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Panama To Reduce Debt With Privatisation Receipts

by Mike Godfrey, Tax-News.com, New York

17 December 2001


The Panamanian administration and opposition political parties, supported by most of the country's business groups, have reached an agreement to use $1.2bn of the $3bn Fiduciary Fund for Development created by the proceeds of the privatizations of state-owned enterprises during the last administration to reduce the national debt, currently standing at $8.4bn, or about 80% of GDP.

There is more than $3 billion in the fund, and the balance will be used to carry out five major public works projects: the installation of a sewer and sewage treatment system to clean up Panama Bay, the completion of the Panama-Colon autopista, the widening of the Pan-American Highway all the way to David, the construction of the Government City office complex, and low-income housing developments.

Panama's economy has been suffering in 2001, with low prices for staple exports coffee and bananas, and the crucial tourism business hit by the September 11th terrorist attacks. The Ministry of Economy and Finance reports that Panama's economy will have grown half a percent over 2001 when the year-end figures are in. According to the ministry, Panama's exports of services increased by 1.2%, but exports of merchandise suffered a 4.4% decline. The ministry cites the effects of the September 11 attacks on the United States as an important factor in the poor economic performance.

The country has experienced a continuing decline in direct foreign investment over the past several years. For the year ending this past June, Panama received $106.6 million in such investments, while in the similar period that ended in June of 1997, the figure was $1.3 billion. Local economists say that to improve this situation the government has to create a more attractive climate for investment.

Standard & Poors has reduced the rating on Panama's long-term government bonds from BB+ to BB. The change means tha Panama will have to pay four to five percent more interest on the long-term loans it obtains. S&P cited the nation's present budget deficit and the legislature's rejection of the president's 2002 budget as factors in its decision to lower Panama's rating. The country had been pushing for an upgrade to investment grade.

The government's parlous financial situation is being worsened by falling tax collections. The Ministry of Economy and Finance's revenue director Estelabel Piad says that more than 200,000 Panamanian individuals or enterprises owe the government overdue taxes. Only about 2,000 of these have been approached by tax officials in connection with the debts, and that only a little more than one-third of these have signed agreements to pay off the arrears before the end of the year in order to avoid interest and penalties. The government's tax collections this year have been more than $100 million less than was projected in the 2001 national budget.

The government is proposing structural reforms to the government's financial practices and budget, and linking them to a package of legislation that will establish stable guidelines in which short-term economic solutions can be achieved. A plan to get control of public spending is central to the Moscoso administration's strategy, so the advocates of its 2002 budget proposal say. However, that budget has been rejected by the Legislative Assembly, based upon the argument that its revenue predictions are wildly unrealistic. According to the PRD-led alliance that dominates the legislature, the administration's proposal was out of balance to the tune of about $500 million.

Another part of the administration's strategy, with which the opposition concurs, is to attack unemployment, variously estimated at between 13% and 17%, through major public works projects. The public has been clamoring for such initiatives, as unemployment has struck not only the lower end of the social and economic scale, but also the middle classes and many highly educated professionals. The problem appears to be growing day by day, with no easy solution in sight.


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