US embassy cable - 04PANAMA2841

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