Social Security was a very hot issue during the last administration, in fact after much wrangling with the unions they were able to work out a deal that would keep it from going broke. Now in today's paper we get details on operational costs and expenditures for the first 6 months of the year. Why should foreign investors care about the social security system of Panama? Well, because if anything happens to that system there will be tremendous social unrest which will affect the economy greatly and therefore the value of your investments.
The article points out that the revenues in the first six months of the year are in 'surplus" of $82 million. But then it goes on to say that they had an increase both in revenue and expenditures due mostly to increased number of people working for the Social security offices around the country. They increased the number by 1500 which makes me wonder just how many people work in that department. It must be many thousands. With revenue of $877 million for just 6 months this department must the the biggest in the country. In any case the head of the administration says "This is not a loss, on the contrary, it's improved service,". Some how I find that difficult to believe.
In any case the Ministry of Economy weighs in saying that really they would be in deficit if the MEF did not make an annual transfer of $176 million from the state. The financial condition of Social Security is totally dependent high employment and the last few years has seen just that take place. Of course the state increased the cost of operations which nullified any real benefit or "surplus" to help carry it through tough times, which are surely going to come. Lets hope the new administration will have an opportunity to work on Social Security reform even if it just comes in the form of more efficient operations needing less people on the payroll.
Free zones are named such because they typically offer those who operate within them freedom from taxation. I have experience in operating in a free zone in Costa Rica for a good number of years and I believe the one in Panama operates pretty much the same.
As a business operating in the Free Zone, you typically are free of import and export duties on goods that do not leave the zone and enter the country. As long as the goods are shipped outside Panama, there are no taxes. Another incentive to set up in the zones is there are no taxes on repatriation of funds which means no taxes on profits of monies paid to shareholders outside the country. Income paid to Panama shareholders would be treated like any other source of domestic income and be taxed. Of course, no Free Zone operator has the profits sent directly to his account in Panama so there typically are no taxes collected.
So what is the advantage to the country to allow such business operations? First and foremost is employment. Usually free zones are set up in areas where there is typically high unemployment like Colon. The country also benefits from taxes on the rental of the buildings and property taxes on those buildings. The government also collects taxes of various kinds on the thousands of employees payroll and then they collect 5% ITBM and ITBMS tax on the goods and services those employees spend their money on. Not to mention the increase in GDP that the government gets to count towards its economic picture.
As this article points out, the government also collects import taxes on the many goods that do enter the country from the zone and are sold locally. Between it all they say the government collects upwards of $68 million from the zone operation. Now certainly this is not a lot when you look at the billions of dollars worth of business the zone does, but is it fair to change the rules of the game just because the state needs more money? In the case of the colon free zone, I am sure they could withstand a tax, but once taxes of this kind begin, they will continue to increase because government always needs more revenue. Business operators in the zone will begin to look for other locations in which to do business and others just may be forced out of business due to the taxes they are forced to pay. In any case, the original reasons these deals were made between government and industry should be honored because the real beneficiaries are the many thousands of Colon residences who have jobs.
From La Prensa:Tax reform in the Colón Free Zone could have potentially "devastating" effects, warned Raul Moreira, former Planning and Finance Director of the international marketplace.
Economist Raul Moreira has correctly identified the reason the cost of food continues to increase in Panama. It is a direct result of inflation created by the monetary policy of the U.S. government. What could Panama do to solve this every increasing problem? How about working on a new currency platform back by commodities such as gold and silver. If you really wanted to see growth in foreign investment, this would be the way to do it. Some day soon the U.S. dollar is going to go into hyper-inflation and when it does, countries like Panama who are tied to the U.S. dollar are in a very bad position. The very thing that has helped them over the last 20 years, the dollarized economy, will be the thing that ruins them if they don't look at alternatives.
From La Prensa:
As of about two years ago, economists noted that the purchasing power of the dollar fell to 80 cents in respect to the country's higher food prices, putting at risk the pocketbooks of much of the population.
According to economist Juan Jované, this situation has been worsening in the country, as food products continue to lead Panama's cost of living. Since September 2007, the food industry has experienced an increase of over 26 percent, one factor that has contributed to the reduction in the dollar's actual value, he added.
Between June 2008 and June 2009, the price of food and beverages rose 6.1 percent, according to figures from the General Accounting Office.
Meanwhile, the price of basic food basket stands at $260.96, with meat, fruit and platanos being the products that have registered the largest price hike.
Raul Moreira, president of the College of Economists of Panama, contends that the value of the currency has been falling since inflation has eclipsed it. Nevertheless, inflation edged down to 1.8 percent, after measuring 4.9 percent in January.
When the state revenue declines there are only two options. Curtail spending or increase revenue. No different than private enterprise except in the case of the state, they don't produce anything of value except hindrances to business. From the many promises made for new programs and infrastructure projects it is apparent that reduced government spending is just not in the cards. So increased revenue collection is the only alternative.
The challenge for the new administration is how to increase revenue in a dwindling economy without becoming even more burdensome on private enterprise. Panama is just a little model of what is going on in the U.S., except they can't print money here in Panama. Some wrongly believe that increased spending will lead to a better economic landscape while those of us schooled in the Austrian school of economics as well as common sense know that you cannot spend your way out of debt. It should be interesting to see how they will make up the shortfall in the deficit while at the same time continuing with the needed infrastructure plans.
Public finances seem to be much worse off than first expected.
In the first half of this year, the central government had a deficit of $409.6 million, or 4,257 percent greater than in the same period last year, and equivalent to 1.7 percent of the country's gross domestic product (GDP).
The vast disparity was attributed to a 7 percent drop in tax revenue and a 12.8 percent increase in expenditures.
"In the first half of 2008, the government received nearly $250 million non-recurring income, a contribution of $73 million of the Canal and $172 million from the sale of two cellular concessions," said Minister of Economy and Finance Alberto Vallarino. "And this year we do not have that. Additionally, there was an increase of $200 million in capital expenditure [public investment] which deepened the deficit."
As long as central government spends more than it brings in, public debt will increase.
"If the Assembly does not approve of any of the laws that we have
asked for to boost revenue, the state deficit could approach 2.5
percent of GDP this
year," he said. In other words, the debt could increase to some $648 million.
Not surprising to most of us, but seemingly so to those who forecast these things.
Panama's economy, as measured through the Monthly Economic Activity Index, contracted 4.13 percent in May as compared to the same month in 2008. And the aggregate of the first five months of the year also entered into red figures, dropping .22 percent.
Ministry of Economy and Finance Alberto Vallarino said the decline was due to the global economic crisis, which has contracted world trade and impacted economic activity in the Colón Free Zone and the Panama Canal.
With Martinelli being an entrepreneur, it makes sense that he would want to enlist their help in the growing of the country. This is refreshing as all of the other politicians in previous administrations felt they could do it on their own and business people were only for financial support. It is the entrepenures who really drive the economy and in ost cases the goevrnment is a hinderence to their success. Maybe this time it will be different.
Excerpt from Central America Data;
The Ministry of Economy came out with its spending plan for the next several years which includes the funding for the four lane road to Boquete from David. The last administration also promised this road and nothing came of it except some public meetings to tell us it was going to be done. Most people agree that this would be a benefit as the road is usually very busy and until recently had a great deal of construction traffic to contend with. Another important project they mention that has been talked about a great deal is the lengthening of the airport in David to accommodate large jets.
There are a number of other projects including the metro, but not a lot of detail. In any case here is a translation of the article that appeared in La Prensa today.
The government wants to implement in 2010 a public investment program of at least 2 billion dollars, reported yesterday by Minister of Economy and Finance, Alberto Vallarino.
"The initiatives for next year are fairly clear: the subway, the city government, the expansion of the Canal, the sanitation of the bay. And among the new ones, eg, Civil Aeronautics will include in its budget the size of airports in Columbus and David, "he said. Also provide funds for the first phase of the road, Divisa-Las Tablas, the four-way road to Boquete, the new channel transísmico dry, the expansion of the David-way stretch and Veraguas Santiago-La Mesa.
Moreover, said the comptroller Carlos Vallarino, is referred to the expansion of Tocumen Airport, with the north pier for $ 70 million. This work was supported by the Comptroller.
This came out in the paper today and based upon my knowledge of this area they are barking up the wrong tree. First of all there is a road that goes from the inter American highway to Almarante and Bocas. Yes, it is constantly being washed out, but it is functional and an investment in making it better and safer makes a lot more sense than trying to build another one that goes through Boquete. I have hiked up to the top of the range and looked over at Bocas and I can tell you a road through there would be impossible. It would also be an environmental disaster. This is all pristine forest and should be left alone. I don't believe it will ever happen.
A proposed highway linking the provinces of Chiriquí and Bocas del Toro would have a dramatic impact on the shipping of goods throughout the country, according to a report by the Ministry of Public Works.
The highway would be like a "dry canal," ministry officials said, because it would link several important port facilities.
The highway would start in Puerto Armuelles on the Pacific Coast, and then wind through David and Boquete before crossing the province and connecting to a port in Bocas.
This should come as no surprise. The surprise is thsat they are still building. Some interesting statistics from this La Prensa article.
In the first quarter of the year, there were 1,166 projects under construction in the districts of Panama and San Miguelito, according to a census by the Comptroller General of the Republic.
Of that total, 88.6 percent were residential projects, 3.2 percent commercial ones, while the rest were schools, religious centers and other projects.
The areas with the most projects underway are Pacora (248), Las Cumbres (187), Chilibre (141), Tocumen (123) and Rufina Alfaro (101).