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TheWorld Baik FOR0 cIL USEONLY Public Disclosure Authorized MICROFICHECOPY RepwtN. P-561 7-PAN Report No. P- 5617-PAN Type: (PR) BAUA, Y. / X38725 / 1-8139/ LAC2C2 REPORTAND RECOMMENDATION OF THE PRESID OF E Public Disclosure Authorized INT4TATIONAL BANKFOR RECONSTRUCTIONAND DEVELOPMNT TO THE EXECTIVE DIRECTORS ON A PROPOSEDECONOMC RECOVERY LOAN (ERL) OF US$120 MILLION TO THE Public Disclosure Authorized REPUBLICOF PANAMA JANUARY 30, 1992 Public Disclosure Authorized Ti* d shs a ritd distibuon and way be usedby b eale ny tiheperfomne of d. ~offcidal deies. ts cotet may "ot o6te9w be disloed Wiht W Bank athorization. CURRENCY ECUIVALENT Currency Unit Balboa (3/.) USS 51/.1 Note: The issue of Balboas is restricted to coins. The U.S. dollar (US$) is accepted as de facto legal tender. Fiscal Year January 1 - December 31 WEIGHTS AND MEASURES Metric System GLOSSAEY OF ABBREVIAT_ONS APN - Autoridad Portuaria Nacional (National Port Authority) BDA - Banco de Desarrollo Agricola (Agricultural Development Bank) BHN - Banco Hipatecario Nacional (National Mortgage Bank) BLADEX - Banco Latinoamericano de Exportaciones (Latin American Export Bank) BNP - Banco Nacional de Panama (National Bank of Panama) CA - Caja de Ahorros (Savings Bank) CACM - Central American Common Market CBN - Comisi6n Bancaria Nacional (National Banking Commission) CCFF - Compensatory and Contingency Financing Facility CEM - Country Economic Memorandum CFZ - Colon Free Zone CIF - Cost, Insurance, and Freight CIT - Corporate Income Tax COBANA - Compafiia Bananera Nacional (National Banana Company) COBAPA - Corporacion Bananera del Pacifico (Pacific Banana Corporation) CSS - Caja de Seguro Social (Social Security Agency) EEC - European Economic Community ERL - Economic Recovery Loan ESW - Economic and Sector Work FMP - IMF-Monitored Program FOB - Free-On-Board ICB - International Competitive Bidding ICOR - Incremental Capital-Output Ratio IDAAN - Instituto de Acueductos y Alcantarillados Nacionales (National Water and Sewerage Institute) IDB - Inter-American Development Bank IFARHU - Instituto para el Fomento y Adiestramiento de los Recursos Humanos (Human Resources Development Institute) 1FI - International Financial Institution FOR OMCIALUSE ONLY gOSSARY OF ABBREVIATIONS fcontinuedg IMA - Instituto de MercadeQ Agropecuario (Agricultural Marketing Institute) iMF - International Monetary Fund INTEL - Instituto Nacional de Telecomunicaciones (National Telecommunications Institute) PAT - Instituto Panameflo de Turismo (Panamanian Tourism Institute) IRHE - Instituto de Recureos Hidroelectricoo y Electrificacidn (Hydroelectric and Electric Energy Resources Institute) ISA - Instituto de Seguro Agricola (Agricultural Crop Insurance Institute) LRMC - Long-Run Marginal Cost mICI - Ministerio de Comercio e Industria (Ministry of Commerce arid Industry) MIDA - Ministerio de Desarrollo Agropecuario (Ministry of Agriculture and Livestock Development) MIPPE - Ministerio de Planificacifn y Politica Econ6mica (Ministry of Planning and Economic Policy) M1VI - Ministerio de Vivienda (Ministry of Housing) MOH - Ministerio de Salud (Ministry of Health) OECF - Overseas Economic Cooperation Fund of Japan ORP - Oficina de Regulaci6n de Precios (Price Regulation Office) PIT - Personal Income Tax PSE - Public Sector Enterprises REFPAN - Refineria de Panama, S.A. (Refinery of Panama, Inc.) SAL - Structural Adjustment Loan SECAL - Sectoral Adjustment Loan SITC - Standard International Trade Classification SOE - Statement of Expenditurss UNDP - United Nations Development Program USAID - U.S. Agency for International Development VAT - Value-Added Tax This document has a restricted distribution and may be used by recipients o -'v tlbr performance of their official duties. Its contents may not otherwise be disclosed without World Ba.nk authorization. TALEL Or CONTSWTS L4AN AND PROGRAMSUMMARY . 1 PART I - THE ECONOMY AND BANK ASSISTANCE STRATEGY . A. Backgrouad. * * . 1 B. Developments in 1989-91 . 3 C. Recent Macroeconomic Performance . 3 D. Government Development Strategy . 5 S. Bank Country Assistance Strategy . 6 PART II - THE GOVERNMENT'S ECONOMICRECOVERY PROGRAM, 1991-93 . 10 A. Reform of the Public Sector and Privatization Program . 10 B. Public Investment Program .. ..... .... 17 C. Tax Reform . 18 D. Trade Reform ... 20 S. Domestic Deregulation ........ ... F. Reform of the Social Security System . 27 G. Reform of the Financial Sector . 30 H. Social Sector Reform ............ .32 PART III - MEDIUM-TERMPROSPECTS, EXTERNAL FINANCING NEEDS, AND CREDITWORTHINESS . 33 PART IV - THE PROPosED LOAN . 36 A. Background . 36 B. ConJitions for Tranche Releases. 37 C. Procurement, Auditing, Retroactive Financing, and Special Account .4..9.9.9.9... 41 D. Tranching, Disbursement, and Closing Date . 42 S. Technical Assistance 4....... ..... .43 F. The Study of Viable Options for the Canal . 44 G. Program Benefits and Risks . 44 H. Relations with External Creditors . 46 PARTV - IBRD/IMSF/IDBCOLLABORATION ................ 47 PART VI - R1COMMENDATION . 48 Annex I Arrears Clearance Annex II CSP Tables Annex III Attachments i. Financial Program for the Non-Financial Public Sector, 1990-93 ii. Financial Program for the General Government, 1991-93 iii. Public sector Employment Reduction Program iv. Public Waje Bill Targets, 1991-93 V. Financial Program for Public Enterprises, 1990-93 vi. Principles of Public Utility Pricing and Petroleum Pricing vii. Government' Privatization Program viii. Public Investment Program, 1991-93 ix. Agricultural Tariff Reduction Program x. Xey Actions Planned to Restructure Public Sector sanks and Terms of Reference for the Study of Agricultural Development Bank (BDA) xi. Financial sector Issues xii. Nutrition Assistance Program xiii. Projected Financing Requirements xiv. Technical Assistance Program xv. Techniical Assistance for Regulation of the Telecommunications Sector xvi. Study of Options to Reduce Health-Care Costs for CSS xvii. Study of Government Complementary Pension Scheme xviii. Statement of IBRD Loans xix. Statement of IFC Investments Annex IV Letter of Development Policy Annex V Matrix of Policy Action Annex VI Social Indicators Annex VII Supplemental Loan Data Sheet LOAN AND P BRAMAS'IMM Republic of Panama Amount: US$120 million equivalent Te maa Standard IBRD terms with repayments in 17 years and 5 years of gra.ce. Executina Aaencv: Ministry of Planning and Economic Policy (MIPPE). pncr-ijtions The proposed loan would support the Government's Economic Recovery Program, which is designed tot (i) encourage sustained economic growth by raising public investment, and by increasing private sector efficiency through trade and tax reforms; and (ii) help stabilize public sector finances by reducing the public wage bill and eliminating the social security system's cash defic.t in no more than 10 years. Wenefitss Implementation of the Economic Recovery Program would promote economic growth by ensuring stabilization of public finances, and by increasing the efficiency of the private sector through trade reform and of the public sector through public sector reform. It would also increase employment opportunities in the private sector and help alleviate poverty. In addition, it would facilitate the flow of external financing and foreign investment. Risks: The principal risks are weaknesses in institutional capacity to implement the program, and possible opposition by interest groups to trade reform and to retrenchment in public employment. Disbursements: The proceeds of the loan would be disbursed in three tranches of US$60 million, US$25 million and US$33.2 million, respectively, as follows: the first tranche upon effectiveness (with retroactive financing of up to US$60.2 million for aligible imports made after September 1, 1990), the second tranche after a satisfactory performance review expected in the third quarter of 1992, and the third tranche after a satisfactory performance review expected in July 1993. In addition, US$1.8 million for technical assistance would be available upon loan effectiveness. ADpraigal Renort: This is a combined staff appraisal and President's Report. D sEENAIooAL MuN MgsARCOMMMMCTXN- ANZ VtLM REPORT=NDAECIn#MNDaSION Or TMB PRESIDENTOF TE IBiD MR gEB EXECUTIVEDiRECTORS ON A PROPOSD ECOgOMICRlCOVERY OAM fo SU REUBLIC OP 1. I submit the following rep*rt and recommendation on a proposed Economic Recovery Loan (ERL) in the amount of US$120 million to the Republic of Panama. The loan would be on standard IBRD terms, with repayment in 17 years, and a 5-year grace period. The loan would support the Government's economic recovery program, which aims to achieve economic stabilizationand renewed eustalnable economic growth. This would be the first loan to Panama since 1986. The proposed operation would be cofinanced by the Inter-American Development Bank (IDB), and the Japanese Government aid agency (OECF),with US$120 million and US$100 million, respectively. T 1CONY AJIDJANR ASSXISTANCER!EY 2. The assessment of the Panamanian economy in this report draws on the work of the February 1991 pre-appraisal, the June 1991 appraisal, and the October 1991 and January 1992 post-appraisal missions for the proposed ERL. Annex II presents economic data. This report outlines the Government's economic adjustment program -- a program that should create substantial benefits but that, given Panama's changing domestic political situation, also involves high risks. A. ALtZgM= 3. After a period of economic and political upheaval, the Government of Panama aims to return the