By law the Panamanian government's annual operating deficit may not exceed two percent of the gross national product. According to the Panamanian Constitution, the Panama Canal's funds may not be commingled with the national government's and the canal may not be mortgaged, sold or pledged.

There is a lot of secrecy in Panamanian government economic statistics, which are not systematically compiled and regularly released, but rather announced from on high or hidden away in archives according to the political criteria of the governments of the moment. Moreover, lots of errors and a certain amount of fraud skew such statistics as the government has.

The Moscoso administration came into office just as the national economy was turning into a profound recession, and even though her economic team has gone through major contortions trying to deny this it remains an obvious fact to anyone living on the national economy. However, beyond the fudge factor inherent in the government's ability to manipulate statistics, Mireya's government began with the extraordinary resource of more than a one billion dollar fund from the proceeds of the sale of state-owned industries by the prior administration.

Now, however, most of that fund is gone or pledged for other purposes and the bad economy is still with us. We're also off to an early start in a campaign for 2004 elections that could turn Mireyismo into a political legacy much akin to Herbert Hoover's and even make the president's Arnulfista Party a relic of the past. Thus, from the Moscoso perspective, it's not a good time for the austerity measures that would be necessary to bring the national budget within the legal deficit limit. The president has already obtained an unpopular tax increase (which doesn't make up for the tax and rent breaks she gave to Hutchison Whampoa and the nation's other port concessionaires). However, mass layoffs in the government would deprive the Arnulfista Party of campaign workers, while austerity measures that affect non-Arnulfistas would likely provoke rioting in the streets, and then massive retribution in the May 2004 elections.

The problem with doing nothing is that, given its low revenues and high spending, the government is headed for a four percent deficit this year and has run out of the resources by which it has circumvented similar problems in the past.

Thus Minister of Economy and Finance Norberto Delgado released government financial statistics that included the finances of the Panama Canal Authority (PCA), which runs at a profit. By commingling the canal's revenues and expenditures with the national government's, a four percent deficit gets reduced to two percent.

This, however, has prompted a great hue and cry, not only from the opposition but also from some Arnulfistas. The inclusion of canal statistics in the government's economic figures, it is argued, violates the canal's constitutional autonomy. From a Panama Canal institutional perspective, this commingling impairs the excellent credit rating of Panama's most important industrial enterprise, which in turn can render moot the debate about expanding the canal by adding a new lake and building a third set of locks to accommodate post-Panamax-sized ships. The gravamen of the arguments against those proposals had already shifted from protests by environmentalists and the farmers who stand to be displaced to claims by former deputy canal administrator Fernando Manfredo and some of the leaders of Panama's business and financial sectors that the cost of these expansion projects could not be amortized out of canal revenues. Add the higher interest rates inherent in a lower credit rating and canal expansion becomes even harder to finance.

Canal administrator Alberto Alemán Zubieta downplayed the problems that the accounting change may present, but at its February 12 meeting the PCA's board of directors passed a resolution insisting on the need to "preserve the canal's financial autonomy" and calling for a meeting with top Moscoso administration officials to reverse or mitigate the harm that the new policy threatens.

For his part, Vice-Minister of Economy and Finance Domingo Latorraca insisted that there is no new accounting policy, that the government has included PCA figures in its budget since the United States handed full control over the canal to Panama at the end of 1999. It's a more rational and honest way to account for the public sector economy, he argued. Trevor Alleyne, who oversees the region including Panama for the International Monetary fund, told El Panama America that there is nothing wrong in principle with counting autonomous enterprises in the national budget, but that such an accounting change won't alter the IMF's estimates of a country's economic condition.

The Moscoso administration never published any government financial statements that included canal statistics as part of the national budget before now, nor did such data figure in legislative budget debates. However, reports on the Panamanian economy by the Comptroller General's office have included the canal's figures as a separate item.

Late last year, as the Moscoso tax increase was being debated, Credit Suisse First Boston analyst Jan Dehn predicted that the measure would be insufficient to balance Panama's books and that, due to the exigencies of a campaign season, some "accounting trick" would be used to avoid austerity measures. When the nature of that trick was revealed, Credit Suisse First Boston called it "a dangerous precedent" and specifically warned that it would affect canal expansion plans.

From New York, the Fitch financial risk rating company's analyst Theresa Paez told La Prensa that the company will probably downgrade Panama's credit rating in its upcoming reports. Fitch's principal concerns are about the deficit that underlies the government's effort to make its financial situation appear better. The company said it's closely following government revenue collections as the new tax measures come into effect and also expressed worries about the dramatic decline of payments into the Panamanian Social Security Fund (from which the Moscoso administration has borrowed some $113 million). Fitch is asking the government for more information about its accounting methods.

From London, Barclays Bank focused its attention on the discrepancy between Delgado's claim that PCA figures have been included in the national budget since 2000 and the contrary statements that the Moscoso administration has been giving to international lenders. Barclays said that Panama's credibility is compromised and concluded that this will lower the country's credit rating.

Panamanian financial analyst Victoria Figge, who has presided over the Panamanian Business Executive's Association (APEDE) and the Colon Free Zone administration and was the first chief of the government's anti-money laundering Financial Analysis Unit, runs an email list that forwards news clippings and reports of interest to those who follow the world and Panamanian economies. The Barclays analysis was one of the documents that Figge forwarded to her list, with an added rhetorical question: "Who do they think they're fooling?"