Resolving Panama debt challenge

DEBT carried over from the Martinelli era including money owed on unfinished projects may lead administration of Juan Carlos Varela to take advantage of a legal modification to the fiscal responsibility law passed by the last government to increase spending.

The change allows the government to raise the level of expenditure over the established rate if the contributions of the Panama Canal Authority (ACP) to the state do not reach certain level. The threshold was established at 3.5 percent of gross domestic product (GDP). If the ACP contributions exceed that level, the surplus would go to the social development fund. If, on the other hand, they do not reach that figure, the government is allowed to raise the deficit to make up the difference, reports La Prensa.
The economic growth of the country has gradually reduced the percentage of Canal revenues, making the 3.5 percent figure difficult to obtain. Revenues from the ACP are not expected to reach the threshold for the next several years.
This has two consequences: firstly, the social development fund will not get new revenue, and secondly the government will have ability to increase spending and public borrowing.
Representatives of the current administration questioned this mechanism of calculating the deficit upon taking office. Gustavo Valderrama, director of public policy of the Ministry of Economy and Finance, said last year that the modification was done solely to allow the government to raise debt.
“It is money that the government is going to have to borrow,” he said at the time.
But despite the criticism, nothing was done to modify it. The government modified the fiscal responsibility law, but did not change that clause. In fact, the government’s spending plan through 2020 relies on this exception for its spending projections.
The adjustment has been questioned by local analysts and international agencies alike. Economist Felipe Chapman said that “this adjustment does not have greater utility. It only serves the need for balancing the accounts within the limits of the law, without greater significance than legal compliance.”
The International Monetary Fund (IMF) recently noted that Panama’s deficit this year is almost double what is allowed by the law. The agency urged Panama to address its deficit spending.