ECONOMIC ACTIONS AGAINST PANAMA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP92T00533R000100120006-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 21, 2016
• Document Release Date: August 6, 2008
• Sequence Number: 6
• Publication Date: September 7, 1988
• Content Type: MEMO

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SECRETI
The Director of Central Intelligence
Wuhin`too, D.C. 20505
National Intelligence Council NIC 02952-88
7 September 1988
MEMORANDUM FOR: The Honorable Allen Wallis, Under Secretary,
Economic Affairs, Department of State
Mr. Stephen I. Danzansky, Special Asst and Sr Director,
Internat'l Economic Affairs, National Security Council
Mr. Robert Pastorino, Special Assist and Sr Director,
Latin American Affairs, National Security Council
The Honorable Elliott Abrams, Asst Secretary for
Inter-American Affairs, Department of State
The Honorable Morton I. Abramowitz, Asst Secretary for
Intelligence and Research, Department of State
The Honorable Richard L. Armitage, Assistant Secretary
of Defense
Mr. Randall M. Fort, Special Assistant to the Secretary
of the Treasury
SUBJECT: Economic Actions Against Panama
The attached paper represents the views of the Intelligence Community
on the effect of Noriega-related court actions and the imposition of IEEPA
sanctions against Panama. It concludes that:
-- Noriega's overriding concern is his political survival and, as a
consequence, he sees the deteriorating economy in terms of how it
affects his position.
-- The economy is a threat only to the extent further deterioration
might jeopardize payments to the military or provoke Panamanians to
take to the streets in violent protest, but the Community believes
that neither of these events is likely over the next six months.
Furthermore, although retaliation against US firms has been used sparingly
so far, we believe Noreiga would increase pressure if it suited his
political or economic needs.
Attachment:
As stated
SECRET
Deane E. Hoffmann
National Intelligence Officer
for Economics
CL BY SIGNER
DECL OADR
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The Director of Central Intelligence
Washington, D.C. 20505
NIC 02952-88
7 September 1988
National Intelligence Council
Economic Actions Against Panama*
Summary
The Panamanian economy continues to function, albeit at a sub-par level,
despite the effects of U.S. court actions and sanctions. We do not expect
that the US-imposed measures will directly deepen the crisis during the next
six months either for the economy itself or for government finances. General
The sanctions are probably having a greater impact on US firms and the
opponents of Noriega than on his supporters or the regime. Retaliation
against US firms has been minimal so far, but we believe Noriega would
pressure US firms strongly if it suited his political or financial needs.
Noriega's primary consideration remains his political survival. The economy
is a problem only to the extent that further deterioration might jeopardize
payments to the military or provoke Panamanians to take to the streets in
violent protest. We do not believe either of these events is likely over the
next six months. Some protests and work stoppages are probable during this
period. However, we do not believe such actions will be sufficiently large
Noriega will have to manage the situation skillfully, however.
or violent to threaten Noriega's control.
Economic Problems
Panama's economy was in serious trouble well before the Noriega- related
court actions and International Economic Emergency Powers Act (IEEPA)
sanctions were imposed. Key elements in the economic slide were:
-- the loss of confidence in the economy precipitated by the political
unrest that began last year,
-- the havoc the key banking sector faced as a result of a severe
liquidity squeeze and capital flight,
-- the disruptive general strikes called by the National Civil Crusade, and
-- the subsequent suspension of U.S. economic and military assistance.
*This memorandum was prepared at the request of the National Intelligence
Officer for Economics and represents the coordinated views of representatives
from the Central Intelligence Agency, Defense Intelligence Agency, National
Security Agency, The Bureau of Intelligence and Research at the Department of
State, Army Intelligence, Navy Intelligence, and the Department of the
Treasury.
CL BY SIGNER
DECL OADR
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Effect of Court Actions and Sanctions
Although some businesses may be paying under the table, we believe as of
mid-July income denied the regime as a direct result of IEEPA sanctions is
about $85-95 million. This total -- about $10 million from US Government
agencies, $50-60 million from private US firms, and $26.3 million from canal
tolls -- is approximately equivalent to the regime's payroll for two months.
In addition, Court actions taken prior to the sanctions froze Panamanian
Government accounts in the United States totaling $50.5 million. In all,
these actions have reduced monthly government revenues by 25 percent compared
to last y e a r . and we ex ect them to cost the regime as much as $200 million by
yearend.
Noriega's Response
Taking into account the effects of US actions and the overall decline in
economic activity, government revenues now are about 50 percent less than they
were at this time last year. Noriega has responded by cutting expenditures,
running arrears with suppliers and creditors, and drawing down cash reserves.
-- Instead of laying off workers, the regime is cutting remunerations by
shortening work hours, forcing employees to take unpaid vacations, and
lowering salaries.
-- It also has delayed paychecks and other official obligations, and
recently announced that it would be unable to pay government workers
the $18 million bonus due in August.
-- The regime also is refusing to cash some of the government checks it is
issuing in varying denominations for payroll and services, leading to
their use as a quasi-currency. They are worth full value in
transactions, and have allowed the government to avert the financial
collapse that many thought was imminent.
-- Even before the US actions, the regime suspended payments to commercial
creditors. Including the savings from this and unpaid obligations to
official lenders, the government will have withheld over $550 million
in interest and principal payments by yearend.
The lower government income has also caused a suspension of critical public
investment, such as in the electric power sector. There are shortages of
spare parts and the road system is deteriorating.
The military -- whose support is vital to Noriega's continued control--
largely has been spared economic pain. Because of their importance and the
fact that their wages represent a relatively small share of the government
payroll, they have not missed a paycheck, although there have been some
delays. The military's position relative to other groups in Panama probably
has been enhanced, since their incomes have been maintained. Lucrative
illegal business activities also bolster their position.
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Panama's free market and service-orientated economy has made adapting to
the revenue crunch easier. Businessmen in the service sector generally have
small fixed costs as compared to firms that have large investments in plant
and heavy equipment. Wages and rent account for the majority of the costs
that companies in the service sector face, so they can adjust relatively
quickly to changing economic conditions -- they can close their doors or
operate at lower levels of activity with less pain than the owners of large
manufacturing plants. Finally, because they do not require large capital
outlays to start-up business, these firms will be positioned to expand
economic operations when the economy turns around.
Impact on Noriega
We believe that over the next six months the sanctions and other actions
are a manageable problem for Noriega, both in economic and political terms.
Indeed, Panama's economic difficulties are afflicting his opponents more than
his supporters. As to the overall slide in the economy, Panamanians are
deeply concerned about the future and blame Noriega for the downturn but,
except for sporadic, small-scale protests, they have not taken to the streets
effectively since the sanctions have been ass
protest was the general strike in March. any
in the private sector -- initially willing to accept an economic sacri ice in
return for democracy -- now see themselves losing a war of financial attrition
and being forced to fold before Noriega feels the pressure. As a worst case
scenario, these businessmen see their country bankrupt and broken beyond
recovery to pre-crisis norms with Noriega undaunted and still in place.
Calculating that Noriega is here to stay, they want the confrontation between
the United States and Noriega to end and are encouraging the opposition to
open a dialogue with the regime.
Costs to the United States
We believe the costs to US interests imposed by the sanctions may grow.
US firms--Kodak and Xerox, for example--complain they have lost markets and
competitive advantage to foreign firms that are not bound by the sanctions.
Exemptions have been granted, many still remain at a competitive disadvantage
because of the sanctions. Accordingly, we believe US firms will play a
smaller role in the inevitable economic reconstruction once the current crisis
is resolved. The Taiwanese and Japanese, among others, will move in to fill
the void. To date, retaliation against US business interests has been used
sparingly. Nevertheless, we do not believe Noriega would hesita r
US firms strongly if it suited his political or financial needs. 7
The economic crisis also is providing opportunities for elements counter
to US interests. Local banks are trying to attract deposits and are more
willing to ignore regulations because of the financial situation, although
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Outlook
During the next several months, we believe the regime will muddle through
whether sanctions are maintained or not. The Panamanian Government probably
can further lower expenditures in stages, first by trimming the more obvious
public excesses -- eliminating positions that pay Noriega constituents a
salary for no actual work, for example -- then by further delaying payrolls,
cutting pay, and, ultimately, selectively laying off workers. The regime has
sent the message to public sector workers that significantly lower wages might
be necessary to avoid eliminating some 20,000 jobs. Some wildcat strikes or
work stoppages may occur, but not sufficiently violent or widespread to
threaten the regime.
We believe a number of factors contribute to the regime's staying power.
These include:
-- Noriega's continued ability to shield the military from the effects of
the economic crisis.
-- The ineffectiveness of the opposition and the unwillingness of most
public workers seriously to challenge the regime.
-- Panamanians' continued ability to adapt to deteriorating economic
conditions, facilitated by their lower expectations and their
short-term resignation to Noriega's control and economic decline.
-- Financial relief obtained by the government by issuing checks, and
obtaining foreign aid assistance.
-- The continued inflow of dollars from the Colon Free Zone, private
firms, and other sources outside the reach of U.S. sanctions. 25X1
We believe Noriega's interest in the economy is limited to how it affects
his political survival. He is only concerned about adapting to changing
economic conditions, not about implementing badly needed economic reforms.
Despite the continued deterioration we predict over the next six months,
protests and demonstrations will not unseat him. At the same time, the
military is unlikely to miss a paycheck. Given these judgments, we conclude
that economic factors alone will not prompt Noriega's departure. E -1 25X1
Despite our belief that Noriega can retain control during the six-month
time frame of this memorandum, several factors could alter the outlook and
challenge the regime's grip on power:
-- If the government were to respond to fiscal squeezes by the excessive
printing of government checks, the instruments could begin to be
discounted heavily, or ultimately even rejected. Continued discipline
will be critical for financial survival.
-- Also critical to the government check mechanism is the continued
willingness of international banks to act as clearinghouses. If
revenue shortfalls result in Panama's foreign accounts being depleted,
it would be difficult to find an international bank that would do
business with the regime.
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-- Continued support of the regime from union bosses also is critical. So
far, labor leaders have been able to soothe most of the rank-and-file.
An end to this discipline or a decision by union leaders to adapt a
confrontational approach could lead to disruptive public demonstrations.
-- A breakdown in the distribution network from suppliers to retailers
would cause shortages and also could put Panamanians in the streets.
In a similar vein, many producers have been relying on inventories to
meet demand. Unless they step up production within the next several
months, shortages, and associated increases in inflation, are likely.
-- Finally, the government's inability to maintain the infrastructure
needed to avoid a disruption of canal operations could provoke
customers -- and current regime sympathizers -- to pressure Noriega.
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