US dollars fuel Panama economy despite sanctions. A deal forcing Noriega from power is imminent, US officials said as this went to press. But Panamanian sources denied an agreement had been reached (Page 2). Whether or not the general goes, a close look at the economy shows US sanctions have not worked.

Panama has beaten the odds. For the past three months, this tropical isthmus has been sinking into an economic quagmire. The government has gone broke, the banking system has clogged, investment has stopped, and confidence in the economy has perhaps been lost forever.

But because of a remarkable confluence of factors, the country and its military ruler, Gen. Manuel Antonio Noriega, have hung on tenaciously.

Ironically, both the economy and the Noriega regime have been buoyed by the injection of cash from an unlikely source: the United States Treasury. The cash crisis has also been alleviated by the fact that unredeemable Panamanian government checks have come to be widely accepted as a kind of currency in lieu of cash.

Ever since US sanctions forced banks to close, the US has flown in some $40 million in cash a month to pay its military personnel and Panama Canal employees. So, even as the US hoped a cash-starved population would revolt against Noriega, these fresh bills were filtering into the economy. Analysts say the money helped quell protests that might have hastened Noriega's fall.

The US hasn't been the only conduit of cash. Wealthy businessmen say they have been shipping in suitcases full of money from their Miami bank accounts to help sustain their companies and families. Earlier this month, several foreign banks flew in millions of dollars to prepare for the partial reopening of the banking system on May 9, bankers here say.

``There is more cash floating around this place than ever,'' says Juan Luis Moreno, a US-educated economist who serves as an adviser to the government. The money is neither well distributed nor a viable base for economic development, he says, ``but it's there.''

For Noriega's survival, the key factor has not been cash, but the remarkable transformation of government payroll checks into a new form of currency.

With on-hand cash reserves wavering between $750,000 and $3 million, the Panamanian government couldn't possibly cover the estimated $80 million to $100 million on outstanding checks it has passed out to meet the massive public payroll. But the checks still keep their value because they can can be used to pay taxes and utility bills.

The government now pays each member of its bloated 130,000 work force with several small checks to be used like traveller's checks: Customers can, for example, use three-quarters of a government check to buy groceries and then get change in cash.

``Without a fully operating banking system, the economy cannot function,'' says Richard Wainio, chief economic analyst for the Panama Canal Commission. ``But individuals can still find small amounts of cash.''

Besides these impromptu sources of money, there have been other economic escape valves. Instead of protesting, tens of thousands of laid-off workers have returned to the countryside, where they can live off the land. The government, meanwhile, has received a few million dollars each month in taxes, utility bills, and - most recently - checks stuck in the banking system. And since banks opened for limited withdrawals on May 9, the gradual acceptance of private checks has helped recuperate commerce.

With the wisdom of hindsight, some economic analysts now wonder how the US ever believed economic sanctions alone could force the Noriega regime to fall.

``I'm surprised the US government thought limited economic restrictions would create such a severe economic punch to bring this man down,'' one economist says. ``They clearly overestimated the effects.''

US officials, in turn, caution against overestimating the effects of these temporary injections of cash and currency. They argue that the economic noose continues to tighten even.

Indeed, there are signs that the flood of currency is only transitory. Behind the sheen of renewed consumerism lies the fact that some businesses are merely selling off their inventories. Rather than going toward new investment, the cash they earn returns to bank accounts abroad.

Furthermore, the ``devaluation'' of government checks has already hit 20 percent on the emerging black market. A few banks no longer accept government checks while others charge a 3 percent ``commission,'' a banker says. The future of this parallel currency is not clear.

But economists say the checks will come back to haunt the government if the banks ever fully reopen. People would likely rush to cash their government checks - but there would be no money. Check-holders would feel somewhat like the young Colombian hijacker who landed a plane in Panama Monday and demanded $1 million in cash from the government. He quickly realized he had come to the wrong country.

Even before the political crisis flared up last June, Panama's economy had deep structural problems, reflected in the highest per capita debt in Latin America, a nearly 10 percent unemployment rate, and a massive budget deficit.

``Even if you started pre-June and tried to turn the economy around, it would've been difficult,'' according to one economist. ``But now it is virtually impossible.''

In the past three months, private-sector income has plunged an estimated 40 percent. Unemployment has rocketed to more than 20 percent. Debt payments have been suspended. And nobody dares to invest in the future.

Economic analysts agree that faith, which is so crucial to Panama's service-oriented economy, won't return until an elusive political solution can be reached and stability restored.

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