Panama Will Create a “Sovereign Fund” For Panama Canal Profits

Panama Will Create a “Sovereign Fund” For Panama Canal Profits

Tuesday, April 05 2011 @ 12:01 PM EDT
Contributed by: Don Winner
Views: 35
The Panamanian Government is being advised by the International Monetary Fund (IMF) in order to discuss the creation of a sovereign fund. This fund is a savings system being used by those countries that have a significant revenue surplus. In the case of Panama the additional resources generated by the Panama Canal once the expansion project is completed in 2014 would be used for this fund, according to the tentative proposal being presented at this time by Alberto Vallarino, Panama’s Minister of Economy and Finance (MEF). These types of “sovereign funds” are mostly created in oil producing countries, and others such as Singapore also have this mechanism as a kind of reserve. From among the countries of Latin America the model most appealing for the government of Panama at this moment is that of Chile, because their situation is similar to that of Panama. Panamanian government officials are also evaluating the current structure of the “sovereign fund” being used by Norway.
“We are preliminarily evaluating the subject, because a fund like this cannot be organized from one day to the next,” said Mahesh Khemlani, the Director of Public Credit of the MEF. The IMF and other advisers will come to help predict the income and expenditure of the Central Government of Panama until at least 2030, he said. Khemlani added there is no requirement or proposed amount to launch a sovereign wealth fund.

About this issue, local economists who were asked disagree over whether or not the government should wait three more years before creating a financial cushion to support the unforeseen future. “Why not start now,” emphasized the former president of the National College of Economists, Adolfo Quintero, arguing that at present the country is experiencing a boom. However, he thinks the government’s initiative is wise, as long as they decrease the deficit of the nonfinancial public sector that was approved by the National Assembly at 3% of GDP or the equivalent of $900 million dollars this year. Quintero said the costs incurred by the state in new social programs – the universal scholarship, the “$100 for 70” program, and others – reduce opportunities for savings. Added to this opinion is that of economist David Saied, who said the sovereign fund that is being proposed must be organized before the start of enlargement (of the Panama Canal), because by that time he has predicted the start of a new recession.

Both Saied and Quintero are of the view that Panama, which has emerged as one of the economies with the highest economic growth in Latin America – 7.5% as estimated by the MEF – that managed to increase tax revenues after the implementation of a tax reform package, has the potential to adopt a system of savings ahead of schedule. (Panama America)

Editor’s Comment: Right now the existing Panama Canal has annual gross revenues of about $3 billion dollars. Of that about $2 billion will be spent on operations and maintenance (with the vast majority of the money staying right here in Panama) and the other $1 billion dollars is straight profit that gets handed over to the central government. Now that the expansion project is underway, profits from the Panama Canal are being used primarily to pay for the expansion project. The project to expand the Panama Canal will result in a doubling of traffic and therefore revenues. In short, the relatively tiny nation of Panama is going to be rolling in it. Lots and lots of “balboas.” Panama has a fiscal responsibility clause in law so they can only operate at a 3% deficit of GDP (that’s what Quintero was talking about). Thanks to the increased tax revenues and eventually the increased income from the Panama Canal, it’s very possible that in the relatively near future the Republic of Panama might be able to wipe out all debt and operate at a surplus – effectively loaning money to other nations at a profitable return on investment. That’s why this fund is being established, with an eye on being the rich kids on the block in the not too distant future. And for the record, the guy who is predicting a recession within three years is nuts. There’s nothing to indicate that, and I’d like to see the data underlying his prediction, if it’s something other than a desire to see his name in th

Post a Response

Post a Response