systems that contribute to fiscal discipline, operational efficiency and strategic allocation o f resources are critical elements o f public sector effectiveness, which in turn can positively influence the country’s enabling environment for private sector development. Moreover, both are critical for achieving progress toward the GOP’s overarching objective o f increasing and sustaining broad-based economic growth in Panama, which would in turn contribute to continued fiscal stability.
2 . The proposed D P L was originally planned as a US$75 mi l l ion operation. However, in view o f the recent turbulence in global financial markets and the potential impact that i t may have on Panama, the authorities have requested the Bank to increase it by US$25 mi l l ion to US$lOO.
3 , The DPL series specifically supports competitiveness enhancing reforms to reduce bureaucratic red tape and modernize training and innovation policies, as well as reforms aimed at modernizing public financial management by increasing fiscal transparency and improving public procurement, revenue and debt management systems. The efficient and effective operation o f these systems i s critical for improving both the delivery o f public services and the competitiveness o f the private sector, a fact that underlines the interconnections between the two areas on which the D P L series focuses.
4. The proposed D P L would continue support toward the medium-term objectives included in: (i) the Public Finance and Institutional DPL (PFIDPL, FY07) for US$60 mi l l ion equivalent, which was approved as a stand-alone operation in the context o f the Interim Strategy Note for the Republic of Panama (ISN, FY06-07), and (ii) the First Competitiveness and Public Finance Management DPL (First C&PFM, FY08) for US$75 mi l l ion equivalent, which was approved in the context o f the Country Partnership Strategy for the Republic of Panama (CPS, FY08-10). As agreed with the Government, the D P L series supports outcomes that could be attained by December 3 1, 2008, reflecting achievements through the final full fiscal year o f the current administration.
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5 , The DPL series i s an important component o f the Bank lending program to support Government designated programs under two objectives o f the CPS : promoting broad-based economic growth and establishing modern public financial management systems and institutions. These objectives are aligned with the Strategic Vision of Economic & Employment Development Toward 2009 articulated by the Torrijos Administration, which emphasizes fiscal discipline, transparency and greater efficiency as crucial elements for accelerating export-led economic growth, creating more jobs and lowering poverty by one- fifth during i t s term o f office. In the two areas o f the CPS supported through the DPL series, the Government and the Bank have established strong policy dialogue supported by analytical work. Moreover, under the CPS, the Bank wil l continue providing technical assistance and capacity building support complementary to the DPL series.
11. COUNTRY CONTEXT
6. Panama’s GDP has been growing very fast in recent years, averaging 8.6 percent during 2004-2007. Even though Panama’s medium te rm macroeconomic framework i s in the process o f adjusting to the current global turbulence, the outlook remains positive. Indeed, the average annual growth over the next four years was expected to exceed 7 percent before the start o f the present financial turbulence, thus giving substantial space to accommodate potential shocks. To a large extent, Panama i s reaping the benefits o f a broad-based reform agenda that was started in the second half o f the 1 9 9 0 ~ ~ when trade barriers and price controls were largely dismantled, a far-reaching privatization program and anti-trust legislation were introduced, and fiscal reforms coupled to debt-reduction allowed Panama to regain access to international financial markets. The current Government recaptured the momentum on this structural reform agenda and has placed a renewed emphasis on fiscal sustainability, transparency and improved efficiency, while at the same time exploiting the advantages o f Panama’s open trade and investment regime. In particular, the Government has succeeded in moving ahead with a project to expand the Panama Canal and i s currently exploring a range o f other large infrastructure projects, including a possible regional oil refinery. The expanded canal, expected to be operational in 2014, would provide a supply-driven growth impulse.
7. The challenge facing Panama, however, i s not just one o f weathering the current global financial crisis as a means o f preserving rapid growth, but also o f ensuring that economic benefits are more broadly shared. Indeed, Panama’s economic development has been characterized by a high degree o f inequality. Growth has traditionally benefited mainly the capital-intensive service sectors concentrated geographically in the Panama and Colon provinces, while generating l i t t le economic opportunity for less skilled members o f society. The increased fiscal transfers from an expanded canal offer a unique opportunity to address this challenge in the medium-term.
A. Recent Economic Developments in Panama
8. Panama’s economic growth has been accelerating during the past four years, peaking at a record rate o f 11.5 percent in 2007, and the rate o f unemployment has declined sharply. The economic boom appears to have been triggered by rapid improvements in the external environment, coupled with an improved fiscal stance and a strengthened banking system, both o f which raised investor confidence and facilitated the transmission of positive external shocks onto the domestic economy. From a sector
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perspective, GDP growth has been mainly driven by the tertiary or services sectors, which accounted for 80 percent o f the total increase in GDP since 2002. Within the service sector, the main engines o f growth have been transport & communications, hotels & restaurants, and commerce. The recovery o f financial intermediation also has been making a major contribution since 2005. The secondary sector accounted for most o f the remaining increase in GDP since 2002 (16 percent), mainly on account o f a booming construction industry. In contrast, agriculture (excluding fisheries) and manufacturing, which remain among the most protected sectors in Panama, have not exhibited anywhere near the same dynamism being shown by the service sectors.
Table 1: Panama Medium-Term Macroeconomic Framework
(in % o f GDP, unless noted otherwise) 2004 2005 2006 2007 2008 2009 2010 2011 ...................... Actual _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __-____________ Projection __________-_-_____
GDP growth rate (%) 7.5 7.2 8.7 II 5 8.3 5 5 6 6 7 5
Inflation rate (%, average) 0.5 2.9 2.5 4.2 10.0 4 2 3 5 3 5
Gross Domestic Investment 20.3 18.4 19.5 22.8 25.5 26.6 29.1 27.4
National Savings 12.7 13.4 16.2 15.6 14.9 16.1 16.5 16.6
Open Unemployment (YO) 9.7 8.1 6.8 5.3 4.7 n a. n.a. n.a.
Revenues (excluding PCA) 21 1 22.3 24.9 27.9 25.9 24.9 24 7 24 5
Expenditure (excluding PCA) 26.0 24.9 24 4 24.4 25.2 25.6 25.4 25.3
Overall Balance, excl. PCA -4 9 -2 6 0.5 3.5 0.7 -0.7 -0.7 -0.8
Primary Balance, excl. PCA -0.7 1.8 4.8 6 9 3 7 2 3 1 8 1.3
Merchandise Exports (fob)* 8.1 8.3 8.5 8.2 7 6 6 9 6 7 6.7
Merchandise Imports (fob)* 19.6 20.5 22.0 26.8 29.1 28.0 29.4 26.9
Current Account Balance -7.5 -4.9 -3.2 -7.2 -10.6 -10.5 -12.6 -10 8
Public Debt (excl. PCA)** 62.2 58.3 52.6 45.7 37.9 35.4 32.7 30 1 *Excludes the Col6n Free Zone. **Net of CSS and Fiduciary Fund debt owed by the Central Government. Source: IMF and WB calculations.
9. Panama’s CPI inflation has accelerated rapidly in 2007 and 2008, reaching levels not seen since the o i l price shocks o f the 1970s and 1980s. Year-on-year CPI inflation reached 9.6 percent in June 2008 driven by food and commodity prices, a strong economic performance, and the weak dollar. Food prices (accounting for a third o f the consumer basket) rose by 15.1 percent in June 2008 compared to 2.4 percent in January 2007. Higher food prices are expected to spill-over into higher prices in the non-tradable sector. To address the higher cost o f living the government has taken several measures, including: (i) reducing the income tax on low-income earners; (ii) increasing interest mortgage subsidies and broadening eligibility o f subsidized mortgages; (iii) direct government import and distribution o f staple food items at cost; (iv) lowering import tariffs on selected food and intermediate items; and (v) supporting the agricultural sector through the facilitation o f imports o f agricultural inputs.
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10. Public finances have strengthened remarkably in recent years as revenues surged and spending was kept under control. The nonfinancial public sector balance, excluding PCA, turned from a deficit o f about 5 percent o f GDP in 2004 into a surplus o f 3.5 percent o f GDP in 2007, despite a major increase o f capital spending in 2007. The tax reform package adopted by the Torrijos Administration in 2005, including the parametric changes contained in the pension reform, i s the most important contributing factor. The recent increases in the revenue-to-GDP ratio are also explained by higher fiscal transfers from the PCA, more effective tax collection efforts and some extraordinary events.’ The positive fiscal results along with the strong economy have been reflected in a significant reduction in the public debt from a peak o f 62.2 percent o f GDP in 2004 to 45.7 percent o f GDP in 2007. The improved fiscal position contributed to a Standard & Poors upgrade o f Panama’s long-term foreign and local currency issuer default ratings from ‘“’BB’’ to “BB+”, while Fitch affirmed Panama’s rating at “BB+” and revised the rating outlook to Positive.
1 1. Panama has traditionally run a current account deficit, which reached 8.0 percent in 2007 after a temporary decline in the two previous years. Export services related to the canal, ports, tourism and re-exports i s a sizeable positive item in the current account, although s t i l l not great enough to offset the trade deficit. The current account deficit i s financed by foreign direct investment - mainly in the financial, commerce and housing sectors - averaging more than 9 percent o f GDP annually since 2004.
B. Macroeconomic Outlook and Debt Sustainability
12. Before the recent global financial developments, economic growth was projected to decelerate to 7.8 percent in 2009 in light o f the ongoing slowdown in the U S economy - Panama’s most important trading partner and the prime user o f the canal. In the medium- term, growth was expected to converge towards i t s trend level o f 7.5 percent. The canal expansion project would give a boost to investment activity, especially in the 2009-1 1 period, including complementary investments in the ports and telecoms sectors. This effect would have been countered by higher o i l prices and a likely slowdown in the real estate boom.
13. These projections have been updated as a result o f the global financial crisis. There are two main channels through which the current global environment can affect Panama. First, as in other parts o f the world the Panamanian financial sector may suffer the global credit squeeze, even though so far no evidence along this front has emerged. Second, the expected global slow down will likely reduce traffic in the Canal and hence affect economic activity and government revenues. On the other hand, the revised scenario incorporates lower o i l prices projections which are expected to have a positive impact on Panama. With these elements in mind, growth i s now projected at 5.5 percent in 2009 and 6.5 percent in 2010 before converging towards 7.5 percent in 201 1. On the fiscal front, the expected public deficit o f .3 percent o f GDP for 2009 i s now expected to slightly increase to .7 percent and remain well below 1 percent over 20 10-201 1, as ependitures will be kept
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Extraordinary events explain approximately one percentage point o f the increase in the revenue-to- GDP ratio in 2006 and 2007, including capital gains tax generated from the HSBC acquisition o f a local bank in 2006 as well as the tender for the duty f ree concession at the Tocumen Airport in 2007.
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in check in adherence to the recently approved Social and Fiscal Responsibility Law, which limits the overall public deficit to one percent o f GDP.
14. Panama’s financial market does not appear to have been significantly affected by the global financial turbulence so far. Moreover, the authorities have reacted to the global situation by stepping up their monitoring o f banks’ asset quality and liquidity ratios.
Box A. Panama’s Financial Sector
Panama’s financial sector i s an important o f f shore financial and business center, with financial intermediation dominated by the banking sector - the largest in Central America. As o f mid 2007, there were 2 state-owned banks, 41 general license banks, 34 international license banks and 1 1 licensed representation- offices. The consolidated assets o f the banking system represent around 250 percent o f Panama’s GDP. Recent mergers and acquisitions have increased the role o f international conglomerates, such as HSBC, and the share of bank assets owned by foreign banks i s close to 60 percent. The net loan portfolio to assets ratio stands at 60 percent. Domestic capital markets are comparable in terms o f market capitalization to countries of similar size. Financial intermediation services played an important role in Panama’s recent economic boom, contributing around 9 percent of 2007 GDP.
The banking system soundness indicators are strong, despite some liquidity ratio fluctuations due to the rapid consumer and housing lending growth. Liquidity i s central as there i s no formal lender o f last resort or deposit insurance. Asset quality i s relatively high with non-performing loans constituting 1.4 percent o f total loans and a ratio o f provision to nonperforming loans o f around 130 percent (March 2008). The rapid credit growth (with net credit growing around 18 percent in 2007) could be o f concern as it may mask problems in the banks’ credit origination, monitoring and risk appraisal. The recent consolidation o f the regional and domestic banking market also raises exposure to cross-border supervisory concerns, which may require stronger collaboration and information sharing among supervisors. Bank supervision exhibits a high degree o f compliance with the Basel Core Principles reflecting generally satisfactory implementation combined with an adequate legal and regulatory foundation (according to the 2006 FSSRA). Improvements are needed on non-bank financial supervision, the institutional framework for insurance and securities and anti-money laundering practices.
The exposure of Panama’s financial sector to troubled US institutions i s limited, amounting to less than 0.1 percent o f total banking sector assets according to the Banking Superintendence. The exposure to US sub- prime mortgages i s also low. The deep and well-capitalized financial system mitigates the risk o f lending growth being derailed by global market turmoil as most bank lending i s financed by deposits. Nevertheless, the unpredictability o f the global financial crisis continues to carry substantial risks.
The ongoing construction boom, another important growth driver, may represent a potential source o f domestically generated risk. Construction activity, growing at 33 percent in the second quarter of 2008, i s driven by a range o f public and private infrastructure investments, including the canal expansion project. An important component, however, i s the booming real estate market driven partly by foreign demand from retirees seeking a second home. Housing bubbles are hard to predict, but the bursting o f such bubbles in the US, UK, Spain and elsewhere, raises the spotlight on Panama. A mitigating factor o f a potential price fall and its wider financial sector implications i s the institutional arrangement whereby mortgage payments are deducted directly from the pay check o f formal sector workers.
The Panamanian authorities recently made a request to conduct a Financial Sector Assessment Program (FSAP).
15. Food price inflation i s expected to decline as global food prices level o f f after 2008. Headline inflation will decline only gradually due to wage pressures arising from a tight labor market and the impact o f food inflation on non-tradable goods. The current account deficit will widen due to capital and other imports related to the canal expansion, but will
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contract again once this project nears i t s end. Public sector revenue collection will remain strong over the projection period, but will nevertheless decline relative to prior years which benefited from some extraordinary inflows.
16. A debt sustainability analysis carried out in early 2006 under fairly conservative medium-term growth projections had concluded that Panama’s consolidated public debt, which stood at 58.3 percent o f GDP at the end o f 2005 (down from 62.2 percent in 2004), would be sustainable (in the sense o f placing the public debt ratio on a steadily declining trajectory) as long as the government i s able to maintain a primary fiscal surplus o f 1.6 percent o f GDP. Under the current macroeconomic settings, with growth well above the 4 percent used in baseline simulations and with the primary surplus well above 1 percent, Panama’s debt ratios are projected to continue declining at much faster rates than previously anticipated. The limits on public deficits and debt introduced by the Social Fiscal Responsibility Law are expected to further strengthen debt sustainability.
17. These positive views are shared by IMF staff, whose latest projections (Article IV consultation report presented to the Board on July, 28th, 2008) suggest that public debt would fall to 32.7 percent o f GDP in 2010 and to 26.4 ercent by 2013. Even when using the most comprehensive measure o f public debt: the IMF concludes that debt sustainability i s not a concern. Thus, given Panama’s positive growth outlook and the strong indications that i t s public debt i s on a steadily declining trajectory, the country’s overall macroeconomic framework can be considered adequate for the purposes o f the proposed operation and conducive to achieving i t s objectives.
111. THE GOVERNMENT’S PROGRAM
18. President Torrijos assumed office in September 2004 with a strong political mandate that gave his party’s coalition a majority in the Legislative Assembly. In early 2005, the GOP launched its ambitious medium-term development strategy (Strategic Vision), which gives renewed attention to poverty reduction and reinvigorates the structural reform program initiated during the 1990s. This comprehensive development program encompasses policies aimed at reducing poverty and improving the income distribution, fostering economic growth and employment creation, reorganizing public finances, developing human capital, and modernizing the state.
19. In the context o f this strategic vision, the GOP has taken some major steps to strengthen the overall foundations for sustained broad-based economic growth, including the passage during 2005 o f the fiscal reform package and the politically difficult pension reform, together with measures to increase fiscal transparency, improve budget management and modernize public procurement. The above reforms were supported by the Bank through the PFIDPL and the First C&PFM D P L and can be considered important steps toward the objectives o f restoring fiscal sustainability and further improving public financial management. The proposed D P L would support the GOP’s continued progress towards these objectives. The principal issues and government plans with respect to these areas are discussed further below in some depth as they form the background to the specific actions supported by the DPL series in the area o f public financial management.
A debt sustainability analysis o f total NFPS debt (including PCA debt) was conducted by the IMF. 2
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20. Another important Government action, toward the objective o f increasing broad- based economic growth, was the negotiation o f a free trade agreement with the United States3 To maximize the benefits o f this and other FTAs, diversify Panama’s sources o f growth and increase productivity, actions will be needed to address key constraints to private sector competitiveness. In this context, the GOP i s implementing a so-called “complementary agenda” o f reforms, aimed at enhancing competitiveness and taking advantage o f the opportunities offered by Panama’s increasing degree o f trade in teg ra t i~n .~ This policy agenda includes actions aimed at improving the efficiency and transparency o f the State as a facilitator o f private investments by means o f reducing bureaucratic red tape, improving human capital through vocational and entrepreneurship training programs and promoting increases in private sector productivity by fostering technology adoption and innovation. The proposed DPL would continue to support progress toward these competitiveness-enhancing objectives, which are critical for increasing the productivity o f Panamanian businesses. The main issues in each o f these areas and the corresponding Government plans are described further below, as background for the specific actions supported by this D P L series in the area o f competitiveness enhancing policies.
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Box B. GOP Strategic Vision of Economic and Employment Development Toward 2009 T h e Strategic Vision i s compr ised of five pillars:
Pillar I - Reduce Poverty and Income Inequality encompasses four dimensions: stimulate growth and expand employment opportunities, especially for youth; build h u m a n capital o f the poor; pioneer a flagship condit ional cash transfer program (Red de Opor&ittmihdes) w h i c h brings together efforts to improve education, health, nutrition and basic infrastructure access, targeting the poorest areas; and invest in productive activities in rura l areas, inc lud ing land tenure security
Pillar I1 - Foster Economic Growth and Employment focuses on efforts to open the economy to international compet i t ion and p r o m o t e export-led growth, inc lud ing through free trade agreements, development o f expor t infrastructure (roads, ports, etc.), removal o f distortions and unfa i r sector incentives, and targeted complementary investments in Canal expansion, irrigation, and urban transport.
Pillar I11 - Reform Public Finance includes actions to reduce publ ic debt, achieve fiscal sustainability and modernize pub l i c f inancial management, inc lud ing fiscal and pension reform, measures to improve the accuracy and transparency o f national accounting systems, modern izat ion o f procurement and tax administration, and improvements in budget management.
Pillar IV - Develop H u m a n Capital seeks to improve the competit iveness o f Panama’s labor force and reduce inequality through investments in education and health. Init iatives wlll support national curr icu lum reform, expanded coverage o f preschool and secondary education, effective worker training, preventative and occupational health programs, and expanded health, water, and sanitation infrastructure in rura l and indigenous areas.
Pillar V - Reform and Modernize the State supports activities to help the publ ic sector and publ ic institutions become better fachtators o f countrywide development. Measures wdl b e taken to reduce corruption, improve private part icipation in infrastructure, increase compet i t ion in the electricity and transDort sectors. and foster decentralization o f service-deliverv.
The agreement was signed in June 2007 but i s s t i l l to be ratif ied by the U.S. Congress. In September 2006, through the Cabinet Decree 37, the GOP created the Council o f Ministers for
the Complementary Agenda and Competitiveness (“Consejo de Ministros para la Agenda Complementaria y la Competitividad”) to develop policies and programs for improving Panama’s competitiveness in order to take advantage o f opportunities derived from increased market access. The council i s composed o f the Ministers o f Trade and Industry, Economy and Finance, Agriculture, Foreign Affairs and Labor.
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2 1. The GOP i s taking other major steps in the context o f i t s Strategic Vision to foster broad-based growth but they are not elaborated here in detail as they l i e beyond the scope o f the proposed DPL series. They include, notably, the expansion o f the Panama Canal to accommodate larger ships, and the launch in 2006 o f a conditional cash transfer (CCT) program, “Red de Oportunidades.” The Canal expansion project, which received overwhelming support in an October 2006 referendum, should help strengthen Panama’s comparative advantage in the traditionally dynamic service sectors associated with the Canal. In parallel, the GOP i s seeking to increase private participation in various major infrastructure projects in the ports, urban transport, sewerage, and power sectors. As for the CCT program, supported by the Bank and the IADB through investment operations, it i s expected to improve the targeting o f social assistance, increase the poverty impact o f social expenditures and allow more Panamanians to benefit from the country’s favorable growth performance. Finally, in the context o f the trade-complementary and competitiveness enhancing reform agenda, the GOP i s working with the IADB in the modernization o f the agencies in charge o f implementing international trade agreements, as well as on the design o f temporary financing and technical assistance mechanisms to support the adjustment o f private enterprises directly affected by FTAs.
22. The D P L series was prepared in close dialogue with Panamanian authorities and in l ine with the CPS. The series supports specific components o f the Government program, which i s the outcome o f national democratic policymaking processes. Indeed, in addition to democratic elections -which indicate public preferences for the policy platforms o f parties and candidates- the GOP makes use o f various means o f consultation to develop reforms and reach agreement. Recent examples include the multi-party negotiations undertaken to conclude the pension reform, the national referendum on the Panama Canal and the National Dialogue for Development.’ The consultations done for the CPS, o f which the D P L series i s an integral part, stressed messages contained in the DPL program, particularly: (i) the importance o f promoting broad-based economic growth and competitiveness as a way to reduce poverty and promote employment creation; (ii) the importance o f strengthening the effectiveness o f key public institutions, including supporting reforms and initiatives to promote the establishment o f more modern and transparent public financial management systems; and (iii) the role played by improvements in the efficiency and transparency o f Government spending both in enhancing the delivery o f social services and in improving the investment climate.
A. The Competitiveness Program
23. Panama’s main challenges in enhancing the competitiveness o f i t s private sector are related to the improvement o f public sector governance and regulatory frameworks, and to the human capital and innovation policy agenda. These are the areas that offer the largest potential payoffs in terms o f increasing the productivity o f Panamanian businesses by means o f closing the country’s gaps with respect to international best practices. Indeed, Panama’s shortcomings with respect to other emerging countries appear larger in those two
The main goal o f this national dialogue - the “Concertacidn Nacional Para e l Desarollo” - has 5
been that o f prioritizing the use of additional revenues to be generated by the expansion o f the Panama Canal, in the context of the overarching objective of eradicating poverty in Panama. The process, facilitated by UNDP, has had the participation o f representatives from Government and a wide range o f civil society and private sector organizations. The Government’s programs on Economic Growth and Competitiveness, Fiscal Stability, and Institutional Strengthening were among the focal areas discussed by the working groups.
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areas, relative to those o f infrastructure and access to finance, in which Panama’s performance i s closer to that o f OECD countries than to the average for the Latin America Region (LAC). The World Economic Forum (WEF), for example, rates the quality o f Panama’s infrastructure above the average for LAC. Moreover, domestic credit to the private sector as a fraction o f GDP i s about three times as high in Panama than in the rest o f Latin America. In contrast, the World Bank’s Doing Business reports indicate that in Panama the procedures to comply with tax and labor regulations and those needed to enforce contracts are more burdensome, while levels o f regulatory non-compliance and informality are higher than in the rest o f L A C and the OECD. Moreover, according to WEF and Transparency International the incidence o f corruption in Panama i s similar to that found in the rest o f Latin America, which in turn lags considerably behind the OECD.
24. The GOP, however, i s addressing the above challenges through a number o f policy actions. In the area o f tax administration, the Government expects to increase tax performance by means o f improved filing, audit and collection procedures, which should translate into an increased enforcement o f tax regulations but also facilitate tax compliance. These reforms are described in more detail further below in the context o f the Government’s public sector financial management program supported by this DPL. With regard to the impact o f labor regulations on labor market outcomes, as described below the GOP i s emphasizing actions aimed at improving the ski l ls o f the labor force, so as to increase labor productivity and contribute to reducing the incidence o f informal employment. In the area o f contract enforcement, with support from the IADB, UNDP and bilateral aid agencies, the GOP i s implementing an ambitious program o f reform o f the justice system aimed at increasing i t s independence, transparency and efficiency. This judicial reform program, coupled to other policy actions to increase public sector transparency and efficiency by modernizing the Government’s financial management system i s expected to help reduce the incidence o f corruption and create further incentives for regulatory compliance.
25. In order to boost private sector competitiveness i t i s also critical that Panama advances i t s international standing in the areas o f human capital and innovation. Especially outside the modern service sector, Panamanian f i rms tend to invest less in workers’ training and in innovation than do their counterparts from other emerging countries. Moreover, in comparison with the rest o f Latin America, Panama currently invests less in research and development (R&D) activities as a percent o f GDP, and employs fewer researchers as a share o f the population. Reducing these gaps i s important both for facilitating the diversification o f Panama’s sources o f growth in the wake o f the country’s FTAs and for taking advantage o f new investment opportunities associated with the Canal expansion project and other significant infrastructure projects in stages o f planning or execution.
26. In particular, the continued development o f non-traditional exports i s already requiring increased investments in technology adoption and innovation. These are needed to promote increases in productivity and competitiveness, taking advantage o f Panama’s climatic conditions and i t s expanded access to international markets. Similarly, improvements in the skills o f the labor force are a necessity to support the rapid growth o f the tourism and construction sectors. Finally, an expanded pool o f highly qualified workers i s critical to continue attracting foreign direct investment into service activities with higher
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technological content, which benefit from the transportation and telecommunications infrastructure available in the Canal area.
27. The GOP has recognized these challenges and, as described further below, it has begun implementing ambitious reform programs to modernize both i ts worker training and innovation policies. In the case o f training, the ongoing reforms are expected to allow for the supply o f training services to respond more closely to current and emerging needs in the labor market, particularly in light o f the canal expansion and other investment projects in the pipeline. In the area o f innovation, the Government has introduced efficient and transparent mechanisms to finance, through matching grant funds, both public and private investments in R&D and innovation. It has also expanded scholarship programs aimed at creating a critical mass o f local researchers. The modernization o f the technological infrastructure o f IFARHU (Human Resources Institute) - under the responsibility o f the SPIG - i s a project which objective i s to improve the effectiveness and efficiency o f the activities being executed in relation with scholarships, grants, and loans.
28. The Government program in the areas o f training and innovation should help Panama close i t s current gaps in education and technology and boost the long-term productivity o f i t s private sector. Moreover, these policies should be complementary to the GOP’s efforts to improve the coverage and quality o f education. Indeed, improvements in the formal educational system will probably take time to have a notable effect on the schooling o f the labor force, and will likely have a limited impact on current generations o f Panamanian workers. Moreover, improvements in the quality o f tertiary education will be directly linked to the development o f the country’s own scientific and technological capacity, and to the development o f a critical mass o f well trained researchers and university professors. The approval on December 14th, 2007 o f Law #56 establishing a National Research System i s a significant step forward in achieving the intended goals.
29. As noted above, a primary focus o f the GOP’s competitiveness enhancing policy agenda i s i t s program to reduce the time and cost required for completing various bureaucratic procedures, both for facilitating private sector development and for increasing public sector transparency and efficiency. This program i s an integral part o f the Government’s agenda to continue developing electronic government - e.g. including through reforms in public procurement and tax administration, as described below. I t should be highlighted that through the Panama Tramita portal and l i n k s , the GOP has been able to reduce as o f August 2008, 241 bureaucratic transactions that were either consolidated or eliminated altogether, with a positive impact o f time and costs for business and individuals.
30. The GOP i s placing a large emphasis on measures aimed at eliminating excessive bureaucratic red tape as an important avenue for increasing the transparency and efficiency o f the public sector, as well as for reducing transaction costs and increasing the competitiveness o f private companies. In particular, the GOP i s streamlining Government procedures and has been putting on-line those transactions that are most critical for the
Examples include the establishment in Panama o f regional headquarters o f multinational corporations, which the Government i s promoting through a streamlined tax, migration and regulatory framework, and the development o f new value-added services linked to the country’s transformation into a regional logistics hub, ranging from shipyards to aircraft maintenance centers.
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enterprise sector and the population in general. The GOP’s program to reduce excessive bureaucratic red tape has been led by the “Secretariat o f the Presidency for Governmental Innovation” (SPIG), with technical support provided by the Governments of Chile and Korea, as well as through the Bank’s Public Policy Reform Technical Assistance project. As a f i rs t critical step, SPIG has prepared a detailed inventory o f bureaucratic procedures in all Government institutions, including detailed data on the requirements to be met by users, hours o f operation, costs, etc. In this context, a key action has been the launch, in May 2006, o f an internet portal - “Panama Tramita” - that provides all the above information. This portal has made significant progress aiming at becoming a digital one- stop shop for different transactional and informational interaction between government entities, private sector enterprises, and public in general.
3 1. In a second stage o f the reform process, SPIG i s gradually incorporating the option o f completing selected procedures on-line. By June 2008, “Panama Tramita” already allowed for completing 81 different types o f on-line transactions. In this respect, an important milestone was the passage o f Law 5 o f January 2007, which was implemented in July 2007 through the launch o f a new internet portal - “Panama Emprende” - that allows for the on-line registration o f most firms. This reform i s likely to place Panama among the countries with the most simplified and efficient procedures for starting new businesses. “Panamarket ”, an integrated system for management o f information and statistics related to foreign trade, i s another relevant project being developed b y SPIG. I t aims at being a one-stop digital window for entities/companies/individuals involved in foreign trade and to provide best public services for investors, exporters, and importers. I t will complement Panama Tramita and Panama Compra and i s being developed on the basis o f intensive consulting work done joint ly with Compite Panama.
32. I t i s important to note that in order to establish the administrative procedures to be prioritized during this reform process SPIG has performed consultations with various c iv i l society, private sector and government organizations represented at the National Competitiveness Center. A higher priority has been given to those procedures that are more frequently used and for which administrative improvements such as the elimination o f unnecessary steps or the possibility o f completing the corresponding transactions on-line, would be expected to have a larger impact on the enterprise sector or the general population. The issuance and certification o f “Paz y Salvo ”, the electronic access to forms needed for transactional processes, the information being published in the Gaceta Oficial, the on-line processing o f passports, the establishment o f companies, the participation o f bidding/offering process for the need o f the government, the on-line reporting o f suspicious activities related to the management o f public funds, and a status-tracking system for processes being dealt with by Contraloria General de la Republica among others, are the result o f those efforts.
33. I t i s worth noting that Panama already performs relatively well, in an international perspective, in terms o f the burdens created by excessive bureaucratic red tape. According to Doing Business 2009, Panama ranks 8th among 18 1 countries regarding ease o f trade. Maintaining excellence in this area i s seen as a priority for strengthening the country’s comparative advantages in internationally integrated service activities - e.g. linked to the Canal and Panama’s International Banking Center - for which l o w transaction costs are critical. In other words, by implementing among the most efficient procedures for registering new businesses and trading across borders, the GOP expects not only to
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increase public sector transparency and stimulate regulatory compliance, but also to further increase the country’s attractiveness as an international logistics hub and financial center.
34. There are important synergies between the GOP’s program to reduce red tape and i t s actions to foster the development o f electronic commerce. The latter i s important because it should contribute to increase domestic competition and thus promote private sector competitiveness. Synergies between the development o f electronic government and that o f electronic commerce are related to the fact that some o f the technical developments and regulatory changes needed to allow businesses to transact electronically with the Government can also facilitate on-line transactions between private parties. Most notably, establishing a modem regulatory framework to govern the use o f electronic signatures i s key both for facilitating on-line transactions involving government agencies - e.g. related to electronic procurement, online export and import procedures, etc. - and for fostering the development o f electronic commerce. In this respect, in consultations with various relevant stakeholders, including representatives o f the private sector, and with the cooperation o f the South Korean government, the GOP approved Law # 51 o f Firma Digital on July 22, 2008.
35. The GOP has recently made important efforts to modernize i t s policy and institutional framework in the area o f worker training. These reforms should contribute to Panama’s international competitiveness by upgrading the ski l ls o f the workforce and consequently increasing labor productivity. In particular, the new framework should allow the public and private supply o f training services to respond more closely to changing private sector and labor market needs. These include the expected increase in the demand for semi-skilled and skilled labor resulting from investments associated with the canal expansion project and the F T A with the U.S. There are several projects - both in analytical and execution stages - relevant to the achievement o f these goals, like a System o f Virtual Training and cooperation agreements with private sector entities such as SFERE (gastronomy, tourism, hotels), SERTV (audiovisual technology for film industry), COPA AIRLINES (airline industry), ODEBRECHT (construction industry), and others.
36. Through i t s Decree Law 8 o f February 2006, the Government set a new framework for promoting and strengthening the supply o f training services. Decree L a w 8 established that national training policies need to be formulated and implemented under the principles o f pertinence to the needs o f the private sector and the labor market, diversity o f public and private supply, efficiency, transparency and accountability. The Law also mentions the need to respect the principles o f equity and social inclusion, mandating the need for training policies to offer opportunities for workers and entrepreneurs at all levels and in all sectors o f the economy, with a special emphasis on those affected by poverty, unemployment and informality.
37. The new framework gave a leadership role to a restructured National Training Institute (“Instituto Nacional de Formacidn Professional y Capacitacidn para e l Desarrollo Humano,’’ INADEH), which was put in charge o f the design and implementation o f national training policies, and i s governed by a Board where the Government, employers and workers have equal representation. Some o f the key responsibilities attributed to INADEH are the implementation o f new systems for the evaluation and accreditation o f public and private providers, and for the certification o f workers participating in competency-based training. To fund the implementation o f the
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new training policy, the Government has consolidated all public training resources in a new National Fiduciary Training Fund, to be managed by INADEH. So far, INADEH’s overall budget has been increased from about $8 mi l l ion in 2005, to $10.5 mi l l ion in 2006, $88 mi l l ion in 2007, and $9lmi l l ion in 2008, with the bulk o f the increase allocated to the upgrading and rehabilitation o f infrastructure and equipment.
38. After the establishment o f INADEH’s tripartite governing Board and the appointment o f a General Director - who was confirmed unanimously by the National Assembly - a first key action was the launch, in October 2006, o f the National Plan o f Technical Training. This Plan i s aimed at providing short term training courses to 200,000 workers in selected priority areas which were determined on the basis o f public consultations, and include tourism, construction, agriculture, transport and other services. By December 2007, 182,723 workers had already been trained in the context o f this Plan, which represents a significant increase with respect to the 42,000 workers that were trained by INADEH during 2006. INADEH expects to have trained more that 200,000 workers by the end o f 2008.
39. In the context o f INADEH’s quality assurance program, the institution has already performed - as o f December 2007 - preliminary external evaluations o f 117 private training providers under the supervision o f the National Commission o f Quality Assurance which was created by Decree Law 8. INADEH has also launched a plan to re-design curricula and rehabilitate physical spaces in public sector training centers, keeping a critical role in the provision o f courses to the most disadvantaged segments o f the population.
40. With regard to the development o f a competency-based training system, INADEH i s collaborating with a bipartite non-governmental organization governed by labor and private sector representatives - the Labor Foundation (“Fundacion del Trabajo”). Building upon the experience developed by this Foundation through a pilot program financed by IADB, INADEH has completed the norms for the issuance o f competency standards for a total o f 23 certifications covering selected occupations from strategic sectors o f the economy - among others - tourism, construction, and agro-industry.
41, In order to fulfill i t s responsibilities under the framework created by Decree Law 8, INADEH has established various other partnerships with public and private sector organizations. With the National Canal Authority, for example, INADEH has signed an agreement to train workers for the Canal expansion project. In this context, 400 heavy machinery operators were trained and internationally certified. INADEH has also established a partnership with the National Competitiveness Center (CNC), to identify the most pressing private sector needs in the area o f training and create mechanisms to facilitate the labor market insertion o f training graduates. Finally, a key action taken by INADEH in 2007 i s the signing o f a cooperation agreement with the Ministry o f Education (MINEDUC) to establish mechanisms for better articulating Panama’s training and formal educational systems - e.g. to create better options for graduates o f training courses to reenter formal educational programs. In particular, INADEH’s National Plan of Technical Training i s being implemented to a large extent using MINEDUC’s secondary technical education centers. Moreover, INADEH has nearly completed investments for US$17.6 million in the improvement o f the infrastructure (fundamentally equipment)of those
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centers, to be used both for worker training and formal technical education programs. (See Box on INADEH’s projects related with training and capacity building projects.)’
42. In December 2005 the GOP issued i t s National Strategic Plan for the Development of Science, Technology and Innovation 2006-201 0, which was based on consultations, by means o f thematic and transversal working groups, with representatives from government, academia and the private sector. The Plan aims at accelerating productivity growth and enhancing competitiveness by increasing Panama’s relatively low investments in innovation and expanding the country’s human resources involved in research and development (R&D) activities. The Plan recognizes that the State has an important role to play in financing public investments in R&D - e.g. in universities and research centers - as these allow for developing human resources and a physical infrastructure that are critical for facilitating private sector investments in innovation, including those aimed at absorbing knowledge generated abroad which i s especially important for a small open economy such as Panama. The Plan also argues for an active role o f the State in co-financing private sector investments in innovation and promoting cooperative projects involving private f i r m s together with local or foreign research institutions.
43. Among the most critical actions contemplated in the Plan i s the expansion o f matching grant funds to finance R&D and private sector innovation projects, and o f , scholarship programs aimed at increasing the number o f local researchers. The Plan emphasizes the use o f transparent technical evaluation mechanisms for selecting R&D and innovation projects subject to public financing. Similarly, merit based mechanisms are used for selecting the beneficiaries o f scholarship programs. The proposed matching grants for R&D and innovation are similar to successful programs implemented in Chile, Mexico and Costa Rica, as well as in other regions o f the world - e.g. Finland. * 44. Another key aspect o f the Plan i s the creation o f a National Research System which establishes monetary incentives aimed at strengthening the country’s principal research centers and at increasing the number and the quality o f professionals dedicated to research and development activities. On 14th December 2007, the Law #56 was approved, establishing the National Research System (Sistema de Investigacion Nacional), later regulated by SENACYT. The mechanisms to promote research activities that are incorporated in the legislation are similar to those already implemented in Argentina, Chile, Colombia, Mexico and Brazil. The funds to be destined to the new system would be allocated using transparent technical evaluation mechanisms similar to those used for selecting the R&D and innovation projects financed through matching grants. Complementing the above actions and with the objective o f strengthening Panama’s human resources for R&D, the Plan also includes efforts to attract top Panamanian and foreign researchers to the country by means o f offering temporary research grants, as well as a program to improve the teaching o f sciences in schools, in cooperation with the
The new technical training and educational facilities cover the areas o f construction, welding, 7
electricity and mechanics. The 22 centers in which they are located are distributed across Panama’s nine provinces.
The allocation o f public resources based on scientific merit as evaluated by expert peer reviewers was incorporated in the new Public Procurement Law (Law 22). Matching grant programs such as those proposed in the Plan have been considered best practices by World Bank analyses - e.g. Maloney and Peny
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(2005), pp. 36-37.
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Ministry o f Education. As o f the end o f 2008, the investment in R&D per capita i s expected to reach $8, up from a real $5.57 at the end o f 2005’.
Box C. Training and Capacity Building Projects at INADEH
Project Virtual Education / Training System
Training Cooperation Agreement
Agreement for Cooperation and Technical Assistance INADEH- SFERE (Gastronomy, Hotel, and Tourism) Agreement for Cooperation and Technical Assistance INADEH. SERTV
Agreement for Cooperation and Technical Assistance for professional and labor training
Agreement for Cooperation for professional and labor training INADEH-ODEBRECHT S.A. Information Technologies Excellence Center INDIA- PANAMA
Training of technical professional for Programs related with the Social Protection Network Specialized Center for the Management of the Environment
Special Projects related to Renewable Sources of Energy
Objectives/Expected Results To establish v i r t ua l educat ion to w i d e n the coverage o f t ra in ing a n d education, ensur ing access without geographic l imi tat ions. To enhance the qual i ty o f t ra in ing actions m a k i n g t h e m m o r e relevant, effective, a n d attractive. 100 connect ing points to in t ranet dl b e built dedicated to v i r t ua l courses, a n d there will b e m o r e than 400 v i r tua l t ra in ing programs. I t i s expected that 125,000 peop le working in produc t i ve sectors will b e trained annually. To t ra in Panamanian h u m a n resources that d b e requi red by the establ ishment in Panama o f a G l o b a l Service Center for H e w l e t t Packard in orde r to take advantage o f the jobs created by this Center, a n d to convey a n pos i t i ve message to comora t i ons a n d investors w o r l d w i d e abou t the business
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oppor tun i t ies available in Panama To enhance quant i tat ively a n d qual i tat ively INADEH’s o f fe r o f t ra in ing a n d capacity building. In cooperat ion with APATEL, AMP, a n d SFERE, 30,000 local peop le will b e t ra ined in 12 soecialtv areas in the n e x t 3 vears. To p r o m o t e the development o f h u m a n talent, generate exchanges a n d transfer o f know ledge a n d technology. Programs a n d projects for the technical t ra in ing o f professionals for c inematography a n d audiovisual industries. To p r o m o t e the deve lopmen t o f h u m a n talent a n d profess ional t ra in ing for the av ia t ion industry. INADEH will t ra in students ir classrooms a n d flight simulators, a n d COPA A I R L I N E S will b e in charge o f the f o r m a t i o n o f pi lots. To exchange a n d m o b i l i z e experts for the establ ishment o f capacity buildng prog rams for the const ruct ion indust ry .
To p r o v i d e qual i f ied l abo r needed for i n f o r m a t i o n a n d commun ica t i on technologies. T r a i n i n g o f teaching professionals, p r o v i s i o n o f equ ipmen t a n d tools, a n d insta l l capacity to t ra in m o r e t h a n 600 technical personnel p e r a n n u m during 2 years. To t ra in m o r e t h a n 20,000 peop le p e r a n n u m from the most vulnerable segments o f popu la t i on in o rde r to h e l p t h e m to i m p r o v e social, economic, a n d env i ronmen ta l aspects o f the i r c o m m u n i ties. To p r o v i d e technical t ra in ing to p roduc t i ve sectors a n d regulatory agencies in matters related to clean product ion, reforestat ion, a n d the p ro tec t i on a n d conservat ion o f the env i ronmen t To create, equip, a n d develop a Center for Renewable Energies (CER - Centro- de Energias Renovables) to p r o v i d e an answer tc the needs o f profess ional training in this sector, a n d to p r o m o t e de deve lopmen t renewable energy sources in Panama.
B o t h figures excluding the Smithsonian Institute. 9
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45. The implementation o f the Plan has been assigned to the National Secretariat for Science, Technology and Innovation (SENACYT), under the supervision o f an Inter- Ministerial Council. SENACYT established the Reglamento del Sistema de Investigacion Nacional in order to regulate the application o f the law creating the National Research System. To enable SENACYT to execute i t s responsibilities accordingly, the GOP has significantly increased the budget allocation for SENACYT’s activities, from about $1 M. to $14 M between 2005 and 2007. This support from GOP to SENACYT’s activities i s continuing and 2008 budget allocation i s $22 M (a 57% increase from the previous year). As o f 18 July 2008, approximately 87% o f the yearly budget has been executed and/or committed. For specific R&D and Innovation activities, the 2008 budget has assigned $10,637,000. SENACYT funded R&D and Innovations projects with matching grants for $5,723,000 in 2007, and $3,514,000 in the first semester o f 2008.
46. Given that investments in science and technology have a long maturation process and since SENACYT’s matching grant and scholarship programs were introduced fairly recently, i t i s too early to assess the impact o f these programs. However, SENACYT estimates that most, if not all, the projects supported under the innovation program will generate technological innovations in the form o f new products, new services, or significant improvements in existing products or services. Nine (9) projects on Innovation and 24 projects on R&D have been completed as o f June 2008. These have generated 13 Research Articles, 4 Chapter books, 4 registered/patented products, (and 1 non-registered), 12 pieces o f “grey” literature and/or non-certified products, 9 thesis, and 36 research results for diffusioddistribution purposes.
B. The Public Financial Management Program
47. As noted earlier, addressing challenges in public financial management (PFM) will help to enhance the environment for investment and business development. It wil l also contribute to sustaining fiscal discipline and increasing the impact o f public spending. To support that endeavor, the World Bank and the Inter-American Development Bank recently completed a Country Financial Accountability and Procurement Assessment Report (CFAAKPAR, FY07), which looked into the performance o f P F M systems (see Box D),
48. Two pillars (reform o f public finance and modernization o f the State) o f the GOP’s Strategic Vision lay out the key areas o f P F M strengthening and transparency. The Government’s program to regain fiscal stability consists, among other measures, o f (i) the rationalization o f public expenditures, including avoiding unnecessary expenses, with transparent, effective and efficient public procurement and contracting mechanisms, (ii) tax reform geared to capturing more resources through a fairer tax structure and a more effective tax administration; (iii) improved management o f the budgetary system geared to achieve more productive investments, (iv) provision o f accurate fiscal information through transparent accounting standards and responsible management o f accounts payable. The State reform and modernization area includes actions in various fronts, including (i) ensuring transparency and eradicating corruption from the public sector, and (ii) redesigning the government’s functions by eliminating obsolete activities, simplifying and reducing bureaucratic dealings, and modernizing administration through improved staff professional training.
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49. The CFAA/CPAR provides a comprehensive view o f the status o f public financial management systems and institutions in Panama. The following paragraphs, in turn, present information on selected aspects o f the GOP’s reform program that are directly related to the proposed DPL operation.
Box D. Public Financial Management The performance of public financial management (PFM) systems including public procurement i s a critical factor for fiscal discipline, strategic allocation, operational efficiency and transparency in use o f public finds. The Bank’s 2007 Country Financial Accountability and Procurement Assessment Report (CFAAKPAR) concludes that the PFM system in Panama possesses a number o f strengths that contribute to fiscal discipline control, such as legal powers to contain budgeted expenditures, timely monitoring of budget execution data and cash flows, centralization of revenues, and adequate debt management. However, as implied by the Government strategy, certain key institutional issues require and are also now getting attention.
With respect to the fiscally sustainable strategic allocation o f resources, the initiatives underway to develop a medium-term budget framework should continue, with particular emphasis on the operational and transparent reconciliation o f the “top-down’’ fiscal framework and the “bottom-up” budgeting process (i.e,, costed strategic plans with aligned investment programs), and on better control o f in-year budget modifications to enhance the credibility o f the original budget as the main tool for policy implementation.
In terms o f operational efficiency, government procurement could be optimized under the framework o f a comprehensive public procurement strategy comprising, among others, cost reduction strategies (price benchmarking, consolidation for economies o f scale) and more efficient procedures (including basic tools such as standard documents, manuals and guidelines). The Government i s actively moving in that direction with the aid o f a recently approved modem legal procurement framework. On the other hand, transactional controls (both ex-ante fiscal control and the entities’ own procedures) could be streamlined and applied on the basis o f risk management considerations, and complemented by strengthening external audit capacity. The Office o f the Controller’s General (CGR) i s paying increasing attention to modernization o f ex-ante and ex-post controls as central pieces to i ts multi-annual strategic plan. The Ministry of Finance, in turn, i s strengthening treasury and information systems to reduce payment arrears.
Concrete actions have been taken recently to enhance transparency o f public finances, such as the increase in information that i s made publicly available and the legal protection given to rights o f access to that information. These are good foundations to continue improving public financial information, with a view to reaching convergence with international practice, in areas such as tax and payment arrears, quality o f financial statements, and coverage of financial audits. Progress has also been made with the operation o f the electronic procurement system (Panamacompra), which, under the adoption o f a strategic plan to complete its development and implementation, will help ensure a smooth transition to an electronic public procurement marketplace
Consolidating fiscal reform through improved revenue and debt policy and management
50. As noted earlier, the fiscal package implemented in 2005 with the approval o f the Fiscal Equity Law (Law 6, February 2005) and i t s implementation rules (October 2005), contributed -along with other key factors- to relevant outcomes, such as generating fiscal surpluses and reducing the consolidated public debt. The fiscal correction helped to set the ground for other medium-term efforts on the administrative side, both for revenue and debt management,
5 1. Tax administration. During this decade, MEF’s General Revenue Directorate (DGI) has increasingly enhanced the operation of tax information systems with a view o f facilitating taxpayer compliance and assessment, objectives that aim at both reducing private sector transaction costs and incrementing efficiency in the collection o f government revenues. As a result o f these efforts, in 2007 the fraction o f income tax declarations
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presented on-line increased to 19 percent for persons (up from 6 percent the previous year) and 33 percent for f i r m s (up from 16 percent the year before). The overall number of tax returns increased 10.5 percent for persons and 5.75 percent for f i r m s in 2007. That same year, the estimated average time spent preparing, f i l ing and paying taxes, while s t i l l high, suffered a significant decrease from 560 to 482 hours, in accordance with the Doing Business report. Looking ahead, and building upon the early successful experiences with on-line tax declaration, the DGI intends to foster and increase on-line tax payments.
52. In the audit and investigation front, the DGI adopted a new tax audit strategy under an organized framework that differentiates selective, sectorial, and massive audit approaches in response to coverage and cost targets. The implementation tools and correlated sk i l ls for more effective audit planning and execution are being built, with early successes already shown by the new Massive Audit Unit program. DGI’s overall modernization program, supported by IADB, comprises other activities under six areas o f work: enhancing institutional planning and management, implementing effective controls to combat tax evasion, strengthening information technology resources, improving institutional communication policies, promoting improvements in staff training, taxpayer services, and operational capacity, and strengthening internal controls.
53. Debt management. Recent Bank analyses suggest that in general, and particularly in comparison with other developing countries, the debt management capacity o f MEF’s Public Credit Directorate (DCP) i s high. With a view o f sustaining progress made and expanding i t s potential, the DCP plans to develop in the short term a formal debt management strategy formulated on the basis o f ongoing detailed costhisk scenario analyses. The DCP has rightly approached development o f the strategy as a knowledge and learning process that will enhance i t s debt management ski l ls in the short term, as foundation for longer term outcomes in the reduction o f risks and costs o f public debt. The Bank i s providing technical support to the DCP on this critical process.
54. In another important process, the joint program between MEF and CGR to improve debt management governance arrangements i s at the final stages o f implementation. The most significant outcome o f the program, expected before the end o f 2008, will be the consolidation o f debt management responsibilities in the MEF with the transfer o f debt servicing - which i s s t i l l handled by the CGR.
Enhancing fiscal transparency and financial management governance
55. Fiscal transparency. Both the MEF and the CGR issue on a timely basis relevant fiscal information and make it available through public means such as the internet. In a healthy step towards the improvement o f governance arrangements, the function o f consolidating budget and accounting records was transferred effective January 2007 from the CGR (who audits the financial statements) to the MEF.
56. A significant step towards increased fiscal stability and transparency was taken with the recent approval o f the Social and Fiscal Responsibility Law (Law No. 34 o f June 5, 2008). The Law intends to ensure that fiscal accounts remain under control, establishing limits to annual deficits (one percent o f GDP) and debt (40 percent o f GDP after a period o f declining trajectory). The Law also contains important fiscal transparency provisions,
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such as clearer definitions to the components o f fiscal accounts, and the requirements to prepare and publish the medium-term fiscal framework, sector strategies, a multi-annual financial and public investment program, and periodic reports on compliance with the Law, including a specific report on accounts payable.
57. Work is underway in the MEF, together with the sector ministries, to review the balance o f payables in order to provide more accurate accumulated data for fiscal reporting. In the meantime, the MEF remains committed to restricting payment arrears, thus providing more certainty for the private sector in i t s business transactions with the State. Accordingly, the average number o f days to process payments to providers has been reduced significantly from 175 days in 2004 to 7 1 days in 2007.
58. Fiscal oversight. The CGR i s aware o f the constraints imposed by the ex-ante fiscal control system, and has accordingly issued guidelines and verification checklists, which aim at an orderly and consistent application o f the ex-ante reviews. The document tracking and management system (SIGUEME) intends to enhance accountability and performance through the measurement o f transaction times within CGR, such as payment endorsements. When the monthly systematic measurements started in September 2006, 68 percent o f documents were processed under 15 days. In April 2008, the same ratio was over 97 percent. Other worthy initiatives are the project o f electronic endorsements (e- Fiscaliza) to help reduce the physical transfer o f documentation, and the system o f public works control (COBE) to enhance monitoring o f c iv i l works contracts. In the medium term, i t would be advisable for the CGR to design a risk-based framework for a more selective and efficient application o f ex-ante fiscal controls.
59. The CGR also plans to strengthen i t s ex-post audit capacity by developing methodologies and building ski l ls for the application o f risk assessment and quality standards for audit planning and execution, in l ine with international good practice. This critical process i s being aided through the initial use o f computer-assisted audit techniques (CAATs), which have now been used in nine central government audit engagements involving databases with large numbers o f transactions. Also, the f i rst phase o f the Government Auditing Integrated System (SIAG), i.e. the planning module, was recently completed. However, the CGR s t i l l has to address certain hardware shortages to make more extensive use o f CAATs.
Improving expenditure efficiency and transparency through public procurement reform
60. Public procurement represents an important share o f total government expenditure and, accordingly, the GOP has prioritized procurement reform to streamline public administration and increase the efficiency o f public spending. Highlights under this administration include the development o f a procurement reform strategy, the implementation o f a new Procurement Law, reform o f the Public Procurement Directorate (DGCP), and strong support for e-procurement.
61. Regulatory framework. Under the Public Procurement Law (Law 22 o f June 27 2006) and the swift approval o f i t s Regulations (Executive Decree No. 366 o f December 28), several improvements were introduced: (i) elimination o f parallel frameworks applicable to several agencies (with exception o f the Social Security Institute (CSS), the
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Panama Canal Authority (ACP) and municipal entities), which in the past hampered the application o f a consistent public procurement system; (ii) creation o f an autonomous DGCP, as the entity responsible for the interpretation o f the law; and (iii) establishment o f several procedures and systems for promoting efficiency, economy and transparency. These procedures and systems included: (a) a framework for cost reduction strategies (consolidation for economies o f scale), (b) an independent administrative tribunal to review and decide on procurement-related protests and complains, and (c) a sound framework for the implementation o f an e-procurement system. The roll-out o f the new regulations was accompanied with a strong training program.
62. Electronic procurement. The new e-procurement system (PanamaCompra) was released in October 2005 with the objective o f promoting transparency and competition in public procurement. As o f early 2007, public procurement processes in all the central government and a number o f decentralized entities were already taking place through the system. As o f June 2008, more than 100,000 procurement acts were awarded through PanamaCompra (from 20,000 as o f June 2007) and the number o f participant bidders was o f 11,000 (from 4,000 as o f June 2007), thus benefiting the development o f enterprises o f different size and nature. I t i s also important to note that as o f 2008 the Bank's projects in Panama are also publishing their procurement notices in Panamacompra.
63. Cost savings. The DGCP has recently implemented innovative public procurement consolidation processes (framework contracts) for the provision o f common use goods and services for the central government that, in the past, were procured in a fragmented manner. Up to date, six framework contracts have been completed for procurement o f vehicles, tires/lubricants/batteries, computer equipment, internet service, office supplies, and cleaning service. According to information by the DGCP, significant savings have been achieved against market prices for most procured items, e.g. 36 percent in computer equipment, 14 percent in office supplies and 13 percent in vehicles. Another important saving i s in transaction cost, since now all entities access the framework catalogue for the cited items through a purchase order, instead o f conducting separate procurement processes. Finally, value added benefits include enhanced agreements for service and maintenance. Building upon the experience with the framework contracts, the DGCP i s advised to strengthen the cost-reduction strategies with market studies and price benchmarking.
64. Monitoring systems. The DGCP i s one o f the f i rst entities worldwide to adopt the Methodology for Assessment o f National Procurement Systems, developed by the OECD- DAC/World Bank Joint Venture on Procurement, as a monitoring and evaluation tool on national procurement reforms. The baseline indicators (BLIs) that deal with the formal and functional features o f the system were measured as o f June 2007, showing significant improvements with regards to the situation in 2004. An update o f the indicators will be undertaken by the end o f CY08, forming the basis o f an update to the national procurement strategy.
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IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
Pillar I1 P r o m o t e E c o n o m i c
Growth a n d E m p l o y m e n t
A. Link to the Country Partnership Strategy 65. The Country Partnership Strategy (CPS) aims to provide selective, demand driven technical, financial, analytical and capacity building assistance that deepens the Panama- Bank partnership in support to four objectives which are aligned with the pillars and goals o f Panama’s 2004-2009 Strategic Vision (Table 2). The program i s designed to focus on a limited number o f interrelated objectives and to make institutional capacity building a cross-cutting theme. In addition, the program anticipates that there will be a change in Government on July 1, 2009 and i s set up to help provide the new Government with information on policy issues as well as access to immediate financial and technical support to bridge until a new Partnership Strategy i s agreed.
Table 2: CPS Program Objectives and Select Areas of Action
I I I Pillar I11 and V Pillar IV
R e f o r m Pub l i c Finances D e v e l o p H u m a n a n d M o d e r n i z e the State Capi ta l
Pillar I Reduce Pover t y a n d
Inequal i ty
Reduce p o v e q , e.pehal& among rctralpoor and indigenous groups
Imprave health, nutrition, and education attainment ofthe poor
Promote broad-based economic Establish modern PFM growth ytems and institutions
Broad objectives to which the CPS will contribute
Selected Progran Pover t y monitoring & social assistance target ing/ admin is t ra tion Red de Oport‘tmidzdes p r o g r a m
L a n d tenure security a n d access for the r u r a l poor Compet i t iveness o f small-scale ru ra l producers, i nc lud ing access to ru ra l f inance Sustainable use o f the A t lan t i c Mesoamer ican
Reduce costs for doing business and improve competition through streamlined procedures and on- line processing Market-oriented worker training Technical innovation support M o r e ef f ic ient u r b a n t ranspor t in Panama City i n c l u d i n g mass transi t for the u r b a n poor Sustainable t o u r i s m outs ide Panama City
Cross-cuttin
for Support Fiscal sustainability Financial management systems and fiscal transparency Comprehensive public procurement reform Efficiency and effectiveness of fiscal oversight Debt management and debt market development T a x administration
Water a n d sani tat ion coverage for the r u r a l poor
integrated package o f basic heal th a n d nutrition services Qua l i t yand coverage o f preschool , basic a n d secondary educat ion
Supply o f
I
themes Bio log ica l Corridor
Strengthen inst t tuuonal capacity in G o v e r n m e n t enuties execuung Bank - fmanced pro jects to p l a n m o r e strategically through i m p r o v e d monitoring, to execute projects ef fecuvely through m o r e ef f ic ient p u b h c f inancial management systems a n d practlces a n d to strengthen p ro jec t sustainabhty.
P l a n for a n d engage through the na t i ona l G o v e r n m e n t t rans i t lon with analysis a n d of fers of f inancial a n d technical support.
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66. The proposed CPS lending envelope o f $390-465 mi l l ion over FY08-10 aims at a balanced program with about 40 to 50 percent o f new lending to be channeled through the programmatic Development Policy Loan series, and the remainder devoted to new poverty- focused investment projects and one new policy reform technical assistance loan. Each annual D P L supports staged progress in the form o f prior actions towards medium-term program outcomes related to two CPS objectives: promoting broad-based economic growth by means o f measures designed to enhance Panama’s competitiveness, and establishing modern public financial management systems and institutions (Table 2 highlights the CPS areas directly connected to the D P L Program).
B. Collaboration with the IMF, Other Bank Operations, and Other Donors
67. The Bank’s country team has been collaborating with the IMF in the review o f macroeconomic developments, (Annex 3), lo Reports on the Observance o f Standards and Codes (ROSC) and Bank analytical work. The proposed D P L program i s consistent with the IMF’s policy advice regarding fiscal responsibility, tax policy and administration, as well as competitiveness enhancing policies associated with improvements in the business climate.
68. Comprehensive multilateral aid for Panama has been provided by the IADB, the Bank and UNDP, followed by more modest and targeted support from bilateral aid agencies. In terms o f lending and technical assistance operations, the Bank and the IADB are supporting several complementary areas o f the GOP’s development strategy. Thus, the Bank’s Public Policy Reform Technical Assistance Project (Annex 4) and an IADB loan to Strengthen and Modernize Economic and Fiscal Management provide support to most o f the Government initiatives aiming to improve fiscal transparency and public financial management. In addition, the D P L series i s complementary to a policy-based loan (PBL) that was approved by the IADB in February 2006 and a technical cooperation loan approved by the IADB in July 2006 to support investment climate and trade-related reforms. In general, as part o f the consultations for preparation o f the CPS, the Bank and IADB went through the CPS program to identify areas o f potential synergy and agreed on collaboration approaches in both lending and non-lending activities.
C. Lessons Learned
69. The Implementation Completion and Results Report for the PFIDPL (ICR, December 2007) identifies three main lessons learned that remain relevant and are fully incorporated into the design o f the C&PFM D P L Program:
0 The PFIDPL successfully incorporated lessons from previous adjustment loans to Panama during the 1990s and best practice for well performing middle income countries. This included (a) emphasis on upfront action instead o f ex-post conditionality, and (b) support o f a reform program instead o f specific conditionality.
0 Ownership o f reform is critical for a successful outcome. This suggestion i s not novel, but nevertheless deserves emphasis as it i s well-illustrated by this operation. The
Panama i s on the standard 12-month Article I V consultation cycle. 10
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satisfactory outcome o f the PFIDPL i s to a large extent a consequence o f government- led initiatives. The legal and regulatory framework underpinning reform was initiated and developed by the Administration itself, with technical input from the Bank. As the ICR review demonstrated, the government made substantial progress even in areas that were not supervised by the Bank, such as pension reform. DPL objectives were strategically aligned with the government strategy (procurement reform i s a good example). In the public financial management components, the core D P L objectives were linked to the Government’s reform and strategy. Two critical entities, the MEF and CGR, shared the same objectives to strengthen fiscal transparency, and coordinated their complementary efforts to their pursuit.
0 Strong analytical underpinnings and l i n k s to Bank investment lending provide the foundation for a well-designed development policy operation. The key pieces o f Economic and Sector Work (ESW), the PER and the C F A A K P A R contributed not only to the design o f the PFIDPL, but also helped inform the reform efforts o f Government and supported a fruitful policy dialogue. In the area o f procurement reform, the tracking indicators o f the PFIDPL (as well as the programmatic series) relate to specific activities which will be financed under the TA loan.
70. The C&PFM D P L series builds on the policy dialogue and World Bank support to the Government fiscal consolidation and public financial management reform program initiated through the PFIDPL, thus expanding the engagement to medium-term programmatic development policy lending. Moreover, the new C&PFM D P L series broadens the scope by taking on important challenges to improve the country’s competitiveness. Finally, by aligning the DPL series with the government’s financial program, the programmatic approach intends to become a predictable l ow cost source o f financing for the Government.
I Box E. Good Practice Principles on DPLs I Principle 1: Reinforce Ownership. T h e opera t i on i s based on t h e GOP’s m e d i u m - t e r m deve lopmen t strategy, Strategic V i s i o n o f E c o n o m i c a n d E m p l o y m e n t D e v e l o p m e n t T o w a r d 2009, w h i c h results from Panama’s engagement o f democrat ic processes in the deve lopmen t of p u b l i c po l i cy . T h e DPL, as p a r t o f the CPS, responds to GOP requests to support specif ic p rog rams a n d areas w h i c h ref lect t he o u t c o m e o f na t i ona l p o l i c y m a k m g processes. T h e passage o f a f iscal r e f o r m package, a po l i t ica l ly d i f f i c u l t pens ion re fo rm, a n d m o d e r n legislat ion for p u b l i c p r o c u r e m e n t a n d f iscal responsibl l t ty, together with strategic act ions taken in the compet i t iveness a n d p u b l i c f inanc ia l management fronts (wh ich form the basis for the p rog rammat i c DPL), attest to the administrat ion’s good track r e c o r d o f po l i cy imp lemen ta t i on . T h e DPL p r o g r a m focuses on selected po l i cy areas that bene f i t from b r o a d support, w h i c h i s not to say i t i s e x e m p t from risks. Rsk mi t i ga t i ng measures have therefore b e e n ident i f ied. T h e process developed with the GOP to select the focused areas o f DPL support responds, in large part, t o the s t rong po l i cy d ia logue under taken recent ly a r o u n d extensive analyt ic work.
Principle 2: Agree up fronr with the government and other financial partners on a coordinated accountability framework. T h e Bank’s s u p p o r t i s summar i zed in a b r i e f a n d focused po l i cy matr ix , agreed with the GOP, w h i c h p rov ides the accountabi l i ty f r a m e w o r k for the operat ion. T h e DPL p r o g r a m i s cons is tent with IMF’s policy advice, a n d i t supplements a n d re in forces the Bank’s Pub l i c P o l i c y R e f o r m Techn ica l Assistance Pro jec t a n d I A D B ’ s P r o g r a m to Strengthen a n d M o d e r n i z e Economic a n d F iscal M a n a g e m e n t
Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances. T h e MEF has i n d c a t e d tha t i t i n tends to fill i t s mul t i la tera l “budget support” needs through the p roposed DPL prog ram, c o m p l e m e n t i n g the i nves tmen t l e n d m g portfolio o f o t h e r donors a n d the B a n k . T h e p rog rammat i c series approach, as w e l l as the tentat ive timing of each operation, was requested by the GOP. T h e selected p o l i c y areas covered by the DPL p r o g r a m are de r i ved from the GOP’s Strategic ’ Ikion o f E c o n o m i c
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a n d E m p l o y m e n t D e v e l o p m e n t T o w a r d 2009. Accord ing ly , t he specif ic act ions a n d i n t e n d e d ou tcomes also en joy technical a n d po l i t i ca l s u p p o r t in thei r respective sectors. T h e relevance a n d soundness o f said actions have b e e n assessed through B a n k andy t i ca l work a n d follow-up activi t ies.
Principle 4: Choose only actions critical for achieving results as conditions for disbursement. T h e prior act ions form p a r t o f a n agreed accountabi l i ty f r a m e w o r k tha t focuses on GOP’s cr i t ica l act ions for achiev ing the p r o g r a m objectives, as assessed through B a n k analyt ic work. Cons ide r ing that the opera t i on supports two large GOP programs, the m a t r i x has b e e n l i m i t e d to the n u m b e r o f actions considered necessary to ma in ta in the coherence o f po l i cy dialogue a n d bene f i t from complementar i t ies towards the i n tended outcomes.
Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support. T h e p rog rammat i c series app roach a n d the tentat ive timing of each i n d i v i d u a l ope ra t i on respond to the GOP’s stated f inanc ia l needs. T h e MEF will exercise leadership in c o o r d i n a d n g the monitoring a n d evaluat ion arrangements. Accord ing ly , t he Bank‘s superv is ion e f f o r t will b e d o c u m e n t e d through semi- annual reviews, w h i c h will take into accoun t progress m a d e towards the selected ou tcomes a n d ind i ca to rs in the po l i cy ma t r i x .
71. The lessons learned through the Bank’s previous engagement in Panama, as well as the latest thinking on Development Policy Lending for well performing middle income countries (see Box E), have influenced the design o f this DPL.
D. Analytical Underpinnings
72. The focus o f this lending operation i s consistent with the CPS objective o f helping the GOP achieve i ts development goals by means o f providing selective, demand driven assistance to the main pillars o f the Government’s Strategic Vision. As noted above, the Bank has undertaken several recent studies, including the Panama Country Financing Accountability and Procurement Assessment Report (CFAAKPAR, FY07), that underscore the criticality o f the key aspects o f the Government program supported through the proposed D P L series.
V. THE PROPOSED OPERATION
A. Operation Description
73. The proposed Second C&PFM D P L i s the final in the programmatic series o f two annual single-tranche operations. The second D P L would be in the amount o f US$lOO million. The interrelated development objectives o f the D P L program are to promote broad-based growth through the enhancement o f private sector competitiveness and to consolidate fiscal sustainability and public sector transparency and efficiency through the modernization o f public financial management systems. The proposed program supports selective and critical actions in two major areas: (i) enhancement o f competitiveness through red tape reduction, improved training policies and increased investments in innovation; and (ii) modernization o f public financial management through enhancements in revenue and debt management, fiscal transparency and governance, and public procurement. The actions supported by the DPL series have been assessed through the Bank’s analytical work and, as noted elsewhere in the document and in the Government’s Letter o f Development Policy (Annex 1)’ they form an integral part o f the Government’s economic and social development plan and the Bank’s CPS.
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74. The DPL series supports outcomes that could be attained by December 3 1, 2008, reflecting achievements through the final full fiscal year o f the current administration. The series provides continued support toward the medium-term objectives included in the PFIDPL. The programmatic framework was explained in Section I11 and i s summarized in the matrix in Annex 2.
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e
e
e
e I
I- N
- s m a, 0
m Y e, 5
b 5 0 3 D Y
75. Policy actions. The key aspects o f the Government program to be supported through the Second C&PFM DPL are presented in Table 3, with a comparison against the original triggers for the second DPL (as laid out in the f i rst DPL document). As the table shows, the DPL program remains on track, with solid progress in the two areas o f the agenda. And, while most original triggers are to be fully met or surpassed, in a single case a substitute prior action that i s equal to or exceeds the policy impact o f the trigger originally proposed was specified regarding the substitution o f issuance o f government standard bidding documents (SBDs) with framework contracts. The adoption o f framework contracts i s a de facto standardization process, as goods are procured from a predetermined l i s t using a standard purchase order, leading to a higher level o f transparency whilst at the same time removing discretionality from the purchasing process. The new prior action i s deemed by the GOP and the Bank team to exceed the impact o f the original trigger because, as explained earlier, framework contracts significantly generate both price and transaction cost savings, while standard bidding documents are mostly concerned with the latter. In any case, the GOP wil l address SBDs in a future stage o f the procurement reform program with Bank’s technical assistance lending support. In general, the set o f prior actions continues to support the original development objectives o f the DPL Program.
76. Intended medium term outcomes. The measures supported by the proposed DPL series represent important steps toward achieving medium-term objectives o f selected components o f the Government program. The intended end-of-series outcomes resulting from the DPL Program, which are consistent with the CPS outcomes, are presented in Table 4, together with the corresponding indicators to be measured. As noted, significant progress has been made towards achieving the outcomes expected for end-2008.
Table 4: Expected Program Outcomes and Indicators
Reduced t i m e to c o m p l y Increased coverage o f the Panama with g o v e r n m e n t regulat ions.
Tramita i n te rne t p o r t a l (200 on- l ine transactions m a d e available by e n d 2008, up from 75 in June 2007).
T h e GOP has focused on consol idat ing or e lun inat ing admin is t ra t ive processes, ra ther t h a n s imp ly d ig i ta l iz ing al l ex is t ing processes, consequent ly reduc ing the d ig i ta l izat ion target to 90 on- l ine transactions by e n d 2008. .4s o f .August 2008, 81 d i f f e ren t types o f on - l i ne transactions were available through the Panama T r a m i t a p o r t a l a n d l inks, a n d 241 transactions have b e e n consol idated or el iminated. A d d t i o n a l l y , re la ted n e w pro jects h a v e b e e n started: a) SPIG’s “Panamarket”, w h i c h will eventual ly integrate a l l ex is t ing on l i ne processes into o n e portal, reg is t ra t ion process for cargo shps, c) MICI ’s d ig i ta l izat ion o f consul ts a n d transactions on Patents & Inte l lectua l Proper ty , a n d d) the SDMC (Sistema
b) AhP’s n e w
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E x p a n d e d w o r k e r t ra in ing p rog rams adapted to emerg ing l a b o r m a r k e t needs.
Increased investments in R&D a n d innova t ion .
Reduced costs of Doing Btlsiness in Panama as measured by the WB through e n d 2008 (t ime needed to start a business reduced from 1 9 to 5 days, t i m e for e x p o r t i n g reduced from 1 6 to 12 days).
Increase in the yearly n u m b e r o f worke rs tha t comp le te t ra in ing courses f u n d e d by INADEH, from 42,000 in 2006 to 200,000 in 2008.
T r a i n i n g p rog rams for ce r t i f y i ng l abo r competencies o f fe red b y acc reh ted p rov ide rs for at least 9 occupat ions from the sectors o f hote ls a n d tourism, const ruct ion, manu fac tu r ing a n d agro- indust ry .
Increase in Panama’s p e r capi ta R&D from $ 1 1.8 in 2005 to $20 in 2008 (exc lud ing the Smi thson ian Institution).
Increase in the n u m b e r o f full t i m e researchers in Panama, from 3 1 2 in 2005 to 410 in 2008 (exc lud ing the Smi thsonian Institution).
Increase in the share o f R&D personnel with master or PhD. degrees, from 23.5% in 2005 to 33.3% in 2008 (excluding the Smi thsonian Ins t i t u t i on ) .
d e Dec la rac ion d e M o v i m i e n t o Comercial) within the Colon Free T r a d e Zone), to faci l i tate i n f o r m a t i o n exchange be tween Customs, banks, trade companies, f re ight - forwarders a n d pub l i c sector entities, as w e l l as the t rack ing o f conta iners a n d goods in general.
A c c o r d i n g to Doing Business 2009, t i m e needed to start a business was reduced from 1 9 to 1 3 days, a n d t i m e for e x p o r t i n g was reduced from 1 6 to 9 days.
A s o f D e c e m b e r 2007, 182,723 worke rs from the p r i va te sector h a d comp le ted training, in a d h t i o n to 79,375 from t h e p u b l i c sector. INADEH will have t ra ined m o r e than 200,000 p r i va te sector w o r k e r s by the e n d o f 2008.
INADEH has developed cer t i f icat ion norms for 23 occupat ions. See above for t ra in ing a n d capacity bddmg pro jects tha t INADEH present ly i s executing.
A c c o r d i n g to n e w px-Smi thsonian data p r o v i d e by S E N A C Y T , the actual the i nves tmen t p e r capita was $6.79 as o f 2006 (up from $5.57 in ZOOS), a n d i t i s expected to b e $ 8 b y the e n d o f 2008). S E N A C Y T has expla ined tha t the data used to establ ish the Base L i n e was o b t a m e d from pub l i shed S E N A C Y T ’ s ind icators tha t i n c l u d e d the Smi thsonian Institution.
O f f i c i a l statistics are not yet available at t he t i m e o f p repar ing th i s operat ion. A s o f August 2008, SENACYT’s data shows that a t least 115 fu l l - t lme researchers have b e e n inco rpo ra ted af ter 2005.
e O f f i c i a l statistics are not yet available at the t ime o f p repar ing this operat ion. F A R H U - S E N A C Y T scho la rshp p rog rams have bene f i t ed 285 Panamanians (177 P h D s a n d 1 0 8
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I m p r o v e d d e b t sustainabi l i ty . E n h a n c e d pe r fo rmance o f tax admin i s t ra t i on resul t ing from i m p r o v e d f h g , a u d t a n d co l l ec t i on procedures.
I m p r o v e d capacity to manage debt .
P u b l i c avai labi l i ty o f m e d i u m - t e r m f iscal f r a m e w o r k a n d f iscal i n fo rma t ion , closer to in ternat ional standards. Reduced paymen t arrears.
Increased ef f ic iency o f in ternal con t ro l s .
I m p r o v e d capacity to conduc t a u d t s .
I m p r o v e d par t ic ipat ion o f enterprises in pub l i c p rocu remen t . Increased savings in pub l i c l y p r o c u r e d goods a n d services a n d reduc t i on o f transaction costs.
Masters), o f w h i c h 5 4 h a v e already re tu rned to Panama. A sirmlar scholarship p r o g r a m managed by MEF has bene f i t ed 80 ind iv iduals .
T o t a l consol idated N F P S d e b t 12 reduced to 54% o f GDP or less.
Progress in PEFA ind ica to r No. 14.
R e d u c t i o n in Doing Business sub- i n d c a t o r s for the t ime spent filing a n d ~ a v i n e taxes. F o r m a l d e b t management strategy a n d a consol idated system for p u b l i c d e b t management in the MEF.
Progress in PEFA indicators Nos. 6, 12, or 25.
R e d u c t i o n in average No. o f days to process paymen ts to prov iders, to at most 90 days.13
processed by the CGR u n d e r 1 5 days. U s e o f CAATs in at least f i ve a u d t engagements.
- I t least 90% of documen ts are
Inc remen ts in par t ic ipant enterprises in PanamaCompra to a t least 10,000 bidders. Savings o f at least 10% in unit cost o f k e y i t ems against m a r k e t prices.
Fully m e t . NFPS d e b t was 46% o f GDP m 2007.
On tra jectory to b e m e t through the recen t i m p l e m e n t a t i o n of a n e w tax aud i t p rog ram.
Fully m e t . DB 2008 indicates that t i m e spent pay ing taxes decreased from 560 to 482 hours in 2007. On tra jectory to b e m e t T h e u n d e r l y m g scenano analyses are already underway, the approved d e b t management strategy wdl b e issued m the first quar ter o f CYO9, a n d the process to transfer d e b t s e m c e responsibl l i t ies from CGR to LEF i s a b o u t to f m s h On tra jectory to b e t m e t w h e n the f iscal transparency reqmrements m t r o d u c e d by the Socia l F isca l Responsib l l i ty L a w are i m p l e m e n t e d
Fully m e t . T h e average was o f 7 1 days in 2007.
Fully m e t . In April 2008, the rat io was o f 97%.
Fully m e t . As of M a y 2008, C. IATs h a d b e e n used m m e centra l g o v e r n m e n t a u d t engagements. Fully met . A s o f June 2008, the n u m b e r o f b idde rs exceeded 11,000.
Fully m e t . For m o s t p r o c u r e d i t ems u n d e r f r a m e w o r k contracts, savings h a v e reached 36% in c o m p u t e r equipment , 14% in o f f i ce supplies a n d 13% in vehc les .
This i s a Government target that i s supported by the actions recognized under the DPL series. 12
Evidently, there are other macroeconomic factors that will influence the decline o f the debt-to-GDP ratio, as well as some risks discussed in Section V I (Part F).
C&PFM document (“outstanding accruals do not surpass 10% o f central government expenditures”) has been changed to an indicator monitored by the Government of equal or larger relevance.
Wh i le the outcome remains valid, the measurement indicator originally proposed in the First 13
3 1
Improved public procurement management.
Progress in OECD/DXC BLI 14
indicators.
On trajectory to be met through t h e ongoing implementation o f the Drocurement reform.
77. DPL Program will take advantage o f the following data sources:
To help measure performance in the area o f competitiveness enhancing policies the
0
0
0
The Doing Business reports produced by the World Bank; Ad-hoc reports to be prepared by SPGI and INADEH, and SENACYT. SENACYT’s annual report on Indicators of Scientijk and Technological Activities.
78. adopts international frameworks o f reference, as follows:
To help measure performance in public financial management, the D P L Program
the Public Financial Management Performance Measurement Framework developed by the Public Expenditure and Financial Accountability (PEFA) group, an international partnership including, among others, the World Bank and the IMF;
0 the sound practice benchmarks documented in the “Guidelines for Public Debt Management” by the World Bank and the IMF; and
0 the Baseline Indicators (BLI) Tool included in the Methodology for Assessment o f National Procurement Systems developed by the OECD-DAC/World Bank Joint Venture on Procurement.
79. Expected Benefits. As noted, the actions supported by the DPL program are expected to benefit Panama by contributing to macroeconomic stability, increasing economic growth through improvements in competitiveness, and enhancing the impact o f Government programs through strengthened public financial management. These outcomes should contribute to building investor confidence and improve the foundations for sustained broad-based growth.
80. The DPL series i s also expected to help Panama obtain better financial terms for i t s public borrowings and diversify i t s external sources o f finance. Indeed, while Panama i s a creditworthy country with access to world capital markets, the terms and conditions on IBRD loans tend to be better than the terms that are currently available to Panama in private financial markets. Access to IBRD finance, therefore, would help reduce Panama’s debt servicing burden. Moreover, the proposed D P L series would help diversify Panama’s sources o f finance and thus reduce the potential volatility o f changing financial market conditions.
While the outcome remains valid, the measurement indicator originally proposed in the First 14
C&PFM document (“issuance o f standard bidding documents”) has been changed to an indicator monitored by the Government o f equal or larger relevance.
32
VI. OPERATION IMPLEMENTATION
A. Poverty and Social Impacts
81. The specific actions supported by this D P L are not expected to have direct significant distributional or social consequences. In 2008, the Government o f Panama, with technical assistance from the World Bank, carried out the fieldwork for a Liv ing Standards Measurement Survey (LSMS). The data analysis, which will result in an update o f the poverty figures, i s currently in i t s final stages and the results are expected to be announced before the end o f 2008. The actions supported by this operation are expected to help strengthen the microeconomic and good governance foundations for sustained broad-based economic growth in Panama. Thus, through i t s effects on growth, the program could have positive spillover effects on poverty reduction that would emerge over the long term, as the economy expands in response to increased private sector competitiveness and improved public financial management. Thus the policy actions supported by the proposed D P L are a critical component o f a broader Government program which has, among i t s core objectives, the significant reduction o f poverty in Panama. In other words, the D P L series i s an important complement to on-going and planned investment projects that are directly targeted at nearer-term gains in poverty reduction. In particular, with Bank support through other components o f the CPS, the GOP i s implementing actions to improve the targeting o f social expenditures, including by means o f a Conditional Cash Transfer program that i s intended to increase access to education and other social services among the poor. Moreover, the Bank i s also committed to support the Government’s efforts to promote sustainable and broad-based rural development by means o f investment projects in the areas o f land administration, rural productivity and microfinance.
B. Environmental Aspects
82. Specific actions supported by this D P L are not expected to have significant effects on the environment, forests or other natural resources. It i s worth noting, in any case, that the Bank i s currently supporting the GOP through the preparation o f a strategic Country Environmental Analysis (CEA), with the objective o f helping to strengthen Panama’s national institutional capacity to identify and address overall environmental policy and regulatory issues.
C. Implementation, Monitoring and Evaluation
83. The Ministry o f Economy and Finance (MEF) i s responsible for the implementation o f the D P L series as well as for coordinating the actions among the concerned l ine agencies and decentralized institutions, especially the Presidential Secretariat o f Government Innovation (SPIG), the National Training Institute (INADEH), the National Secretariat for Science, Technology and Innovation (SENACYT), the Office o f the Controller General (CGR), and the General Public Procurement Directorate (DGCP). Together with MEF, these institutions collect the necessary data to assess implementation progress and reporting it to the Bank, both with regard to the relevant actions o f the Government’s program and in terms o f the goals and monitoring indicators o f the program. As noted earlier, certain international frameworks o f reference will be used to help measure achievement o f intended D P L outcomes.
33
84. Semi-annual reviews will take place between the MEF and the Bank Team, aimed at identifying areas o f strengths and weaknesses, and possible assistance needed to maintain momentum toward the planned medium-term outcomes and address possible downside risks. A mid-term review will be made in the context o f the CPS Progress Report preparation, when the Government and the team will joint ly evaluate progress towards achieving the outcomes laid out for the D P L program and the CPS at large.
D. Fiduciary Aspects
85. In general, the public financial management and public procurement systems are adequate for this operation. As noted earlier, the Bank recently prepared a CFAA/CPAR to document the current state o f public financial management in the country, including the actions taken by the current administration to further increase transparency. While challenges remain -hence the D P L focus-, the Government i s moving ahead to further strengthen i t s public fiduciary control framework, as described previously in Section I11 (part B). In connection to this process, the Bank i s engaged in policy dialogue with the Government to fol low up on priorities identified in the CFAAICPAR. Drawing from this work, and as i s made evident in Section IV and the policy matrix in Annex 2, the D P L program supports key actions to continue strengthening public financial management.
E. Disbursements
86. The Bank would make the single loan disbursement to the MEF’s Treasury Single Account. Since this account centralizes government revenues for financing o f government spending, upon i t s deposit the DPL disbursement will become available to finance budgeted expenditures. The account i s denominated in US Dollar, which has legal tender in the country, and i s held in the National Bank o f Panama (BNP), which i s the financial agent o f government. Based on the review o f external audit reports and the experience with special accounts for investment lending, nothing came to the attention o f the Bank that would indicate that the banking control environment into which the loan proceeds will flow i s other than adeq~a te . ’~ Upon the Bank’s request, the MEF would provide the Bank with a written confirmation o f the described transaction. N o additional fiduciary arrangements (e.g. dedicated accounts subject to audit) are deemed necessary for this DPL.
F. Risks and Risk Mitigation
87. The staged approach o f stepped up partnership with Panama, building from an Interim Strategy (FY06-07) to a full CPS (FY08-IO), and from a stand-alone D P L operation to this programmatic series, has facilitated the tailoring o f program commitments to evolving developments while reducing risk. Panama i s in a stronger macroeconomic position than it was when the I S N was agreed, and the political situation has also proved conducive to advancing on policy reforms in l ine with the administration’s Strategic Vision. In addition, the majority o f activities proposed in the CPS, including the present
An unqualified (“clean”) audit opinion was issued by external auditors on BNP’s financial statements as o f December 31, 2007, which was prepared in accordance with International Financial Reporting Standards.
15
34
D P L series, have a strong foundation in on-going policy dialogue supported by extensive analytical work.
88. institutional capacity.
The program, however, i s subject to three main risks: economic, political and
89. Economic. On the economic front, the main risks would derive from the global financial crisis and more specifically from a deep and prolonged global deceleration. As discussed previously, even though Panama i s s t i l l expected to display robust growth in 2009 and beyond, the current global situation i s expected to negatively impact the country as credit to the private sector may become tighter, foreign direct investment growth decelerate, Canal traffic decline, and US demand for Panamanian products weaken. While these factors have already been taken into account in the design o f the program and in the projections developed for the medium-term, to the extent that the global slowdown lasts longer or i s deeper than anticipated, the government may find some difficulties implementing i t s program.
90. The Bank i s supporting the Government in the analysis o f economic challenges and possible actions, including discussions about prospective additional financial assistance. Per Bank policy, the proposed D P L can only go forward in the context o f an appropriate macroeconomic framework.
91. Political: The current Administration will complete i t s te rm o f office on June 30, 2009. Under Panama’s Constitution, the president may not be elected to a consecutive term. Traditionally, new administrations have upon taking office made substantial changes within the c iv i l service, especially in line ministries. These staffing changes can make an orderly transition challenging and can be disruptive to the sustainability o f on-going programs, including those supported by the DPL series. The Bank is, o f course, a small actor in this process. As recommended by QAG, the Bank will support the transition by preparing a set o f policy notes to provide presidential candidates with an additional source o f information about development challenges and on-going policies and programs. In addition, the Bank will coordinate with the new administration on training needs and will continue to support implementation o f the fiscal responsibility and public procurement regulations. All in all, the visibility and inherent benefits achieved through competitiveness and P F M reforms would make it difficult to back track.
92. Institutional capacity. Given traditional limitations in the capacity o f public sector institutions, including civ i l servants’ comfort in maintaining the status quo, the GOP’s drive to sustain the reform agenda may be slowed down. Despite these capacity constraints, a number o f champions o f reform showing already a good track record -with critical support from authorities- have been identified. The Bank i s strongly supporting through policy advice and technical assistance these leaders. In the process, synergies between the policy agenda supported by the DPL and the investment lending operations by the Bank and partners have been identified and are being exploited. This effort will be complemented by the GOP’s own mechanisms to raise awareness o f the issues to be addressed and potential impact o f reforms.
35
ANNEXES
ANNEX 1. LETTER OF DEVELOPMENT POLICY
November 7,2008 DdC P/UC S PI997
Mr. Robert Zoellick President World Bank Washington, DC
Ref.: Letter of Development Policy - Competitiveness and Public Financial Management
Dear Mr. Zoellick,
This letter summarizes in a selective manner critical aspects of our prwram to develop competitiveness and public financial management, which is an integral part of our Government's overall development strategy as presented in the Strategic Vision of Economic & Employment Development Toward 2000.
1. Fiscal and Mactoaconomic Policy
Upon taking office, this administration faced serious immediate and medium-term financial problems, such as a high level of indebtedness, an unsustainable fiscal deficit, negative current public saving, and serious problems in respect of the finances of the Social Security Fund (CSSf. We found that the deficit of the Non- financial Public Sector (NFPS) rose from B/. 623 million in 2003 to 61. 691 million in 2004, representing nearly 5 percent of gross domestic product (GDP) in both years. These conditions, together will? the deterioration in the finances of the CSS, jeopardized the financial sustainability of the state and had a negative impact on country risk. The lack of transparency in the management of the fiscal accounts aggravated the situation.
We therefore implemented a number of actions.
The increases in tax revenues have been the combined result of the tax reform of 2005, the strong growth of economic activity and more effective tax collection efforts. The positive fiscal results have been reflected in a reduction in the public debt ratio to GDP from a peak of 70 percent of GDP in 2004 to less than 53 percent of GDP in 2007, already surpassing the goal initially established for 2009.
36
The goal of the administration are to continue the gradual reduction of public debt ratio to GDP to achieve greater public savings in order to finance the investment program, to have a tax system with greater elasticity and equity, and to foster broad-based economic growth by increasing Panama’s competitiveness.
Our muntry’s economy has responded adequately. GDP growth averaged 9.0 percent during 2005-2007 and reached around 11.5 percent in 2007, These grawth levels have stemmed primarily from the external sector, through the strong increase in sewices exports, for example in banking, tourism and ports. There have also been significant domestic growth engines such as the construction industry and the outlook remains favorable given major investment projsts such as the modernization of the Canal. Moreover, there has been a reduction in the open unemployment index, which declined from 7.6 percent in 2005 to 4,7 percent in 2007. Still, we are monitoring closely the global financial crisis and its possible effects on the Panamanian economy.
An improved legal framework compatible with the goals of debt reduction and the maintenance of fiscal stability was achieved through the passage of the Fiscal and Social Responsibility Law, The law establishes limits to annual deficits (one percent of EDP) and net debt (40 percent of GDP after a period of declining trajectory) and addresses qualitative issues relating to fiscal transparency.
II. Key Competitiveness Enhancement Actiorns
Reducing transaction costs for businesses remains a priority. We had already launched an Internet portal “Panama Trarnita“ to facilitate the completion of selected procedures on-line, and passed Law 5 (“Panama €mprende’? to allow tor the online registration of most firms. More recently, we have designed a new system to permit on-line completion of export and import procedures (‘Ventanilla Unica DigMizaday, and the Electronic Signature Law was passed to facilitate electronic wrnmem and other transactions.
We continue to increase our investments in human capital through advanced training and €he provision of relevant skills. Through Decree Law 8 of February 2006, we had already set a new framework for promoting and strengthening the supply of training services. National training policies were formulated and implemented according to the needs of the private sector and labor markets, with the National Training Institute (INADEH) assuming a leadership role in the process. More recently, INADEH has appmved labor competency standards for key occupations.
Important efforts persist to support research & development and innovation. In December 2005, we issued a Nationaf Strategic Plan for the Development of Science, Technology and Innovation 2006-2010. We had already introduced matching grants funds to foster both public and private investments in R&D and innovation and expanded scholarship programs aimed at creating a critical mass
37
of researchers. In accordance with the strategic plan, more recently a National Research System Law was passed to strengthen the country’s principal research centers and increase the number and quality of researchers in Panama.
111. Key Public Financial Management Modernization Actions
We are enhancing our tax administration and debt management systems. In terms of tax administration, the Revenue Directorate (DGI) had already undertaken significant efforts to foster on-line presentation of income taxes and adopted a new tax audit strategy (fiscalizacicin) under an organized framework that differentiates approaches in response to coverage and cost targets. On the debt management front, the Public Credit Directorate (DCP) has recently implemented modern cost and risk scenario analysis to serve as basis for future public debt strategies.
Simitarfy, we continue to strengthen fiscal transparency. With the objective of improving governance arrangements, the fundion of consolidating government financial statements had already been transferred from the Controller’s General Office (CGR, who continues to audit the financial information) to the Ministry of Economy and Finance (MEF). As mentioned above, the recent approval of the Fiscal and Social Responsibility Law is a significant rnilt3stone to consolidate fiscal discipline and improve our fiscal transparency and planning systems.
The CGR also remains committed to a more efficient and effective public sector operation. As part of its effort la improve the ex-anta fiscal control system, the CGR had already launched a number of technological tools, including the document tracking and management system (SIGUEME) which intends to enhance accountability and performance through the measurement and monitoring of transaction processing times. To complement these efforts, the CGR also recently has started to strengthen its ex-post audit capacity through the initial use of computer-assisted audit techniques [CAATs).
The public procurement reform continues to improve expenditure efficiency and transparency. Under the Public Procurement Law (Law 22 of June 27,2006) and its Regulatjons, the government procurement framework was significantly enhanced. We had already made possibfe that public procurement processes in the central government and a number of decentralized entities take place through the e-procurement transparency system (PanamaCompra). More recently, the DGCP has implemented innovative public procurement process (framework contracts) for the provision of key services and goads for the central government that, in the past, were procured in a fragmented manner. The framework cantracts produce savings while increasing competition, promoting greater transparency, and increasing the quality of the products and services, Additionally, with a view of reducing transaction costs and enhancing procurement transparency, the DGCP plans to design in the short term standard bidding documents to be applied by all entities subject to Law No. 22.
3 8
IV. Summary
The strategic vision of this administration encompasses a macroeconomic framework conducive to sustainable development, poverty reduction, and promotion of trade in conjunction with policy changes supporting fiscal sustainability, increased public sector efficiency and transparency, and enhanced private sector competitiveness. To that effect, we have critical programs underway and welcome the support from the World Bank through the Competitiveness and Public Financial Management Development Policy Lending (DPL) Program*
Accordingly, the Government of the Republic of Panama requests that the second DPL in the program be approved.
Sincerely yours,
Hector-E. Alexander H Minister
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e e
e e
e e
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ANNEX 3. FUND Public Information Notice (PIN) No. 08/113 August 28,2008
On July 28,2008, the Executive Board o f the International Monetary Fund (IMF) concluded the 2008 Article I V consultation with Panama.
Background
The strong economic performance o f the last few years continues, despite the deteriorating global environment. Panama was one o f the fastest growing economies in the world in 2007 with real growth rising to 11.2 percent, following an average growth rate o f nearly 8 percent in 2004-06. The large service sector, including the canal, ports, and the Colon Free Zone, strongly benefited from the regional and international trade expansion. Construction soared, and the well developed financial center quickly responded to new opportunities and has attracted significant new investment. At the same time, employment expanded significantly, leading to a decline in unemployment to an unprecedented low level. Growth in 2008-09 i s projected to slow somewhat, to about 8 percent, with the Canal expansion and related investment activities partially offsetting the effects o f higher oil prices and the slowdown in the U.S. and the global economy.
Like in the rest o f the region, inflation has sharply accelerated, reaching almost 9 percent in May, after averaging about 1% percent in the last twenty years. Although the surge in inflation i s mainly due to higher global food and fuel prices and distortions in the agricultural sector, core inflation (excluding food and fuel) i s rising as well reflecting the buoyant economic growth and the emergence o f some capacity constraints. The current account deficit has also widened significantly as a result o f the high level o f foreign direct investment and the strong domestic demand.
The public finances have remarkably strengthened. The overall balance o f the nonfinancial public sector (NFPS), excluding the Panama Canal Authority (PCA), turned from a deficit o f about 5 percent o f GDP in 2004 into a surplus o f 3.5 percent o f GDP in 2007, despite a major increase in capital spending in 2007. This improvement was due to structural factors reflecting fiscal reforms implemented by the government in earlier years, the containment o f current spending, favorable cyclical conditions, a surge in transfers from the PCA, and one- of f revenues.
The fiscal surplus i s projected to fall below 1 percent o f GDP in 2008 as a result o f lower transfers from the PCA and an increase in expenditures, in part related to the government's program to partially alleviate the effects o f higher food and fuel prices. The Canal expansion i s shifting into higher gear and remains within budget. The strong fiscal performance combined with the fast pace o f growth has led to a rapid decline in the public debt ratio. A new Fiscal Responsibility Law (FRL) that sets a deficit limit o f 1 percent o f GDP for the NFPS, excluding the PCA, and a debt target o f 40 percent o f GDP by 2015 was approved by the National Assembly in early May and should help sustain the improvements in public finances.
Expansion o f the banking sector has been spurred by foreign investment, consolidation, and regional integration while the ongoing global financial turbulence does not appear to have impacted the sector or the rest o f the economy. Increased scrutiny by the Superintendency o f
44
Banks has not uncovered bad assets. Banks' deposit base has continued to increase, and capital adequacy and financial ratios remain satisfactory. Although there has been a significant easing o f monetary conditions as a result o f the depreciation o f the U.S. dollar and lower interest rates, liquidity has been building up moderately and growth o f credit to the domestic private sector continues to expand in line with nominal GDP.
Executive Board Assessment
Executive Directors commended Panama's remarkable growth performance and improved public finances. Despite a deteriorating external environment, economic prospects are favorable, thanks to the Canal expansion project and associated investment, as well as improvements in competitiveness reflected in expanding export services such as tourism, communications, and transportation. While the current account deficit i s expected to widen over the medium term, this should not undermine Panama's external stability, given the temporary nature o f some o f the factors.
Directors commended the authorities for the strengthening o f the public finances, noting the remarkable turnaround in the nonfinancial public sector balance excluding the Panama Canal Authority, notwithstanding a significant increase in capital expenditures. The strong fiscal performance and rapid economic growth has led to a falling public debt ratio and an improvement in Panama's credit ratings.
At the same time, Directors pointed out that managing the sharp r ise in inflation, which i s due mainly to the higher global food and fuel prices, and the apparent overheating o f the economy will be particularly challenging and will put a greater burden on fiscal policy to pursue a countercyclical stance. They encouraged the authorities to pursue such a stance, pointing to the continued positive output gap, inflationary pressures, and an additional expansionary stimulus from the weak dollar and low interest rates. This could be done by targeting a larger surplus, and a few Directors suggested achieving this through a moderation o f capital spending. I t would also be important to provide some additional room to expand programs to support the poor.
Directors welcomed the recent measures to ease the impact o f inflation on less advantaged income groups, and called for additional measures targeted to help the most vulnerable members o f society. Directors noted that the extension o f the mortgage subsidy could further stimulate the already booming construction sector.
Directors welcomed the enactment o f a new Fiscal Responsibility L a w (FRL) and the preparation o f a strengthened legal framework for public private partnerships (PPPs). They noted that the new FRL should help safeguard the improvements in public finances and maintain the debt-to-GDP ratio on i t s downward trajectory. They noted in this regard the staffs recommendation to set clear rules to govern transfers from the PCA to reduce the risks o f circumventing the new FRL deficit limits.
Directors observed that Panama's financial market has not been adversely affected by the global financial turmoil, and commended the authorities for stepping up the monitoring o f banks' asset quality, liquidity, and risk management. They noted that capital adequacy and financial ratios remain strong and that the dynamic financial sector is expanding rapidly, reflecting foreign investment, consolidation, and regional integration. Directors welcomed the
45
enactment o f the new Bank Law, which will strengthen the national supervisory framework and should help enforce regional supervisory provisions. Nevertheless, Directors stressed the need for vigilance, in light o f the easing monetary conditions against the background o f a rapidly growing economy, a booming housing market, and volatile global financial markets.
Directors commended the authorities' effort to reduce trade protection and increase incentives in the agricultural sector. They noted that although imports and distribution by the government o f staple food items may have reduced price pressures, removing distortions and strengthening legal means to address unfair competition would provide a better and more lasting remedy. Reducing tariffs and increasing tariff rate quotas for selected food items i s a welcome step to enhance competitiveness and moderate inflation. Directors also observed that steps to enhance productivity in the agricultural sector, including improved access to financing, insurance, and technical assistance, will help increase agricultural production over the medium term and will strengthen food security.
46
ANNEX 4. THE PUBLIC POLICY REFORM TECHNICAL ASSISTANCE PROJECT
(financed by World Bank)
This project was approved by the World Bank Board o f Executive Directors in FY02. The objective o f the project i s to consolidate and deepen the reforms needed to accelerate growth and reduce poverty, by strengthening the government's economic monitoring and planning, policy formulation and execution capacity in four areas: (i) promoting trade reform and liberalization; (ii) contributing to fiscal sustainability and public sector efficiency by strengthening the overall capacity o f the government to monitor economic data and improve macroeconomic policy formulation and implementation; (iii) improving the quality o f poverty data and information on social expenditures so as to increase the relevance, efficiency and targeting o f social programs; and (iv) improving the efficiency and transparency in public procurement.
The public procurement component i s supporting three areas o f reform: (1) Improving the public procurement legal framework. Under the TA operation, the World Bank supported GOP's actions aimed at implementing the new legal framework, such as the regulations o f the Law 22. (2) Building institutional capacity for handling procurement; and (3) Developing a public procurement system. This sub-component supports the establishment o f a Public Procurement Information System and setting the basis for Electronic Government Procurement (EGP). The project has financed technical assistance, training and equipment for the development if this system.
The GoP has recently negotiated an additional financing for the TA (AF-TA) increasing the original financing and extending the operation for 3 more years. Under the AF-TA, the Bank and the GoP plan to continue working together on supporting the ongoing procurement reform, in particular in key areas such as: (i) develop and implement standard procurement documents; (ii) design and implement relevant strategies: cost-reduction strategy with price benchmarking and e-procurement; (iii) develop and implement M&E systems with performance indicators; (iv) achieve an interoperable procurement system with other government systems, including contract management modules by CGR. The AF-TA also contemplates assistance to modernize fiscal oversight in the CGR and strengthen fiscal transparency.
47
L c e m m - C I b w w 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 C I N N N N N N ( U N
d o 0 0 0 x 0 0 0 0 0
0 0 0 0 0
o o o m m 2; d
~ 0 0 0 0 + v l m
v l o o o o 2
0 0 0 0 0
0 0 0 0 0
0 0 0 m m 2 % d
- 0 1 0 0 0 - v l c l d m
ANNEX 7. PANAMA AT A GLANCE 9/24/08
Key Deve lopmen t I n d i c a t o r s
(2007)
Population. mid-year (millions) Surface area (thousand sq. km) Population growth (Oh) Urban population (% of total population)
GNI (Alias method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP. international $)
GDP growth (%) GDP per capita growth (Oh)
(most recent estlrnate, 200CL2007)
Poverty headcount ratio at $1 25 a day (PPP, %) Poverty headcount ratio at $2.00 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child mainutntion (% of children under 5)
Adult literacy, male (% of ages 15 and older) Adult literacy. female (% of ages 15 and older) Gross pnmary enrollment, male (% of age group) Gross primary enrollment, female (Oh of age group)
Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)
Panama
3 3 76 1 6 72
18 4 5,510 8,340
11 2 9 4
75 18
93 91
113 110
92 74
Latin America 8 Carib.
563 20,421
1.2 78
3,118 5,540 9,320
5.7 4.5
8 18 73 22
5
91 89
120 116
91 78
Upper middle income
823 41,497
0 6 75
5,750 6,987
11,868
5 8 5 1
70 22
94 92
112 109
95 83
Net A i d Flows
(US$ mibons) Net ODA and official aid Top 3 donors (in 2006)
United States European Commission Spain
Aid (% of GNI) Aid per capita (US$)
Long-Term Economic T rends
Consumer prices (annual % change) GDP impliut deflator (annual % change)
Exchange rate (annual average, local per US$) Terms of trade index (2000 100)
Population, mid-year (millions) GDP (US$ millions)
Agriculture industry
Services
Household final consumption expenditure General gok't final MnsumDtion emenditure Gross capital formation
Exports of goods and services Imports of goods and services Gross savings
Manufactunng
1980
45
15 0
1 3 23
13 8 33 7
1 0 90
1 9 3 810
8 9 19 5 11 0 71 5
4 4 9 17 6 28 1
98 2 88 8 27 6
1990 2000
99 16
97 -9 0 3 6 13
2.0 0.1 41 5
-5.1 1.5 0.6 -1.2
1 .o 1 .o 94 100
2 4 2 9 5313 11 621
(% of GDP) 9 8 7 2
15 1 19 1 9 7 10 1
75 1 73 6
56 9 59 9 18 1 13 2 16 8 24 1
86 8 72 6 78 6 69 8 24 2 23 1
2007 '
30
19 13 6
0 2 9
7 1 3 8
1 0 96
3 3 19740
6 9 15 8 7 2
77 4
71 4 6 6
23 0
68 3 69 4 16 4
Age distribution, 2007
Male Female
75.79
60 64
4 5 4 9
30-34
15 19
0 4
15 10 5 0 5 10 I 5
Dercant
Under4 mortality rate (per 1,000) I
OPanama Latin America 8 the Canbbean
I Growth of GDP and GDP per capita (Oh)
'1
90 95
- -O-GDP -GDP per capita
1980-90 1990-2000 200047 (average annual growth %)
2.1 2 0 1 8 0 5 4 7 6 0
2 5 3.1 4 4 -1 3 6 0 3 6 0 4 2 7 0 7 0 7 4 5 6 6
3 8 6 4 6 9 1 2 1 7 4 3
-9 2 10 4 6 7
0 4 -0 4 5 3 t o 1 2 5 8
Note: Figures in italics are for years other than those specified. 2007 data are preliminary. .. indicates data are not available a. Aid data are for 2006.
Development Economics, Development Data Group (DECDG).
50
Panama
Balance of Payments and Trade 2000 2007
(US$ mi//fons) Total merchandise exports (fob) Total merchandise imports (uo Net trade in goods and services
Workers' remittances and compensation of employees (receipts)
Current account balance as a % of GDP
5,838 9,241 7,655 13,293 -279 -212
16 173
-715 -1,079 -6.2 -5.5
Reserves, including gold 707 1,628
Central Government Finance
(% of GDP) Current revenue (including grants)
Cumnt expenditure
Overall surplus/defidt
Highest marginal tax rate (Oh)
Tax revenue
Individual Corporate
External Debt and Resource Flows
(US$ miliions) Total debt outstanding and disbursed Total debt seMm Debt relief (HIPC, MDRI)
Total debt (% of GDP) Total debt seMce (Oh of exports)
Foreign direct investment (net inflows) Portfolio equity (net inflows)
18.2 17.5 9.6 10.2
16.9 15.4
-1.1 0.5
30 27 30 30
7,038 9,989 917 3,459 -
606 584 9 7 246
624 2,574 0 0
Composition of total external debt, 2006 1 \ IBRD 185 I IDA IMF 15
Other mulQ. i*ClSI 983 Shon-trrm 505
Bilateral 183
I Private 8 117 US$ rnllltonr I
Private Sector Development 2000 2008
Time required to start a business (days) - 13
Time required to register property (days) - 44 Cost to start a business (% of GNI per capita) - 196
Ranked as a major constraint to business 2000 2007
Electncity 30 6 Tax rates 14 6
Stock market capitalization (% of GDP) 240 31 5 Bank capital to asset ratio (Oh) 9 6 113
(56 of managers surveyed who agreed)
sovernance indicators, 2000 and 2007
Voice and accountability
Political stability
Regulatory quality
Rule of law
Control of corruption
0 25 50 75 too
0 2007 Country I percentile rank (0-100) 02000 hggher valuer imply betlormtmgl
wrce Kaufmann-Kraav-Masrmul World Bank
Technology and Infrastructure
Paved roads (% of total) Fixed line and mobile phone
High technology exports subscribers (per 1,000 people)
(% of manufactured exports)
Environment
Agricultural land (Oh of land area) Forest area (% of land area) Nationally protected areas (% of land area)
Freshwater resources per capita (cu. meters) Freshwater withdrawal (% of internal resources)
C02 emissions per capita (mt)
GDP per unit of energy use (2005 PPP $ per kg of oil equivalent)
Energy use per capita (kg of oil equivalent)
World Bank Group portfoiio
(US$ mlhons)
IBRD Total debt outstanding and disbursed Disbursements Pnncipal repayments Interest payments
IDA Total debt outstanding and disbursed Disbursements Total debt service
IFC (fiscal year) Total disbursed and outstanding portfolio
Disbursements for IFC own account Portfolio sales, prepayments and
repayments for IFC own account
of which IFC own account
MlGA Gross exposure New guarantees
2000
34 6
28
0 1
29 57 9
0 6
1 9
7 3
875
2000
263 22 24 21
0 0 0
226 117 84
2
0 0
2007
86
0 3
30 57 7 17 6
45 613
1 8
9 0
804
2007
216 74 43 13
0 0 0
175 157
0
54
0 0
Note: Figures in italics are for years other than those specified. 2007 data are preliminaly. .. indicates data are not available. -indicates observation is not applicable.
9/24/08
Development Economics, Development Data Group (DECDG). b
5 1
