Increased private sector investment and inflows from lending agencies should offset lower public expenditure and help to stimulate economic growth. The government sold the electricity generation and distribution utilities in 1996. In addition, the government partially sold the telephone company. The United Kingdom's Cable and Wireless bought a 49% stake in INTEL, the national telecommunications monopoly. Privatization of the state water utility was put on hold in 1998 due to violent protests, which President Moscoso promised not to sell. Other parastatal sales included the transisthmian railroad, both canal ports, two sugar companies, a casino, a cement company, a fruit company, and a horse racetrack.
The government encourages industrialization by granting special tax concessions to new enterprises and imposing protective duties on competing foreign manufacturers. The Industrial Development Bank, equivalent to the US Small Business Administration, promotes small industries and facilitates credit on a long-term basis. A 1986 law on industrial incentives grants industrial investors a wide range of benefits, the foremost of which is tax exceptions that vary according to whether all or part of the output is earmarked for the export or domestic market.
In 1997 and 1998, annual inflows of foreign direct investment (FDI) peaked at almost $1.3 billion a year. Total FDI reached 40% of GDP in 1998. In 1999, as sovereignty over the canal was transferred from the United States to Panama, FDI flows declined by more than half, to $652 million in 1999, $603 million in 2000, and $513 million in 2001. Major investors include the United States, the United Kingdom, Mexico, and Taiwan. The majority of foreign investments in Panama are in the transport, storage, services, and communication sectors.