PANAMA: GOP SEEKS TO PROVIDE RELIEF AGAINST

UNCLAS PANAMA 000253

SIPDIS

SIPDIS

FOR STATE WHA/CEN - TELLO
FOR COMMERCE - DESK OFFICER SARA GARY
FOR TREASURY DESK OFFICER - GAISFORD

E.O. 12958: N/A
TAGS: EAGR ECON EFTA ENRG ETRD FAS PM
SUBJECT: PANAMA: GOP SEEKS TO PROVIDE RELIEF AGAINST
INFLATION

REF: PANAMA 184


1. (U) SUMMARY. During the March 1, 2008 National Assembly
inaugural speech, President Martin Torrijos presented a $110
million fiscal package, aimed in large part to ease the
impact of higher inflation. The package provides continued
energy subsidies, a middle class tax cut, increased mortgage
subsidies, and elimination of tariffs on certain foods not
produced locally. END SUMMARY.

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Torrijos Announces Plan to Ease Inflation Pain
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2. (U) During his March 1, 2008 National Assembly inaugural
speech, Torrijos presented a $110 million fiscal packagewhich
includes a middle class tax cut of approximately $43 million.
Most of the announced measures are designed to help
consumers cope with higher inflation by increasing disposable
income. None of the measures are designed to lower inflation
by lowering demand or tightening fiscal policy. As the U.S.
dollar is the official currency, the GOP has no monetary
tools to combat inflation.


3. (U) Torrijos blamed inflation on international factors
outside of the GOP's control. Specifically, he cited rising
oil prices (increasing production costs),the falling U.S.
dollar (raising import costs),and growth in China and Asia
(increasing demand). Panama is experiencing its highest
inflation rate in over 26 years with inflation running at a
7.6% annual rate as of February 2008. Various basic food
items have risen 10%-25% in each of 2006 and 2007.

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Energy Subsidies to Continue
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4. (U) Torrijos said the GOP will maintain its subsidies on
electricity and liquid gas purchased in small tanks.
Currently, the GOP subsidizes approximately 672,000
households (90% of Panamanians who have access to
electricity). Individuals not subsidized have seen their
electricity bills increase almost 400% over the last three
years. The GOP has a program allowing poor Panamanians to
purchase liquid gas with a market value of $12.37 for $4.37.
During 2008, the GOP's Ministry of Economy and Finance (MEF)
estimates energy subsidies (including liquefied gas) will be
$149.1 million.

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Middle Class Tax Cut
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5. (U) Torrijos also said the GOP will eliminate all income
tax on individuals earning between $800 and $860 a month
(approximately 40,000 individuals) starting in 2008, and on
all individuals earning between $860 and $2,500 a month
(approximately 70,000 individuals) starting in 2009.
Currently, individuals earning less than $800 a month do not
pay income tax. The GOP estimates the average worker earning
between $800 and $860 a month would save $26 a month. The
GOP estimates the value of the tax cuts for 2008 to be $8
million and $35 million in 2009. Under current law, once a
worker exceeds $800 a month, he pays tax not on the marginal
income but the gross income. As a result, modest salary
increases result in a tax bill exceeding the wage increases.


6. (U) If the tax cuts were implemented as of December 31,
2007, only 18,750 salaried workers nationwide would have paid
income tax. Currently, approximately 125,000 salaried
workers pay income tax.

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Mortgage Subsidies to Expand
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7. (U) Torrijos also announced that the GOP would provide a
100% subsidy on all mortgages on houses valued at $30,000 or
less. Also, the program to provide subsidized mortgage
interest payments on homes valued at $62,500 or less would be
extended. Under the new plan, the subsidized mortgages rate
(currently 3.5%) would be available to houses valued at
$80,000 or less. The preferred rate would apply on the first
$62,500 and the market interest rate on the balance
(currently between 5.5% and 6.0%). During 2008, MEF
estimates the cost of the subsidized mortgage program will be

$15 million.


8. (U) According to the Panamanian Banking Association, 85%
of all mortgages are for homes valued at $50,000 or less.
Only 4.9% of all mortgages related to homes exceeding
$100,000. The Panamanian National Council of Home Promoters
(CONVIENDA),who represent 59% of all real estate brokers in
Panama, reported that 75% of homes sold by the members were
valued at $62,500 or less. The construction and real estate
brokerage industry had lobbied for the subsidized mortgage
rate program to extend to homes values at $85,000 or less.
Such groups have claimed the increase limit was necessary, in
large part, due to higher building costs. CONVIENDA reported
that the average value of its home sales have risen 10.4% in
2007 and 7.9% in 2006. According to CONVIENDA, its average
home sales price has risen from $71,473 in 2006 to $85,149 in

2007. Juan Carlos Mastellari, President, Panama Association
of Business Executives, said the extension of the subsidized
mortgage program will cause an overheating of the
construction sector. During 2007, the construction sector
grew by 25%.

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Elimination of Tariffs on Some Foods
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9. (U) Torrijos also announced the removal of tariffs on
certain foods not produced domestically. The full list of
such products has not been determined, but on March 11, 2008,
GOP Agriculture Minister Guillermo Salazar said that it would
include apples, pears and peaches.

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Other Announced Measures
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10. (U) In addition, to the items listed above, Torrijos
announced plans to increase the police force by 2,000
officers, incentive to 40,000 subsistence farmers, increased
assistance to rice, dairy, beef, poultry and vegetable
producers, and pay increase for 4,000 teachers who work in
isolated areas. During 2008, MEF estimates total
agricultural subsidies will be $15.1 million

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Comment
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9. (U) Given the GOP's $686 million fiscal 2007 surplus (see
reftel),the cost of these measures will not affect
significantly the GOP's fiscal account. The measures,
however, are contradictory to the recommendation in the March
4, 2008 IMF Assessment Letter which states that, "Given the
higher inflation and continued risk of overheating, a tighter
fiscal stance than that which had been envisaged at the time
may be advisable." The 2007 budget surplus is almost equal
to the estimated costs of all GOP subsidies for 2008 ($683.7
million). Two noteworthy aspects of the Torrijos speech was
(1) blaming everyone but the GOP for inflation and (2) the
lack of any measures to lower the cost or allow for the
importation of cheaper foods to compete against the more
costly domestically produced foods, such as rice, potatoes,
and onions.
EATON