Report No. 1066a-PAN FILEtS,! Y UpdatingReport on the Economyof Panama (In Two Volumes) Public Disclosure Authorized Volume 1:Main Report May 13, 1976 Latin America and the CaribbeanRegional Office Country ProgramsDepartment I P 'L q FOR OFFICIAL USE ONLY Ll UtuJ Lk - J Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Thisdocument has a restricteddistribution and may beused by recipients oniy in the performanceof theirofficial duties. Its contentsmay not otherwisebe disclosedwithout WorldBar!k authorization. CURRENCYEQUIVALENTS 1.00 Balboa = 1.00 US$ 1.00 US$ = 1.00 Balboa Fiscal Year: January 1 to December 31 FOR OFFICIALUSE ONLY UPDATINGREPORT ON THE ECONOMYOF PANAMA Volume I TABLEOF CONTENTS Page No. COUNTRYDATA MAP SUMMARYAND CONCLUSIONS I. INTRODUCTION 1 II. THE ECONOMYIN 1975 2 A. General Trends 2 B. Trends in Output 11 (i) Agriculture 11 Poverty and Agriculture 11 Recent Trends 12 (a) Basic Grains 12 (b) Livestock 16 (c) Export Crops 18 Policies 18 Future Needs 20 (ii) Fisheries 21 (iii) Manufacturing 21 (iv) Other Sectors 25 III. THE GOVERNMENT'SPROGRAM 29 A. Short-TermProgram 29 This Economic Updating Report is based on the findings of an economic mission in September/October1975, comprisingMessrs. Luis Landau (MissionChief), John Kendall (PublicInvestment Analyst), Alberto Eguren (GeneralEconomist), Francisco Ravecca (IFC CMD Consultant, Banking and Finance), Jose German Cardenas (Consultant,Public Sector Finance) and Helmut Wieseman (Power). In April 1976, Messrs. Roberto Fernandes and Luis Landau discussed a draft of this report with the authorities. This document has a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - 2 - TABLE OF CONTENTS (Cont'd.) III. THE GOVERNMENT'S PROGRAM (Cont'd.) Page No. B. The Government's Development Strategy 30 (i) Agriculture 31 (ii) Sugar 33 (iii) The Bayano Cement Plant 34 (iv) Copper Mining 35 (v) Tourism 36 (vi) Transport 37 (a) The Transisthmic Oil Pipeline 37 (b) Roads 37 (c) Ports 39 (d) Aviation 40 (vii) Telecommunications 40 (viii) Power 40 (ix) Education 41 (x) Health 42 (xi) Housing 45 (xii) Overall Aspects 45 C. Financing Public Expenditures 47 (i) Recent Trends 47 (ii) Central Government Financial Operations 50 (iii) The System of Budgeting and Control 53 IV. STRATEGIES FOR GROWTH 55 A. Introduction 55 B. The Government's Preliminary Financial Program 57 C. An Alternative Financial Program (Medium Growth Case) 59 D. The Low Growth Case 65 E. Conclusions 69 ADDENDUM 70 VOLUME II - STATISTICAL APPENDIX Note: Tables 1 through 24 are inserted in the Main Report. Tables 1.1 through 10.4 are included in the Statistical Appendix. Page 1 of 2 pages COUNTRYDATA GROSS NATIONALPRODU5T IN 197J ANNUALRATE OF GROWTH(%, constant prices) US$ Mln. % 1963 -68 1968 -73 1974 GNP at Market Prices 1649.7 100.0 7.0 7.2 1.9 Gross Domestic Investment 448.3 27.2 10.5 11.1 -5.2 Gross National Saving 186.3 11.3 15.3 7.1 -30.2 Current Account Balance -259.6 -15.7 Exports of Goods, NFS 734.6 44.5 8.2 4-5 9.0 Imports of Goods, NFS 906.1 54.9 6.5 7.5 11.9 OUTPUT, LABOR FORCE AND PRODUCTIVITYIN 1973 Value Added Labor Force-/ V. A. Per Worker US$ mln. ,g Thou. % US$ Agriculture 250.9 17.0 154.7 31.0 1622.0 55.0 Industry 366.8 24.9 81.3 ]6.3 4512.0 153.0 Services 254.8 58.1 25).5 51.0 3359.0 113.8 Unallocated 8.5 1.7 Total/Average 1jS72.5 100.0 49 9. 0 100.0 {z 100.0 GJ0VERN1ENTFINANCE NGeneral Government2/ Central Government ( Mlni.) % of GDP ( Mln.) of GDP 197 _197 19.2-7h 19715 1-97 i 1, '-- 7! Current Receipts 478.9 27.5 25.5 267.3 15.4 15.4 Current Expenditure l1o9.4 23.5 22.5 263.)5 15.1 15.3 Current Surplus T5 75 -S75 3.0 3.9 - 0.3 Capital Expenditures 193.0 11.1 9.9 59.2 5.1 5.5 External Assistance (net) 83.3 5.8 5.9 62.7 3.6 4.1 MONEY, CREDIT and PRICES 1969 1970 1971 1972 1973 1974 (3!lillion outstanding end period) Moncy and Quasi Moneyi/ 217.4 284.7 339.9 I50.15 506.5 596.4 Bank credit to Public Sector 22.1 31.2 U8.2 75.7 75.2 132.6 Bank Credit to Private Sector 306.1 407.9 520.7 703.5 965.1 1259.0 (Percentages or Inclex Numbers) Money and Quasi Money as % of GDP 23.0 27.2 29.1, 33.9 34.4 34.3 General Price Index (1961 = 100) 109.7 112.0 113.1 128.1 151.6 185.4 Arnual percentag3 changes ins General Price Index (wholesale) 1.2 3.0 5.5 8.5 10.5 30.2 Bank credit to public Sector 106.5 51.2 54.6 57.1 -0.7 76.3 Bank credit to Private Sector 22.0 33.3 29.6 33.1 3702 30., NOTE: All conversions to dollars in this table are at the average exchange rato prevailing during the period covered. 1/ Total labor force; unemployed are allocated to sector of their norrnal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. j Consolidated puhl ic sector P ;imand, time .nd savinrs dcpo0its only. The aciutoit of US dollars in cir-culetion ia un1luowrl. ildboa issue_ rue lr!dte.l to coins. Page 2 of 2 pages CUXJNTRYDATA BALANCEOF PAYMENTS MERCHANDISEEXPORTS (AVERAGE1970-73) 1969 1973 1974 US $ Min % (Millions US $) Bananas 63.0 52.3 Refined Petroleun& 23.1 19.2 Exports of Goods, NFS 276.3 427.6 622.4 Shrimp 13.3 11.0 Imports of Goods, NFS -360.7 -587.0 -891.5 Sugar 6.5 5.4 Resource GaP (deficit = Beef and meat 2.1 1.7 -84.4 -159.la -269.1 1Alother commodities 12.4 10C.4 Interest Payments (net) -25.6 -42.4 -90.6 Workers' Remittances 79.8 92.4 97.8 Other Factor Payments (net) - - - Net Transfers 1.2 0.2 2.3 Balance on Current Account -29.0 -109.2 -6 Total 120.4 l)0.0 Direct Foreign Investment 21.5 35.5 23.6 EXTERFALDEBT, DECEMBER31, 19,74 Net MLT Borrowing Disbursements 39.9 156.8 171.2 US.$ Mln Amortization 8.5 .&3 f.o Subtotal 31.4 98.5 108.2 Public Debt, incl. guaranteed 472.2 Capital Grants - - - Non-Guaranteed Private Debt Other Capital (net) _ - _ Total outstanding & Disbursed 1472-T Other items n.e.i -140.2 -109.8 Increase in Reserves (+)2 -i0.4 -115.14 -237.6 DEBTSERVICE RATIO for 19 / Public Debt, incl. guaranteed .7 Non-Guaranteed Private Debt Fuel and Related Materials Total outstanding & Disbursed .7 Imports 58.6 91.3 277.4 of which: Petroleum .. 88.1 271.2 Excports 39.8 75.9 227.5 of which: Petroleum 39.8 75.9 227.5 IBRD/IDA LENDING, ( 12/31/1975 ) (Million US $) RATF, OF EXCHLVNGE IBRD IDA Outstanding & Disbursed 64.3 Thro-ch -= . 71 Since - 1971 Undisbursed 61.7 u 1.00 - I-O US $ TB1 00-7 .00 Outstanding incl. Undisbursed 126.0 I/ Ratio of Debt Service to Exports of Goods and Non-Factor Services plus workers' remittances . Debt service in 19714 eXcludes $145.6 rillion prepayment of loans. 2/ Net foreign transactions of the banking systeJn Ex .cludes sale of bunker oil Country Programs I Latin America and the Caribbean Regional Off ice February 12, 1976 IBRD 12082 PANAkiA. C ~~~~~~~~~~~~~~bb a aa a-17 4 ~~~~~~~- ~~~~ £I~~~~~~~~ 50010 Lao ~~~~~~~~~~~~~~~~~~~~~ESANSLAS Commitiedpre*f.~~~~00000 optaa - La Piotada - P0000 CIOoS,~ ~ ~~~I POJE OLON Ie~ _ Paso Dole Cooper rare IN ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ p -1 T~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~' /I~ ~ - ~ { ,a \Ga00C Lo PA.& pufa EISiNmTGe rArSPWrTlN pc16 S..t. F6~~~~~~~~~~~~LS ATS ao4aRiaeoherrd hV.f 6 so. cafts DE, W PERLO - F- i- pwoto Obdkoo~~~~~~~~~~-POoiion Nanoro II' so~~~~~~~~~C OOLEfS o rr, , SUMMARY AND CONCLUSIONS Recent Trends 1. In the 1960's, the Panamanian economy expanded rapidly with lim- ited government participationand an efficientuse of investment. Many factors made this fortunate situation possible. World trade flourished during that decade and Panama was able to benefit from its unique geo- graphic location,owing to liberal trade legislation,free use of the U.S. dollar as the domestic currency,and limited investment of high eco- nomic yield, such as the Colon Free Zone. The domestic market offered opportunitiesfor small-scaleindustrialization, and there still was much accessiblevirgin land that could be brought under production. The situ- ation changed in the present decade. There are fewer opportunitiesfor import-substitution.Further expansionof agriculturerequires more capital and specializedmanpower, whether to improve yields and cropping patterns or to extend the frontier to new less accessible lands. The recessionwhich is affectingworld trade has lowered the growth of the export-orientedservice sector. World inflationand high interest rates have been transmittedto the open Panamanian economy, at a time when slackening aggregatedemand made it particularlydifficult to pass on to consumers the full cost increases. The impact of these unfavorable developmentswas compoundedby the end of a boom in private construction of high income housing and office buildings. The rate of GDP growth, which averaged 8 percent in 1959-71, fell to 6.4 percent in 1972-73, to 3.5 percent in 1974 and to less than 2 percent in 1975. The unemployment rate is estimated to have risen from 7 percent of the labor force in 1973 to 8.5 percent in mid-1975.