Final report : Panama post-1989 AID program evaluation

invasion of 12/89. While USAID had set aside $108 million early in 1990 as a "safety net" to encourage the unfreezing of bank deposits, reflows of money into the banks during the first half of 1990 made it unlikely the safety net would be needed. As a result, it was decided to use these funds to reactivate the economy. Under a program designated FREN (Fondo de Recuperation Economica Nacional), USAID made the $108 million available to the Bank of Panama to purchase certificates of deposit from participating banks for the equivalent of 50% of medium-term loans (1-5 years). It turned out that FREN was implemented during an expansionary banking period. For example, from mid-1990 to 3/92, loans of FREN banks increased by $284 million, while total loans of all private banks in Panama increased by nearly $1 billion. Still, FREN resources accounted for 14% of total investment in 1991, and had an estimated impact of $125 million or 2.5% of the GDP for that year. The program also had a positive effect on unemployment, though the latter remains substantial. Under the public sector program, USAID provided funds for priority investments in agriculture, health, education, justice, other social sectors, natural resources, and infrastructure. Of the total available, $20 million was channeled through a Social Emergency Fund to fund a large number of small, labor-intensive, local social development programs. Release of the second and third tranches was linked to conditionality set by two international financial institutions (IFI"s) -- the World Bank and The InterAmerican Development Bank. This strategy was appropriate; for USAID to have designed its own conditionality would have created confusion in Panama. At the same time, USAID acted wisely in timing its disbursements differently than the IFI"s and in giving somewhat greater weight to political considerations. USAID also provided $130 million to help Panama settle its arrears with the IFI"s, under conditionality once again linked appropriately to that of the IFI"s. In many ways the Panama program represented a special case. In per capita terms, it was the largest such program administered by USAID (surpassed only by Israel and Egypt in absolute terms). It was organized in an extremely short time, in the wake of a military operation, without full knowledge of the economic situation in the country or the economic policies of the new coalition government. Moreover, the program was politically urgent and included numerous specifications, set by the U.S. Congress, which left USAID less maneuvering room than desirable. At various points, USAID had to choose between direct involvement in investment decisions or leaving these decisions to be made by either private banks or the government. Wisely, USAID decided not to exercise excessive influence on the Panamanian economy. The criticism this provoked -- that USAID did not know what happened to the money -- is fundamentally mistaken. Although USAID"s Panama program is atypical, it teaches several general lessons. (1) USAID can respond to lack of demand in host countries either by sponsoring a fast-disbursing domestic program or by pumping additional resources into banks for onlending. In the latter case, USAID should be carefully not to assume loan risks (the CD approach in Panama met that test), and the government should leave the choice of debtors, terms, and projects to the banks. (2) USAID funds to support banks" lending activities should return to the government as the loans are due for repayment (even it the borrower needs to repay) and this reflow should be considered a new aid program to which USAID can attach conditionality. (3) When IFI conditionality substantially meets Agency objectives, USAID should piggyback onto it, while tailoring it to the particular situation (e.g., by exempting urgent subprograms). (4) The Panama experience exhibits the drawbacks of a program that is rigidly allocated into parts long before the magnitude of need or the availability of other resources can be defined.