PANAMA: TORRIJOS AGENDA CONTINUES AFTER

UNCLAS SECTION 01 OF 02 PANAMA 002841

SIPDIS


DEPARTMENT FOR WHA/CEN
SOUTHCOM ALSO FOR POLAD


E.O. 12958: N/A
TAGS: PGOV PREL ECON PINR PM POLITICS FOREIGN POLICY
SUBJECT: PANAMA: TORRIJOS AGENDA CONTINUES AFTER
CONSTITUTIONAL REFORM


REF: A. PANAMA 01963

B. PANAMA 01883

C. PANAMA 02613


SUMMARY: PUSHING THE AGENDA THROUGH
--------------

1. (SBU) President Martin Torrijos and his Democratic
Revolutionary Party (PRD) are trying to make the most of
their honeymoon period. Less than 100 days into its
five-year term, the new administration has accomplished one
of its top domestic priorities by pushing through a
constitutional reform package (reftel A) that became official
on November 15, 2004. With constitutional reform now out of
the way, the legislature's PRD leadership wants to focus on
tax reform (before the March 2005 deadline for tax payment),
reforming Panama's social security system (CSS),and
preparing a Canal expansion referendum, but opponents may
well have other plans. Bad blood over tough but necessary
domestic reforms may burn PRD political capital well before
the legislature must review ratifying a possible US-Panama
bilateral Free Trade Agreement (FTA); however, the President
of Panama's legislature, Jerry Wilson, has indicated no doubt
about lawmakers' ability to pass such an agreement. END
SUMMARY.


TAX REFORM, CSS, AND THE CANAL BEFORE FTA
--------------

2. (SBU) While tax reform and Social Security Fund (CSS)
reform will be politically unpopular, lawmakers (including
National Assembly President Jerry Wilson) insist that
inevitable friction will not impair their ability to secure
approval of a Canal expansion referendum (their top strategic
priority),or ratify a possible US-Panama FTA when the time
comes. To "get them out of the way," tax reform and
reforming Panama's ailing Social Security Fund (CSS) top the
Torrijos administration's immediate domestic agenda, followed
by Canal expansion. All have strong short-term downsides
with Panamanian voters despite positive medium-to-long-term
impacts. With the service tax (ITBMS) that President Moscoso
imposed in late 2002 fresh in their minds, Panamanians want
nothing to do with tax reform if it means they will pay more
taxes. CSS reform will likely reduce benefits and Canal
expansion threatens to displace numerous small farmers from
the canal watershed, both easy targets for PRD opponents
seeking political advantage in 2009.



3. (SBU) During the campaign, President Torrijos promised to
repeal the unpopular service tax (ITBMS) that President
Moscoso implemented in December 2002, but his administration
appears to have dropped the idea. According to Florencia
Rios Serracin, Torrijos' Director of Revenue, the Moscoso
administration was collecting the tax incorrectly, and lost
revenue. Accounting studies by the Ministry of Economy and
Finance have shown the Torrijos Administration the tax
potentially can generate much more revenue. Given the
constitutional mandate that eliminating one tax must be
accompanied by the establishment of an equivalent tax, it
appears that President Torrijos won't live up to this
campaign promise.



4. (SBU) Necessary belt tightening at the Social Security
Fund (CSS) (which National Assembly President Jerry Wilson
told POL Counselor is on the agenda for this December) will
allow PRD opponents to paint the Torrijos administration as
hard on the poor. PRD leaders have expressed concerns to
EmbOffs that the Arnulfistas in particular would oppose CSS
reforms for short-term political mileage instead of
considering the undeniable need for reform. (COMMENT: PRD
and Arnulfista roles in the CSS saga have reversed since the
Moscoso administration (1999-2004),but both parties share
historical responsibility for the institution's problems.
Arnulfista Party namesake Arnulfo Arias created the CSS as a
paternalistic entitlement. The CSS's actuarial woes and
bloated roll of beneficiaries are well-known problems that no
Panamanian government has fully addressed since Martin
Torrijos's father Omar created them during the 1970s. See
reftel B for a discussion of CSS problems. END COMMENT.)



5. (SBU) The constitutional reform package mandates a
referendum on Canal expansion (which Assembly President Jerry
Wilson told POL Counselor will come in late 2005),but even
PRD legislators on the Canal Affairs Committee don't know
what it will look like. PRD leaders and independent analysts
have speculated that the referendum will be very simple (a
yes-or-no question such as, "Do you think the Panama Canal
should be expanded?") to avoid locking the Torrijos
administration into specific engineering or financing plans.
Contacts in the Electoral Tribunal have confirmed to Embassy
that they are planning for a 2005 Canal referendum, but they
do not know the date. (COMMENT: As with other items on the
Torrijos administration's agenda, PRD legislators may be the
last to know what the canal referendum they need to approve
will look like. END COMMENT.)


COMMENT: HONEYMOON WILL END
--------------

6. (SBU) President Torrijos already has accomplished
important reforms and seeks to pursue several others (see for
example a summary of the anti-corruption initiatives in
reftel C),but the Panamanian "what have you done for me
lately?" attitude will catch up with him and his allies.
Torrijos's tight-lipped management style may generate
problems for him with PRD congressmen (now called "diputados"
under the new constitution instead of legisladores).
Executive-driven initiatives with little buy-in from PRD
legislators (much less those from the opposition) may deplete
the political capital that Torrijos will need to conserve as
he tries to press forward with an ambitious agenda.



7. (SBU) During recent encounters with PRD congressmen,
EmbOffs have noted their frustration at being left out of the
loop on important decisions. Several remarked that having no
funds to spend in their districts makes it nearly impossible
for them to meet the paternalistic expectations of their
constituents. The congressman who drew the most votes in the
May 2004 election put it best when he said, "I have to go
home every night and explain to the thirty-eight thousand
voters who elected me why I haven't been able to live up to
what I promised during the campaign." This remark reflects a
widespread perception that despite a strong electoral
mandate, Torrijos is working in an atmosphere of high
expectations and in a political culture characterized by
impatience and patronage.


MCMULLEN