COMBAT IN PANAMA : Panama’s Economy Left Crippled by U.S. Sanctions, Flight of Capital

President Bush’s lifting of economic sanctions against Panama on Wednesday is expected to provide some quick relief, but analysts said that it probably will take years for the country’s economy to get back on its feet.

The sanctions imposed in March, 1988, failed to squeeze Panama enough to force the ouster of dictator Manuel A. Noriega, as U.S. officials had hoped. But they destroyed the country’s once-thriving banking and money-laundering industry and set off a massive flight of capital to dozens of havens abroad.

They also crippled the fledgling industries that Panama had built up, mainly as a result of investment from the United States and other Western countries, and pushed the country into arrears on its debts to the World Bank, commercial banks and other foreign creditors.

As a result, analysts here said, several years of effort most likely will be required to erase the impact of the last year’s events. Necessary steps include unlocking the Panamanian assets that Washington has frozen, providing sizable new aid and restructuring the Panamanian economy.

“It’s not as though we’re going to just be able to turn around and write a check,” said Donald Patton, a General Accounting Office analyst who has studied the sanctions. “The money that’s been withheld won’t come anywhere near what’s needed to come to grips with the issue.”

Jeffrey J. Schott, a Panama expert at the Institute for International Economics, a Washington-based research organization, agreed. “I think we’re talking years even to get them back to where they were a couple of years ago,” he said.

Bush Administration officials estimated that the “unblocking” of the sanctions will release about $375 million that Washington had frozen, including Panamanian assets in American banks, taxes owed by U.S. firms and payments for use of the Panama Canal.

Panama also could glean another $15 million in export earnings if Washington restores the allocation that Panama had under current U.S. sugar quotas for sales of sugar to the United States. During the Noriega years, Panama’s share has been reallocated to other nations.

But GAO estimates show that Panama is about $650 million in arrears on payments to the World Bank and other international lending organizations and another $850 million behind on loans from commercial banks--the result of a default Noriega ordered after sanctions were imposed.

And the country will need new money to repair its shattered industry and deteriorating infrastructure, both of which slipped badly during the period. An American embargo aimed at forcing U.S.-bound ships to shift their registry to other countries was too recent to have had much impact.

As a result, Schott and other analysts both in and out of government say that restoring Panama’s financial health is likely to come slowly, even with the best of U.S. intentions. The Panamanian economy was in a recession anyway; the sanctions only exacerbated the slide.

U.S. policy-makers cautioned Wednesday that simply unlocking the Panamanian assets that Washington has frozen could take two or three weeks, as Treasury officials struggle to set up procedures for ensuring that the funds are properly posted and delivered.

And although Secretary of State James A. Baker III hinted Wednesday at a possible new aid package for the country, any new economic assistance program is apt to require weeks to draft and send through Congress. Officials have not even begun formally considering any such proposal.

How quickly Panama’s once-lucrative foreign banking industry can rebuild its operations in the country remains to be seen.

Stuart Tucker, an analyst with the Overseas Development Council, argued that rebuilding the banking operations should be completed “relatively quickly.” But he conceded that this depends in good measure on how rapidly Panama’s new government can win the confidence of investors--and that is uncertain.

Robert Kurz, a Brookings Institution specialist, said investor confidence may hinge on the ability of the new Panamanian government to break the hold of the Panama Defense Forces, which have been loyal to the Noriega regime--and possibly on how long Noriega himself remains at large.

“The PDF is like an octopus with tentacles in every sector,” Kurz said, “so you have to break the back of the military’s control of the economy.” He added: “I don’t know how many bankers and businessmen are going back, especially with Noriega still running around loose.”

There also is the question of how far Western bank regulatory agencies will allow commercial banks to go in resuming the money-laundering practices that once were widespread in Panama.

Initial indications were that some regulators may insist on a cleanup of banking operations in Panama that, ironically, could make the country less attractive as a financial haven for foreigners. If that happens, Panama never will be able to regain its bank earnings.

“It may be irretrievable,” Schott said.

As a result, Schott and many other analysts believe that what actually may be in store for Panama now is a thorough restructuring of the economy to make it less reliant on drugs and corruption and able to generate legitimate earnings.

“It will be a long-term project to reconstruct the Panamanian economy,” he said.