Document of The World Bank FOR OFFICIAL USE ONLY Report No. 81921-PA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT US$200 MILLION TO THE REPUBLIC OF PANAMA FOR THE THIRD PROGRAMMATIC FISCAL MANAGEMENT AND EFFICIENCY OF EXPENDITURES DEVELOPMENT POLICY LOAN November 20, 2013 Poverty Reduction and Economic Management Central America Country Management Unit Latin America and the Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. PANAMA-GOVERNMENT FISCAL YEAR January 1–December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of November 20, 2013) Currency Unit=Balboas (B/.) 1.00 B/=US$1.00 ABBREVIATIONS AND ACRONYMS ANIP Autoridad Nacional de Ingresos Públicos (National Public Revenue Authority) ACP Autoridad del Canal de Panamá (Panama Canal Authority) CCT Conditional Cash Transfer CPS Country Partnership Strategy DGCP Dirección General de Contrataciones Públicas (Public Procurement Agency) DGI Dirección General de Ingresos (Department of Income Collection) DPL Development Policy Loan DTCs Double Taxation Conventions FAP Fondo de Ahorro de Panamá (Panama Savings Fund) FDI Foreign Direct Investment FY Fiscal year GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development IDB Inter-American Development Bank IFARHU Instituto para la Formación y Aprovechamiento de Recursos Humanos (Human Resources Promotion Institute) IFC International Finance Corporation IMF International Monetary Fund ITBMS Impuesto a las Transferencias de Bienes Corporales Muebles y la Prestación de Servicios (Tax Revenue Collection from Sales Tax) ITU International taxation unit KYC Know Your Client LTU Large Taxpayer Unit MEF Ministerio de Economía y Finanzas (Ministry of Economy and Finance) MIDES Ministerio de Desarrollo Social (Ministry of Social Development) MIGA Multilateral Investment Guarantee Agency MINSA Ministerio de Salud (Ministry of Health) NFPS Non-Financial Public Sector OECD Organization for Economic Cooperation and Development PFM Public Financial Management SIAFPA Sistema Integrado de Administración Financiera de Panamá (Integrated Financial Management System) SFRL Social and Fiscal Responsibility Law TAL Technical Assistance Loan TIEAs Tax Information Exchange Agreements ii Vice President: Hasan A. Tuluy Country Director: C. Felipe Jaramillo Sector Director: J. Humberto Lopez Sector Manager: Auguste Tano Kouame Lead Economist/Sector Leader: Oscar Calvo-Gonzalez Co-Task Team Leaders: Friederike Koehler-Geib and Rong Qian iii REPUBLIC OF PANAMA THIRD PROGRAMMATIC FISCAL MANAGEMENT AND EFFICIENCY OF EXPENDITURES DEVELOPMENT POLICY LOAN TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY I. INTRODUCTION AND COUNTRY CONTEXT .......................................................... 1 II. MACROECONOMIC POLICY FRAMEWORK .......................................................... 3 RECENT ECONOMIC DEVELOPMENTS ...................................................................... 3 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ............................. 7 III. THE GOVERNMENT’S PROGRAM ........................................................................... 10 IV. THE PROPOSED OPERATION ................................................................................... 10 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ............ 10 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ................... 12 LINK TO CAS AND OTHER BANK OPERATIONS.................................................... 22 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS ...... 22 V. OTHER DESIGN AND APPRAISAL ISSUES ............................................................ 23 POVERTY AND SOCIAL IMPACT ............................................................................... 23 ENVIRONMENTAL ASPECTS ...................................................................................... 25 PUBLIC FINANCIAL MANAGEMENT, DISBURSEMENT AND AUDITING ASPECTS ......................................................................................................................... 25 MONITORING AND EVALUATION ............................................................................ 26 VI. SUMMARY OF RISKS AND MITIGATION .............................................................. 26 ANNEXES ANNEX 1: POLICY AND RESULTS MATRIX ........................................................................ 28 ANNEX 2: LETTER OF DEVELOPMENT POLICY- UNDER PREPARATION .................... 32 ANNEX 3: FUND RELATIONS ANNEX .................................................................................. 36 ANNEX 4: POVERTY AND SOCIAL IMPACT OF SOCIAL PROTECTION PROGRAMS . 39 ANNEX 5: COUNTRY AT A GLANCE (includes country map)............................................... 41 The Development Policy Loan was prepared by an IBRD team consisting of Friederike (Fritzi) Koehler-Geib and Rong Qian (Task Team Leaders), Adriana Cardozo, Aleksandra Iwulska, Andres Mac Gaul, Antonio Blasco, Concepcion Aisa Otin, Diana Mercedes Lachy, Edmundo Murrugarra, Kinnon Scott, Kiyomi Cadena, Meilyn Gem, Patricia de la Fuente Hoyes, Raul Junquera Varela, Rodrigo Silveira Cabral, Rocio Malpica, and Silvia Gulino. Peer reviewers are Abha Prasad, David Rosenblatt, Manuel Salazar, and Munawer Sultan Khwaja. The team gratefully acknowledges the support and guidance provided by C. Felipe Jaramillo, J. Humberto Lopez, Auguste Tano Kouame, Ludmilla Butenko, and Oscar Calvo-Gonzalez. In addition, the team is thankful for helpful comments and support from Alma Kanani, Andrea Kucey, Antonio Velandia-Rubiano, Bryan Welsh, Cecile Valadier, Desiree Gonzalez, Dianna Pizarro, Fang Yang (IMF), Joana Godinho, Jovana Stojanovic, Komal Mohindra, Lucca Ricci (IMF), Maryanne Sharp, Michelle McCue, Peter Moll, Rajul Awasthi, Steen Byskov, Stefano Curto and Wei Shi (IMF). Finally, the Bank team would like to express its gratitude for the collaboration of the Government of Panama in the preparation of this Development Policy Loan. iv SUMMARY OF PROPOSED LOAN AND PROGRAM REPUBLIC OF PANAMA THIRD PROGRAMMATIC FISCAL MANAGEMENT AND EFFICIENCY OF EXPENDITURES DEVELOPMENT POLICY LOAN Borrower Republic of Panama Implementin Ministry of Economy and Finance g Agency IBRD Loan Terms: Commitment-linked variable spread loan, denominated in US dollar, with level repayments of principal payable in 20 years (including 2 years of grace Financing period). The Borrower wishes to maintain all risk management options embedded Data in the loan. The front end fee is 0.25 percent of the total loan amount, financed from Borrower’s own resources. Amount: US$200 million Operation Single tranche Development Policy Loan (third in a series of three programmatic Type DPLs) The Program Development Objective of the DPL series is to support the Pillars of the Government of Panama in improving fiscal management and strengthening social Operation transfer programs. The four pillars of this operation are: (i) mobilizing domestic And Program tax revenue and increasing tax transparency; (ii) modernizing public procurement Development practices; (iii) improving the institutional arrangements for debt management; and Objective(s) (iv) expanding social transfer programs and improving the capacity of institutions for targeting. (i) Mobilizing domestic tax revenue and increasing tax transparency • Central government tax revenue as a share of GDP is at least 12 percent in 2014 (baseline: 2009=11 percent). • The ITBMS revenue increased by at least 1 percentage point of GDP (baseline: 2009=2.1 percent; target: 2014=3.3). • The Large Taxpayer Unit (LTU) covers at least 55 percent of total tax revenue in 2014 (baseline: 2009=0 percent). • By 2014, Panama has signed 12 tax information exchange agreements and has exchanged information as requested (baseline: 2009=no TIEAs in place). (ii) Modernizing public procurement practices Result • Central government agencies and all others subject to Law 22 and its modifications use framework agreements and the number of catalogue items Indicators procured under those framework agreements is increased (baseline: 2009=2,452; target: 2014=7,300). (iii) Improving the institutional arrangements for debt management • By 2014, the medium term debt management strategy is published and revised annually and corresponding debt evaluation reports compare the evolution of risk indicators with the targets in the strategy (baseline: 2009=no formal debt management strategy). (iv) Expanding social transfer programs and improving the capacity of institutions for targeting • By 2014, the revised proxy means test is in use to select all households that enter in the Red de Oportunidades program (baseline: 2009=0 percent). • Increased ability of MIDES to conduct recertification of beneficiaries of 100 a v los 70 through the regulation of Law 86 and the recertification strategy of 100 a los 70 in 2014 (baseline: 2009=no technical tools nor legal support to conduct recertification). • By 2014, MIDES has issued quarterly reports based on the single registry assessing the coverage and efficiency of social programs, including individual duplications at household level (baseline 2009=no report). • Percent of children from the poorest quintile who receive Beca Universal (baseline: 2009=0; target: 2014=70). • The number of people with severe disabilities and in poverty or vulnerable condition covered by the Ángel Guardián program reached 10,000 (baseline: 2009=0; target: 2014=10,000). Moderate—The proposed operation is considered to have an overall moderate risk. The main risks and mitigation measures identified include: (i) macroeconomic risks, particularly risks deriving from the fiscal stance and the country’s vulnerability to external shocks, mitigated by robust economic growth, the Government actively raising revenues, the potentially flexible timing of capital expenditures, and the large share of FDI financing the current account; (ii) institutional risks arising from weak participatory processes, mitigated by a close dialogue and consultations with political parties, donor community and Overall risk stakeholders on the measures supported by the DPL series, and from the quality rating of public institutions where improvements in financial management and procurement systems are needed for a better monitoring and evaluation of public investment and spending, mitigated by the Government’s reforms in the area of fiscal management and procurement; (iii) natural disaster risks related to Panama’s exposure to floods and landslides, mitigated by support from donors’ community in case of need and the Country’s Disaster Risk Management National Plan 2011-2015 that defines specific actions to improve disaster resilience with the support of different stakeholders. Operation ID P146942 vi IBRD PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY LOAN TO THE REPUBLIC OF PANAMA I. INTRODUCTION AND COUNTRY CONTEXT 1. This document presents a proposed Development Policy Loan (DPL) in the amount of US$200 million for the Republic of Panama, the final in a programmatic series of three. The Government has requested this single-tranche operation in the series of three Programmatic Fiscal Management and Efficiency of Expenditures DPLs, designed to help improving fiscal management and strengthen social transfer programs. The series of operations supports four key policy areas: (i) mobilizing domestic tax revenue and increasing tax transparency; (ii) modernizing public procurement practices; (iii) improving the institutional arrangements for debt management; and (iv) expanding social transfer programs and improving the capacity of institutions for targeting. 2. Economic growth and public transfers brought about an important reduction in poverty, which has almost halved over the decade. The poverty rate fell from 48.5 percent in 2002 to 26.2 percent in 2012, dropping continuously by around 2 percentage points per year. Over the same period, extreme poverty decreased from 21 to 11.3 percent. The reduction was even larger in urban areas making poverty a more rural phenomenon. The highest incidence of poverty is in the three main remote and indigenous areas also known as comarcas—Ngobe Bugle, Emberá and San Blas, at 93, 81 and 72 percent respectively (Figure 1). 3. Strong economic growth in Panama has been pro-poor and contributed to prosperity being more widely shared. Panama’s economic growth has been one of the fastest in Latin America over the past decade, a trend that has even accelerated in recent years. The country has done well in integrating into the global economy and has leveraged its geographical position, transforming itself into a well-connected logistics hub. At the same time, income growth of households in the bottom 40 percent of the income distribution reached 8.9 percent between 2007 and 2011, which puts Panama well above the Latin American and Caribbean average of 4.8 percent. The income growth of the bottom 40 percent also far exceeded Panama’s average income growth of 6.6 percent. Moreover, the average growth of incomes of the indigenous populations in the three main comarcas was even higher at 11 percent. As result, inequality decreased, with the Gini coefficient dropping from 0.56 in 2003 to 0.53 in 2011. 4. Yet inequality remains in the mid-range for Latin American countries and challenges persist in the public provision of social services. Ample scope remains for improving the public provision of social services across the country. For example, children in indigenous communities still have significantly less access to basic services than children in rural or urban areas (Figure 2) and 40 percent of pregnant indigenous women do not have any prenatal health checks while such checks are almost universal for the rest of the population. The key challenges of the Government’s social programs remain, among others the need for better targeting of poverty interventions and the provision of services in isolated communities. 5. As part of a strategy to address the country’s development challenges, the Government has been reforming the tax system, and improving the efficiency of spending 1 and social protection. At the outset of its term in 2009, the Government presented a five-year Strategic Plan with the overall objectives of achieving sustainable economic growth and reduction of poverty and inequality. It also presented a strategy to mobilize tax revenue and to improve fiscal management for public investment and social protection. The Government has been implementing two tax reforms that widen the tax base and improve the efficiency of tax administration. The Government has also made significant progress in negotiating bilateral tax information sharing agreements. These revenue measures have been complemented by financial management and procurement reforms to increase transparency and efficiency of spending. The Government has also improved social protection by introducing a non-contributory pension program 100 a los 70, a universal scholarship program Beca Universal, and a transfer for citizens with severe disabilities and in poverty, Ángel Guardián. It has also improved the targeting of the conditional cash transfer (CCT) program Red de Oportunidades. Figure 1: Poverty Head Count Figure 2: Children’s Access to Basic Services (Percent, 2011) (Probability of access) 1 100 1 0.98 0.880.96 0.98 0.81 75 0.8 0.68 0.6 50 0.35 0.35 0.4 25 0.2 0.1 Comarca de San… Comarca Ngobe… 0 0 Los Santos Colón Chíriqui Coclé Veraguas Herrera Darién Bocas del Toro Comarca Emberá Total Panamá access to sanitation access to electricity school attendance typical child in indigenous community typical child in rural area typical child in urban area Poverty Headcount Rate Extreme Poverty Headcount Rate Source: World Bank staff calculations, Ministry of Source: World Bank (2011): “Panama Poverty Education, Educational Statistics 2010, Household Assessment”. surveys 2002-10. 6. The programmatic series of Fiscal Management and Efficiency of Expenditures DPLs has been supporting this reform program. The first DPL for US$100 million supported the legislative approval of important reforms in public financial management and social protection with an emphasis on coverage, such as broadening the tax base and increasing the number of social protection beneficiaries. The second DPL for US$100 million supported the sustained implementation of these reforms and addressed questions of efficiency with a focus on large taxpayers and improved targeting of social transfer programs. The third DPL builds on the progress achieved under the previous two operations and complements them. 7. The programmatic DPL series was initially designed to consist of four operations but was shortened to three at the time of DPL II. The envisaged timeframe for the series spanned the period from 2010 to 2014. Due to the long time that elapsed between DPL I and DPL II it became impossible to fit four operations within that time span. 1 Based on Human Opportunities Index estimations, Figure 2 demonstrates what the probability is that a child in different areas will have access to basic services. 2 II. MACROECONOMIC POLICY FRAMEWORK RECENT ECONOMIC DEVELOPMENTS 8. Panama’s strong and relatively stable growth over the past decade is a result of the fact that the economy is open, competitive and diversified. Panama’s real growth over the past ten years averaged 8.3 percent; double the average for Latin America and the Caribbean. The economy is one of the most open and competitive in the region. The country's continuous improvements in infrastructure, including one of the best port and airport networks worldwide, has allowed Panama to consolidate its position as the most competitive economy in Central America and second after Chile in Latin America and the Caribbean, according to the 2013-14 Global Competitiveness Report. Growth has mainly stemmed from transport and communications, trade, construction and financial intermediation. The strong growth in these sectors has translated into historically low levels of unemployment of 4 percent in 2012 and 4.5 percent in the first quarter of 2013. Over time, growth has become more driven by domestic demand on the back of increased investment and private consumption. 9. The strong growth performance during 2011-2012 has started to moderate; yet it remains at high levels. After the 2009 economic crisis, economic growth in Panama has exceeded the pre-crisis pace, with growth rates of over 10 percent in 2011 and 2012. The main drivers for this growth were massive infrastructure investment and private consumption. In the first half of 2013 growth decelerated, although it still remains at a high level and annual growth is expected at 7.8 percent. 10. This deceleration is largely a result of external factors. First, certain shipping companies have rerouted their vessels away from the Panama Canal. These arrangements, which are expected to be temporary until the enlarged canal starts operating in June 2015, have led to a decline in cargo volume and canal fees this year. However, the expanded Panama Canal is likely to not only regain this business but also attract other companies that are currently not using it due to limits on the size of vessels that can pass. Secondly, in March 2013, Colombia imposed new tariffs on textile and footwear imports 2 with a large negative impact in the Colon Free Zone: in March 2013, business contracted by 26.6 percent with respect to the previous month. Thirdly, companies from Venezuela failed to pay for their imports from Colon Free Zone due to the currency restrictions they face. These last two shocks combined resulted in a year-on-year decrease of 15 and 6 percent in re-exports from Colon Free Zone in the first and second quarters of 2013. Finally, activities in the Panama harbor in 2013 have declined as a consequence of the loss of business from the Canal and the Colon Free Zone. These external shocks contributed to lower year-on-year growth in the first two quarters of 2013, estimated at 7.0 and 7.6 percent respectively. 11. Meanwhile, import demand has remained strong leading to a significant deterioration of the trade balance and as a result, the current account. In early 2013, the continued demand for imports for mainly the Government investment program and the Canal expansion led to a 3.7 percent increase of imports in the second quarter of 2013 relative to the 2 Colombian importers of finished textiles and footwear must pay 10 percent of the value of the merchandise and US$5 per kilo gross for garments and clothing accessories. 3 same period in 2012. As a consequence of the simultaneous drop in exports and increase in imports, the trade deficit widened to 11.8 percent of GDP in the first half of 2013. This was the main driver behind the current account deficit of 7.8 percent of GDP in the first half of 2013, 5 percentage points larger than during the same period in 2012. Table 1: Panama—Key Economic Indicators 2008-2018 Estimated Projected 2008 2009 2010 2011 2012 2013 2014 2015 2016 (annual percentage change) Real GDP 10.1 3.9 7.6 10.6 10.5 7.8 7.0 6.5 6.2 CPI Inflation (eop) 6.8 1.9 4.9 6.3 5.0 4.7 4.4 3.9 3.6 (in percent of GDP) Savings and investment Gross national savings 16.7 24.9 15.5 15.7 19.6 16.9 17.4 16.7 16.5 Gross fixed investment 27.6 25.6 26.4 28.5 28.7 29.5 29.0 27.0 26.6 Fiscal accounts Central government Total revenues (including grants) 19.8 18.5 18.4 17.8 17.9 17.5 16.8 17.0 18.0 Current revenue 18.4 18.1 17.9 17.7 17.9 17.0 16.8 17.0 18.0 Tax revenues 10.8 11.1 11.4 11.3 12.2 11.6 11.9 12.0 12.0 Nontax revenues 7.6 7.0 6.5 6.4 5.7 5.4 4.9 5.0 6.1 o/w Panama Canal fees and dividends 3.3 3.2 3.0 3.3 2.9 2.4 2.4 2.5 3.5 Capital revenue 1.1 0.2 0.5 0.1 0.0 0.5 0.0 0.0 0.0 Total expenditure 19.5 19.9 21.0 21.3 21.9 21.0 19.9 20.4 19.6 Capital expenditure 5.6 6.3 7.3 8.2 9.0 9.2 8.7 8.2 7.4 Primary Balance 3.4 1.4 0.1 -1.2 -1.9 -1.5 -1.0 -1.2 0.7 Overall Balance 0.3 -1.5 -2.6 -3.6 -4.0 -3.5 -3.1 -3.5 -1.5 Nonfinancial Public sector Overall Balance (excluding ACP) 0.4 -1.0 -1.9 -2.2 -2.1 -3.1 -2.7 -3.0 -1.5 Overall Balance (including ACP) 2.5 -0.4 -3.4 -5.5 -4.3 -4.9 -2.9 -2.0 -1.5 External sector Current Account Balance -10.9 -0.7 -10.8 -12.8 -9.1 -12.6 -11.6 -10.3 -10.1 Trade Balance (of goods) -19.9 -9.0 -17.1 -19.3 -15.6 -20.2 -19.0 -17.5 -18.0 Net exports from Colón Free Zone 0.0 1.7 1.8 1.8 1.7 1.3 2.2 2.4 2.4 Services Balance 13.6 13.8 12.9 12.2 13.7 13.3 13.1 12.6 13.2 Net factor income -6.9 -6.0 -7.0 -6.1 -7.4 -6.0 -5.9 -5.8 -5.6 Net current transfers 2.3 0.5 0.5 0.4 0.2 0.3 0.2 0.4 0.3 Foreign direct investment 9.3 5.2 8.8 9.1 8.0 8.0 8.2 7.7 7.8 Total Public Debt* 45.4 45.4 44.9 44.9 41.3 38.1 36.7 33.9 30.4 GDP (in millions of current US$) 23,002 24,163 26,590 30,569 36,028 40,664 45,424 50,264 55,302 Source Comptroller General, IMF and World Bank staff calculations Note: ACP = Panama Canal Authority. * Total Debt of Non-Financial Public Sector, including ACP and net non-governmental assets formerly held by the Fiduciary Fund. 12. With no independent monetary policy, much of the relative stability of the economy can be attributed to prudent fiscal policies. Panama’s economy is fully dollarized and therefore, does not have independent monetary policy. Thus fiscal policy plays a crucial role in stabilizing the economy. Primary surpluses and modest deficits since 2011 in combination with fast economic growth have led to a decrease of public debt from 51 percent of GDP in 2007 to 41.3 percent in 2012 (Table 1 as well as Figures 3 and 4). 4 13. In 2012, the fiscal deficit was kept in check despite the high public investment. The fiscal deficit of the nonfinancial public sector (excluding ACP) closed at 2.1 percent of GDP in 2012 below the legally mandated deficit ceiling of 2.9 percent under the Social and Fiscal Responsibility Law (SFRL). In parallel, investment spending increased from 8.2 percent of GDP in 2011 to 9 percent in 2012 as part of the implementation of the Government’s five-year investment plan. Yet the fiscal deficit did not deteriorate further in 2012 due to a revenue increase. Figure 3: Overall fiscal balance Figure 4: Total public debt (percent of GDP)* (percent of GDP) Overall Balance Central Government 60 (% of GDP) External Internal 4 Overall Balance NFPS excl. ACP 50 3 40 2 *Preliminary data for Q1 and Q2 of 2013. 1 30 0 -1 20 -2 10 -3 -4 0 2007 2008 2009 2010 2011 2012 2013* 2007 2008 2009 2010 2011 2012 2013* *Projection. Source:World Bank staff calculations, MEF, Comptroller General, and IMF. Note: * NFPS excl ACP = Non-Financial Public Sector, excluding Panama Canal Authority. 14. The Government has been implementing a comprehensive tax reform program to address the low tax-to-GDP ratio. The implementation of tax policy and administration reforms approved in 2009 and 2010 is expected to raise an additional 1.7 percent of GDP in revenues per year. This increase is expected to stem from a 0.9 percentage point increase through the changes in personal and corporate income taxes, a negative impact of 0.6 percentage points through the lowering of the tax rates and the increase of income thresholds, and a further increase of 1.4 percentage points due to other reforms, including 0.5 percentage points related to tax administration reforms. The second DPL in the series supported the implementation of tax policy measures and other tax administration efforts with considerable results. Until 2012, the overall tax revenue as percent of GDP increased by 1.4 percentage points relative to 2008 and reached 12.2 percent. In 2012, the economy grew at a comparable rate to 2008, suggesting that the higher tax-to-GDP ratio results from the reforms rather than an increase in economic activity. Yet in 2013, due to negative external shocks and lower economic growth, tax revenue-to-GDP is expected to be lower, at 11.6 percent. 15. Despite these efforts, the tax-to-GDP ratio is still low by international standards, and reforms supported by this DPL are relevant to further increase spending efficiency in order to achieve more impact with the revenue available. Panama’s tax revenue, 12.2 percent in 2012, was lower than the Central American average of 13.5 and Latin American average of 15.7 percent. 3 While dividends and fees from the Panama Canal and other non-tax revenues add around another 5.7 percentage points of GDP to total public revenues, they remain low by 3 Economic Commission for Latin America and the Caribbean (2013). “Panorama Fiscal de America Latina y el Caribe. Reformas tributarias y renovación del pacto fiscal”. 5 international standards. A higher tax-to-GDP ratio would allow the Government to increase social spending, which has been increasing at a slower pace than the rest of Latin America in the last 20 years. For instance, Panama spent about 10 percent of GDP on social expenditure in 2010 compared to an average of 15.4 percent in Latin America and the Caribbean. 4 The scarcity of resources highlights the relevance of reforms in the areas of procurement, debt management and social protection to increase efficiency of spending. Table 2. Panama: Summary Operations of the Central Government (In percent of GDP) Budget Projected 2008 2009 2010 2011 2012 2013 2014 Overall balance 0.3 -1.5 -2.6 -3.5 -4.0 -3.5 -3.1 Primary balance 3.4 1.4 0.1 -1.2 -1.9 -1.5 -1.0 Revenues and grants 19.8 18.5 18.4 17.8 17.9 17.5 16.8 Current revenue 18.4 18.1 17.9 17.7 17.9 17.0 16.8 Taxes 10.8 11.1 11.4 11.3 12.2 11.6 11.9 Direct taxes 5.7 6.0 5.8 5.2 6.4 5.7 6.0 Income tax 5.1 5.4 5.1 4.6 5.8 5.1 5.4 Of which: Capital gains 0.0 0.0 0.0 0.4 0.3 0.3 0.3 Tax on wealth 0.5 0.6 0.7 0.6 0.6 0.6 0.6 Indirect taxes 5.1 5.1 5.6 6.1 5.8 5.8 5.9 Import tax 1.8 1.6 1.4 1.4 1.2 1.1 1.2 ITBMS 2.3 2.3 2.8 3.3 3.3 3.3 3.3 Petroleum products 0.4 0.5 0.4 0.5 0.3 0.3 0.3 Other tax on domestic transactions 0.7 0.7 1.0 0.9 1.1 1.1 1.1 Nontax revenue 7.6 7.0 6.5 6.4 5.7 5.4 4.9 Dividends 2.9 2.7 2.7 3.0 2.8 2.7 2.2 Of which: Panama Canal Authority 1.8 1.8 1.7 2.2 1.8 1.6 1.5 Panama Canal Authority: fees per ton 1/ 1.5 1.4 1.3 1.1 1.1 0.8 0.9 Transfers from decentralized agencies 1.6 1.4 1.4 1.1 0.9 1.0 0.9 Other 1.5 1.4 1.2 1.2 1.0 1.0 0.9 Capital revenue 1.1 0.2 0.5 0.1 0.0 0.5 0.0 Grants 0.4 0.1 0.1 0.1 0.0 0.1 0.1 Total Expenditure 19.5 19.9 21.0 21.3 21.9 21.0 19.9 Current expenditure 13.9 13.6 13.7 13.1 12.9 11.8 11.2 Capital expenditure 5.6 6.3 7.3 8.2 9.0 9.2 8.7 Source: Comptroller General, Ministry of Economy and Finance, and Fund staff estimates and projections. 1/ Includes public service fees. 16. Recent upgrades by rating agencies have rewarded Panama’s downward trending debt-to-GDP ratio and the improving quality of the debt portfolio. The quality of the debt portfolio has steadily improved as the authorities have extended the maturities of new issues and smoothed the portfolio redemption profile. These policies have significantly reduced exposure to refinancing and interest rate risk. This overall improvement has been recognized by all credit rating agencies, which awarded Panama investment grade in the spring of 2010 and the rating has further improved in 2012. The debt management reforms supported by this operation will contribute to further improvements. 17. Notwithstanding this positive debt dynamics, Panama is facing bond spreads on the rise along with its Central American peers. Major reasons behind the higher spreads are the increased volatility in international capital markets and uncertainty about future US Federal 4 Economic Commission for Latin America and the Caribbean (2012). “Panorama Social de America Latina”. 6 Reserve quantitative easing. The mid-yield to maturity for 30-year Panama’s Government bonds has increased in 2013 from a low of 4 percent to 5.4 percent in mid-September peaking at 5.75 percent at end August. Panama shares this spread dynamics with other Central American countries. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 18. The Panamanian economy is likely to continue growing at a strong pace, although lower than 2011-2012, sustained by a high investment rate and private consumption. Investment and private consumption were among the main drivers of the recent rapid growth and are expected to remain so for 2013 and 2014. The investment rate is expected to remain close to 29 percent until 2014, similar to 2011-2012. This is higher than the Latin American average of below 25 percent and close to rates in East Asia. The Panama Canal expansion is part of this investment and is likely to sustain strong growth in 2013 and 2014. The project is currently within budget and the expanded Canal is expected to begin operations in June 2015. After the completion of the Canal expansion, large private investment projects such as a US$6.5 billion investment in copper mining which has just started in 2013, and new public investment such as a second line of the Panama City metro, would further sustain growth. In addition, increased activity around the Canal would kick in. Current growth rates are likely to be sustained and lead to a smooth transition towards trend growth in the medium term. Yet, sustaining high growth in the long run will require investment in education and innovation for growth to rely more on increases in total factor productivity and less on capital accumulation. 19. Inflation is expected to ease. Consumer Price Index inflation is expected to fall below 5 percent in 2013 continuing the decreasing trend from 2012. While the stabilization in international commodity prices drives the decline from a peak in 2011, economic dynamism and historically low unemployment rates prevent inflation from dropping further in the next two years. In the medium term, inflation will slowly subside to lower levels as growth moderates to its long term growth trend. Nonetheless, a spike in oil prices and a potential increase in food prices are still risks to the inflation outlook. 20. Fiscal deficits have been widening in Panama, yet projections suggest a declining debt-to-GDP ratio thanks to robust economic growth. Panama’s fiscal deficit is projected to reach 3.1 percent of GDP in 2013 and to be below 2 percent in 2016 (nonfinancial public sector, excluding the Canal Authority). The ceiling for 2013 fiscal deficit has been slightly increased by 0.2 percent of GDP in April 2013 to reach 3.1 percent on account of reconstruction efforts after a flood in November 2012. In addition, capital expenditure is expected to peak in 2013 at 9.2 percent of GDP mainly as a result of completion of projects in the Government’s five-year plan and Presidential elections in 2014. The plan includes the construction of the first metro line in Panama City (US$1.9 billion), a major improvement of the national road network (US$677 million) and an expansion of airport infrastructure (US$227 million). Current public investment projects are expected to be completed within budget and new Government projects will be financed out of additional Canal proceeds, thus the fiscal balance will not be impacted. With growth remaining at high levels, debt-to-GDP ratios continue to decrease despite the sustained fiscal deficits. 7 21. Panama’s public debt vulnerabilities are low. The 2013 debt sustainability analysis by the International Monetary Fund (IMF) concludes that external debt, relatively high as a share of GDP, is sustainable over the medium term. It suggests that a combination of a gradual rise in revenue and a containment of current expenditure would allow the authorities to expand public investment while keeping public debt on a sustainable path in coming years. Under a number of alternative scenarios in which shocks are applied to interest rates, current account and growth, such shocks are found to have a limited impact on Panama’s external debt-to-GDP ratio. While a further deterioration of fiscal accounts would limit the room for maneuver in case of an external shock, it would not endanger debt sustainability. As one mitigating measure, the Government has engaged in reforms to increase revenue, including tax policy and administration reforms and the approval of a sovereign wealth fund, the Fondo de Ahorro de Panamá (FAP), in 2012. The FAP will set aside transfers from the Panama Canal Authority to the Treasury in excess of 3.5 percent of GDP starting in 2015. However, the net savings (savings less incremental debt incurred during the year) in the FAP will likely be low if the Government were to incur the maximum permissible deficits under the SFRL. To mitigate risks, the Ministry of Finance (MEF) is preparing a medium term debt management strategy, including the deepening of the domestic bond market, supported by this DPL series. As a result, the quality of the debt portfolio is expected to further improve. 22. While the current account deficit is expected to widen in 2013, a large part of it is financed by foreign direct investment (FDI) inflows and the deficit is expected to decrease in the medium term. Based on external factors described above in combination with sustained import demand, the current account deficit would likely reach 12.6 percent in 2013. While the large deficit exposes the economy to deteriorations in external demand and changes in the risk aversion of foreign investors, strong domestic fundamentals are mitigating factors. Moreover, a large part of the deficit is financed through FDI flows which are more stable than other capital flows over time. In 2011 and 2012, FDI inflows amounted to 9 and 8.4 percent of GDP respectively. Moreover, the economy demonstrated resilience during the 2009 crisis and based on stress tests, a 2011 financial sector assessment program concluded that Panama’s financial system faced minimal vulnerabilities. This is in part due to reforms to improve the financial safety net and strengthen financial sector supervision, mitigating external vulnerabilities after the 2009 crisis. In the medium term, imports for investment will decrease slowly while export challenges will subside, bringing about a lower current account deficit. 23. On the public sector side, additional financing needs will be covered through official sources and markets thanks to Panama’s credibility and market access. Managing its debt portfolio actively, the Government of Panama has revised its financing needs for 2014 upwards, explaining the request for the proposed DPL in the amount of US$200 million. The request arises from potentially higher international borrowing costs due to the phasing out of US quantitative easing and moderating growth prospects in parallel to Government’s objective of completing its public investment program. In the medium term, financing needs are expected to decrease on account of the decreasing debt-to-GDP ratio and contained primary deficits. 2015 is an exception to this overall trend due to scheduled amortization payments on external debt. Financing is primarily expected to be raised in capital markets (See Table 3). 8 Table 3. Government's medium term financing plan (In percent of GDP) 2012 2013 2014 2015 2016 Financing needs 9.0 4.7 3.8 6.3 2.3 Amortizations 5.0 1.2 0.7 2.8 0.8 Domestic 2.5 0.8 0.2 0.2 0.1 External 2.5 0.5 0.5 2.6 0.6 Multilateral 0.4 0.4 0.4 0.4 0.4 Bilateral 0.0 0.0 0.0 0.0 0.0 Primary deficit 1.9 1.5 1.0 1.2 -0.7 Interest payments 2.1 2.0 2.1 2.2 2.3 Financing Sources 9.0 4.7 3.8 6.3 2.3 Disbursements 9.0 4.7 3.8 6.3 2.3 External 2.4 4.4 2.5 0.8 0.7 Multilaterals 1.4 1.5 1.5 0.8 0.7 o/w new budget support 0.6 0.5 0.7 0.2 0.2 Bilaterals 0.0 0.0 0.0 0.0 0.0 Capital Markets 6.6 0.4 1.3 5.5 1.6 Financing gap 0.0 0.0 0.0 0.0 0.0 Source: MEF 24. The main economic risks derive from the fiscal stance and the country’s vulnerability to external shocks. The risk of overheating eased in comparison to 2012 and will further decrease as capital spending winds down in 2014. There is some risk that fiscal balances may deteriorate, given the lower tax collections in the first half of 2013 as well as lower revenues from Panama Canal in 2013. This would not compromise debt sustainability but would slow the reduction of the public debt-to-GDP ratio and limit room for maneuver should negative shocks hit the economy. Factors mitigating this risk include: (i) there is some flexibility in the timing of capital expenditure; (ii) most public infrastructure projects are being within budget and are expected to be completed on time; and (iii) the Government is actively raising revenues. A second risk is that Panama is vulnerable to external shocks. External risk factors include potentially lower external demand and lower revenues from the Panama Canal, given deceleration of China and slow growth rates in Europe. Moreover, the uncertainties around the future of the US quantitative easing and the potential increase of US interest rates could lead to risk aversion of foreign investors and a slowdown in investment flows into the region. However, robust economic growth, the fact that a large part of current account is financed through relatively stable FDI, the approval of the FAP sovereign wealth fund to a lesser degree and the country’s access to multilateral financing mitigate this risk. 25. Panama’s macroeconomic framework is deemed adequate for development policy lending despite the risks noted above. The macroeconomic framework will support economic growth expected to reach 7.8 percent this year and exceed 6 percent in the medium term, with inflation declining and expected to be contained at below 5 percent. Fiscal policy is expected to remain prudent with the overall balance (nonfinancial public sector, excluding the Canal Authority) expected to be contained at 3.1 percent of GDP this year and below 3 percent over the medium term. The public sector’s debt-to-GDP ratio is expected to decline over the medium term. Although the current account will experience a slight widening due to external factors 9 while investment-related imports remain strong, it will be largely financed through FDI, and the remaining financing needs will be easily met. III. THE GOVERNMENT’S PROGRAM 26. In December 2009, the Government presented a five-year Strategic Plan with the overall objectives of sustainable economic growth and reduced poverty and inequality. The plan is built around strategies for economic growth and social development accompanied by a detailed five-year investment plan and fiscal projections. This combination facilitates the implementation of the plan within the country’s resource envelope. To ensure fiscal sustainability, the Government has complemented the plan with a set of reforms to increase tax revenue and the efficiency of public spending. 27. The strategy emphasizes logistics, tourism, agriculture and financial services as drivers of future economic growth. Panama is considered to have a competitive advantage in these sectors, and their expansion through additional public investment of US$5.8 billion promises clear economic and social returns. The sectors were also selected as a means to promote opportunities in less developed parts of the country, reduce inequalities and generate self-reinforcing clusters of growth. 28. The strategy for social development is built around the formation of human capital and greater social inclusion. This strategy aims to reduce the stark inequality of opportunities and address the need for a qualified labor force for a fast-growing economy, while strengthening social protection programs for vulnerable groups, such as the poor, indigenous peoples and children. It includes an additional US$3.8 billion in infrastructure for the construction of hospitals, social housing, water and sewage as well as funds to increase coverage of CCT programs. 29. The Government complemented its plan with measures to improve fiscal management, the transparency and efficiency of institutions. In addition to the previously- mentioned tax policy and administration reforms, the Government has also launched several measures to improve spending efficiency in the areas of public procurement, debt management and targeting of transfer programs. IV. THE PROPOSED OPERATION LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 30. The proposed DPL series supports the Government’s reform program, focusing on aspects of tax revenue mobilization and transparency, efficiency of spending, and strengthening of social protection. Specifically, the series supports four key policy areas which are closely linked with Government priorities: (i) mobilizing domestic tax revenue and increasing tax transparency; (ii) modernizing public procurement practices; (iii) improving the institutional arrangements for debt management; and (iv) expanding social transfer programs and improving the capacity of institutions for targeting. The tax transparency component contributes to the Government’s goal to foster growth by improving the country’s image with foreign investors. The measures focusing on tax revenue mobilization and efficiency of spending help to 10 free resources for social spending, ultimately feeding into the Government’s goal of reducing poverty and inequality. Lastly, the measures on social protection directly impact this goal. 31. The program was adjusted to varying reform progress across pillars at the time of DPL II. The Government took longer than expected to analyze tax expenditures and include them in the budget. Therefore, the action related to tax expenditures was dropped from the tax revenue component. Regarding social protection, the ambitious measure of recertifying beneficiaries of the 100 a los 70 according to the revised targeting criteria had to be substituted, because it became clear that the instruments to carry out the recertification were not in place. Thus, DPL II supported the Government in creating these instruments, and the medium term outcome indicator was updated. In contrast, expanding the Beca Universal program exceeded the target, and this was reflected in the revised results indicator. A detailed description is in the program document of DPL II. 32. During the preparation of DPL III, a few changes to prior actions and results indicators have been made. With regards to procurement reform, the Government progressed slower than expected, due to an accidental fire that destroyed the offices of the Public Procurement Agency and diverted attention to the reconstruction. In contrast, in social protection, advances in coverage exceeded expectations, for example the introduction of an additional program, Ángel Guardián, to assist people with disabilities. The next section contains detailed descriptions of changes in the program. 33. Despite changes overall, the Government program remains solid, and the Government is on track to meet the medium term outcome indicators as redesigned during the preparation of DPL II. On the tax reform component, the tax-to-GDP ratio has increased to 12.2 percent by end of 2012 and the Tax Revenue Collection from Sales Taxes (Impuesto a las Transferencias de Bienes Corporales Muebles y la Prestación de Servicios, ITBMS) has upped by 1 percentage point of GDP. While the tax-to-GDP ratio is expected to decline slightly in the near future due to economic factors, the ITBMS-to-GDP ratio is expected to remain unchanged due to better tax administration. Also, Panama has already signed ten Tax Information Exchange Agreements (TIEAs) so that fulfilling the medium term outcome indicator of 12 is within reach. In procurement, the number of catalogue items covered by framework agreements has reached 6,622, so that it is likely that the medium term outcome indicator of 7,300 by end 2014 will be met. In debt management, Panama has made important strides towards the publication of a debt management strategy in 2014. Finally, in the area of social protection reform, progress is on track to meet the end of program result. 34. The design of the proposed operation builds on lessons learned from previous DPLs in Panama and the World Bank’s experience with other middle-income countries. Main lessons include (i) ownership of reform, as illustrated by previous operations in Panama that exclusively supported Government-led initiatives. The legal and regulatory framework underpinning reform was initiated and developed by the administration, with technical input from the World Bank. The Government made substantial progress in areas that were not monitored by the World Bank. DPL objectives were strategically aligned with the Government strategy (procurement reform is a good example). In public financial management components, the core DPL objectives were linked to the Government’s reform and strategy. Two critical 11 entities, the MEF and Comptroller General’s Office, shared the objective of strengthening fiscal transparency and coordinated efforts to achieve it; and (ii) strong analytical underpinnings and links to complementary World Bank investment lending social protection. Key economic and sector work, including the Public Expenditure Review, helped inform the reform efforts of Government and supported a fruitful policy dialogue. In particular, in the area of social protection, complementarities of the loan program with other World Bank projects have helped progress. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Operation Pillar 1: Mobilizing domestic tax revenue and increasing tax transparency 35. This pillar supports the Government’s tax policy and administration reforms and improvements in international tax information sharing. Together, these reforms are expected to mobilize tax revenue and to increase the international exchange of tax information. Subcomponent 1: Mobilizing domestic tax revenue Indicative Trigger(s) for DPL III Prior action(s)for DPL III The Large Taxpayer Unit (LTU) has carried out audits The Government, through the ANIP has taken steps to in at least two new economic sectors based on training increase tax compliance by carrying out ten audits of in advanced audit techniques for LTU auditors. large taxpayers using advanced audit techniques. (Completed) The Dirección General de Ingresos (DGI) (Department of Income Collection) has strengthened the monitoring of tax compliance by connecting a minimum of seven banks online with the DGI. 36. The first objective of the DPL series is to mobilize domestic tax revenue helping the Government to generate resources for social spending. Major challenges in Panama were a narrow tax base, significant tax exemptions, and an inefficient tax administration resulting in low tax revenue collection. The Government has been addressing these weaknesses through the implementation of comprehensive tax reforms approved in 2009 and 2010. The DPL series has been supporting the Government in this effort focusing on (i) widening the tax base and reducing exemptions (DPL I); (ii) creating a tax tribunal (DPL I); and (iii) monitoring and auditing large taxpayers (DPLs II and III). The estimated revenue gains from the reforms can be used for social spending, thereby contributing to reduced poverty and inequality. 37. Most recent measures to increase domestic tax revenue collection include the audits of large taxpayers reflecting an effective operation of the LTU, selected as prior actions for DPL III. The LTU was formally established within the organizational structure of DGI (Dirección General de Impuestos), the legal predecessor of the National Public Revenue Authority (ANIP), by an administrative resolution on December 12, 2012. The LTU is expected to provide tax compliance control and monitoring of large corporate taxpayers. Establishment of a LTU poses significant challenges to tax administration. The characteristics of this taxpayer segment call for a significant degree of specialization of staff and business processes. ANIP has strengthened the LTU’s monitoring of tax compliance through the training on advanced audit techniques for its auditors, supported by DPL II, and the completion of ten audits in 2013, 12 generating additional tax revenue of US$13 million. Five further audits are underway and are expected to significantly increase this amount. 38. The selected prior action supports the medium term outcome indicators for the tax component. The indicators are that (i) tax collection of the Central Government is at least 12 percent of GDP by end 2014; (ii) ITBMS revenue is increased by at least 1 percentage point of GDP; and (iii) the LTU covers at least 55 percent of total tax revenue. While the focus on large taxpayers is expected to generate additional tax revenue, the medium term indicator of the tax-to- GDP ratio has been adjusted downward from 13 percent to 12 percent on account of unexpected external factors, such as newly imposed tariffs by Colombia on Panamanian exports and lower activity at ports due to a temporary rerouting of shipping traffic. The tax-to-GDP ratio is not an optimal indicator of the Government’s tax effort because impact from these only materializes later, especially given that the LTU was established in 2012. In addition, many other factors beyond the supported reforms influence the measure. A better indicator would be an estimate of the tax gap. However, such measure is unrealistic in the context of Panama’s capacity constraints. Hence, the tax-to-GDP ratio is the best available measure to keep track of tax effort and is complemented with two additional indicators that are closely related to the program. 39. Another recent advance in tax administration is the creation of ANIP which needs to be complemented with further reform measures. The DGI as part of the MEF was replaced by ANIP by Law 24 of April 8, 2013. This reform is a significant step in the process of institutional modernization of the Panamanian tax administration. The law vests administrative, financial, and operational autonomy in ANIP which aims to reduce political interference and gives more responsibility and accountability for managers to achieve their objectives. To generate a positive impact, this measure has to be complemented with improvements in core business processes, organizational reforms and investment in information technology. 40. The tax administration is also moving towards customer-orientation by providing better services to taxpayers. Steps have been taken to increase the coverage of offices that can receive payment of tax liabilities. In this regard, the ANIP is contracting banking entities to expand the network of offices allowed to receive tax payments and enabling payment through online banking. This is facilitating taxpayers’ compliance with their tax obligations. Subcomponent 2: Increasing tax transparency Indicative Trigger(s) for DPL III Prior action(s) for DPL III The Government has approved legislation to allow the The Government has adopted a custody regime for immobilization of bearer shares to identify ownership bearer shares for purposes of facilitating the of shares. identification of the ownership of said type of shares. (Completed) 41. The second objective of this operation is to increase tax transparency supporting the Government in protecting domestic tax bases and fostering growth. The Global Forum’s peer review report from September 2010 highlighted a number of shortcomings that need to be addressed to move to the second phase of the review process. 5 Among others, the identified 5 In September 2009, the OECD Global Forum launched a formal process of peer review to monitor and review progress made towards full and effective exchange of information. The Peer Review Process consists of two phases: 13 shortcomings included: (i) reluctance to enter into tax information exchange agreements (TIEAs) rather than double taxation conventions (DTC) as a way to exchange information; (ii) lack of availability of ownership information; and (iii) the remaining anonymity of holders of companies’ bearer shares was also flagged. The Government has taken important steps to adapt the regulatory framework and ANIP’s operational capabilities to the recommendations, bringing them closer to compliance with the standards of the Global Forum. Reform actions include: (i) the approval of Law 33-2010 amending the fiscal code to incorporate key international taxation legislation (supported by DPL I); (ii) the negotiation and signing of 19 double taxation conventions (DTC) and ten tax information exchange agreements (TIEAs) with most relevant economic partners (supported by DPLs I and II); 6 (iii) the approval of Law 2-2011 applying Know Your Client (KYC) rules to allow disclosure of corporate ownership (supported by DPL I); 7 and (iv) the approval of Law 47-2013 adopting a custody regime for bearer shares which facilitates the identification of the ownership of the shares (supported by DPL III). By participating in the Global Forum’s peer review process, the Government has improved its international standing. This is likely to positively impact Panama’s ability to attract foreign investment and thereby future growth. 42. The legislation to adopt a custody regime for bearer share certificates is a relevant step in the direction of increasing tax transparency, and has been selected as a prior action for DPL III. The enacted Law 47 of August 6, 2013 establishes a custodial arrangement system for bearer shares which will help Panama’s competent authority to identify the owners of these shares. A custodial arrangement system provides for ownership information to be registered with the custodian to be available to the competent authority on demand. A caveat of the law is that it will be effective after two years’ time, and that bearer shares issued after the promulgation of the law will enjoy a further transition period of three years. 43. Overall, the Government is on track to meet the medium term objective on tax transparency. Panama has made efforts towards meeting the agreed international standard on tax transparency and the exchange of information. The Government is close to reaching the target of 12 signed information exchange agreements. The actions taken thus far with the support of the DPL series would protect domestic tax bases from inbound and outbound international transactions. The bearer shares legislation is an important step in this context. Yet, given the effectiveness date of the law, it will be too early at the end of the program to assess its outcome. Phase 1 (review of legal and regulatory frameworks) and Phase 2 (assessment of the practical implementation of the “internationally agreed standard” on tax transparency). A country that signs agreements with 12 countries (OECD or other countries) is considered to have “substantially implemented” the standard. 6 Overall, 25 international taxation agreements have been signed of which 11 DTCs and 1 TIEA are already in force. 7 For details please refer to Panama DPL II program document, World Bank report number 73406-PA, dated February 15, 2013. 14 Pillar 2: Modernizing public procurement practices Indicative Trigger(s) for DPL III Prior Action(s) for DPL III All Central Government agencies are using standard No prior actions for DPL III. bidding documents and contracts. The Government approves a regulatory decree to replace obsolete procurement regulations and better accommodate public investment projects drafted by a participatory committee formed by civil society, public and private sector The Government has formulated and published guidance notes with evaluation criteria in addition to the price for selecting and contracting. 44. The third objective of the DPL series is to modernize public procurement practices helping the Government to increase the efficiency of public spending. The Government faced the twin challenges of high transaction costs and intensive administrative effort in buying goods and contracting services. The Government’s ongoing procurement reforms are expected to significantly increase accountability and transparency and reduce transaction costs since 37 percent of nonfinancial public sector spending is done through procurement. The DPL series has supported the Government in this effort focusing on technical advances as for example the introduction of the e-procurement platform PanamaCompra (DPL I), institutional steps such as the introduction and use of framework agreements (DPL II), and legal advances such as the update of the regulatory framework to better handle high-value, complex contracts (during preparation DPL III). 45. Despite the accidental burning of its office in May 2013, the Government’s procurement agency, Dirección General de Contrataciones Públicas (DGCP), managed to progress on its modernization agenda, yet at a slower pace. DGCP’s offices were destroyed by a fire on May 4, 2013 and staff is since working in difficult working conditions in a temporary and less equiped office space that was lent by MEF. The World Bank is supporting the rental, refurbishment and equipment of the new DGCP offices through the Enhanced Public Sector Efficiency Technical Assistance Loan – TAL (P121492). While the DGCP has advanced on the legal framework for procurement, progress in other areas have been slower than initially planned due to the shift of focus towards reestablishing the office and challenging conditions of the work environment. As a result, indicative triggers foreseen for DPL III have not been converted into prior actions. 46. The most relevant, recent advance is the updating of the regulatory framework for public procurement, aligning it with international standards. An executive decree, pending approval, will facilitate the procurement of high-value, complex contracts through improving the processes for the pre-qualification of bidders. During pre-qualification, potential suppliers prove that they have the necessary experience and resources to perform a contract prior to bidding. While for most contracts, qualification is realized after bidding, due to the high value and complexity of contracts, pre-qualification is appropriate for large investment projects. Second, the decree will create the legal basis for the consideration of environmental and social criteria in bid evaluation. Environmental criteria include the costs related to removing pollution. Social criteria include poverty reduction and fairness in distributing public resources. Third, a legal 15 basis will be created for the accreditation of staff in procurement practices assuring sufficient training and coaching of staff handling public procurement. Fourth, the decree will align regulations to technological updates of the PanamaCompra e-procurement platform, particularly to the dynamic procurement feature of the framework agreements module. This feature implies that suppliers selected through a framework agreement processed through PanamaCompra have to compete before each specific purchase order is issued with prices being revalidated or even lowered after each bid. While well advanced, the approval process is underway and the decree is expected to be approved in the next few months, yet not in time for this operation. Therefore it has been dropped from the list of prior actions, although the monitoring of progress will continue. 47. Still, challenges to the legal framework remain, particularly regarding the use of standard bidding documents and the award criteria in bid evaluation. In particular, a first challenge is that standard bidding documents in Panama no longer fulfill the needs of increasingly sophisticated implementing agencies. This has resulted in procurement entities substantially amending existing standard bidding documents, which has undermined harmonization efforts and the effectiveness of control. The Government has identified this challenge and is working towards the formulation of updated standard bidding documents that will be used by all central Government agencies. A second challenge consists of the use of subjective award criteria despite the overall transparent operation of the procurement system. As reported by PanamaCompra, 86 percent of the aggregate awarded amount results from open competition; yet only 36 percent of this results from purely economic considerations while the remaining 64 percent results from considering non-economic evaluation criteria (quality, experience, etc.) in addition to price. The development and application of guidance notes with evaluation criteria in addition to the price for selecting and contracting will greatly help in this context. The Government has been working on this issue and remains committed to both reform measures and their realization is now expected for 2014. However, advances have been slower than anticipated due to the diverted attention in the context of the destruction of the DGCP offices. Consequently, these measures have been dropped from the list of prior actions. 48. The medium term outcome indicator, consisting of a number of goods purchased through framework agreements, is expected to be met. Framework agreements with suppliers, contractors and providers of non-consulting services set out terms and conditions under which the procurement of common use good and services can be undertaken in the medium term. The use of framework agreements by central agencies is mandated by Law 22 of 2006 and aims at helping the Government achieve savings in time, price and transaction costs. These savings result from the fact that framework agreements are e-procured through PanamaCompra. By September 2013, the number of goods and services purchased by Government agencies covered by framework agreements has more than doubled (from a baseline of 2,452 catalogue items in 2009 to 6,622 items in 2013), almost reaching the end-program target of the DPL series (7,300 items for 2014). More than US$600 million has been channeled through framework agreements since the creation of the instrument. This represents the bulk of the procurement of common use good purchases or around 5 percent of total public procurement in Panama. The remaining 95 percent of public procurement includes large public infrastructure projects. Therefore, the instrument of framework agreements is close to its upper limit. Although the enactment of the decree will contribute to the achievement of the medium term outcome of the DPL by increasing 16 the amount of goods and services procured through framework agreements, the Government is already well on track to meet the target. Pillar 3: Improving the institutional arrangements for debt management Indicative Trigger(s) for DPL III Prior Action(s) for DPL III The Government has taken measures to increase The Government through MEF has adopted a plan for liquidity, introduced mechanisms of transparency and domestic debt market development including: (i) the price discovery, and broadened the investor base with adoption of a policy and issuance of regulation for the the formulation and implementation of a plan for promotion and functioning of the primary dealers domestic market development. program; (ii) the modification of the contracts with international credit rating agencies to have domestic sovereign bonds rated; and (iii) the selection of a worldwide known financial information platform to conduct domestic Government bond auctions on this platform. (Completed) 49. The fourth objective of the DPL series is to improve the institutional arrangements for debt management supporting the Government to increase spending efficiency. A major challenge in Panama is the lack of a formal debt management strategy despite overall guidelines such as the development of the domestic debt market and the smoothing of the debt profile. Such a strategy would establish target ranges for selected indicators of financial risk after assessing the cost-risk tradeoffs under different scenarios for market developments. This strategy would guide public debt management and summarize the Government’s intentions on the debt portfolio. An annual borrowing plan would then be derived from the strategy defining yearly issuance. The Government has been addressing this challenge through developing the domestic debt market (supported by DPLs I and III) and the alignment of the organizational structure of the debt management office with international best practices (supported by DPL II) to enable the formulation of a debt management strategy. Efficient debt management and hence optimal choices of debt instruments reduce interest costs in the medium to long run. 50. The Government has taken measures to further develop the domestic debt market as part of the development of a medium term debt management strategy, selected as prior actions for DPL III. A liquid domestic market supports the development of the debt management strategy by increasing the range of available debt instruments and reducing risks for Government funding. This is achieved through broadening the investor base and reducing demand volatility. In 2013, specific Government measures to increase the liquidity of the domestic debt market included: (i) the adoption of a policy and issuance of regulation for the promotion and functioning of the primary dealer program; (ii) the modification of contracts with international credit rating agencies covering the rating of domestic sovereign bonds; and (iii) the selection of a worldwide known financial information platform to conduct domestic Government bond auctions on this platform. Such an integrated platform will ensure that prices of Panamanian Government bonds are immediately available to investors worldwide. The efforts to increase domestic issuance have resulted in an increased share of 27 percent of domestic debt in the total in 2013 compared to 24 percent one year earlier. At the same time, the spread of domestic and external bonds has narrowed from more than 100bp to less than 50bp. Yet, such spreads are influenced by multiple factors and the reduction cannot solely be attributed to the efforts of market development. 17 51. The prior action feeds directly into the medium term outcome indicator of the publication of a medium term debt management strategy. The Government is committed to formulate and publish its first formal medium term debt management strategy by the first quarter of 2014. The debt management strategy is a result of a thorough cost-risk analysis of alternative debt strategies under baseline and risk scenarios, taking into consideration market and macroeconomic constraints. Its outcome is a debt portfolio with an optimal cost-risk profile, given the risk appetite of the Government. It also guarantees consistency of the debt management operations across time and increases transparency to all stakeholders leading to a reduction in borrowing costs over time. Pillar 4: Expanding social transfer programs and improving the capacity of institutions for targeting Indicative Trigger(s) for DPL III Prior Action(s) for DPL III MIDES has approved a recertification strategy for The Government through MIDES has adopted a policy and 100 a los 70. issued regulations for the better targeting of beneficiaries of the 100 a los 70 program including provisions to (i) verify compliance with beneficiaries’ co-responsibilities and processes for entry to and exit from said program; (ii) incorporate beneficiaries in the Registro Único de Beneficiarios; and (iii) formally incorporate the Secretaría Ejecutiva del Programa 100 a los 70 into MIDES. (Completed) The Government has developed and implemented The Government has developed a Registro Único de a single registry for the Red de Oportunidades, Beneficiarios for the following social protection programs 100 a los 70, y Beca Universal CCT programs to Red de Oportunidades, 100 a los 70, and Evaluación Social improve targeting. CCT programs to improve targeting and harmonize information among said programs. (Completed) The Government has improved monitoring of the The Government has taken steps to establish a monitoring Beca Universal program by including related and evaluation system for the Beca Universal program by questions into the 2013 household survey. including individual based questions on scholarship benefits into the 2013 Encuesta de Propósitos Múltiples. (Completed) The Government has created the Programa Ángel Guardián, a social assistance program for people with severe disabilities who are in extreme poverty and in vulnerable dependent condition. (Completed) 52. The fifth objective of the DPL series is to expand the coverage and improve the targeting of social transfer programs, in support of the Government’s efforts in this area. The Government improved the targeting of the already-existing CCT program, Red de Oportunidades that started in 2006, introduced a non-contributory old age pension, 100 a los 70, in 2009 and a cash transfer to children for school grade achievements, Beca Universal, in 2010. The program Ángel Guardián was established in 2012 and started operation in 2013 to provide social assistance to an estimated 55,000 people with severe disabilities in poverty or vulnerable condition. The DPL series has supported the Government in these reforms, focusing on (i) the coverage of vulnerable groups with the introduction and expansion of the Beca Universal program (DPLs I and II) and the introduction of the Ángel Guardián program (DPL III); and (ii) the targeting of the Red de Oportunidades program through the use of proxy-means tests (DPL I) as well as the targeting of 100 a los 70 through the recertification of beneficiaries (DPL I, II, III). 18 53. In terms of coverage, the Government has exceeded expectations with the creation of the Ángel Guardián program, selected as prior action for DPL III. The Government legally established this program in June 2012 for people with severe disabilities and in extreme poverty or vulnerable conditions, as it is defined in the decree based on International Classification of Disabilities and Health. Operation started with a first payment to 1,671 beneficiaries in August 2013. Through a transfer of B/.80 (equivalent to US$80) per month, the program improves the living conditions of beneficiaries and reduces the impoverishing effects on their families. The program is the first of its kind in Central America. Once fully implemented, the Government expects to reach 55,000 beneficiaries. The related medium term outcome is the number of beneficiaries in 2014 with a target of 10,000. 54. In terms of targeting, the Government has recently advanced in four areas including a policy for better targeting of 100 a los 70, selected as a prior action. In 2009, the Government created the 100 a los 70 program providing US$100 per month to more than 100,000 eligible elderly. Supported by DPL I in 2010, the Government passed Law 86 that established clear target populations but still lacked the technical instruments for operational targeting and eligibility verification, as well as the legal grounds for implementing these instruments. In 2012, 100 a los 70 adopted a survey instrument to collect individual information to verify eligibility (Encuesta de Vulnerabilidad Social) and operational eligibility criteria (proxy means) (supported by DPL II). Although these technical instruments were formally adopted, it became clear that the program still lacked regulation for program functioning and the use of these technical instruments. An Executive Decree in February 2013 addressed the shortcoming by establishing operational processes for program implementation, including mechanisms for entry to and exit from the program, specific co-responsibilities for participants, and processes for social evaluation, complaints and grievances, as well as quality control, among others. It is also the legal basis for recertification processes and their implementation. In addition, the Ministry of Social Development (Ministerio de Desarrollo Social, MIDES) has progressed with a recertification strategy which will be formally approved by the end of 2013. The strategy establishes a gradual process starting in geographical areas (corregimientos) where the lower poverty rate and the high number of elderly suggest higher inclusion errors. After its formal approval, MIDES will implement the strategy during 2014. 55. The prior action feeds directly into the medium term outcome indicator of MIDES’ increased ability to conduct recertification, but it needs to be accompanied by an increased operational budget. The formalization of the social vulnerability survey, the development of criteria to evaluate program eligibility, the establishment of the formal operational manual, and the recertification strategy are critical preconditions for recertification. The recertification itself and the achievement of the outcome indicator hinges on a sufficient operational budget. Currently, budget allocations mainly cover the transfer costs and the payment transactions but do not allow for operational activities that would enhance efficiency. The Government has drafted legislation establishing the Directorate for 100 a los 70, providing it with regular staff and an adequate operational budget. This executive decree is awaiting approval by the Presidency. 56. Second, the Government has taken steps to set up monitoring and evaluation of the Beca Universal program, which is recognized as a prior action for the operation. The Beca 19 Universal program was introduced in October 2010 supported by DPL I. The program transfers US$20 per month per child, conditioned on academic performance. This program helps families afford schooling costs and is intended to reduce drop-out and repetition rates in public schools and private schools with low tuition fees. In 2012, the program reached full coverage from grades 1 to 12 in public schools and private schools with low tuition fees supported by DPL II. The inclusion of individual based questions on scholarship benefits into Encuesta de Propósitos Múltiples enables the evaluation of the impact of the program and the assessment of targeting efficiency. Due to its relevance to improve targeting, it has been selected as prior action. It also allows for the measurement of the medium term outcome indicator which assesses the impact of the Beca Universal program on children from the poorest quintile of the population. 57. Third, the Government has improved the coordination of social protection programs through the development of a Registro Único de Beneficiarios (single registry) of beneficiaries, selected as prior action. The Technical Secretariat of the Social Cabinet (Secretaría Técnica del Gabinete Social) of the MIDES coordinates social policy across different agencies. MIDES has been exploiting synergies in the design of targeting instruments and in critical operational activities, such as payment processes. These synergies represent efficiency gains that need to be expanded. In October 2013, the Secretariat completed the inclusion of three of the cash transfer programs (Red de Oportunidades, 100 a los 70, and Evaluación Social) into the Registro Único de Beneficiarios. 8 In the future, the integration of Ángel Guardián and Beca Universal is also envisaged. 58. Fourth, the Government has been improving the targeting of the Red de Oportunidades program and is generally on track to reach the end of program result. First, the DPL series supported the implementation of a targeting design that enabled channeling resources to the poor in remote geographic areas for the Red de Oportunidades program. 9 As a result, about 46 percent of beneficiary households are indigenous, reaching almost universal coverage in the comarcas (provinces of Bocas del Toro and Darién, and in the Kuna Yala, Emberá y Ngobe Buglé). 10 Moreover, in 2010 Red de Oportunidades put in place a management information system that addressed inclusion errors (non-eligible households receiving benefits) that gradually allowed verification of eligibility conditions. Moreover, the proxy means test used to determine eligibility has also been revised to more accurately reflect poverty conditions. It will be implemented in 2014, fulfilling the medium term outcome indicator of using the revised proxy means test to select all households that enter the program. This is an important step towards reducing targeting errors and ensuring an appropriate expansion of a very progressive scheme. Moreover, the Government is currently conducting a targeting assessment of Red de Oportunidades and results are expected by May 2014. 8 The Evaluación Social program targets those affected by the large flooding in 2012. 9 IPEA, 2008. 10 An impact evaluation of Red de Oportunidades is currently being conducted. 20 Table 4: Prior Actions and Analytical Underpinnings Prior actions Analytical Underpinnings Mobilizing domestic tax revenue and increasing tax transparency The Government, through the ANIP has taken steps • Forum on Tax Administration: Working smarter in to increase tax compliance by carrying out 10 audits restructuring the administration, in compliance, and of large taxpayers using advanced audit techniques. through legislation (OECD 2012) • Informe de la visita realizada entre el 17 al 21 de Mayo 2010 (Centro Regional de Asistencia Técnica de Centroamérica, Panamá y República Dominicana/DGI Panamá) • Public Expenditure Review (WB 2006) • Tax Administration in OECD and Selected Non-OECD Countries (OECD 2008, Comparative Information Series) • Revenue mobilization in Developing Countries (IMF 2011) • Public Expenditure Review (WB 2006) • Panamá: Consideraciones metodológicas y estimación de los gastos tributarios y del coeficiente de cumplimento del ITBMS (Sabaini 2009) • Expanding Taxable Capacity and Reaching Revenue Potential : cross-country analysis (Le, Moreno-Dodson and Rojchaichaninthorn WB 2008) The Government has adopted a custody regime for • Forum on Tax Administration: Working smarter in bearer shares for purposes of facilitating the restructuring the administration, in compliance, and identification of the ownership of said type of through legislation (OECD 2012) shares. • Peer Review Report – Phase 1 Legal and Regulatory Framework (OECD 2010) Improving the institutional arrangement for debt management The Government through MEF has adopted a plan • Public Debt Markets in Central America, Panama, and for domestic debt market development including: (i) the Dominican Republic (IMF 2007) the adoption of a policy and issuance of regulation • Non Lending Technical Assistance on Debt Management for the promotion and functioning of the primary (WB NLTA 2010) dealers program; (ii) the modification of the • Public Debt Management and Market Development contracts with international credit rating agencies to Needs Assessment (WB 2007) have domestic sovereign bonds rated; and (iii) the selection of a worldwide known financial information platform to conduct domestic Government bond auctions on this platform. Expanding social transfer programs and improving the capacity of institutions for targeting The Government through MIDES has adopted a • Panama Poverty Assessment (WB 2011) policy and issued regulations for the better targeting of beneficiaries of the 100 a los 70 program including provisions (i) to verify compliance with beneficiaries’ co-responsibilities and processes for entry to and exit from said program; (ii) to incorporate beneficiaries in the Registro Único de Beneficiarios; and (iii) to formally incorporate the Secretaría Ejecutiva del Programa 100 a los 70 into MIDES. The Government has developed a Registro Único de • Review of Social Assistance Programs and Beneficiarios for the following social protection Recommendations for Priorities and the Way Forward programs Red de Oportunidades, 100 a los 70, and (Marques, 2009) Evaluación Social CCT programs to improve • Social Protection Responses to the triple wave of crises targeting and harmonize information among said 21 programs. in Central America and Panama (Marques, 2010) • Red de Oportunidades: Conditional cash transfer evidence from Panamá (Arraiz, S. Rozo 2011) • Mejores Empleos en Panamá: El Rol del Capital Humano (WB 2012) The Government has taken steps to establish a • Panama Poverty Assessment (WB 2011) monitoring and evaluation system for the Beca Universal program by including individual based questions on scholarship benefits into the 2013 Encuesta de Propósitos Múltiples. The Government has created the Programa Ángel • Disability and poverty: A survey of World Bank Poverty Guardián, a social assistance program for people Assessments and implications (Braithwaite and Mont, with severe disabilities who are in extreme poverty 2009) and in vulnerable dependent condition. LINK TO CAS AND OTHER BANK OPERATIONS 59. The proposed DPL is envisaged in the Country Partnership Strategy (CPS) (Report No. 54265-PA), discussed by the Executive Directors on September 21, 2010. The DPL will influence CPS outcomes in all three pillars: (i) tax administration measures contribute to fiscal sustainability, which is a precondition for economic growth that supports competitive advantages; (ii) the expansion of the Beca Universal program under the social protection component feeds into the CPS objective of greater opportunities for all; and (iii) measures to enhance tax information sharing, improve procurement, strengthen debt management and improve the targeting of social programs all contribute to the CPS objective of enhanced public sector transparency, effectiveness and efficiency. 60. Several World Bank financed operations complement this DPL to achieve CPS outcomes: (i) jointly with the World Bank, IFC has provided technical assistance to Panama to improve the transparency of the country’s tax system and enhance its ability to exchange tax information, by implementing international best practices on transparency and exchange of information for tax purposes recommended by the OECD Global Forum; (ii) the IBRD-financed Public Sector Efficiency Technical Assistance Loan (P121492) and convening services supporting the improvement of financial management and procurement support the implementation of better management and more transparent procurement practices, which would contribute to enhanced efficiency and effectiveness of public spending; (iii) two advisory services provided by the World Bank Treasury and a MIGA guarantee that cover public debt management and asset management; and (iv) investment lending operations in the social protection and health sectors. The Social Protection Project (P098328) focuses on improving the management and delivery of the flagship Red de Oportunidades CCT. The Health Equity and Performance Improvement Project (P106445) focuses on increasing access of targeted underserved rural communities to basic health services to improve mother and child health and support the development of strategic planning regulatory and monitoring mechanisms to improve health system performance. CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS 61. The Government has employed various mechanisms to consult on reform measures. While the current administration has used its National Development Council (Consejo para la 22 Concertación Nacional para el Desarrollo) selectively, it relied on other mechanisms to reach agreement on reforms supported by this DPL. The Consejo had been initially created in the context of the Panama Canal expansion and the decision making process on how to use additional public revenues. On tax transparency, it has held consultations with the private sector (Consejo Nacional de la Empresa Privada, Chamber of Commerce, Asociación Panameña de Ejecutivos de Empresa, Executive Enterprise Association of Panama) and civil society on the Global Forum recommendations. In the area of procurement, a participatory committee including civil society and public and private sector representatives has been discussing options to replace existing regulations and better handle procurement of public investment projects. 62. In the area of social protection, the Government has developed an Indigenous Peoples Plan and a communication strategy to generate social consensus. The plan and strategy are still under implementation in 2013 and can help generate consensus around the reforms supported by this DPL. However, in some cases, the administration’s desire for speedy implementation of its program has presented a challenge when legislation was approved with limited prior consultations with civil society (e.g. sale of state-owned land in the Colon Free Zone). The lack of consultations led to protests and was followed by the National Assembly voting to rescind the law. 63. The proposed operation was prepared in coordination with Inter-American Development Bank (IDB). The World Bank and the IDB undertook joint analytical work that underpinned the proposed operation. For the Red de Oportunidades, both institutions provide parallel financing using harmonized fiduciary, procurement, and monitoring and evaluation systems. In terms of lending and technical assistance operations, the World Bank and the IDB are supporting several complementary areas of the Government’s development strategy. In fact, IDB approved a second Programmatic Policy-Based Loan for US$200 million in May 2013 to support Panama’s consolidation of its macro-financial and fiscal framework to improve financial sector oversight and regulation. The first Programmatic Policy-Based Loan for US$350 million was approved in 2012. V. OTHER DESIGN AND APPRAISAL ISSUES POVERTY AND SOCIAL IMPACT 64. The Government actions supported in this DPL are expected to have positive poverty and social impacts. The analysis carried out on the potential impacts of the reforms supported under the previous DPLs in the series showed a positive or neutral impact for each of the reforms. Progress has been made in the implementation of key reforms that affect poor and vulnerable populations in the area of social protection, such as the Single Beneficiary Registry that is about to come on line and which will help ensure that households receive all benefits for which they are eligible. The introduction of new, targeted programs, such as the program for people with disabilities, will also improve welfare of vulnerable groups. 65. The supported tax reform likely has an indirect positive effect on Panamanians at the low end of the income distribution. Increased tax compliance for large payers will likely generate fiscal space for increased social spending. There exists a slight chance of a negative 23 impact, if corporations pass on the higher tax burden to customers and if Panamanians with low incomes buy goods of those corporations. Yet, the impact is likely to be negligible. 66. The Government has already begun to increase social spending. A new program for persons with severe disabilities has been introduced and the benefit paid to older adults will increase by 20 percent in 2014. A similar increase for beneficiaries of the Red de Oportunidades is under discussion. This is potentially important as the Red de Oportunidades appears to have had a significant effect on poverty. In 2009 poverty was 32.4 percent, if the CCT benefit is subtracted from household income, poverty would have been 40.5 percent. While such a simple analysis overstates the positive impact of the program, it does indicate that the program’s effect on welfare has not been trivial. (Results from a formal evaluation are not yet available.) 67. Tax information sharing and the procurement reform are not expected to directly impact poverty or the distribution of incomes. However, indirect effects could occur, for example, based on an overall increased transparency which could generate an improved business environment and therefore more employment. Also, more efficient spending may free up resources for social development spending. 68. Measures related to social protection programs are expected to generate significant, positive impacts for indigenous, rural and extremely poor Panamanians. The size of this impact depends on the quality of targeting of these programs. The development of tools to implement the recertification of 100 a los 70 is important in order for the program to have a positive distributional impact. A universal, untargeted program is regressive, since poorer people tend to have lower life expectancies. For instance, people over 70 make up 3.5 percent of the lowest decile, but 8.7 percent of the top decile. Focusing the program according to economic need greatly improves its progressive nature. The untargeted program has a small impact on national poverty rates but halves the poverty rate among those above 70, and almost eradicates extreme poverty. Increasing the benefit by 20 percent will decrease even further the poverty rates among the elderly indigenous (by almost 7 percentage points) although it has a very limited impact on other groups and overall poverty (around one percentage point). However, increasing the monetary benefit makes the need to recertify and improve targeting even more important. Also, the new cutoff in the 100 a los 70 program may lead to a risk of some almost poor elderly being excluded. Figure 5: Potential impact of the 100 a los 70 program on poverty by population group (a) Overall Poverty (b) Extreme Poverty 100.0 50.0 Percent in Poverty Percent in Extreme 30.0 50.0 Poverty 10.0 0.0 -10.0 No Program All 70 + No Program All 70 + All 70+, no pension 70 +, Ext. Poor All 70+, no pension 70 +, Poor 24 Note: Column one shows the actual poverty levels by group (national versus indigenous, male and female). Column two shows the poverty rate if all persons above 70 receive the benefit, column three is all persons above 70 with no other pension who receive the benefit and the last column shows the poverty rates if all persons above 70 in extreme poverty receive the benefit. Source: Authors’ calculations, Encuesta de Hogares 2009. 69. Targeting extreme poverty is a concern, especially among the indigenous population and given the gender differences in poverty between older women and men. In terms of extreme poverty, special attention needs to be paid to the comarca of Gnobe Buglé. While the overall poverty rate among the three comarcas is fairly similar, the extreme poverty rate in Gnobe Buglé in 2012 was 70 percent higher than in Kuna Yala and Emberá. 11 Targeting the 100 a los 70 to the extremely poor will have a particularly important impact in this poorest comarca. Compared to the present universal benefit system, targeting 100 a los 70 to the poorest will have the advantage of lowering the cost of the program while still almost eliminating extreme poverty. ENVIRONMENTAL ASPECTS 70. The measures supported under the proposed DPL are not likely to have significant effects on the environment, forests or other natural resources. Policy actions in the areas of tax administration, tax information sharing, public procurement, debt management and social policy are not likely to have either positive or negative environmental impacts. PUBLIC FINANCIAL MANAGEMENT, DISBURSEMENT AND AUDITING ASPECTS 71. Panama’s public financial management (PFM) and public procurement systems are adequate for the operation. Panama has no Central Bank and uses the US dollar as currency. The budget is published promptly after its approval in the official gazette (the 2013 budget approved on October 18, 2012 was published on that day). The published budget and data on budget execution are publicly available online. 12 A public expenditure and financial accountability assessment by the World Bank in coordination with the IDB is under way. Several areas of PFM would benefit from further improvement, in particular, budget preparation and budget execution. Nonetheless, the overall findings indicate that the PFM environment is adequate. 72. The Government is moving ahead to further strengthen its PFM. In line with its Strategic Plan 2010-2014, the Government is implementing a set of key reforms to strengthen and modernize planning and budgeting, the financial management system, the financial control framework, and procurement systems. The World Bank has been supporting the Government in the improvement of PFM through the DPL series (P123255 and P127332), as well as the Enhanced Public Sector Efficiency Technical Assistance Loan (P121492). These operations support the implementation of better management practices in the use of public resources around the budget cycle, which would contribute to enhanced efficiency and effectiveness of public programs, as well as transparency and accountability in the use of public resources. IDB has also been supporting the Government in complementary activities in planning, budgeting and evaluation. 11 The focus on the three comarcas is due to the fact that the household survey data only identifies these three comarcas. No information on the other comarcas is available. 12 http://sipresweb.mef.gob.pa/diprena_web/PDF_OUTPUT/2013/gaceta2013.pdf, http://www.mef.gob.pa/Portal/Transparencia-Ejecucion-Presupuestaria.html 25 73. The proposed loan will follow IBRD’s disbursement procedures for DPLs. Once the loan is approved by the Board and becomes effective, IBRD would make the single loan disbursement to the MEF’s Treasury Single Account. Since this account centralizes Government revenue for financing Government spending, upon its deposit, the DPL disbursement will become available to finance budgeted expenditures. The account is denominated in US dollars, which has legal tender in the country, and is held at the National Bank of Panama, the financial agent of the Government. During the review of external audit reports and the experience with special designated accounts for investment lending, nothing came to the attention of IBRD indicating that the banking control environment into which the loan proceeds will flow is other than adequate. Upon IBRD’s request, the borrower would provide written confirmation of the described transaction that the amount of the loan has been credited to an account available to finance budgeted expenditures. If the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, IBRD will require the Borrower to refund an amount equal to the amount of said payment to IBRD promptly upon notice from IBRD. Amounts refunded to IBRD upon such request shall be cancelled. MEF is responsible for the administration of the loan. MONITORING AND EVALUATION 74. The MEF is responsible for the implementation of the DPL operation and for coordinating the involved agencies, including MIDES and MINSA. Together with MEF and the National Institute of Statistics, these institutions collect the data for the monitoring indicators. Moreover, MIDES is responsible for the Red de Oportunidades program within which MINSA provides health care services in indigenous areas. The MEF and the IBRD have agreed to monitor program progress supported by the DPL series. VI. SUMMARY OF RISKS AND MITIGATION 75. Macroeconomic: The main economic risks derive from the fiscal stance and the country’s vulnerability to external shocks. The risk of overheating eased in comparison to 2012 and will further decrease as capital spending unwinds in 2014. There is some risk that fiscal balances may deteriorate, given the lower tax collections in the first half of 2013 and lower revenues from the Panama Canal in 2013. This would not compromise debt sustainability if revenue continues to rise and current expenditure is contained. However, the reduction of the public debt-to-GDP ratio would slow and room to buffer negative shocks would be reduced. The main mitigating factors are: (i) potentially flexible timing of capital expenditure; (ii) public infrastructure projects are progressing as planned; and (iii) the Government is actively raising revenues. External risk factors include potentially lower demand and lower revenues from the Panama Canal as China decelerates and EU’s slow growth. Some risk stems from potential phasing out of US quantitative easing and the potential increase of US interest rates. Nevertheless, robust economic growth, FDI financing of the current account, the approval of the FAP sovereign wealth fund to a lesser degree, and the country’s access to multilateral financing mitigate this risk. 76. Sector policies and institutions: The main institutional risks relate to weak participatory processes and the quality of public institutions. The effectiveness of some 26 reforms depends on the capacity and ability of the Government to involve relevant stakeholders to create consensus around those reforms (i.e. the implementation of the recertification program). Mitigating measures include a close dialogue and consultations with political parties, donor community and stakeholders on the measures supported by the DPL series. A related risk refers to Panama’s public sector institutions. Improvements in financial management and procurement systems are needed for a better monitoring and evaluation of public investment and spending. To mitigate this risk and improve transparency and efficiency of public spending, the Government is implementing reforms in the areas of fiscal management and procurement, such as strengthening budget execution, accounting and control through an integrated financial management system. These reforms are supported by several donors. An additional low risk stems from the claim of unconstitutionality of articles 1 and 14 of the Law 24 regarding the new autonomous nature of the ANIP and the seven-year term period of the administrator, respectively. 77. Natural Disasters: Panama is highly vulnerable to multiple natural disasters. Most recently floods and landslides occurred in November 2012 with an estimated cost of around US$123 million or 0.4 percent of GDP. According to the World Bank’s Natural Disaster Hotspot Study, Panama ranks 14th in terms of risk exposure to multiple hazards. The Catastrophe Deferred Drawdown Option Program approved in FY12 would mitigate this risk providing immediate liquidity to the Government in order to respond to affected areas and populations. Emergency grants that Panama received from IDB, Corporación Andina de Fomento, and the Central American Bank for Economic Integration show that financing is available in case of need. Another mitigation measure is the Country’s Disaster Risk Management National Plan 2011-2015. It defines specific actions to improve disaster resilience with the support of different stakeholders. Finally, FAP financing would be available to mitigate the impact of certain emergencies in the future. 78. The overall preparation risk is rated as moderate. All prior actions have been completed and proven with evidence. The Government has shown strong commitment to support the DPL preparation and is willing to share all necessary information. 27 ANNEX 1: POLICY AND RESULTS MATRIX Prior Actions Supported by First Prior Actions Supported by Second Prior Actions Supported by Third Results Programmatic Loan Programmatic Loan Programmatic Loan Mobilizing domestic tax revenue and increasing tax transparency Subcomponent: Mobilizing domestic tax revenue The Government has widened its tax base The Government, through the MEF, has The Government, through the ANIP has Central Government tax revenue as a share and reduced tax exemptions by enacting created the LTU within the DGI and has taken steps to increase tax compliance by of GDP is at least 12 percent in 2014 Law 8 of 2010, which: (i) increases the made it operational through: 1) the carrying out 10 audits of large taxpayers (baseline: 2009=11 percent). ITBMS rate from 5 to 7 percent; (ii) identification of 72 Large Taxpayers; 2) using advanced audit techniques. eliminates ITBMS exemptions for air the selection and training of ten (10) tax (Completed. Evidence: Audit reports ITBMS revenue increased by at least 1 passenger transport, residential phone calls auditors to carry out audits of large informing taxpayers about outcome of the percentage point of GDP (baseline: and lubricants; (iii) taxes real estate taxpayers; 3) the preparation by DGI of an audit) 2009=2.1 percent; target: 2014=3.3). transactions in the Colon Free Zone and action plan to be implemented by the LTU other existing free zones (including in free in 2013 to increase tax collection from The LTU covers at least 55 percent of total zones created in the future); (iv) expands Large Taxpayers; and 4) the tax revenue in 2014 (baseline: 2009=0 the taxation of dividends, including for implementation of an audit system that percent). companies located in the Colon Free Zone tracks validation of Large Taxpayers’ and other existing free zones (including in compliance against their declared tax free zones created in the future by the liabilities; as evidenced by (i) Ministerial Government); (v) eliminates certain Resolution No. 065 issued by the MEF on personal deductions; and (vi) modifies the December 12, 2012 and published in the calculation of expenditure deductions, to Government’s Official Gazette on January take into account the proportion of taxable 4, 2013 and (ii) the DGI’s Note No. 201- income versus total income (including tax 01-8462 dated December 11, 2012 to the exempt income and income from foreign Bank. sources) The Government has implemented the following measures to improve the performance of its tax administration: (i) the establishment of an Administrative Tax Tribunal, as evidenced by Law 8 of 2010 which creates the Tribunal and the appointment of the Magistrates for the Tribunal; and (ii) the creation of a unit of tax information sharing and a unit of international taxation within the DGI. Responsible Agency: DGI. Responsible Agency: ANIP. Subcomponent: Increasing tax transparency 28 Prior Actions Supported by First Prior Actions Supported by Second Prior Actions Supported by Third Results Programmatic Loan Programmatic Loan Programmatic Loan The Government has taken steps to The Government, through DGI’s The Government has adopted a custody By 2014, Panama has signed 12 tax implement some of the Global Forum’s Subdirección de Intercambio de regime for bearer shares for purposes of information exchange agreements and has Peer Review-Phase 1, as evidenced by: (i) Información Tributaria has effectively facilitating the identification of the exchanged information as requested signing double taxation conventions with exchanged tax information with foreign tax ownership of said type of shares. (baseline: 2009=no TIEAs in place). 10 countries; (ii) signing of the Agreement jurisdictions by responding to twenty one (Completed. Evidence: Law 47 of August for Tax Cooperation and Exchange of (21) exchanges of information requests, in 6, 2013 passed by the National Assembly.) Information Related to Taxes with the accordance with Law 2 of February 1, United States; (iii) enactment of Law 33 2011 and its corresponding tax information of 2010, which empowers the DGI to sharing obligations, as evidenced by DGI’s obtain information for the purposes of Note No. 201-01-8458 dated December 13, complying with any international 2012. agreement that provides for the exchange of information in tax matters, regardless of the relevance of the information for domestic tax purposes; and (iv) enactment of Law 2 of 2011. Responsible Agency: DGI. Responsible Agency: ANIP. Modernizing public procurement practices The Government has taken steps to The Government, through its Dirección Central government agencies and all others improve the efficiency and transparency of General de Contrataciones Públicas, subject to Law 22 and its modifications use its national procurement system, as within the e-procurement platform framework agreements and the number of evidenced by the implementation of a new PanamaCompra, has introduced new catalogue items procured under those e-procurement platform, PanamaCompra mandatory Framework Agreements for all framework agreements is increased (version 2.0) including the core system for Public Entities since April 2011; and (baseline: 2009=2,452; target: 2014= publication and receipt of bidding offers, published all Framework Agreements 7,300). which is currently being used by the signed in years 2011 and 2012. Central Government. Responsible Agency: DGCP. Improving the institutional arrangements for debt management The Government has started to design a The Government, through the MEF has The Government through MEF has By 2014, the medium term debt medium term debt management strategy approved the organizational structure of adopted a plan for domestic debt market management strategy is published and which includes the development of its the Crédito Público, including the development including: (i) the adoption of revised annually and corresponding debt domestic public debt market, as evidenced functions and responsibilities for each of a policy and issuance of regulation for the evaluation reports compare the evolution by: (a) Cabinet Decree No.4 of January 26, its internal units, as evidenced by promotion and functioning of the primary of risk indicators with the targets in the 2010, which authorizes the issuance up to Ministerial Resolution No 003 issued by dealers program; (ii) the modification of strategy in 2014 (baseline: 2009=no formal US$600 million in Treasury Notes; and (b) the MEF on January 16, 2013. the contracts with international credit debt management strategy). the issuance of Treasury Notes with an rating agencies to have domestic sovereign aggregate value of more than US$500 bonds rated; and (iii) the selection of a million during 2010. worldwide known financial information platform to conduct domestic Government 29 Prior Actions Supported by First Prior Actions Supported by Second Prior Actions Supported by Third Results Programmatic Loan Programmatic Loan Programmatic Loan bond auctions on this platform. (Completed. Evidence: Ministerial Decree 001-2013 of February 20, 2013 and Executive Decree No. 768 of June 19, 2013; draft contract to be signed with worldwide known platform; Reference to a webpage, which contains Panama’s 2018 and 2022 bond classification including effectiveness date) Responsible Agency: Crédito Público. Responsible Agency: Crédito Público. Expanding social transfer programs and improving the capacity of institutions for targeting The Government has taken the following The Government, through MIDES, has By 2014, the revised proxy means test is in measures to increase the outreach of its adopted the new criteria to evaluate the use to select all households that enter in key social protection programs: eligibility of elderly citizens for the 100 a the Red de Oportunidades CCT program - Improved the targeting of beneficiaries los 70 cash transfer program, as evidenced (baseline: 2009=0 percent). under its Red de Oportunidades CCT by: by Ministerial Resolution No. 225, 2012 (i) eliminating ineligible households issued by MIDES on October 4, 2012 and enrolled in the program; and (ii) enrolling published in the Borrower’s Official 3,000 new households, eligible as per the Gazette on December 13, 2012. proxy-means test. - Improved the operating rules and The Government through MIDES has Increased ability of MIDES to conduct enhanced the proper targeting of poor and adopted a policy and issued regulations for recertification of beneficiaries of 100 a los vulnerable beneficiaries under its 100 a los the better targeting of beneficiaries of the 70 through the regulation of Law 86 and 70 cash transfer program, through the 100 a los 70 program including provisions the recertification strategy of 100 a los 70 enactment of Law 86 of 2010. (i) to verify compliance with beneficiaries’ in 2014 (baseline: 2009=no technical tools co-responsibilities and processes for entry nor legal support to conduct to and exit from said program; (ii) to recertification). incorporate beneficiaries in the Registro Único de Beneficiarios; and (iii) to formally incorporate the Secretaría Ejecutiva del Programa 100 a los 70 into MIDES. (Completed. Evidence: Executive - Established the Beca Universal Decree No. 11, dated February 15, 2013 scholarship program through the published in the Borrower’s Official enactment of Law 40 of 2010, and started Gazette on March 6, 2013 ) implementing said scholarship program in public secondary schools during 2010. The Government has developed a Registro By 2014, MIDES has issued quarterly Único de Beneficiarios for the following reports based on the single registry social protection programs Red de assessing the coverage and efficiency of 30 Prior Actions Supported by First Prior Actions Supported by Second Prior Actions Supported by Third Results Programmatic Loan Programmatic Loan Programmatic Loan Oportunidades, 100 a los 70, and social programs, including individual Evaluación Social CCT programs to duplications at household level (baseline: improve targeting and harmonize 2009=no report). information among said programs. (Completed. Evidence: exchanges between MIDES and the government agencies managing the different social programs on use of registry and letter from MIDES certifying the development of the registry) The Government has taken steps to Percentage of children from the poorest The Government, through IFARHU, has establish a monitoring and evaluation quintile who receive Beca Universal expanded the Beca Universal scholarship system for the Beca Universal program by (baseline: 2009=0; target: 2014=70 program to include grades 1 to 6 of all the including individual based questions on percent). Borrower’s public schools. scholarship benefits into the 2013 Encuesta de Propósitos Múltiples. (Completed. Evidence: Panama 2013 Encuesta de Propósitos Múltiples) The Government has created the Programa The number of people with severe Ángel Guardián, a social assistance disabilities and in poverty or vulnerable program for people with severe disabilities condition covered by the Ángel Guardián who are in extreme poverty and in program reached 10,000 (baseline: vulnerable dependent condition. 2009=0; target: 2014=10,000) (Completed. Evidence: Law 39 issued on June 14th, 2012) Responsible Agency: MIDES and Responsible Agencies: MIDES and IFAHRU. IFAHRU. 31 ANNEX 2: LETTER OF DEVELOPMENT POLICY- UNDER PREPARATION 32 33 34 35 ANNEX 3: FUND RELATIONS ANNEX I NTERNATIONAL MONETARY FUND WASHINGTON , D.C. 204 31 Facsim ile Nvmoet 1·202·623·4661 October 29, 2013 Mr. J. Humberto Lopez Acting Director Poverty Reduction and Economic Management Department Latin America and the Caribbean Region 111e World Bank 1818 1-! St. N.W, Washington D.C. 20433 Dear Mr. Lope--~: Auached is the assessment letter requested by the World Bank for the T hird Programmatic fisca l Management and Efficiency of Expenditures Development Policy Loan. In keeping with previous practice, the Jetter carmot be included in any document intended fo r publication, without the consent of the Panamanian authorities. S incerely yours, IN~ AleJandro Werner Director Western Hemisphere Department Attachment cc: S PR 36 P .-\.l'iAMA-ASSESS~IEt\1 LETTER fOR THE WORLD B.-\t\'K October 2S, 2013 This letter updates the assessment contained in the 2012 Article 1VConsultation staffreport dated Jam10ry 10, 2013. A staffvisit took place on June 4- 7, 2013. I. Panama's ~conomy continu~s to expand strongly, alb~it at a som~what slow~r pac.~ than in 2011-12. Economic gro'A~h in 2013 is projected to slow to 7V, percent, from over 10 percent in 2011 and 2012. The slowdown reflects mainly a decline in Colon Free Zone activity and Canal traffic, despite continued support from public investnent, and is likely to continue in 2014. Headline inflation declined to 3.9 percent y/y in Septentber (from the 2012 average of5.7 percent), and is projected at just above 4 percent in 2013. Buoyant FDI inflows, including in the mining sector, are projected to continue to flll3llce most of the cUITent account deficit (9 percent ofGDP). A presidential election is scheduled for May 2014. All major candidates are pro-business and no major change in economic policies is anticipated. 2. DowusiM risk~ to th~ faYor abl~ bas ~lin~ outlook mostly r~lat~ to ext~rnal shocks. Panama 's trade and financial openness enhances the country's vulnerability to exterual shocks, such as slower world trade or tighter world financial conditions, although strong domestic fundamentals would mitigate their impact, with the implententation of large public infrastructure projects expected to continue to support gro'A~h and domestic demand. 3. Th~ flScal deficit is expected to r~main within the self-imposro ceilings, but a righter fisc.a l stanc.e would be desirable to build fiscal buffers against ex t~rnal shocks. The 2012 fiscal deficit, 2.1 percent ofGDP, was well below the revi;ed ceiling of 2.9 percent of GDP. For 2013 the deficit ceiling was raised to 3.1 percent after approval of a supplementary budget to cover the costs of reconstruction following the 2012 floods. For thefu:st half of 2013, the deficit reached 2.1 percent of GDP. Keeping the 2013 fiscal deficit firmly below the revised ceiling would help build fiscal buffers should negative shocks hit the economy. 4. Th~ authotiries ar~ s trengthening the financial saf~t)· net and fmandal s~ctor supenision, in line with IMF staff r~comm~ndarious. The 2011 FSAP confirmed the resilience of the banking system and identified some wealmesses of the financial sector. An AMUCFT assessment was conducted by IMF staff in 2012. In line \vith staffrecommendatiOflS, the authorities are actively working on two important initiatives, a draft AML law and a facility for the provision of tentporary liquidity to the banking systen1, but progress might be delayed by the incoming election. The law inlmobilizing bearer shares was passed in July 2013, and will become effective in 2015. 5. 1\lroium-t~rm economic. prosp~cts are bolst~r~d by the ongoing Canal ~xpausion, and oth~r public. and ptint~ inwstments. The creation of a Sovereign Wealth Ftllld to save additional revenue from the expanded Canal should fttrther strengthen the economy's resilience to external shocks. Foreign direc.t investments in copper mining are expected to ftuther dive.rsify the economy, incre.ase revenues, and foster growth. Going forward, refomts aimed at boosting productivity (while enhancing inchtsiveness and equity) will be necessruy to exploit the ft11I growth potential, especially as large public and private investment projects wind down over the medit1111tem1 . 37 Table 1. Panama: Selected Economic and Socia l Indicators Populatio n (millio ns. 2012) 18 Poverty line (percent 20ll) :n.6 Populatio n g rowth rat e (percent, 2012} 16 Adu lt lit eracy rat e (percent 2010) 9<.0 Life expectancy a t birth (years, 20ll) 7&0 GOP per capita (USO, 2012} 9,452 Total u neme l2l:m ent ~March 20131 4.5 lMF Quota (SOFt m inio n! 206.6 Proj. 2009 2010 2011 2012 2013 2014 (Percent chan ge) Prod uctio n a nd prices Real GOP (1996 p rices) 3.9 7.5 10.9 10.8 7.5 6.9 Consumer price index (average) 2.4 3.5 5.9 5.7 4.1 4.0 Cons u mer price index (end-of-year) L9 4.9 6.3 4.6 4.2 3.9 Dom estic dem and (at constant prices) Public consu m pt io n 4.1 15.3 1.6 5.9 7.9 5.5 Private consump tio n -2.8 n .4 19.3 -3.6 as 6.6 Public investm ent 11 4.8 23.3 34.9 2&4 ll7 9.1 Private i:nves.tment -9.7 5.9 11.9 9.7 10.0 10.1 Financial secto r Private sector c redit 13 13.6 16.8 14.1 13.6 11.3 Broad m o ney 9.4 11.6 8.1 10.4 &3 9.7 Average deposit rat e (l ·year) 2.8 2.9 2.1 2.2 Average lend ing rate (l ·year) 7.5 7.5 6.9 7.2 External trade Mercha nd ise exports -37.1 12.8 29.4 3&2 -1 0 6.0 Mercha nd ise i:m ports -1&1 18.9 26.3 12.0 4.8 7.4 (In percent o f GOP) Saving-investm ent balance Gross dom estic investm ent 25.6 25.5 :n.2 2&6 29.7 30.5 Public sector 7.9 12.0 12.8 12.9 13.4 13.7 Private sect or 17.7 13.5 14.4 15.7 1&3 16.8 Gross nat io nal saving 24.9 15.3 15.0 19.5 19.9 20.7 Public secto r &1 5.1 6.7 &9 7.3 6.9 Private sect or 1&7 10.2 8.3 12.6 12.S 13.7 Pu blic finances Revenue a nd g ran ts 343 33.3 32.7 31 9 30.7 30.5 Expend itu re l2.4 36.0 36.7 35.8 35.6 35.3 Cu rrent. i:nd ud ing interest 24.5 24.0 23.9 22.9 22.1 21.6 Capital 7.9 12.0 12.8 12.9 13.4 13.7 Overall balanc e 1.8 -2.7 -4.0 -3.9 ·4.9 -4.8 Overall balanc e. exclud ing ACP -0.2 -1.0 -1.6 ·2.1 ·3.1 -2.7 External secto r Cu rrent account -0.7 · 10.2 - 12.2 ·9.1 -9.8 -9.8 Net expons from Colon Free Zone ao 1.8 0.8 15 l2 1.1 Net oil im ports 0.5 1.0 1.4 -0.2 0.2 0.6 Foreig n d irect investm ent 5.2 8.7 8.8 &4 9.1 8.6 To tal public debt Total debt 11 45.4 44.1 43.8 42.6 4M 40.9 Extema l l/ 42.0 39.7 37.7 32.9 32.2 31.1 Dom estic 3.4 4.4 6.1 9.7 &2 9.8 Memorand um it em s: GOP (in m inio ns o f USS) 24,163 :n,OS3 31,320 35,9 38 4Q.261 44,781 Sou rces: Com ptroller General. Su perintendency o f Ban ks and IMF staff estim at es. 1/lnd udes Pa nam a Canal Autho rity (ACP). 38 ANNEX 4: POVERTY AND SOCIAL IMPACT OF SOCIAL PROTECTION PROGRAMS Recent qualitative (Waters, 2009) and quantitative (Arráiz and Rozo, 2011) studies examine the impact of the Panama’s Red de Oportunidades program on indigenous communities. Introduced by the Government in the mid-2000s, the Red de Oportunidades program has four parts: (i) conditional cash transfers to beneficiaries, contingent on their use of preventative health care and education services; (ii) the supply of the health and education services required by beneficiaries; (iii) the provision of assistance to help families access such services; and (iv) infrastructure improvement (MIDES in Waters, 2009). The Ministry of Social Development (MIDES) manages the program, with cooperation from ministries including health and education (Arráiz and Rozo, 2011). Using information collected through focus groups and individual interviews in the comarcas (autonomous indigenous regions) of Kuna, Ngobe-Buglé and Emberá-Wounaán in March and April 2009, Waters (2009) explores community beneficiaries’ perceptions of the program. Through the responses of 140 focus group participants, the author documents support for the conditional cash transfer program and some of the challenges currently faced in its implementation. Overall, Waters’ analysis finds there to be a positive general perception of the program, with respondents noting its importance both in the form of helping families in poverty as well as increasing their ability to access local services. Respondents noted using transferred funds for a variety of purposes, including funding health and education related expenses, transportation, and household investments, as well as saving for future emergencies. Additional benefits mentioned included a greater sense of social inclusion and female empowerment. Respondents expressed the need for the program to continue, not only due to its direct economic impact, but also to its ability to improve access to healthcare and nutrition services. Challenges to accessing the program included physical difficulties in reaching places where services and transfers are provided, inadequate service staffing, and feelings of discrimination, among others. The study recommends expanding the program to cover districts that have not been covered by the program yet (in particular indigenous population) as well as improved monitoring and evaluation of the program. Improved targeting of the program, supported by this DPL, could lead to greater efficiency in reaching families in need. Arráiz and Rozo (2011)’s quantitative approach also finds evidence of the positive impact of the Red de Oportunidades program on outcomes in rural and indigenous areas of Panama. The authors used data from the 2008 Living Standards Measurement Survey (in which program beneficiaries can be identified) to estimate the impact of the conditional cash transfers program on school enrollment, child labor, use of preventative child and women’s health services, and pregnancy via propensity score matching. In rural areas, the authors found that participation in the program increases middle school enrollment by 10.2 percentage points and decreased child labor among children aged 12 to 15 by a similar magnitude (10.1 percentage points). In indigenous areas, program participation was found to increase elementary school enrollment by 7.9 percentage points and to 39 reduce child labor among 12 to 15 year olds by 15.8 percentage points. While the authors did not find any evidence of an impact on use of preventative health care services for children (visits or polio, influenza, hepatitis B, “rotavirus” and DPT vaccinations) (which they explain by the universality of such coverage in these areas), they found female participants over 15 in both rural and indigenous areas to be more likely to have had a Papanicolaou test (11.7 and 14.7 percentage points, respectively). The conditional cash transfers program is also found to have positively impacted pregnancies in rural areas, perhaps as a result of the (mistaken) belief that women needed to be pregnant to receive the transfer. 40 ANNEX 5: COUNTRY AT A GLANCE (includes country map) Panama at a glance 3/ 17113 Latin Upper- POVERTY and SOCIAL America middle- Development diamond' Panama & Carib. income 2011 Population, mid-year (millions) 3.6 589 2,490 Life expectancy GNI per capita (Atlas method, US$) 7,470 8,574 6.563 GNI (Atlas method, US$ billions) 26.7 5,050 16,341 Average annual growth, 2005-11 Population (%) 1.6 1.2 0.7 GNI Gross Labor force (%) 2.4 2.0 1.1 per primary Most recent estimate (latest year available, 2005-11) capita enrollment Poverty (% of population below national poverty line) 33 Urban population (% of total population) 75 79 61 Life expectancy at birth (years) 76 74 73 Infant mortality (per 1,000 live births) 17 16 16 Child malnutrition (% of children under 5) 4 3 3 Access to improved water source Access to an improved water source (% of population) 93 94 93 Literacy(% of population age 15+) 94 91 94 Gross primary enrollment (% of school-age population) 107 116 111 - Panama Male 109 118 111 Upper-middle-income group Female 106 114 111 KEY ECONOM IC RATIOS and LONG-TERM TRENDS 1991 2001 2010 2011 Economic ratios• GOP (US$ billions) 5.8 11.8 26.8 26.8 Gross capital formationiGDP 19.2 17.6 27.5 27.5 Trade Exports of goods and services/GOP 96.8 72.7 77.0 80.8 Gross domestic savings/GOP 23. 1 24.4 35.0 24.2 Gross national savings/GOP + 20.3 21.2 28.5 17.7 Current account balance/GOP -3.3 -1.4 - 11 .0 -23.4 Domestic Capital Interest payments/GOP 3.5 3.8 2.7 2.8 savings Total debt/GOP 113.5 59.8 42.5 47.0 Total debt service/exports 5.2 11.8 5.5 4.5 Present value of debt/GOP 40.6 Present value of debt/ex,ports 53.0 Indebtedness 1991-01 2001-11 2010 20 11 2011-15 (average annual growth) GOP 4.2 7.8 7.6 10.6 6.7 - - Panama GOP per capita 2.1 6.0 5.9 8.9 5.2 Upper-middle-income group Exports of goods and services -1.0 9.1 7.6 5.0 9.0 STRUCTURE of the ECONOMY 1991 2001 2010 2011 Crowth of capital and COP (%) (%of GOP) Agriculture 9.3 7.7 4.5 4.0 Industry 16.8 16.8 16.5 16.6 Manu1acturing 9.9 9.3 6.0 5.6 ~ Services 74.0 75.5 78.9 79.4 to 11 Household final consumption expenditure 59.4 61 .6 53.9 63.7 General gov't final consumption expenditure 17.5 13.9 11.2 12.1 - Ga - -GOP Imports of goods and services 92.9 65.9 69.5 84.1 1991-01 2001-11 2010 2011 Growth of exports and imports (%) (average annual growth) Agriculture 3.6 0.7 - 14.6 -2.9 Industry 4. 1 7.4 4.7 10.8 Manu1acturing 1.1 2.3 0.9 3.2 Services 4.3 8.3 9.7 10.7 Household final consumption expenditure 5.6 5.7 13.5 37.8 General gov't final consumption expenditure 2.0 5.0 18.1 8.6 Gross capital formation 6.5 13.1 20.5 0.0 - - Expocts - - lmpocts Imports of goods and services -0.2 8.5 19.2 21.0 Note: 20 11 data are preliminary estimates. This table was produced from the Development Economics LOB database. • The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 41 Panama PRICES and GOVERNMENT FINANCE 1991 2001 2010 2011 Inflation (%) Domestic prices (%change) Consumer prices 1.2 0.2 6.7 7.7 Implicit GOP deflator 0.5 1.0 3.3 -9.6 Government finance (% of GOP, includes cu" ent grants) Current rev enue 18.6 16.3 18.2 Current budget balance -3. 1 -0.5 4.4 - GOP deflator - - - CPI Overall surplus/deficit -4.6 -2 .9 -2.5 TRADE 1991 2001 2010 2011 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 4,192 5,992 11,970 12,825 :10,000 Bananas 197 122 75 73 Shrimp so 70 51 51 tS,OOO Manufactures 3,902 5,536 11.512 12,392 10,000 Total imports (cif) 4,990 7,347 16,124 17,744 Food 149 318 1.922 2,096 S,OOO Fuel and energy 145 426 1.399 1.506 Capital goods 319 515 2 .270 2,679 08 10 II Export price index (2000; 100) 49 101 91 88 Import price index (2000;100) 56 104 106 103 Terms of trade (2000; 100) 87 98 86 85 BALANCE of PAYMENTS 1991 2001 2010 2011 Current account balance to GOP (%) (US$ millions) Exports of goods and services 5,408 7,985 17.423 19,003 Imports of goods and services 5,439 7,792 18,706 23,729 Resource balance -3 1 194 - 1.283 -4,725 Net income -384 -590 -1,861 -1 ,861 Net current transfers 222 226 129 129 Current account balance -193 - 170 -2 .953 -6,265 Financing items (net) 397 804 2.611 5,922 Changes in net reserves -204 -634 343 343 Memo: Reserves including gold (US$ millions) 499 1,092 2,715 2,275 Conversion rate (DEC, /ocaVUSS) 1.0 1.0 1.0 1.0 EXTERNAL DEBT and RESOURCE FLOWS 1991 2001 2010 20 11 Composition of 2011 debt (US$ mill.) (US$ millions) Total debt outstanding and d isbursed 6,630 7,057 11,382 12,583 IBRD 417 282 420 399 A:399 C: 302 IDA 0 0 0 0 Total debt service 336 1, 109 1,047 930 IBRO 85 46 55 57 lOA 0 0 0 0 E: 371 Composition of net resource flows Official grants 77 9 27 Official creditors -57 -1 275 262 Private creditors -12 188 -150 914 Fo reign direct investment (net inflows) 109 467 2.182 3,258 Portfolio equity (net inflows ) 2 0 0 0 World Bank program Commitments 0 93 40 55 A - lBRO E - Bilateral Disbursements 0 26 24 20 B - IDA D -other multilateral F - Private Principal repayments 49 26 38 41 C - IMF G - S hort-term Net flows -49 0 - 15 -21 Interest payments 36 20 17 16 Net transfers -85 -20 -32 -37 Note: This table was produced from the Development Economics LOB database. 3117113 42 PA N A M A SELECTED CITIES AND TOWNS MAIN ROADS PROVINCE CAPITALS RAILROADS NATIONAL CAPITAL PROVINCE BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES 83°W 82°W 81°W 80°W 79°W 78°W 10°N 77°W 10°N Caribbean Sea Elena To Uatsi El Porvenir Portobelo Changuinola Ustupo Yantupo Teribe Bocas del Toro KUNA DE Colón Cordiller CO S TA OCAS B OCA a de S K U N MADUNGANDI Almirante Cañita an B A Salud Lago las RIC R ICA IC DEL Cusapin Go l fo de l os Coclé Gatún Pa P A N A M Á Chepo Lago Piriá Bayano YA KUNA DE T OR ORO del Norte COLÓN n Ca am LA WARGANDI Lago Chiriquí M osquitos na a Tocumen 9°N Chiriquí San l 9°N Vulcán Barú Grande Cristóbal PANAMÁ (3475 m) La Chorrera Cañazas Cerro Calovébora Chorcha N G O B E Cerro Puerto Peña Blanca Cerro To (2238 m) BUGLE (1314 m) Bah ía de Chiman Chucanti Santa Fé Obaldía Corredor CHIRIQUÍ El Copé Se (1439 m) La Concepción Cerro Santiago Santa Fé El Valle P an amá r E Mcunaq Soloy (2826 m) ra Ch Penonome Cordillera Central u David ní La Palma B Eue Chichica Isla a Pedrega VERAGUAS COCLÉ Rio Hato del Rey de A R Puerto Santa M l D Pablo Armuelles aria Aguadulce Guabalá Yaviza Cerro Santiago ari Tacarcuna S an Dívisa DARIÉN (1875 m) Garachiné é Chitre 8°N 8°N Ocú A G ol fo de Yape n Sona Boca de Tucutí ER Puerto Mutis P an amá Limón Cerro Pirre EMBERA HERR Las Tablas (1445 m) Macaracas El Tigre LOS Puerto Piña Isla de SANTOS Los Asientos Coiba Cerro Cambutal Tonosí 0 20 40 60 80 100 Kilometers (1400 m) C O L OM COL OMBIA PANAMA 0 20 40 60 Miles 7°N PACIFIC O CEA N This map was produced by the Map Design Unit of The World Bank. IBRD 33462R The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any JUNE 2007 endorsement or acceptance of such boundaries. 83°W 82°W 81°W 80°W 79°W 78°W 77°W