PANAMA Projzct Pon PRIVAT SECIR REALVIVATIC
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•t u UNITED STATES INTERNATIOIW. DEVELOPMENT COOPERATION AGENCY AGENCY FOR INTERNTIONAL DEVELOPMENT Wahngton," D. C. 20523 PANAMA PROJzCT Pon PRIVAT SECIR REALVIVATIC PMMGMZ AIDILAC/P*-522 Project Notmer: 525-0304 Grant Nmurler: 525-K-605 UII rllI D €.GNCV fow ,.VER9ATIONAL 0CVCLOP.'tMk 525-0304 Z5-K-gUn 2. Counthy PROGRAM ASSISTANCE PANAM 3. Category APPROVAL DOCUMENT CASH TRANSFER (PAAD) 4. Date _JLY 12, 1990 TO 6. OYS a=F Number N/A Ak/LC, JaMues H. ?ihel LOYIncreae From N TTo btau from: LC/_, Jeffrey_ W. Evans__ _c awp FUNDS (ESP) A.pproval RNUa for Commitmt of 10. AppropdaasU Budget rm Code S 107,900,000 L090-3552 5-1G31 72-110/11037 Tylpe Funding 2!.UW' Cumc Awwgem 13. Esd~aWa Delivery eriod 14. Transacim ElIgibnty Daft -1 Lo E Gm- I Imformul 0 Formal MI Peoge 7/90",.7/92 5.Commodities Fbxaced 6. Pemmied Souw=e 17. Etialaed Source u.S in, u.s. Umied F.W. IaWdslaiM C..nius Fv Wld L 107.900.000 c€, 107.,OO;000 oh . S*m My r a doa The purpose of this program is to assist the Government of Panama (GOP) to provide immediate liquidity to reactivate the banking system and to permit an increase in credit to the private sector in Panama. Upon GOP compliance with conditionality, the ESF will be disbursed into and maintained in an interest bearing separate account until needed for eligible end-use transactions (i.e., the purchase of certificates of deposit and rediscounting banNing assets or entering into repurchase agreements for short-term liquidity) to provide funds to the Panamanian banks. Funds will be disbursed in tbree tranches. The first tranche of $36 million will be disbursed upon meeting Conditions Precedent to disbursement noted in Section V of the PAAD. The second tranche of $36 million and the third tranche of $35.9 million will be disbursed upon evidence that the preceding tranches have been fully committed in accordance with the objectives of the program. !21& W14mvlvM 20. Actin LW4M~chutenAMRM C DISAPIROVID ,.,4 ,CA h ) This PAAD complies with current Agency guidance on methods of financing and has provided for adequate audit coverage in accordance with the Payment Verification Policy Implementation Guidance. E. Cecile Adams, Controller LAC USA ID USAID LO X me. P LOSVW~ PANAMA PANAMA USAID/PANAMA PROGRAM ASSISTANCE APPROVAL DOCUMENT PRIVATE SECTOR REACTIVATION PROGRAM, NO. 525-0304 TABLE OF CONTENTS Page I. SUMMARY AND RECOMMENDATIONS A. Summary 1 B. Recommendations 4 II. PROGRAM STRATEGY AND RATIONALE A. U.S. Interests and Objectives 5 B. Rationale for Program Assistance 5 C. Linkages with Other Program and Project Assist 7 D. Coordination with Assistance Efforts of Other Donors 7 III. RECENT ECONOMIC PERFORMANCE AND FUTURE PROSPECTS OF THE PANAMANIAN ECONOMY A. Structure of the Panamanian Economy 9 B. The Panamanian Economy in the 1980s 10 C. Prospects for the Panamanian Economy in 1990 12 IV. THE BANKING SYSTEM A. Institutionsl Setting of the International Banking Center 13 B. The National Banking System 14 C. The Banking Crisis 15 D. Recent Banking Developments 16 V. PROGRAM DESCRIPTION A. Objectives of the Program 20 B. Introduction 20 C. Risk Analysis 21 D. Mechanism to Provide Liquidity to Private 9anks 27 1. Policy Guidance 27 2. Financing and Management of Funds 27 3. Financial Agent 29 4. Participating Banks (PBs) 29 5. Types of Operations under the Program 29 6. Administration and Audit 31 7. Reflows 32 Iv E. Monitoring 34 F. Duration of Program 34 G. Program Conditionality 34 1. Conditions Precedent to Disbursement 34 2. Covenants 35 3. Conditions Precedent to Disbursement of Funds from the BNP Separate Account After Year 2 36 H. Program Accountability 36 I. The Separate Account 36 2. Program Audits 37 3. Reports 37 4. Adherence to Guidance 37 I. Status of Negotiations and Program Timetable 38 1. Status of Negotiations 38 2. Program Timetable 38 USAID/PANAMA PROGRAM ASSISTANCE APPROVAL DOCUMENT PRIVATE SECTOR REACTIVATION PROGRAM, NO. 525-0304 I. SUMMARY AND RECOMMENDATIONS A. Summary Panama is crisis emerging from a severe which culminated political and economic United in the December military States, necessary to action by the had been trapped restore democracy to in a ruinous dictatorship. a country that now faces the formidable The new government December task of reactivating of 1989, was an economy that, in the midst of its in loss of national income worst recession, with and employment comparable a sustained by the U.S. to the losses two during the Great years, the GDP declined Depression. In the by nearly one-fifth, last unemployment rate and the national jumped to over 20 percent, the urban areas with higher rates of Panama City and in government's task Colon. The urgency is heightened by of the expectations of high, perhaps unrealistic, the Panamanian people living, substantially that their standards eroded over the past of quickly several years, and tangibly improve. will A major constraint to rapid weakened banking sector, economic reactivation restrictions the result of the is a under which different types of March, that sector has been 1988. Today, 43 percent operating since deposits of domestic private in the banking system sector term significantly the remain restricted, liquidity in the economy. reducing the private sector Loans outstanding declined by more than to end of 1987 and the 23 percent between ei-iterprises. end of March, 1990. the are at very Accounts payable of public high levels, and the all sector increased sharply floating debt of the what could since late 1987. be termed a financial Panama is facing gridlock that only the liquidity is affecting not solvency. of enterprises and Although the banks but also their and private sector is the economy is clearly showing great resiliency be on the rebound, achieved until banking rapid growth will not lack system operations of a lender of are normalized. The last resort for the deposit insurance increases banking system and the lack of of makes the full reactivation confidence and therefore of the banking system more difficult. -2- After two years of political and economic crisis, there is an urgent need to reactivate the private sector, and this can only be achieved with a fully functioning banking sector. The Government of Panama (GOP) intends to lift restrictions on term deposits on July 10, 1990. Although the most recent analysis of the situation of the banking system carried out by the National Banking Commission (Comision Bancaria Nacional, CBN) suggests that a systemic liquidity crisis has a low probability, problems in some banks could trigger a bank run, and this would negate the progress made in the past several months. Therefore, the GOP must minimize the risks associated with the ending of restrictions on time deposits. As Panama does not have a central bank that can serve as a lender of last resort to provide liquidity to the banking system, the GOP must have a flexible mechanism that could provide temporary liquidity to some banks should they require it. Additionally, the demands for restocking and rebuilding the economy will require a significant and rapid injection of resources over the next 24 months. Such resources to finance incremental investment by the private sector will be channeled through private banks. A resumption of strong external financial flows coupled with institutional strengthening will be a key factor in the economic recovery of Panama. Financial and technical assistance, however, can achieve its maximum benefit only in a supportive policy environment. Long unattended weaknesses in Panamanian economic policy must now quickly be addressed by the new government lest they constrain the economic recovery. The United States will provide $420 million in assistance to Panama in FY 1990 to give the country, in concert with resources of other international institutions and donors, the capital it needs to address the policy weaknesses and help return Panama to a path of sustainable growth. This PAAD for the Private Sector Reactivation Program (the Program) provides the rationale and framework for a subset of the U.S. assistance - $107.9 million in Economic Support Funds to be provided in FY 1990 as cash transfer assistance to increase bank credit to the private sector in Panama. This Program complements and reinforces the recently approved Economic Recovery Program (525-0303) which is a policy-based cash transfer program for support to the public sector. Together, the two programs are designed to create the desired policy environment to support Panama's economic recovery. In that the Economic Recovery Program already contains considerable, substantive conditionality to achieve this objective, and given the urgency for making funds available to the private sector for investment purposes, requiring more conditionality via the Private Sector Reactivation Program would simply be duplicative and would not contribute anything additional to the policy environment that can be achieved by the overall USAID program. Therefore, disbursement of the cash transfer under the Private Sector Reactivation Program will not be subject to specific policy conditions. -3- The is purpose of the Private to assist the GOP to Sector Reactivation and provide immediate Program to reactivate the liquidity to the economy banking system to credit to the private permit an increase sectcr in Panama. in substantive conditionality As just noted,. Recovery has been addressed Program. In addition, in the Economic instituting plans to include measures to control conditionality on because the money laundering have GOP has already taken been dropped banking transactions the step of requiring over $10,000 that all authorities. be reported to The Private Sector the proper however, include Reactivation covenants related Program will, system and to modernizing enhancing the supervisory the banking Banking Commission.