Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 47208-PA INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN INTHE AMOUNT OF US%80MILLION TO THE Public Disclosure Authorized REPUBLIC OF PANAMA FOR A PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN March 23,2009 Public Disclosure Authorized Poverty Reduction and Economic Management 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 oftheir official Public Disclosure Authorized duties. Its contents may not otherwise be disclosed without World Bank authorization. PANAMA - GOVERNMENT FISCAL YEAR January 1 - December 3 1 CURRENCY EQUIVALENTS (Exchange Rate Effective as ofMarch 26,2009) Currency Unit Balboa US$1.oo BJ1.00 Weights and Measures: Metric System ABBREVIATIONS AND ACRONYMS AIN-C Atenci6n Integral a la Nifiez en la Comunidad BNP National Bank ofPanama CAR Capital Adequacy Ratio CBI International Banking Center (Centro Buncurio Internacional) CCT Conditional Cash Transfer CD Cambio Democratico CEA Country Environmental Analysis CEWICA Country Economic Memorandumhvestment Climate Assessment CFMCPAR Country Financial Accountability and Procurement Assessment Report CFZ Colon Free Zone CPI Consumer Price Index CPS Country Partnership Strategy css Social Security Institute (Caja de Seguro Social) DPL Development Policy Loan EEC Estrategia de Extensi6n de Cobertura FDI Foreign Direct Investment FOB Free On Board FRL Fiscal Responsibility Law FSSRA Financial Sector Supervision and Regulation Assessment FY Fiscal Year ofthe World Bank (July 1 - June 30") GDP Gross Domestic Product GNI Gross National Income GOP Government ofPanama IADB Inter-Ameri c an Development Bank IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IMF International Monetary Fund INE National Institute of Statistics LCR Latin America and Caribbean Region LDP Letter ofDevelopment Policy LSMS Living Standards Measurement Survey MEF Ministry of Economy and Finance MIDES Ministry of Social Development MNSA Ministry of Health NFPS Non-Financial Public Sector PAISS Paquete de Atenci6n Integral de Servicios de Salud PCA Panama Canal Authority PP Partido Panameiiista PRD Partido Revolucionario Democratic0 RdO Red de Oportunidades (the conditional cash transfer program) ROSC Report on the Observance ofStandards and Codes SBN National Banking System (Sistema Bancario Nacional) SBP Superintendency of Banks of Panama SDR Special Drawing Rights SENAPAN National Nutrition Secretariat UNDP UnitedNations Development Program Vice President: Pamela Cox Country Director: Laura Frigenti Sector Director: Marcel0 Giugale Sector Manager: Rodrigo A. Chaves Lead Economist/Sector Leader: J. Humberto Lopez Task Team Leaders: David M. Gould and Lars C. Moller PANAMA PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN Table of Contents I. INTRODUCTION.................................................................................................................................. 1 I1. COUNTRY CONTEXT......................................................................................................................... 1 I11. ECONOMIC CONTEXT AND MACROECONOMIC OUTLOOK ........................................... 3 A . ECONOMICCONTEXT ............................................................................................................................... 3 B. MACROECONOMICOUTLOOK IN THE CONTEXTOF THE GLOBALCRISIS ................................................... 6 C . DEBTSUSTAINABILITY ........................................................................................................................... 10 IV. THE GOVERNMENT’S PROGRAM AND KEY ISSUES IN PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY .......................................................................................................... 11 A . MITIGATINGTHE IMPACT OF ECONOMICSLOWDOWN ON THE POOR ...................................................... 12 B . PROMOTINGFINANCIAL STABILITY ............................................................... ............................ 15 V . THE PROPOSED LOAN.................................................................................................................... 19 A . LINKTO THE COUNTRY PARTNERSHIP STRATEGY .................................................................................. 19 B. LOANDESIGN ......................................................................................................................................... 19 c . COLLABORATION WITH THE IMF. OTHERBANK OPERATIONS. AND OTHER DONORS............................ 25 D. LESSONSLEARNED FROM PRIOR DPLS IN PANAMA ................................................................................ 26 E. CONSULTATION. DISTRIBUTIONAL.AND ENVIRONMENTALASPECTS ..................................................... 27 VI. LOAN IMPLEMENTATION ........................................................................................................ 29 A . IMPLEMENTATION. MONITORINGAND EVALUATION.............................................................................. 29 B. FIDUCIARYASPECTS .............................................................................................................................. 29 C . DISBURSEMENTS.................................................................................................................................... 29 D. RISKSAND RISK MITIGATION................................................................................................................. 30 ANNEX 1. LETTER OF DEVELOPMENT POLICY .............................................................................. 31 ANNEX 2 . PANAMA BANKING SECTOR STATISTICS...................................................................... 41 ANNEX 3 . IMP STATEMENT ON THE MACROECONOMIC SITUATION..................................... 45 ANNEX 4 . PANAMA: DEBT SUSTAINABILITY ANALYSIS .............................................................. 47 ANNEX 5 . PANAMA: OPERATIONS PORTFOLIO (IBRDDDA AND GRANTS) ............................. 55 ANNEX 6 . PANAMA - IFC COMMITTED AND DISBURSED OUTSTANDING INVESTMENT PORTFOLIO ................................................................................................................................................. 57 ANNEX 7 . PANAMA AT A GLANCE, 3120109 ......................................................................................... 58 MAP................................................................................................................................................................ 61 LIST OF TABLES. FIGURES AND BOXES Table 1: Panama Medium-Term Macroeconomic Framework* ........................................... 5 Table 2: CPS Program Objectives and Select Areas ofAction .......................................... 20 Table 3: Matrix ofPolicy Actions and Expected Outcomes .............................................. 21 Table 4: Links between the DPL and Prior Analytical Work ............................................. 24 Figure 1: Panama Growth and CPI Inflation. 2002-08 (quarterly data) ............................... 3 Figure 2: Colon Free Zone. Cumulative Net Re-exports (millions of Balboas) ...................7 Box 1. Poverty and Inequality in Panama............................................................................. 4 Box 2 . Panama’s Financial Sector ........................................................................................ 8 Box 3 . The Social and Fiscal Responsibility Law .............................................................. 10 Box 4 . GOP Strategic Vision of Economic and Employment Development Towards 2009 ............................................................................................................................................. 12 Box 5 . Red de Oportunidades - the Government’s Flagship Poverty Program ................. 13 Box 6 . Good Practice Principles on DPLs.......................................................................... 27 This DPL was prepared by an IBRD team led by David Gould (LCSPE) and Lars Moller (LCSPE) and included Solange Alliali (LEGLA). Gaston Blanco (LCSHS). Maria Eugenia Bonilla (LCSHH). Aline Coudouel (LCSHS). Mariluz Cortes (Consultant). Maria Lucia Guerra (LCSPE). Patricia De la Fuente Hoyes (LOAFC). and Marie Vidal (LCSPE) . The team is grateful for the close collaboration of the Government of Panama during loan preparation. Rodrigo A . Chaves (LCSPE) and Humberto Lopez (LCSPR) provided internal quality oversight . The peer reviewers were Pablo Fajnzylber (LCSCE). Edgardo Favaro (PRMED) and Dino Merotto (AFTP2) . LOAN AND PROGRAM SUMMARY PANAMA PROTECTING THE POOR UNDER GLOBALUNCERTAINTY DEVELOPMENTPOLICY LOAN Borrower Republic ofPanama Implementing Ministry ofEconomy and Finance Agency Financing Data IBRLI Loan Amount: US$80 Million Terms: Fixed Spread Loan (FSL) in US dollars with level repayments ofprincipal commitment-linked, payable in 20 years, including a 2 year grace period. Front-end Fee is of0.25 percent on principal amount, payable out ofloan proceeds upon loan effectiveness. Operation Type Single tranche Development Policy Loan to be disbursed upon loan effectiveness. Main Policy This Development Policy Loan (DPL) is designed to support the poverty reduction Areas efforts ofthe Government