Summary: KEY ISSUES Background. Panama’s economic performance remains buoyant. Real GDP growth slowed to 8.4 percent in 2013, after the strong expansion in 2011–12, and is projected at above 7 percent in 2014. Inflation is declining, though it is resilient and still higher than in major trading partners, and unemployment is at historically low levels. The 2013 fiscal deficit was within the revised Social and Fiscal Responsibility Law (SFRL) ceiling despite strong public investment. The current account deficit remains elevated, reflecting high investment, but is financed mainly by FDI. The banks are well capitalized, profitable, and liquid. Outlook and Risks. Near-term risks arise mainly from shifts in global trade and financial conditions (such as the normalization of global monetary conditions or a protracted economic slowdown in trading partners), domestic overheating pressures, persistent economic and political difficulties in Venezuela, and the risk of further significant delays in the Canal expansion. Strong domestic fundamentals and the ability to implement countercyclical fiscal policies would, however, mitigate the impact of external shocks. Fiscal and Financial Policies. Targeting a fiscal balance below the SFRL ceilings would help contain overheating pressures and build policy buffers against possible adverse shocks. It is imperative to strengthen the financial safety net and to enhance financial supervision and integrity in line with the recommendations of the 2011 FSAP and the 2014 IMF’s Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism. Medium-term Challenges. Structural, social, and institutional reforms should continue to boost productivity, competitiveness, and inclusiveness. This will be essential to ensure a smooth transition towards strong and sustainable medium-term growth when large public investment projects are completed. In particular, further investment in the quality of education, training, and health, as well as promoting female labor force participation, should complement capital accumulation, raise labor productivity, and improve living standards.

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