PANAMA ECONOMIC BRIEF NUMBER 2: CAPITAL FLIGHT (W/ATTACHMENTS)

Created: 1/4/1990

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MCTORANDUH fOR: Recipienfn

Sconomic Hr.nf ntomberapital flight

1. Tha attached ia the aeconderies of economic briefs focuaing on apeclfic Innuen in Panama as the US and the new government begin tho task of economic

reconstruction. The first in this serien dealt with

unemploypiant and was Issued anuary 2nd.

ope you findseful. If you hava any que at ions orr if you have suggestions for other topics, r

Attachment

KEMORANDUW

Panama Economic HrtWapital Flight

Aa tha Panamanian economy begtnnecover from tho effects of nearlyonUm ollHtnl trials, one factor ln tho Endara government'e ability to nncourage Invaatjiant and growth will ba Ita success In alHacling capital back into tho domestic banking ayatam. here are nolabiaof how much capital haa flod abroad,riMfioctod Panamanian conoultlng firm7 billion In depoalta have left Panamanian hankH sine* lrnoatercent of Panama's pre-crirtn Internal deposit base. Although much of thie capital drawdown wan probably shuttled out of tha country by the wealthy and businesses, bom of the decline was due to normal withdrawals by worried citizens who Hlmply chose fro hold cash rather than make deposits to their accounts.

irid

Intheirbeglnnlivi to exparleu-

attempted to remove their holdlngn for nafekenplng at he or deposit abroad. The "run" which thin demand created forced the Noriega regime lo introducu restrictions on the amount Individuals could withdraw irom demand, time, or savings accounts. Restrictions on demand account withdrawals were lifted in January lifW, but the Endsrs government haa announced it will retain controls on other withdrawals until the liquidity of banks improvea and confidence returns toanking synt-em.

t Panama/

efore the pullin at the National Bank of PanamaP) en million of Panamanian capitaliOver the last threelandestine sources has indicated thol tho middle cluDD--Ji.ive pulled money mil

for deponlt offshore, but iheie has I

reporting on totals. The legime, foirennone, apparently made little offoil capital flight beyond ^meowing reMii't withdrawals.

in began, officials limnted thatroad, mainly ln the tig fiom embassy and rheeven

of Panamanian banksno reliable bvious political

pursue lossesa on domestic

MMriurinT change* In the quantity ol domestictiae provldon onn mennn of g ^

doateetlc

deposits. * lide of

almoatercent!

Banking System Domestic Depoalta (Hllllonn of Dollars)

Domestic

3final Balance aa of

Roughlyercent of domestic deposits were In private accountsoughlyercent were bank holdings,orcent were government deposits.

Although much of the inkage nf deposits may indicate) genuine, flight of assets fmm Panama Vo ovornnan" ofeposit* haa prnhaMy been tho result of depositors falling back on navinga an inrnmfn have declined Furthermore, depositmayecieion by Individuals and hunlnennoa to hold a larger than normal proportion of their operating funds In cash to avoid tight government restrictions on withdrawal**. Much of thia cash lo likely to reenter the hanking ay.it em rustoaMra regain confidence In the hanking nyatem andntrols on withdrawals are lifted

The Challenge for_the New government

Political and economic ratability will halt the outward flow of capital froa the ihm^ni.li: banking system, and will help ntem the flow of depnin ta from rennma'a offshore banking system. In theim, however, tho reduced ntock of loanable funds n dnmenlbanking oysteme mif the political erl.iinredit nhortage, and haa helped drive rates on commercial leans upercentage76 percent. These highertill make houaing, business, and construction loans exp**nnlv* and could alow tha pace of roeovary.

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