Panama - Livestock Development Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use F L I COPY Report No. P-1233-PAN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PANAMA FOR A LIVESTOCK DEVELOPMENT PROJECT April 19, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted | or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or-completeness of the report.  RATE OF EXCHANGE Currency Unit Panamanian Bulboas (B) I US$1.00 - B1.OO Fiscal Year - January 1 - December 31  REFORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PANAMA FOR A LIVESTOCK PROJECT 1. I submit the following report and recommendation on a proposed loan to the Banco Nacional de Panama with the guarantee of the Republic of Panama for the equivalent of ;$h.7 million to help finance a livestock devel- opment project. The loan would have a term of 16 years including a five- year grace period, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. The Bank's most recent economic report (Updating Report on the Economy of Panama CA-22) was distributed to the Executive Directors on August 21, 1972. The economic data in Annex I stems from that report. An economic mission is now in Panama to review the country's recent perform- ance. For four years the Government, which took over in October 1968, has successfully combined a move towards social justice with rapid economic development. General Omar Torrijos, head of the National Guard, has exer- cised leadership of the provisional Government and has relied on civilians to staff all levels of Government including the Presidency. An assembly, elected last August, approved a new constitution and re-elected Demetrio Lakas President. Major cabinet and administrative changes were made soon after the election. Effective power remains in the hands of General Torrijos. L. During 1971 and 1972 the Panamanian economy continued its rapid growth. Real GDP grew 8.6 percent in 1971, slightly above the 7.7 percent average of the previous two years. Domestic tranquility has been maintained and foreign investment encouraged; the expropriation of a foreign-owned utility company in 1972 was quickly resolved by an agreement acceptable to the Government and the U.S. owner (Boise Cascade). As a result of this fav- orable climate and its U.S. dollar currency, Panama is fast becoming a major international financial center. During 1968-1971 foreign deposits in the banking system more than quintupled to over $600 million. Although much of this money was relent abroad, over one-third was invested in Panama. Free-zone warehousing activities and tourism have also expanded rapidly. 5. The Panamanian economy has now averaged close to an annual 8 per- cent real growth since 1950, and its per capita GNP of $730 ranks fifth in Latin American nations. Open unemployment has been maintained at about only 6-7 percent of the labor force; relatively low by regional standards. Panama's geographic location, dynamic entrepreneurs, and open economy have been basic in this rapid and continuing growth. In the past, the growth of traffic through the Panama Canal and related activities in the Canal Zone had provided much of the external stimulus to the economy. This growth, however, generated few benefits for the half of the population not residing in the urban centers along the Canal Zone. Some recent income distribution studies show that Panama's wide disparities in income stem from a large differential between average rural and urban incomes. Average per capita income for Panama City, for example, was $875, but only $200-250 for most rural provinces. Past public expenditure was limited both in size and scope,  -2- as governments followed a policy of limited economic intervention. me new Governmrent through public policies and expenditures has aimed since 1968 at a better income distribtution compatible with rapid growth. So far, this ihas been most noticeable for urban workers. A ne.w labor code, an extra montht.s salary,. and Rn 'tediilnti nnal tax", all. imolemented in the nast two years, have increased the relative earniings of salaried workers. 6. The provisional Government also launched a greatly enlarged oublic expenditure program after 1968 under a strategy aiming particularly at providinmg much needed infrastructure and expanding support to education and he.lt,!. Initially,the investment emp.Lsis was given to quick-impact pro Jects for Job creation purposes while preparation work was accelerated on large infrastructure projects in Panama City and in the rural areas. Subsequently, the Government supported the gro-wth of urban services by investments in airports, power, urban development, a convention center, and expsn.-;ed euciation.al services. Unt4.1 1972 the Government had restric- ted -LtS rurai investments to roads and social facilities. It is now preparing projects designed to increase agricultural output. A sector study, which wi].l provide the information needed for a coordinated attack on agricul.tural and rural problems, will be completed this spring by an interministerial group. At present the average income disparity between urban and rural workers is about three to one; to reduce this disparity the Government mnusi. enhance prciductivity in agriculture. 7. The response of international and bilateral lending agencies to the Government's investment strategy has been favorable and strong. Since 1.968 the -inter-American Devel-o0pment Bank (L-B), the U.S. Agenicy for International De.velopment (AID), and the Bank have approved $167 million in loans for public investment projects. In addition, the U.S. Government has approved a $60 million grant to complete the Pan-American highway in the Darien area. With construction now under way on projects receiving official external fixancing, the volume of public investment in 1972 may well have exceeded the record 1971 level by 30 percent. Sixty percent of the 1972 pub:!'-., investuments were accounted for by the IBRD-financed Bayano power projekt. rural and urban roads, and a Government sugar mill; another one-fifth was for water and sewerage works, mainly in Panama City. 8. wihile public investment and external aid has increased sharply in recent years, Panama continues to have a serious fiscal problem reflected in a lack of adequatie public savings. A 1972 tax package did not produce the large revenue increase the Government had expected, and the normal growth of revenues continued to be absorbed by current expend- tures, notably for health and education for the heretofore neglected poorer Panamanians. In 1972 savings of the Central Government and the Social Security System probably amounted to less than 20 percent of Central Government investment; the rest was financed mostly from abroad. The financial situation of the public sector as a whole was probably better; in 1971,about one-third of' total public sector investment was financed out of public savings. While foreign borrowing has increased from official lending agencies, substantial net borrowing by the Central Government on medium-terms also continued. Besides suppliers' credits, the borrowing  - 3- from private sources has been from consortia of U.S. banks, which used the Eurodollar market as a prime source of funds. Maturities have averaged between five and seven years but the 1973 borrowings recently arranged directly with a European consortium are at 10-year terms. 9. The balance of payrients problem usually associated with a rapidly increasing debt service does not occur in Panama since it has no central bank, uses the U.S. dollar as currency, and virtually all of its official and private debt is in dollars 1/. The fiscal burden of the debt service has become substantial, however. Government debt ser- vice has grown from the equivalent of 12 percent of government revenues in 1968 to 30 percent in 1972. The Rank has continued a close dialogue fith the Panamanian Government over its fiscal policies. Our last economic report concentrated on the fiscal problem, emphasizing the need to control the growth of current expenditures. Many of its recommenda- tions were accepted by the Government. 10. Because of its concern over the rising debt service burden, the Government is undertaking an austerity program during 1973, under which current expenditures are budgeted to increase only slightly above their 1972 level, minor investment projects have been dropped and almost three-quarters of the Goveinment investment planned for 1973 will be for projects associated with the major lending agencies. Current subsidies to some autonomous agencies have also been reduced or discontinued. Major administrative reforms now being initiated are the consolidation of the operations of the principal agricultural agencies into the Ministry for Agricultural Development and the main housing agencies into a new Housing Ministry. The Planning and Finance Ministries are also being strengthened in an effort to control closely the budgets and borrowing of the whole public sector. These recent measures are important steps toward improving the fiscal performance and justify our proceeding with this loani. PART II - BANK GROUP OPERATIONS IN PAN.AMA 11. From 1953 to 1962 the Bank made five loans totalling $18.6 mil- lion, including two (totalling $13.1 million) for road construction, two rela-tively small loans for agriculture, and one for electric power. All five loans have been fully disbursed and three have been fully repaid. Because of lack of development oriented policies and continuous political interferences in the operation and management of key public entities, the Bank suspended lending between 1962 and 1970. Since then, the Bank has lent $42.0 million for power (Bayano), $20 million for an airport, and $3.4 million for fisheries. Implementation of these loans has fallen behind schedule but steps are being takeii to overcome the causes of delay. In FY1971,IFC made its only investment in Panama, a commitment to acquire $0.3 million of equity in the Corporacion de Desarrollo Hotelero, S.A., and lent to it $1.2 million to build a new international hotel. IFC is not considering any further operations in Panama in the near future. Annex II contains a summary description of Bpnk/IFC operations in Panama. 1/ Although Panama mints its own coins, the only legal paper currency is the U.S. dollar. Thus, for all practical purposes, the Panamanian balboa is not only equivalent to a U.S. dollar, it is a U.S. dollar.  12. The main sources of external assistance to Panama in recent years are suimmarized below (in $.millions): IBRD IDB AID '.ending 1960-1968 11.2 37.2 72.2 Lending 1969-1972 65.L bI.6 116.9 ' Power 46.0 - Education and Health - 12.b 17.0 ;griculture, Fisheries, and Livestock 6L 16.6 7 Industry - 1.0 9.1 Waler and bewerage - 13.8 36.0 liouising - 16.6 20.2 Transport 27.2 19.5 72.5 V Other 1.9 2 .9 lo tal 76.6 81.8 189;.1 j Includes $60 million grant from U.S. Govermaent for coTmletion of Darien Gap portion of Pan-American highway. AID has concentrated on social services in recent years through a sector loan to education, water and sewerage loans, famiily planning assistance, and some small loans for subsistence farmers; it has also helped finance a new convention centre in Panama City. IDB has provided suh..port for vocational and university education, general agricultural credit for poor ana medium- size farmers, and. seccndary road construction. 13. As in recent years, the main prospective Bank lending to Panama is focussed on helping to meet the bottlenecks caused by neglect of infractructure in the 19606 and by Panamals exceptiWonally rapid development and to provide agricultural credit in areas not covered by other financing agencies. Becduse of the country's small size and rapid grow-th, relatively large in- Y'ras;i;ruct,ure projects will- be periodically needed to assure a contiinual growth. Ihe Bank is plann.ing to assist the Goverrunent not oily in financing such ojects, but Jn ensuring that the timing and size of the investments are aprropriate. A power project covering generation, transmission and distri- >r,ion is now being appraised. -Projects are at an earlier stage of prepara- t.- r.n for a fishing port and the Panama City-Colon highway. PART III - THE. AGRICULTURAL SECTOR l1L. Panama's agricultural sector provides a livelihood lor approx- ir,ately 50 percent of the country's population and accounts for almost the ,-,ve percentage of total employm,ent. It also contributed some 75 percent tLhe country's merchandise exports over the last five to six years; 6L